The Progressive Ensign

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Category: Stock Buybacks (Page 1 of 2)

Saving Democracy: In the Next Recession Government Stimulus Will Not Be Enough to Help the Middle Class – Innovative Initiatives Are Needed

A recession is emerging with interest rate curves inverted, the end of the business cycle at hand, world trade falling and consumers and businesses beginning to pull back spending.  The question is: will monetary or fiscal stimulus turn around a recession?  In this post, we find both stimulus alternatives likely to be too weak to have the necessary economic impact to lift the economy out of a recession and will not help the middle class out of a stagnant financial position. Finally, we identify a new approach to government intervention based on an innovative ‘seed’ and multi-partner program to lift the middle class out of economic decline.

Our economy is at the nexus of several major economic trends formed over decades that are limiting monetary and fiscal options. The monetary policy of central banks has caused world economies to be immersed in liquidity yet resulting in limited growth. Central bankers in Japan and Europe have been trying to revive growth with $17 trillion injections using negative interest rates.  Japan can barely keep its economy growing with an estimate of GDP at .5 % thru 2019. The Japanese central bank, holds 200 % of GDP in government debt.  The European Central Bank holds, 85 % of GDP in debt and uses negative interest rates as well. Germany is in a manufacturing recession with the most recent PMI in manufacturing activity at 47.3 and other European economies contracting toward near zero GDP growth.  

Lance Roberts notes that world economy is not running on a solid economic foundation if there is $17 trillion in negative yielding debt in his blog, Powell Fails, Trump Rails, The Failure of Negative Rates . He questions the ability of negative interest policies to stabilize world economies,

You don’t have $17 Trillion in negative-yielding sovereign debt if there is economic and fiscal stability.”

Negative interest rates and extreme monetary stimulus policies have distorted financial relationships between debt and risk assets. This financial distortion has created a significantly wider gap between the 90 % and the top 1 % in wealth.

Roberts outlines in the 6 panel chart below how personal income, employment, industrial production, real consumer spending, real wages and real GDP are all weakening in the U.S.:

Sources: Real Investment Advice – 8/23/19

Trillions of dollars of monetary stimulus has not created prosperity for all. The chart below shows how liquidity fueled a dramatic increase in asset prices while world GDP declined by about 25 %:

Sources:World Inequality Lab, Thomas Piketty, Gabriel Zucman et al – 2018

There are a number of reasons monetary stimulus by itself has not lifted the incomes of the middle class. One of the major reasons is stimulus money has not translated into wage increases for most workers.  U.S. real earnings for men have essentially been flat since 1975, while earnings for women have increased though basically flat since 2000:

Source: U.S Census Bureau – 9/10/19

If monetary policy is not working, then fiscal investment from private and public sectors is necessary to drive an economic reversal.  But, will private and public sector sectors have the necessary tools to bring new life to an economy in decline?

Wealth Creation Has Gone to the Private Sector

The last 40 years has seen the rise of private capital worldwide while public capital has declined. In 2015, the value of net public wealth (or public capital) in the US was negative -17% of net national income while the value of net private wealth (or private capital) was 500% of national income. In comparison to 1970, net public wealth amounted to 36% of national income while the for net private wealth was at 326 %.

Source: Wealth Inequality Lab, Thomas Picketty, Garbriel Zucman et al – 2018

Essentially, world banks and governments have built monetary and fiscal economic systems that increased private wealth at the expense of public wealthThe lack of public capital makes the creation of public goods and services nearly impossible. The development of public goods and services like basic research and development, education and health services are necessary for an economic rebound. The economy will need a huge stimulus ‘lifting’  program and yet the capital necessary to do the job is in the private sector where private individuals make investment allocation decisions.  

Why is building high levels of private capital a problem?  Because as we have discussed private wealth is now concentrated in the top 1 %, while 70 % of U.S GDP is dependent on consumer spending.  The 90 % have been working for stagnant wages for decades, right along with diminishing GDP growth.  There is a direct correlation between wealth creation for all the people and GDP growth.

Corporations Are Not In A Position to Invest

Some corporations certainly have invested in their businesses, people and technology.  The issue is the majority of corporations are financially strapped.  Many corporate executives have made profit allocation decisions to pay themselves and their stockholders well at the expense of workers, their communities and the economy. 

