Repurchases reallocate under-utilized capital to more efficient purposes.
Stock buybacks are the latest bipartisan piñata, whacked by politicians on the left and right who misunderstand capital markets. A refresher course is in order lest Congress stampede and undermine the investment needed for growth.
Repurchasing shares is simply one way a company can return cash to owners if it lacks better ideas for investment. Tax reform increased corporate cash flow by cutting tax rates and letting companies repatriate their cash held overseas by paying a one-time tax rate of 15.5%.
Using Federal Reserve data, Dan Clifton of Strategas Research Partners estimates that companies repatriated $730 billion in 2018. CEOs have deployed that for multiple purposes including new investment, debt reduction, pension contributions, employee bonuses, wage and dividend increases and stock repurchases.
This is a policy success. Mr. Clifton calculates that capital expenditures by S&P 500 companies grew about $75 billion in 2018, the fourth-biggest annual gain since 1991. Average wages are growing by at least 3.4% year over
.. The Senators complain that “when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest.” But the money doesn’t fall into a black hole. An investor who sells stock into a buyback will save or reinvest the proceeds. Walmart gives shareholders cash, and capital markets redirect it to some other useful end.
Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns. They could let cash pile up. They could raise dividends, which would also move cash toward better investments. But Messrs. Schumer and Sanders likewise want to “seriously consider policies to limit the payout of dividends, perhaps through the tax code.”
Wages Are Rising in Europe. But Economists Are Puzzled.
In Europe, experts attribute the spike to an acute shortage of workers in countries like Germany, but there are many other theories.
.. Economists there offered numerous theories to explain the phenomenon. The decline of unions has taken away employees’ bargaining power, some said. Globalization, outsourcing, and the easy flow of money and information across borders have also forced workers in wealthy countries to compete with those in poorer ones.
.. Another suggestion is that the rise of companies like Apple, Google and Amazon as industry behemoths has concentrated power in fewer companies and squelched competition. And the so-called sharing economy, exemplified by Uber or Airbnb, has made many people into freelancers with few benefits.
.. In one much-discussed paper presented at Sintra, Uta Schönberg, a professor at University College London, compared data from Germany and France and came to the conclusion that low wage growth and rising inequality were a result of diminished bargaining power by workers.
Flat wage growth in Germany during the last two decades coincided with reforms that allowed companies to opt out of collective bargaining agreements, weakening union power.
In France, where union agreements applied to whole industries and were binding for companies, wages continued to climb and inequality was less pronounced.
.. But France paid a price. While unemployment fell below 4 percent in Germany, it remains above 9 percent in France. The implication is that companies may not hire as much if they are locked into union wage contracts.
.. This hidden reserve of workers is bigger than economists thought, Mr. Talavera said. But in Europe it appears to have finally been exhausted. “That is one of the reasons you haven’t seen wage growth picking up substantially,” he said.
Trump’s Potemkin Economy
According to legend, Grigory Potemkin, one of Catherine the Great’s ministers (and her lover), created a false impression of prosperity when the empress toured Ukraine.
.. the legend has become a byword for the general idea of prettifying reality to please a tyrannical ruler.
.. But Trump’s actual policy initiatives aren’t doing so well. His tax cut isn’t producing the promised surge in business investment, let alone the promised wage gains; all it has really done is lead to a lot of stock buybacks. Reflecting this reality, the tax cut is becoming less popular over time.
.. the trade war that was supposed to be “good, and easy to win” isn’t generating the kinds of headlines Trump wanted... Instead, we’re hearing about production shifting overseas to escape both U.S. tariffs on imported inputs and foreign retaliation against U.S. products... making stuff up is actually standard operating procedure for these guys... Trade policy itself is being driven by claims about the massive tariffs U.S. products face from, say, the European Union — tariffs that, like the immigrant crime wave, don’t actually exist... he declared that the head of U.S. Steel called him to say that the company was opening six new plants. It isn’t, and as far as we can tell the phone call never happened... the Council of Economic Advisers did an internal report concluding that Trump trade policy will cost jobs, not create them; Kevin Hassett, the chairman, pressed on these reports, said that he could neither confirm nor deny them; in other words, they’re true... Hassett is declaring that last year’s corporate tax cut has led to a “massive amount of activity coming home” — which is just false. Some companies are rearranging their accounting, producing what looks on paper like money coming back to the U.S., but this has no real effect on investment or employment... declaration by Larry Kudlow, the administration’s top economic official, that the budget deficit is “coming down rapidly” as “those revenues come rolling in.”.. reports that Trump wants to withdraw from the World Trade Organization... The best hope for breaking the cycle of retaliation would be for Trump to realize that the trade war is going badly, take a deep breath, and step back from the brink... But who will tell him how things are really going?.. Trump will dismiss reports of problems as fake news. Reality will take a long time to break through, if it ever does. And by then the world trading system may be broken beyond repair.