News & Politics

Robert Reich: This Reagan-Era Financial Rule Has Got to Go

Until we eliminate stock buybacks, income inequality will continue to grow.

Photo Credit: HarvardEthics / Flickr

Trump and Republicans branded their huge corporate tax cut as a way to make American corporations more profitable so they’d invest in more and better jobs. 

But they’re buying back their stock instead. Now that the new corporate tax cut is pumping up profits, buybacks are on track to hit a record $800 billion this year. 

For years, corporations have spent most of their profits on buying back their own shares of stock, instead of increasing the wages of their employees, whose hard work creates these profits. 

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Stock buybacks should be illegal, as they were before 1983.

Stock buybacks are artificial efforts to interfere in the so-called “free market” to prop up stock prices. Because they create an artificial demand, they force stock prices above their natural level. With fewer shares in circulation, each remaining share is worth more.     

Buybacks don’t create more or better jobs. Money spent on buybacks isn’t invested in new equipment, or research and development, or factories, or wages. It doesn’t build a company. Buybacks don’t grow the American economy.

So why are buybacks so popular with Corporate CEOs?

Because a bigger and bigger portion of CEO pay has been in stocks and stock options, rather than cash. So when share prices go up, executives reap a bonanza. The value of their pay from previous years also rises—in what amounts to a retroactive (and off the books) pay increase on top of their already outrageous compensation.

Buybacks were illegal until Ronald Reagan made them legal in 1982, just about the same time wages stopped rising for most Americans. Before then, a bigger percentage corporate profits went into increasing workers’ wages. 

But since corporations were already using their profits for stock buybacks, there is no reason to believe they’ll use their tax windfall on anything other than more stock buybacks.

Let’s not compound the error. Make stock buybacks illegal, as they were before 1982.

 

 

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley. Reich's documentary, "Saving Capitalism," is streaming on Netflix. His latest book, "The Common Good," is available in bookstores now.