S & P 500 corporations are paying out more cash than they are taking in, creating a cash flow crunch at a – 15 % rate (that’s right they are burning cash) to maintain stock buyback and dividend levels:

Sources: Compustat, Factset, Goldman Sachs – 7/25/19

In 2018 stock buy backs were over $1.01 trillion are at the highest level they have ever been since buybacks were allowed under the 1982 SEC safe harbor provision decision. It is interesting to consider where our economy would be today, if corporations spent the money they were wasting on boosting stock prices and instead invested in long term value creation.  One trillion dollars invested in raising wages, research and development, cutting prices, employee education, and reducing health care premiums would have made a significant impact lifting the financial position of millions. This year stock buybacks have fallen back slightly as debt loads increase and sales fall:

Source: Dow Jones – 7/2019

Many corporations with tight cash flows have borrowed to keep their stock price elevated causing corporate debt to hit new highs as a percentage of GDP (note recessions followed three peaks):

Source: Federal Reserve Bank of Dallas – 3/6/19

Corporate debt has ballooned to 46 % of GDP totaling $5.7 trillion in 2018 versus $2.2 trillion in 2008.  While the bulk of these nonfinancial corporate bonds have been investment grade, many bond covenants have become lighter as corporations seek more funding. Some bond holders may find their investment not as secure as they thought resulting in less than 100 % return of principal at maturity.

In a recession corporate sales fall, cash flow goes negative, high debt payments become hard to make, employees are laid off and management is trying to hold on.  Only a select set of major corporations have cash hoards to ride out a recession, others may be able obtain loans at steep interest rates, if at all.  Other companies may try going to the stock market which will be problematic with low valuations.  Plus, investors will be reluctant to buy stock in negative cash flow companies.

Thus, most corporations will be hard pressed to invest the billions of dollars necessary to turnaround a recession. Instead, they will be just trying to keep the doors open, the lights on, and maintain staffing levels to hold on until the day sales stop falling and finally turn up.

Public Sector is Tapped Out Too

In past recessions, federal policy makers have turned to fiscal policy – public spending on infrastructure projects, research development, training, corporate partnerships and public services to revive the economy.  When the 2008 financial crisis was at its peak the Bush administration, followed by the Obama government pumped fiscal stimulus of $983 billion in spending over four years on roads, bridges, airports, and other projects. The Fed funds interest rate was at 5.25 % at the peak, so interest rate reductions had a significant impact versus today at 2.25 %. It was the combined monetary and fiscal stimulus that created a V-shaped recession with the economy back on a path to recovery in 18 months. It was not monetary policy alone that moved the economy forward.  However, the recession caused lasting financial damage to wealth of millions. Many retirement portfolios lost 40 – 60 % of their value, millions of home owners lost their homes, thousands of workers were laid off late in their careers and unable to find comparable jobs.  The Great Recession changed many people’s lives permanently, yet it was relatively short lived compared to the Great Depression.

As noted in the chart above, public sector wealth has actually moved to negative levels in the U.S. at – 17 % of national income.  Our federal government is running a $1 trillion deficit per year.  In 2007, the federal government debt level was at 39 % of GDP. The Congressional Budget Office projects that by 2028 the Federal deficit will be at 100 % of GDP.

Source: Congressional Budget Office – 4/9/19

We are at a different time economically than 2008. Today with 80 % of GDP public debt, a Fed balance sheet with $4 trillion while the federal debt level is projected to grow to 100 % of GDP by 2028. In a recession federal policymakers will likely make spending cuts to keep the deficit from going logarithmic. Policy makers will be limited by the twin deficits of $22.0 trillion national debt and ongoing deficits of $1 trillion a year eroding investor confidence in U.S. bonds. The problem is the political consensus for fiscal stimulus in 2008 – 2009 does not exist today, or probably even after the 2020 election. Our cultural, social and political fabric is so frayed as a result of decades of divisive politics it is likely to take years to sort out during a recession. Our political leaders will be fixing the politics of our country while searching for intelligent stimulus solutions to be developed, agreed upon and implemented.

What Will the Next Recession Look Like?

We don’t know when the next recession will come. Yet, present trends do tell us what the structure of a recession might look like, as a deep U- shaped slow period over years, hurting the poor and working class the hardest:

