Share buybacks have reached their highest level since the financial crisis – $450bn in the US over the last year. Many companies, such as 3M, are bumping up dividends too. That’s the equivalent of a deep corporate sigh of relief that it’s back to business as usual – and unfortunately the worst possible news for the rest of us.
Buybacks are Exhibit A in the corporate financialisation that has progressively unbalanced Western economies since the 1980s. They are financial engineering in its simplest form. There is only one reason for companies to buy their own stock, and that is to drive up the share price and return on equity without the tedious business of investing in plant, people or customers. Under current assumptions, this course of action is not only justified but recommended. If, under the efficient market hypothesis, the current share price contains all relevant information about the company’s present and future prospects, then that’s the only thing that managers need to worry about. Being paid substantially in stock, of course, simply redoubles their encouragement to do so (this is the reason that despite all the handwringing executive pay just keeps on going up – that’s what it’s designed to do). Indirectly, share buybacks contributed to the severity of the crash in 2008 and its aftermath. William Lazonick, one of the foremost researchers in the area, found that in the early noughties companies in the financial sector were among the most avid stock repurchasers, often spending more than 100 per cent of their earnings on buybacks and dividends, leaving them with precious little to fall back on when lightning struck. They have been dependent on bailouts and QE ever since.
Buybacks at that level, of course, do not just exhaust the kitty for a rainy day. They are monies the company consciously chooses not to invest for the longer term in the business or the workforce in the shape of higher wages. Thanks to Ed Milliband, falling wages and living standards are now on the political agenda – remarkably, an embarrassing enough problem to provoke even the CBI to call for change (‘In my day’, muttered Vic Keegan on Twitter, ‘unions used to push for higher wages. Today it is employers’). One reason for wage stagnation is the swelling of the reserve army of the unemployed caused by the globalisation of the world economy (there are others, too, which will be the subject of a future article). As Peter Wilby pointed out in a perceptive recent piece in the Guardian globalisation is also a factor in what he terms today’s investment strike which is helping to drive the race to the bottom in salaries and social benefits.
‘Organised capital is more powerful than organised labour,’ he writes. ‘Thanks to the global loosening of capital controls over the past 40 years, investors can take their money where they like. They seek the highest returns. The more that costs such as wages and taxes can be forced down and prices pushed up, the higher the profits and the happier the investors. If they are not happy, the investors will take their money elsewhere.’
For Harvard’s innovation guru, Clayton Christensen, it is the ‘doctrine of new finance’ (ie financialisation) which is behind the investment slowdown that now endangers national competitiveness as well as general living standards. Instead of channelling investment into ‘empowering’ innovation (whole new classes of products and services that create jobs and put capital to productive use) or even ‘sustaining’ innovation (product advances such as hybrid cars), managers are putting such small amounts as are devoted to investment into efficiency gains, which cut the cost of producing existing products and services. Efficiency innovations release rather than use capital and, net, eliminate jobs. If the capital released is not recycled back into empowering innovation to take up the slack, the economy just churns. Sure enough, Christensen calculates that whereas in previous postwar recessions the US economy regularly took six months to get back up to speed, in 1990 it took 15 months, in 2001 39 months and this time five years and counting, even with massive amounts of quantitative easing, one of whose side-effects, according to Manifest’s Sarah Wilson, is ‘printing money for CEOs’ by refloating (and reflating) the economy and stock markets.
Against the incentives pushing in the opposite direction, pleading with companies to raise wages and invest more is about as effective as King Canute ordering the turn of the tide. All the things we’re now seeing – burgeoning share buybacks, the enrichment of the minority at the expense of the flatlining other ranks, dismally low investment and declining rates of innovation – are interlocking facets of the same Rubik’s Cube, all locked in place by a seamless web of vested interest at whose heart lies the ideological assertion that directors are agents of shareholders, whose interests take precedence over all others. Almost everyone in politics is in denial about this, but the puzzle can’t be unpicked without attacking this sacred central tenet. Unless and until it is, a return to ‘business as usual’ will continue to be cause for regret rather than optimism for all except the privileged few.
Happy New Year.