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The billion dollar con

How stock buybacks fuck the economy

On the face of it, stock buybacks seem like a win-win situation. A company, bursting at the seams with cash, decides to invest in itself. It's like a vote of confidence, right? The company reduces the number of floating stocks, and voilà – the remaining shares should be worth more.

But stock buybacks are financial sleight of hand.

Since they were recognized in 1982, stock buybacks have become a symptom of a deep malaise: rampant corporate, shareholder, and CEO greed. They don’t create new value. They reshuffle existing value at the expense of long-term growth and stability.

Not to kick a multi-billion dollar, disaster-ridden, irresponsibly governed corporation when it's down, but aerospace giant Boeing is a prime example. As Former Secretary of Labor Robert Reich points out, Between 2013 and 2019, Boeing spent $43 billion on stock buybacks. During the same period, the company chose not to pursue a $7 billion redesign of its 737 Max aircraft—a decision that directly contributed to two tragic aviation disasters that claimed hundreds of lives.

Meanwhile, General Electric, the face of American industrial might, GE spent nearly $46 billion on buybacks between 2015 and 2016. During this same period, the company's fortunes began to decline precipitously. By 2018, GE had lost a significant chunk of its market value, and its stock price had nose-dived, wiping out $100 billion in shareholder wealth.

Sure, buybacks weren't the sole cause of GE's troubles. But they didn't fucking help. The billions spent on buybacks could—hell, should—have been invested in research and development, modernizing the company's operations, or adapting to changing market conditions. Instead, that money effectively vanished.

Boeing isn't an anomaly.

GE isn't an anomaly.

They're a trend.

Across industries, companies are pouring billions into buybacks while neglecting crucial investments. And it's not hard to see why. The top executives at most publicly traded companies receive a significant portion of their compensation in the form of stock options, which become more valuable as the company's stock price rises. This in itself isn't controversial.

The problem is that by reducing the number of outstanding shares, buybacks artificially inflate the stock price, making those options more valuable.

Fortune 500 CEOs effectively hold a lottery ticket and the power to choose the winning numbers. The personal financial incentive to prioritize buybacks is clear and compelling.

It creates a feedback loop. As buybacks drive up stock prices, they increase the value of executives' stock options. In turn, it incentivizes those executives to continue prioritizing buybacks, even when other investments might be more beneficial for the company's long-term prospects.

Wall Street's obsession with quarterly results adds fuel to this fire. When short-term expectations are the order of the day, the long-term investments that drive genuine innovation are taken out back and shot in the head.

The consequences of corporate short-termism are brutal.

Don't believe me? Just ask the families of those who lost their lives in the Boeing 737 Max disasters. Or the workers who lose their jobs when cash-poor companies, who have blown through billions on buybacks, find themselves ill-equipped to weather economic downturns.

When companies don't invest in research and development, expand their operations, or train and develop their workforce, the economy suffers as a whole. Innovation slows, productivity growth stagnates, and new job creation slows.

By funneling corporate profits back to shareholders rather than into productive investments, buybacks concentrate wealth in the hands of those who already own significant amounts of stock. The benefits of corporate profits flow disproportionately to the wealthiest members of society. Income inequality grows. Society stagnates. And despite record corporate profits and soaring stock markets, we're stuck with sluggish wage growth and a wealth gap the size of the Grand Canyon.

Reinstating restrictions on when and how companies can repurchase their shares would make it harder to use buybacks to manipulate stock prices.

But that's a regulatory band-aid. The most important changes can only come from investors themselves, who must take a longer-term view and demand that companies choose sustainable growth instead of short-term financial legerdemain.

As with Boeing, as with GE, as with countless other companies, the consequences of ignoring this are severe. Lives are lost, jobs disappear, and once-mighty companies crumble.

I'm not arguing for corporate altruism. I could, but I don't have much faith that today's self-interested corporate husks would bother to listen.

I'm arguing for basic economic sense.

The companies that create lasting value for their shareholders, their employees, the economy, and society itself are those that invest in their own long-term future.

They don't run around like a pack of drunk pyromaniacs trying to burn down the market for the benefit of their blurred quarterly reporting.

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