  1. Corporations Short of Cash – Corporations already strapped are short on cash, lay off workers, pull back spending, are stuck paying off huge debts.
  • Federal Government Spending Cuts – The federal government caught with falling revenues from corporations and individuals, is forced to make deep cuts first in discretionary spending then social services and transfer funding programs. The reduction transfer programs will drive slower consumer spending.
  • Consumers Pull Back Spending – Consumers will be forced to tighten budgets, pay off expensive car loans and student debt, and for those laid off seeking work anywhere they can find a job.
  • World Trade Declines – World trade will not be a source of rebuilding sales growth as a result of the China – US trade war, and tariffs with Europe.  We expect no trade deal or a small deal with the majority of tariffs to stay in place. In other words, just reversing some tariffs will not be enough to restart sales. New buyer – seller relationships are already set closing sales channels to US companies. New country alliances are already in place leaving the US closed out of emerging high growth markets.  A successor Trans Pacific Partnership (TPP)  agreement with Japan and eleven other countries was signed in March, 2018 without the US, China is negotiating a new agreement with the EU. EU and China trade totals 365 billion euros per year. China is working with a federation of African countries to gain favorable trade access to their markets.
  • ­Pension Payments in Jeopardy – Workers dependent on corporate and public pensions may see their benefits cut from pensions which are poorly funded today. GE announced freezing pensions for 20,000 employees, the harbinger of a possible trend that will  reduce consumer spending
  • Investment Environment Uncertain – Uncertainty in investments will be extremely high, ‘get rich quick’ schemes will flourish as they did in 2008 – 2009 and 2000.
  • Fed Implements Low Rates & QE – The Fed is likely to implement very low interest rates (though not negative rates), and QE with liquidity in abundance but the economy will have low inflation, and declining GDP feeling like the Japanese economic stasis – ‘locked in irons’.
  • Unemployment Soars – workers in low wage jobs, support, non-core (HR, IT, Admin) jobs will be laid off first. Industries already weak in the economy feel the downward spiral the most: retail, materials, manufacturing, and energy. As the recession deepens, small businesses that can not get loans to get through the rough times so they close. Even medium businesses are hit hard, as they do not have the access to worldwide markets to offset declining US sales. The rate of multiple job holders is at an all time high now, it will continue to soar as workers try to sustain their standard of living in a contractor economy with no safety net for workers.

Next Steps:

A recession of the magnitude we expect will hit the middle class hard as they are the most vulnerable.  Their wages have been flat for most of the decade while the top 10 % have enjoyed the majority of income and wealth increases. Due to the private sector holding most of the positive wealth in the U.S. a new approach to simulating the economy will be necessary.

1.Corporate Stimulus

While most corporations will be cash poor, some companies will be cash rich.  Firms like Apple, Alphabet (Google), Microsoft all hold over $100 billion in cash.  Cisco and Oracle both have over $50 billion cash on hand.  These tech giants hold most of their cash overseas.  To spur spending in the right places for the economy, tax laws could be passed to reduce taxes when repatriated funds are spent on employee development, research and development, productivity and wage increases.  Google, Facebook, and Apple have taken a good first step on housing, with all three donating about $4 billion to housing programs. While housing may not seem like a ‘public good’ it has become a major issue in the San Francisco Bay Area from high growth businesses and long commutes to inexpensive housing 2 hours away. We would like to see the emergence of the ‘servant’ CEO from these companies and others in sectors of the economy with cash like banking, pharma, and health insurance.  Over 180 Business Roundtable executives released a declaration that corporations need to take responsibility for their communities, not just seeking profits. The introduction to their statement notes

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”

Ensuring economic opportunity for all means corporate executives make investments in the future financial health of their communities.  Business leaders can take the lead by ending stock buybacks which totaled $1.01 trillion last year and investment those funds in employee development, pension plans, price reductions, productivity enhancements, maintain staffing levels and innovative research.  Otherwise the safe harbor policy the SEC approved in 1982 can be revoked to prod executives to make investment decisions to ensure the future of both their businesses and communities.

2. Transfer of Private Wealth and Income to Public Sector

Wealthy business people and individuals can take the lead in driving the passage of legislation transferring some wealth back to the public sector. In November, 2017 over 400 millionaires and billionaires sent a letter to Congress to strongly recommend against the passage of the Tax Cut bill which created a $1.5 trillion additional federal deficit while 80 % of the benefits went to the top 5%.  We will need more of this kind of active leadership across the political spectrum to make the necessary shift to finance the creation of public goods and services necessary to turnaround a recession.  Other wealthy individuals have called for increased taxes on income and wealth of the top 5 to 10 %.  Just changing the present tax laws back to 2016 levels would help to boost funding to fund fiscal stimulus programs in innovative ways. There is backing by some wealthy leaders to end the carry tax exclusion that hedge fund managers and others in the financial industry use to reduce taxes. 

Taxes as a percentage of profits has continued to fall from 1960 at 45 % to 15 % in the last year.  Corporate lobbying of Congress worked to reduce company tax rates, create loopholes and subsidies for some industries.

Sources: The Wall Street Journal, The Daily Shot – 6/29/19

Corporate taxes can be evaluated as a percentage of GDP as well where it is clear corporations were able to lower their federal tax burden from a peak of 6% in 1955 to a low of 2 % in 2012 a 66 % reduction, and is estimated to be lower with the Tax Cut Bill of 2017 lowering the standard tax rate from 35 % to 22 %.  The GAO in 2012 evaluated all the tax law benefits and deductions corporations enjoyed and found the effective tax rate was really 12.9 %.  Today, the effective tax rates is even lower as corporate federal tax receipts fell to an all-time low of $204 billion for fiscal 2018 a 31 percent decline from 2017. Some corporations are paying no federal tax at all. Amazon declared $11 billion in income for 2018 and paid no taxes.

