The problem with stock buybacks

Why high corporate profits aren’t translating into widespread economic prosperity, as explained in William Lazonick’s HBR article, “Profits Without Prosperity.”  Here is a video report.

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

As shown below, the net effect of all this ‘financial engineering’ is that it is fleeting.  We are today in the midst of the third unsustainable bubble in asset prices in 15 years. And each time the bubble bursts–as it must and always does–the apparent net worth gains evaporate quickly, revealing deficits, shortfalls and under-investment in the real economy as far as the eye can see.  The deficits last, while the net worth gains do not.

Net worth bubbles since 1970

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