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Why recent stock market gains might not benefit the economy

This week has marked the longest uninterrupted stock market gains in U.S. history, thanks in part to a steady economic recovery now nine years old. But another driver is the growth of stock buybacks: companies purchasing their own shares. Whether this practice benefits the larger economy is very much in question. Economics correspondent Paul Solman has more in his weekly series, Making Sense.

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  • Judy Woodruff:

    This week has marked the longest period of uninterrupted gains in the stock market in U.S. history.

    There are a variety of reasons, including a steady economic recovery that is 9 years old.

    But one of the drivers for the stock market rise has been the increase in what's known as stock buybacks, or companies purchasing their own shares.

    The benefits of that for the larger economy are very much in question, as our economics correspondent, Paul Solman, explains, part of his weekly series, Making Sense.

  • President Donald Trump:

    Corporations are literally going wild over this.

  • Paul Solman:

    When President Trump signed the Tax Cut and Jobs Act last December, a key provision was cutting the corporate tax rate from 35 to 21 percent.

    Republicans argued the savings would be used to create more and better-paying jobs.

  • Rep. Paul Ryan, R-Wis.:

    This gets us better wages, bigger paychecks, a simpler tax system.

  • Paul Solman:

    That was House Speaker Paul Ryan late last year.

    And here's administer economist Kevin Hassett.

  • Kevin Hassett:

    But I can tell you that, if we get this bill through, it'll be great for American workers.

  • Paul Solman:

    And, indeed, the unemployment rate is at an 18-year low.

    But Jared Bernstein, an economist in the Obama administration, was convinced the tax cut money would be used not to create jobs and hike wages, but to benefit shareholders through stock buybacks.

  • Jared Bernstein:

    It's happened big time. We have seen a real escalation in share buybacks.

  • Paul Solman:

    Stock buybacks are expected to hit a record $1 trillion this year, an almost 50 percent increase over 2017.

    So, what is a stock buyback?

    Harvard Business School's Charlie Wang puts it simply.

  • Charlie Wang:

    The company is repurchasing certain number of shares outstanding from the shareholders, and by doing so, they're distributing cash back to the universe of shareholders.

  • Paul Solman:

    In recent years, firms have been repurchasing their own stock with a vengeance.

    Apple approved a new $100 billion repurchase program in the spring. And from eBay to Pepsi in the years 2015 to 2017, companies spent almost 60 percent of their profits on buybacks.

    But, now, why do companies buy back their stock? Because it typically boosts the stock price in the short run.

    Irene Tung with the National Employment Law Project explains.

  • Irene Tung:

    By buying back a company's stock, the company is removing from the open market a number of shares, creating an artificial scarcity of shares, which then temporarily drives up the price.

  • Paul Solman:

    It's the appearance of better financials, which insiders can and do take advantage of, says Republican economist Douglas Holtz-Eakin.

  • Douglas Holtz-Eakin:

    There are some compensation clauses for executives that are tied to share prices. And they might think it's going to help them and help the company, and they will do it.

  • Paul Solman:

    But if stock buybacks are sometimes connected to short-term stock manipulation for the benefit of corporate insiders, that's concerning.

    And, in fact, it's why buybacks were illegal from after the crash of '29 right up to the Reagan administration.

  • Jared Bernstein:

    Much CEO compensation is a function of the share price. Well, all the sudden, you have a massive incentive to inflate your share value.

  • Paul Solman:

    And it has been happening, according to a study by the Securities and Exchange Commission, says Irene Tung.

  • Irene Tung:

    Once these executives announced to the world that they would buy back stock from their company, they themselves quietly would sell off their own personal shares and take advantage of the bump in stock prices that they themselves engineered.

  • Paul Solman:

    But, hey, most of the buyback money doesn't go to insiders, and all of it gets re circulated back into the economy, says Professor Wang.

  • Charlie Wang:

    To fuel the growth and investment and employment in smaller and younger public firms, as well as private companies.

  • Paul Solman:

    But what if the shareholders who are getting the money from the buybacks are simply using it to buy, I don't know, yachts or bigger yachts?

  • Charlie Wang:

    If they're buying yachts, there are companies and employees that work in these yacht companies, and they stand to benefit.

  • Paul Solman:

    OK, maybe some yacht workers benefit, maybe some smaller firms, but what about the average American? Right now, overall wage growth in the U.S. isn't even keeping up with inflation.

    Irene Tung looked at buybacks in the restaurant, retail and food industries in the three years before the tax cut was enacted.

  • Irene Tung:

    If they took all of the money that they spent on stock buybacks, and instead invested it in raises, McDonald's, they could have given each of their workers $4,000 more each year, Starbucks $7,000.

    In retail, Home Depot, Lowe's and CVS could all give their workers at least $18,000 a year more.

  • Paul Solman:

    But, instead, the money went to shareholders, who make up barely half the American public.

    Moreover, 84 percent of the value of stock market wealth is held by the richest 10 percent of us.

  • Jared Bernstein:

    What part of the economy do share buybacks boost? That precise part. So they're lifting the more unequal side of the economy, at the expense of the more equal or the wage share of the economy.

  • Paul Solman:

    Remember, though, says Douglas Holtz-Eakin, the tax cut is a long-term strategy.

  • Douglas Holtz-Eakin:

    We will judge the Tax Cuts and Jobs Act and other things based on whether the final use of those funds has been effective in raising wages and productivity. That's going to be the ultimate test.

  • Paul Solman:

    As of July, however, more than half the corporate savings from the tax cut have gone to shareholders as either stock buybacks or dividends, compared to 18 percent going to job creation commitments, and just 7 percent going to employees in the form of wage increases, bonuses,or benefits.

    So, the bottom line, as with so many policies, you have to wait for a verdict.

    This is economics correspondent Paul Solman.

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