Source: GAO – 5/13

One way corporations evade US taxes is by depositing billions in profits in offshore tax havens to shelter their profits from taxes.

Sources: Zucman – UC Berkelty, Torslov & Wier – University of Copenhagen, The Wall Street Journal, The Daily Shot – 11/13/17

Clearly the use of tax havens needs to end, as our federal government is losing billions of dollars of receipts to invest in the public goods this country so desperately needs.. Corporate taxes raised and loopholes plugged make sense to begin shifting the necessary funds over to the federal government.

The tax legislation process is critical for long term success and support.  Bringing corporate taxes back to levels seen over a decade ago would go a long way toward reducing the federal deficit and fund public services at necessary levels to create more economic opportunities for all. Multiple points of view across the political spectrum need to be sought out and brought together in a special congressional committee focused on writing a fair tax bill to get the federal budget on a firm foundation and fund Medicare and Social Security programs.

3, Deploy Innovative Multi Partner Economic Innovation Programs to Solve Economic Challenges – Heartland Region Development

At the heart of political divisions in our country today is the decline of a strong middle class and economic inequality at the highest level since 1929.  Building a strong middle class that enjoys the economic benefits of a secure home, job, health care and safe community will result in people seeing a common good emerging for everyone. Monetary policy has failed to provide economic benefits to the middle class, while boosting the values of financial assets largely held by the top 1%.  If a recession comes, what will happen to the middle class, and vulnerable people in our economy?

It is unlikely given the present financial structure of our economy that monetary policy alone which has failed the middle class with stagnant wages will somehow turn the economic status around for the middle class.  The decline of the middle class is happening in parallel with a fall in  GDP to 1.9 % forecast for the 3rd quarter of 2019.  Part of the decline in GDP is associated with a declining labor participation rate. There were 7.6 million job openings, last January with more than 8.6 million unemployed for a gap of 1 million jobs.  This gap started in the spring of 2018 for the first time in 18 years.  Part of the reason for the gap between job openings and job seekers is the imbalance in our labor force by skills and regional limitations. Millions are not working due to lack of education, skills, health, lack of child care or limited work opportunities in their area.  For the core workforce between ages 25 – 54 the participation rate recently has been declining since the peak in 2000.

Sources: Federal Reserve – St. Louis, The Wall Street Journal, The Daily Shot – 6/10/19
Sources: Bureau of Labor Statistics, CBO, NBER, Morgan Stanley – 8/9/19

The most vulnerable regions are in non-metro areas of our country where the economic boom on the coasts and big cities has passed them by. Research indicates a key contributing factor to the decline in participation of 18 – 24 years old group is the lack of young workers in non-metro regions.

Source: USDA – 2017

Poverty remains a major issue in rural areas of the country, Midwest and South.  These areas have lost millions of manufacturing jobs due to automation and moving factories offshore.  Lack of economic health, forces supporting businesses to leave, closing of hospitals and support services.  The opioid epidemic is highest in rural regions of the country.

Sources: US Census Bureau, The Economist, The Wall Street Journal, The Daily Shot – 10/18/19

Many of these rural, Midwest and Southern counties have been left out of the economic mainstream for decades as noted by the darkest purple areas of the chart. While, there single factor programs like enterprise zones with reduced taxes, or innovation institutes at major land grant universities we have not seen multi-factor programs that give a ‘focused force’ of economic impact necessary to turnaround these regions.  The Heartland was chosen for the first implementation in addition to the reasons above, there are additional cultural, health and education issues that need to be addressed. 

The Heartland is where: (1) mobility to take new jobs is the lowest in rural and small cities in the Midwest and South (2) there is the highest concentration of young people without a 4-year degree (3)  the lowest concentration of entrepreneurs is holding back business formation and development to create new higher paying jobs with a future (4) the largest number of people without health insurance are found in the South and rural areas of the Southwest and West  (5) slow speed Internet connections are the norm leaving many heartland regions way behind in the digital revolution where new jobs, opportunities for education and quality health are being developed and accessed (6) accounting for births, deaths and migration rural population has declined for five consecutive years.  It is deplorable that a complete socio-economic region of the country has so many factors that have not been addressed to extent necessary to transform people’s lives toward good health and fair share of prosperity.

