Income re-distribution is always in the eye of the beholder, but never seen as such by those for whom more is never enough. The insatiable greed of financiers has reached the point where large corporations are now spending almost all profits on stock buybacks and dividends. And, despite that largesse, those companies are sitting on trillions of dollars in cash.
All this at the same time that wages are stagnant and living expenses are rising. These developments, of course, are not independent of one another.
Stock buybacks and dividends are one form of ongoing class warfare, in which income flows upward. The corporations comprising the Standard & Poor’s 500 Index alone spent US$914 billion on buybacks and dividends in 2014, and they are on course to spend more than $1 trillion in 2015. That $1 trillion will be nearly equal to all of the operating earnings produced by S&P 500 companies.
New York Stock Exchange (photo by Elisa Rolle)
Stock buybacks are also becoming more common in Europe. European firms bought back more than US$2 trillion in stock from 2009 and 2014, according to Reuters, and European firms are sitting on $1.5 trillion (€1.37 trillion) in cash.
As aggregate profits have increased, so have the payouts to financiers. Bloomberg reports that payouts by U.S. companies are outpacing income:
“Excluding the recession years 2001 and 2008, dividends and stock buybacks have represented, on average, 85 percent of corporate earnings since 1998. … Stock repurchases worth almost $2 trillion have helped buoy the bull market since March 2009. … Even as sales were stuck at an average growth rate of 2.6 percent a quarter in the past two years, per-share earnings expanded more than twice as fast, 6.1 percent, data compiled by Bloomberg show.”
Starving investment for short-term gains
To pay for that acceleration of money flowing to financiers, spending on investment is declining, The Wall Street Journal notes. In an analysis of these trends, the Journal reports:
“[C]ompanies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003. At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activists bought their shares to 29% of operating cash flow, from 42% the year before.”
Let’s unpack that paragraph. What the Journal is reporting is that Wall Street is applying pressure to corporate managements to hand over income to it, and those corporations who are particularly targeted are even more compliant than the average. The “activists” who are referenced aren’t activists in any customary sense. In ordinary language, an activist is someone who advocates and organizes for social advancement. But in the looking-glass language of the corporate world, an “activist” is a shareholder who has bought stock in a company for the purpose of demanding the maximum possible short-term profit, regardless of cost to others or even to the company itself.
Wall Street, and the financial industry in general, is both a whip and a parasite in relation to productive capital (producers and merchants of tangible goods and services). The financial industry is a “whip” because its institutions (stock, bond and currency-exchange markets and the firms that trade those and other instruments on those markets) bid up or drive down prices, and do so strictly according to their own interests. The financial industry is also a “parasite” because its ownership of stocks, bonds and other instruments entitles it to skim off massive amounts of money as its share of the profits. People in the financial industry don’t make tangible products; they trade, buy and sell stocks, bonds, derivatives and other securities, continually inventing new instruments to profit off virtually every aspect of commercial activity.
“Shareholder activists” are ultra-rich speculators who are particularly aggressive in demanding that profits be handed over to them. Financiers and industrialists fight over the money that workers produce — profits ultimately derive from the capitalist paying the employee much less than the value of what the employee produces — but they agree they should have all of it.
So although you and your co-workers make the pie, you don’t get anything more than crumbs. And there are a lot of pies out there.
Piles of cash, here, there and everywhere
Not all of those pies are siphoned into financiers’ bottomless pockets. The St. Louis branch of the Federal Reserve estimates that, in 2011, U.S. corporations were sitting on almost $5 trillion of cash, a hoard that had been increasing by 10 percent a year. No more recent estimates exist, but it is likely that total has increased. And much of that hoard is kept out of reach — as of early 2015, an estimated $2.1 trillion in cash was being held overseas by U.S. corporations.
That money is kept overseas for one reason, to avoid paying taxes. U.S. elites are encouraged to do this because U.S. tax law allows profits and income to be shifted offshore, where they remain untaxed. Profits booked in other countries are instead subject to the local tax rate, even if zero. Such financial engineering is simply another manifestation of “capitalist innovation.”
