Paul Roberts has an editorial in the LA Times that sortof, kindof mirrors my post the other day that observed that corporate stock buybacks (and investments to reduce tax rates) were likely signs of a bad investment climate. Until he starts talking about solutions
Roberts begins in a similar manner
Here's a depressing statistic: Last year, U.S. companies spent a whopping $598 billion — not to develop new technologies, open new markets or to hire new workers but to buy up their own shares. By removing shares from circulation, companies made remaining shares pricier, thus creating the impression of a healthier business without the risks of actual business activity.
Share buybacks aren't illegal, and, to be fair, they make sense when companies truly don't have something better to reinvest their profits in. But U.S. companies do have something better: They could be reinvesting in the U.S. economy in ways that spur growth and generate jobs. The fact that they're not explains a lot about the weakness of the job market and the sliding prospects of the American middle class.
I suppose I would dispute him in his implication that there is something unseemly about buybacks. They are actually a great mechanism for economic efficiency. If companies do not have good investment prospects, we WANT them returning the cash to their shareholders, rather than doing things like the boneheaded diversification of the 1960's and 1970's (that made investment bankers so rich unwinding in the 1980's). That way, individuals can redeploy capital in more promising places. The lack of investment opportunities and return of capital to shareholders is a bad sign for investment prospects of large companies, but it is not at all a bad sign for the ethics of corporate management. I would argue this is the most ethical possible thing for corporations to do if they honestly do not feel they have a productive use for their cash.
The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society. We saw this before the 2008 crash, when top U.S. banks used dodgy financial tools to score quick profits while shoving the risk onto taxpayers. We're seeing it again as U.S. companies reincorporate overseas to avoid paying U.S. taxes. This narrow mind-set is also evident in the way companies slash spending, not just on staffing but also on socially essential activities, such as long-term research or maintenance, to hit earnings targets and to keep share prices up....
It wasn't always like this. From the 1920s to the early 1970s, American business was far more in step with the larger social enterprise. Corporations were just as hungry for profits, but more of those profits were reinvested in new plants, new technologies and new, better-trained workers — "assets" whose returns benefited not only corporations but the broader society.
Yes, much of that corporate oblige was coerced: After the excesses of the Roaring '20s, regulators kept a rein on business, even as powerful unions exploited tight labor markets to win concessions. But companies also saw that investing in workers, communities and other stakeholders was key to sustainable profits. That such enlightened corporate self-interest corresponds with the long postwar period of broadly based prosperity is hardly a coincidence....
Without a more socially engaged corporate culture, the U.S. economy will continue to lose the capacity to generate long-term prosperity, compete globally or solve complicated economic challenges, such as climate change. We need to restore a broader sense of the corporation as a social citizen — no less focused on profit but far more cognizant of the fact that, in an interconnected economic world, there is no such thing as narrow self-interest.
There is so much crap here it is hard to know where to start. Since I work for a living rather than write editorials, I will just pound out some quick thoughts
- As is so typical with Leftist nostalgia for the 1950's, his view is entirely focused on large corporations. But the innovation model has changed in a lot of industries. Small companies and entrepreneurs are doing innovation, then get bought by large corporations with access to markets and capital needed to expanded (the drug industry increasingly works this way). Corporate buybacks return capital to the hands of individuals and potential entrepreneurs and funding angels.
- But the Left is working hard to kill innovation and entrepreneurship and solidify the position of large corporations. Large corporations increasingly have the scale to manage regulatory compliance that chokes smaller companies. And for areas that Mr. Roberts mentions, like climate and green energy, the government manages that whole sector as a crony enterprise, giving capital to political donors and people who can afford lobbyists and ignoring everyone else. "Socially engaged" investing is nearly always managed like this, as cronyism where the politician you held a fundraiser for is more important than your technology or business plan. *cough* Solyndra *cough*
- One enormous reason that companies are buying back their own stock is the Federal Reserve's quantitative easing program, which I would bet anything Mr. Roberts fully supports. This program concentrates capital in the hands of a few large banks and corporations, and encourages low-risk financial investments of capital over operational investments
- All those "Social engagement" folks on the Left seem to spend more time stopping investment rather than encouraging it. They fight tooth and nail the single most productive investment area in the US right now (fracking), they fight new construction in many places (e.g. most all places in California), they fight for workers in entrenched competitors against new business models like Lyft and Uber, they fight every urban Wal-Mart that attempts to get built. I would argue one large reason for the lack of operational investment is that the Left blocks and/or makes more expensive the investments corporations want to make, offering for alternatives only crap like green energy which doesn't work as an investment unless it is subsidized and you can't count on the subsidies unless you held an Obama fundraiser lately.
- If corporations make bad investments and tick off their workers and do all the things he suggests, they get run out of business. And incredibly, he even acknowledges this: "And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling." So fine, the problem corrects itself over time.
- He even acknowledges that corporations that are following his preferred investment strategy exist and are prospering -- he points to Google. Google is a great example of exactly what he is missing. Search engines and Internet functionality that Google thrives on were not developed in corporate R&D departments. I don't get how he can write so fondly about Google and simultaneously write that he wishes, say, US Steel, were investing more in R&D. I would think having dinosaur corporations eschew trying to invest in these new areas, and having them return the money to their shareholders, and then having those individuals invest the money in startups like Google would be a good thing. But like many Leftists he just can't get around the 1950's model. At the end of the day, entrepreneurship is too chaotic -- the Left wants large corporations that it can easily see and control.