Rural and small town America enjoyed a renaissance of increasing jobs and prosperity into the mid 1990s. During this time rural counties were home to more than one-third of all net new businesses establishments fueling the job creation engine. Yet, in the past ten years the economic conditions have changed dramatically, leaving these regions out of robust growth in coastal areas since the Great Recession.  For more details and research please read our blog: The Hallowing Out of Heartland America.

We think that the multi-partner program outlined below besides working in rural regions will work as well in economically depressed neighborhoods of our inner cities on the coasts or major cities of the Midwest with local modifications to take into account cultural, ethnic and societal differences. 

The Multi-Partner Economic Innovation Initiative

The Silicon Valley innovation process is a multi-organization model used as a base for the Multi-Partner Economic Innovation Initiative (MPEII).  Universities working as incubators, with investors, local and state government support, investors, highly educated workforce, and immigrants all contributed to making the Silicon Valley model successful in giving birth to Google, Facebook, Apple, LinkedIn, Twitter, and hundreds of other companies. We have added other necessary elements to jump start a slow growth economic regions like non-government organizations  providing training or recovery services, health providers to take on major issues like opioid addiction, faith-based organizations for counseling and financial assistance. Finally, federal government agencies will need to play a key role in turning around a slow growth region vulnerable in a recession to a spiraling down turn. We introduce the idea of a Federal Reserve Labor Bank, organized much like the present Federal Reserve for monetary policy yet with a charter to constantly build and renew our labor force for unimagined new jobs.

The MPEII would be structured as a non-profit corporation with representatives from all the organizations necessary to drive the coalition to success in meeting the economic objectives of the region.  The federal government rather than building a large bureaucracy would seed the development of the MPEII entities called Development Centers with $25 – 50 million, joined by corporate foundations, local and state government and social entrepreneurs. In our first imitative The Heartland Development Center (HDC) is the central innovative entity bringing all the partners together and taking leadership to drive solutions in rural regions. The HDC is formed as an investment organization, putting out a call for business plans from local social entrepreneurs to solve a local regional problem with the help of the MPEII organizations. The economic goals could be achieved by profit making companies or non-profit organizations where making a profit is not appropriate or not fitting within the development goals.

The People – At the center of this economic imitative are the people. The voter participation level during the 2018 – mid-term election hit a 50 year high at 47.5 % with 110 million Americans voting in congressional races. This engagement in the political process at the local, state and federal is crucial if we are to develop the consensus moving forward to solve our economic problems.  Voters need to demand that corporate, private investors, government and related organizations needs to change polices to focus on building the middle class, protecting our environment, cutting the costs of education and ensuring equal opportunities and a level playing field for all that participate in our economy. In our Heartland example implementation to bring our rural and southern regions into the economic mainstream, local communities, and leaders from multiple institutions need to be involved in making the changes necessary to bring a lasting economic boost to the Heartland.

Universities – The HDCs in selected rural and southern regions would be located in nearby universities for support to be forward looking with local students and professors – consultants as core staff along with local leaders to solve major challenges. The Heartland Development Center acts as a catalyst creating an innovation ecosystem to jumpstart local economics and social structures. HDCs would focus on all the key issues that a region needs to address to rebuild their economy and people’s lives: business formation, education and training, digital infrastructure, affordable housing, engaged local innovation media and health care. There already is an imitative by Congressman Ro Khanna, to fund a modern version of the Morrill Act, that funded the development of land grant universities to support agricultural development in the U.S in 1862. Fifty universities would receive grants of $50 – 100 million to fund technology centers to focus on training and development programs for 21st century jobs. This bill is a good start, the HDC is extension of this imitative to provide a ‘focused force’ on solving regional economic problems and create an innovation ecosystem that is self-renewing.

Federal, State, Local Government – Federal government funding is necessary for a cross regional program with multiple components along the scale of the Marshall Plan after WWII for re construction of Europe.  State and Local governments have the local knowledge, leadership and links to local universities, health providers and non-government organizations that will be helpful in forming the consensus required to focus people and resources on the key problems with workable solutions. The Federal Reserve has analysts who have completed research and continue to monitor the economic health of the 12 Federal Reserve districts that will be helpful to base programs on patterns in the facts.  We propose that a pilot ‘Federal Labor Reserve Bank’  (FLRB) be created in the 12 districts to focus on the labor issues, composed of governors in the 12 areas with labor expertise in corporations, universities or labor leaders.  The FLRB would set minimum wages for key regions conduct studies like the Fed beige report, called a ‘lavender’ report on the health of the workforce in each region.  The report would identify key labor trends, wage issues, and obstacles to creating a thriving workforce. The FLRB would offer loans to key entities with assistance from the Federal Reserve to providing of key training and development initiatives, in a timely manner. The FLRB’s mission is to build a thriving labor force and take on major challenges like identifying why the labor participation rate is so low compared to pre – 2008 levels and implement programs accordingly to increase the rate. Every month the FLRB would review how well it is doing in achieving goals of increased labor participation rate, increasing wages for the middle class and other goals as established by the Governors.

