Corporations are chicken plumping the economy with stock buybacks

It’s official: ultra-rich corporate executives are chicken plumping the American economy with stock buybacks.

After a brief hiatus during the height of the pandemic, corporations have doubled down on stock buybacks. Last month, big public companies spent an incredible $132 billion on buybacks, more than triple what they spent in January 2022. By some estimates, in 2023, buybacks by S&P 500 companies alone are projected to top $1 trillion for the first time in history.

What’s the big deal here, you may ask? What are stock buybacks, and why are people so concerned with the enormous sums corporations are spending on them? And what on Earth do they have to do with chickens?

Let’s start with the chickens. Chicken meat is typically sold by the pound, but not all pounds of chicken breast are created equal. Meatpackers keen to maximize profits will sometimes inject chicken with liquids (often saltwater) to increase their weight. You might think you’re buying an 8-pound package of chicken breast when, in reality, you’re paying a premium for five pounds of chicken meat and three pounds of water. The meatpackers are not doing anything substantive to increase the weight of their chickens – e.g. they’re not feeding them more grains or greens – but instead are taking an easy, artificial route to make billions in profits.

Stock buybacks operate under the same principle. When corporations repurchase, or “buy back,” their own stock from shareholders, they plump up their company’s worth by artificially inflating the share prices of their stock while doing essentially nothing to improve the company’s long-term financial health. In fact, in many cases the buybacks provide short-term benefits at the expense of long-term success. At one point, nearly a third of buyback programs were funded not from excess profits, but from corporations actually taking on debt.

Corporate executives are quick to defend buybacks because they benefit all shareholders and investors in companies, not just themselves. They liken them to irregularly scheduled dividends. In his latest letter to shareholders, Berkshire Hathaway CEO Warren Buffett proved himself to be one such buyback apologist, going so far as to say that anyone critical of these transactions was “…an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

To put it lightly, we disagree. It’s true that buybacks do benefit all shareholders, but contrary to what many on Wall Street would have you believe, there is more to the economy than just shareholders. Our primary issue with these transactions is that they don’t do anything tangible to benefit stakeholders like employees, customers, and communities. They allow companies to spend their profits on investors – most of whom are already wealthy (the wealthiest 10% of Americans own about 89% of all US stock) – instead of on investments in things like new products, new facilities, or increased employee pay, all of which substantially improve the underlying value of firms in the long term.

For Buffett and other proponents of buybacks, helping shareholders exclusively does not, by definition, mean harm for stakeholders. Here’s an all too relevant example to show you why they’re wrong:

You may have heard of the train derailment disaster that occurred earlier this month. On February 3rd, a 38-car freight train operated by Norfolk Southern carrying toxic chemicals derailed in East Palestine, Ohio, forcing thousands of residents to evacuate. The technical cause of the crash remains undetermined, but if you look at recent developments in safety regulations, you can see how stock buybacks are at least partially to blame.

Under the Obama Administration, the Federal Railroad Administration proposed a rule that would have required trains carrying hazardous materials to utilize more modern braking systems. The Association of American Railroads, the industry group that represents most US freight railroads, successfully blocked the proposal, arguing that it would be too expensive. (The Federal Railroad Administration estimated that the fix would have cost railroads $493 million over 20 years.)

But for railroad carriers, “expensive” apparently doesn’t apply to stock buybacks. This year, Norfolk Southern will spend $7.5 billion on share repurchases. (They spent $3.4 billion in 2022 and $3.1 billion in 2021.) They are fine shelling out billions to shareholders every year, but can’t be bothered to spend a few million updating their braking system to prevent dangerous crashes like the one that just occurred in Ohio that displaced thousands from their homes.

Stock buybacks are dangerous because they create an incentive structure for executives and shareholders to make short-sighted decisions that undermine their companies’ future financial stability and the well-being of their employees and communities. We want to build a modern economy that offers prosperity and security to everyone, and stock buybacks push us in the exact opposite direction.

In his State of the Union address, President Biden called for a quadrupling of the 1% tax on corporate stock buybacks that was introduced with the Inflation Reduction Act. Corporations already pay extremely little in taxes, so taxing buybacks would force many to start inching toward paying what they owe. But the real end goal here is to deter companies away from buying back their stock in the first place and instead use their funds to reinvest in their employees, operations, and communities.

Call us “silver-tongued demagogues.” We don’t need stock buybacks or any kind of chicken plumping in the economy. We instead need to focus on creating healthy and prosperous businesses and communities that work for everyone in America, not just wealthy investors. 

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