Sometimes it is suggested that a “tax holiday” be granted. That is, let multi-national corporations bring their money home tax-free and that hoard will be magically put to work. But such has not been in the case in the past. An analysis by research firm Capital Economics of a 2004 tax holiday found that 95 percent of the cash brought back home went to stock buybacks and dividends. Nor were any jobs created. An NBC News report said:
“A Democratic congressional report indicated that the biggest companies receiving the benefits of $360 billion in repatriated funds actually cut a net 20,000 jobs, and that the holiday cost Treasury coffers $3.3 billion. ‘This is supported by the results of a 2009 study by the (National Bureau of Economic Research), which found that every $1 that was repatriated during the tax holiday resulted in an increase of almost $1 in shareholder payouts,’ the Capital note said. ‘Around $0.80 went towards share buybacks and $0.15 to dividend payments.’ ”
Total after-tax profits of U.S. corporations, as compiled by the St. Louis Federal Reserve, totaled $7.3 trillion in 2014 — the highest ever recorded. Adjusted for inflation, that is nearly triple the aggregate profits of 2001.
So when we are continually told we must cut back because there is no money, it isn’t true.
Big raises if money were directed to employees
Let’s take Wal-Mart as an example. Wal-Mart has averaged $16 billion in annual profits during the past five years, helping make the Waltons the richest family in the world while Wal-Mart workers are forced to rely on food stamps, other social-welfare programs and charity. The Walton family owns about 50 percent of Wal-Mart’s stock, and thus haul in billions of dollars a year just from dividends. Additional billions are spent on stock buybacks, which benefits stockholders (especially the Walton family) because the profits are spread among fewer people.
What if, instead, those billions of dollars were directed to Wal-Mart employees so that they could at least be closer to a living wage? The public policy organization Demos makes this suggestion:
“We find that if Walmart redirected the $7.6 billion it spends annually on repurchases of its own company stock, these funds could be used to give Walmart’s low-paid workers a raise of $5.83 an hour, more than enough to ensure that all Walmart workers are paid a wage equivalent to at least $25,000 a year for full-time work. Curtailing share buybacks would not harm the company’s retail competitiveness or raise prices for consumers.”
Ah, but “competitiveness” is not the issue; rather it is shoveling as much money as possible into the pockets of the Walton family, other major shareholders and the top executives. Money that is extracted from Wal-Mart’s employees through low wages and benefits, augmented by the massive public subsidies the company extracts.
Earlier this year, General Motors announced it would spend $5 billion on stock buybacks, in an attempt to boost its stock price. PBS NewsHour summarized that development this way:
“To make those purchases, GM is reducing its cash reserves from $25 billion to $20 billion. (Recall that you, the taxpayer, helped prop up GM’s cash reserves with a $49.5 billion bailout in 2009.) The stock buyback, combined with higher dividends, is expected to result in $10 billion for shareholders through 2016. It’s a grand time to be holding GM stock. And a bad time to have been behind the wheel of one of the thousands of defective vehicles for which GM is currently under investigation by the Department of Justice.”
And what of the cost of those defective vehicles to General Motors? The company set aside $400 million — less than one-tenth of what it is spending to buy back stock — as compensation for serious injuries or deaths resulting from recalled automobiles. Not all that money will necessarily be paid; Kenneth Feinberg, the administration of the compensation fund, has ruled three-quarters of claimants ineligible.
These trends go hand in hand with the sharply increasing inequality that has seen incomes at the top skyrocket while most people’s wages stagnate or decline.
This is what plutocracy looks like: The vast majority work hard so that a minuscule layer at the top of the pyramid can earn fabulous wealth, more than they can spend or invest. This also fuels speculation because there aren’t enough investment opportunities for the massive amounts of wealth accumulated, so excess money goes into speculation instead. Stock buybacks are one more method for funneling money to speculators — profits are divided among fewer people and those who do sell their shares are paid a premium above the trading price.
In an economic democracy, the people who do the work would be the ones who earn the rewards. Our current economic plutocracy is far removed from that ideal.