Corporations & Investors – Companies in these slow growth regions need support in multiple areas that are unique to the economics of each area.  Major employers should be included in the steering councils of the HDCs to provide valuable local guidance to HDC leaders on where to focus resources, training for job candidates and the product and sales direction of their businesses. Many corporations have investment groups and can be invited to participate in the HDC program, to achieve results for their business that they are willing to share with the community. Venture capitalists, angels and private equity firms will be encouraged to participate and may be invited to be on the HDC steering council. Telecom firms need to be invited to bid on digital infrastructure projects which may be funded by government grants. It is likely that some of these Internet projects may not be profitable for telecom companies or they would have already laid the fiber optic cables and setup the links to homes in these areas. Like the Rural Electrification program in the 1930s, the digital infrastructure must be in place for rural areas to gain fast access to the Internet.  Plus, high speed Internet access is a requirement to build innovation centers and create businesses with 21st century high technology jobs.

Non-Government Organizations, Foundations & Health Providers – Health services in many rural regions has deteriorated along with companies leaving the loss of jobs.  Unemployment rates are often twice the national average.  The lack of health service providers and hopelessness of not having a job is driving disease and death rates higher.  The CDC reports deaths due to cancer, heart disease and respiratory illness are 15 – 35 % higher in rural areas since the Great Recession. A number of communities have no hospital closer than 2 – 3 hours away.  Doctors setup a practice based on government rural doctor incentive programs, then leave after they have put in their required tenure.  Opioid overdoses are concentrated in rural states and Midwest region.

Source: CDC – 2017

A health services revitalization plan needs to be developed by region which includes hospitals, clinics and incentives for doctors to come, stay and build a practice in reach region. Often, the lack of high speed Internet limits the opportunities for health providers to shift to electronic records, services and even use of tele-medicine which would be helpful to reach out over long distances. Health and job candidate support are related as one research organization found that for many manufacturing employers in Indiana that for factory floor jobs as many as 45 % of the workers tested positive for drugs.

Training, career development, and apprenticeship working closely with universities can make a major contribution in a coordinated effort to put unemployed workers to work. NGO groups like the Opportunity@Work program are one approach to attack the job training challenge.  The training group started in the Obama White House focuses on providing Internet economy job training to workers in the heartland to gain digital skills for jobs in fields like programming and information technology.

Colorado has invested in its CareerWiseto bring businesses, colleges and vocational training groups into partnerships providing all Colorado high school juniors and seniors with a dual career path leading to a community college associates degree plus key skills.  Students can begin working on the factory floor as juniors learning key company job skills, and are guaranteed full time employment at the end of their apprenticeship along with financial support to earn a community college degree. 

Faith Based Organizations – many faith based organizations provide counseling services, welfare, foods services and other resources to those in need.  Working closely in the HDCs with their steering councils programs can be coordinated and focused in areas where churches, synagogues or mosques are located.  FBO groups often have been in neighborhoods for many years, with a deep understanding of the needs, trends and social issues that are unique to their area.  Leaders and staff in the HDC would do well to establish good connections with these groups to gain insights into which programs, services and resources are needed to turnaround the economic situation in their community.

In the end, Americans have always pulled together, solved problems and moved ahead toward an even better future. After a reversion to the mean in our capital markets and an economic recession things will get better.  A reversion in social and culture values is likely to happen in parallel to the financial reversion. The complacency, greed and selfishness that drove the present economic extremes will give way to a new appreciation of values like self-sacrifice, service, fairness, fair wages and benefits for workers, and creation of a renewed economy that creates financial opportunities for all not just the few.

Saving Democracy: Economics – Corporate Stock Buybacks Imperil Corporate Viability

Goldman Sachs just completed an analysis of corporate payouts and found that dividend and stock buybacks were 103.8% of their free cash flow. Meaning that they were paying more out in cash than they had on hand!  Free cash flow has dropped to – 15 %, while debt is up 8 %.

Sources: Goldman Sachs, Marketwatch – 7/29/19
Sources: Goldman Sachs, Marketwatch – 7/29/19

This squeeze is unprecedented, it is the worst cash flow crisis since 1980, and is unsustainable.  Corporate executives have turned to extremely high borrowing levels to keep this financial merry-go-round going. While, turning to stock buybacks to hype the price of their stock and keep earnings per share high to the tune of $1.5 trillion by S & P 500 companies in the last year.

If sales and profits drop due to the trade war and consumer spending declines as it has in the last four months, corporations will default on their debt. A downward economic spiral will be triggered. 

Maybe this is another reason the Fed announced a cut in interest rates and shift to an ‘inflation averaging framework’.  JPMorgan recently commented to Marketwatch they believe Fed economists are shifting to a position of not worrying about inflation but instead on keeping money flowing to corporations at low interest rates possibly to zero.  By keeping rates super low the Fed is enabling executives to waste profits on stock buybacks to hype their pay and stock price. We need strong companies making investments in research, development, innovation, productivity improvements and raising wages for workers. When the economy works for all then democracy is strengthened.

The financial music will stop when sales and profits decline, an already desperate cash flow position becomes untenable putting company viability in doubt.  Looking out a year or two, we expect the Fed to come to the rescue after possible zero interest rates have panned out. Last March, former Fed Chair, Janet Yellen recommended that the Fed be authorized to purchase corporate stock and bonds to keep the economy going if a recession hits.

The Big Myth: Stock Buybacks Boost the Economy & Create Jobs

After the recent NY Times op-ed by Senators Bernie Sanders and Chuck Schumer to require corporations share profits with workers before stock repurchases, there has been a lot of confusion about how stock buybacks work and their impact on the economy.  Let’s clarify how share buy backs work first.

Corporate stock is bought and sold in open markets between a buyer and seller. On any one day the share price moves up or down depending on the demand for shares between a buyer and seller.  Corporate executives can manipulate the price of shares by reducing the pool of shares on any trading day, according to SEC rules up to 25 % of the daily volume and not executing a repurchase within the first 30 minutes of the open or the close.  If shares are taken off the market on any one trading day, posted to the books of the company those shares are effectively taken out of the market and if demand stays the same the price goes up.  Of course, the share price can go down as well, if demand drops on the repurchase day.

Stock buybacks cause misleading reports on earnings per share.  A simple example, if Gigantic HiTech has profits of $1 million for the quarter and 1 million shares are outstanding in the market, then the EPS is $1.00.  However, if the firm purchases 100,000 shares during the quarter and takes them off the open market the total number of outstanding shares is reduced to 900,000 artificially boosting EPS to $1.11 or 11 %.  The company has not increased profits during the period they have just reduced the number of shares outstanding and report the EPS figure in non GAAP reports.  GAAP reporting requires EPS be calculated on the number of outstanding shares before repurchase.

So, the dollars spent on stock share repurchases do not go into ‘jobs, the economy or re-invested’ the money is spent on goosing stock prices. The SEC in 1982 prior to the Safe Harbor policy that allows for stock repurchases called corporate stock repurchasing ‘stock price manipulation’.  From 1982 to today the policy allowed corporations to execute market stock purchases and not be held liable in shareholder lawsuits for price manipulation.  Plus, companies only had to report open market purchases each quarter voluntarily.  Effectively, the SEC gave companies the green light to drive stock prices anyway they wanted. Just because time has gone buy that does not change the manipulative character of the stock repurchase practice.

How big a problem is it?  Goldman Sachs estimates that $940 billion stock repurchases were made in 2018, and they continue to forecast a similar figure for 2019.  Major players in FAANG stocks repurchase billions of dollars of shares supporting stock prices.  Forbes estimates that Apple spent $100 billion in share repurchases in 2018.  CNBC calculated a year ago that Apple share prices were inflated by as much as 20 %.  Between 2015 through 2017 S & P companies spent 60 % of all profits on stock buybacks, according to Forbes.

So, where else could they be spending the money instead of driving stock prices up and increasing the compensation of executives?  On employee wages, but wage increases are not happening, interestingly since 1982 when the SEC Safe Harbor provision went into effect real wages have declined.

Source: Global Technical Analysis – 2/5/19

Real wages after inflation have continued to decline when allocated across all persons employed.  Bankrate surveyed 1,000 workers at all income levels last year finding only 27 % received raises. Corporations are not increasing wages even to keep up with inflation.

What about capital expenditures are they up?  No.  With all the pronouncements of executives that they are investing in their companies to increase innovation and productivity they are in fact not performing, here is the analysis of business investment as percent of GDP since 1998:

Sources: The Wall Street Journal, The Daily Shot – 11/9/18

Note the declining business investment line in the chart from 4.5 % of GDP in 1998 to 2.5 % in 2018, a 44 % reduction.

Maybe corporations are still increasing productivity anyway so they can afford to do stock repurchases?  No.  Productivity continues to stall.  The following chart shows total factor productivity (TFP) since 1948, the long term average is the green line from 1948 to 1971 versus 1972 to today red line today, plus growth in productivity is close to zero:

Sources: San Francisco Federal Reserve, Real Investment Advice – 1/16/19

Executives have made decisions about how to allocate profits that are not increasing productivity, raising wages, hiring workers or reducing prices.  Our economy and our workers are the losers while executives and the wealthy elite who own stocks profit from these short term decisions.

Next Steps:

Do executive decisions on profit allocation really affect workers and consumers?  Yes.

GM last year announced the closing of their Lordstown plant and the layoff of 15,000 workers due to a shift in consumer buying to trucks and misallocated investments in poor selling product lines.  Yet, since 2014 GM spent $13.9 billion in stock repurchases according to the Wolf Report.  GM could have spent that money on employee training, shifts in product development, the phased closing of plants and phased in building of new plants and likely would not have had to resort to massive employee layoffs.

Mylan announced 18 months ago a 584 % increase in the price of EpiPen’s used in life – death situations to counter act food allergy shock.  At the same time Mylan executives took care of themselves first with over $1 billion in stock repurchases to drive stock prices up. Analysts evaluated the product cost of goods and assembly for EpiPens and estimated it cost Mylan about $2 billion to manufacture, so the $1 billion could have gone toward reducing the cost of the EpiPen by 50 %.

In both examples corporate executives took care of themselves first, and their employees or patients second.  This profligate management of profits from customers and patients was not allowed prior to 1982. Corporate executives have a social and ethical responsibility to allocate funds in the balanced interests of the company, employees and the community

Executives are executing stock buybacks at the cost of sound financial management as well. The debt to cash ration of S & P 500 corporations is at 18 %, a lower level than at the 2008 recession. When the economy slows corporations will be squeezed between debt loads, operating costs and low cash reserves.

Sources: Wells Fargo Investment Institute, Factset – 2/14/19

Our economy continues to decline as GDP shrinks year over year, in part by trillions of dollars being wasted on stock repurchases instead of being invested in worker training, wages, capital equipment and research and development. A trillion dollars is 5.26 % of the U.S. economy shifting buy back dollars could have a huge impact. Corporate executives have magnified the problem by borrowing money at low interest rates to keep stock repurchases going even when profits lag. Today, corporate debt is 45 % of GDP at all time high inflating the economic bubble.

Sources: St. Louis Federal Reserve, Real Investment Advice – 2/21/18 (recessions in gray)

A reduction in corporate borrowing to inflate stock prices would go a long way toward putting the economy on a more solid business foundation. A major SEC policy shift ending stock buy backs would need to be phased in as a percentage over several years to allow markets to adjust, yet if we are to build an economy that works for all we need to end this misleading, damaging and costly practice.

Corporate Debt Bubble Increases Probability of Recession

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Image: knowledge.wharton.upenn.edu

S & P 500 corporations have been borrowing money to buyback stock and increase dividends to investors.  Increasing their debt bubble could increase the probability of defaults. Research shows that defaults spike when the corporate debt to GDP ratio exceeds 44 %.

Sources: Bloomberg, S & P, The Wall Street Journal, The Daily Shot – 1/9/19

When companies take on so much debt defaults become a real possibility when sales fall, or profits are squeezed as debt payments become due. Apple recently announced that iPhone sales were falling in China and has decided to cut production of all iPhones by 10 %. Apple has plenty of cash, but their suppliers may not. Fedex in December announced plans to offer domestic employees buyouts because ‘global trade has slowed in recent months and the company expects trade to slow further.’ We can expect more reduced earnings and sales guidance beginning next week when 4th quarter reports begin coming in.

Sources: Gavekal Data/Macrobond, The Wall Street Journal, The Daily Shot – 1/9/19

When corporate debt to GDP ratios close in on 44 % or exceed that level recessions are likely to follow as the chart above shows.  There is much discussion in the financial press about whether there will be a recession or not.  It seems quite possible that record corporate debt combined with a likely fall off of sales in the 1st quarter of 2019 due to pull up buying by companies in the 4th quarter of 2018, will cause an economic slowdown or recession.  The slowdown is made much worse by corporations overindulging in debt to finance stock buybacks and dividend distributions. Plus, turning around these companies will be more difficult as defaults spiral downward, more companies are forced to close or layoff workers.  As workers are laid off they reduce spending, then reduced spending causes broad sectors of the economy to experience sales and profit declines.

Next Steps:

Where is the oversight of spendthrift management policies?  Directors are likely on stock bonus plans too, so they enjoy seeing the stock price goosed by share buybacks.  Where is a voice of moderation looking out for the long term viability of the company for customers, employees, shareholders and communities going to come from?  We need a national dialog on how to improve corporate governance taking into account the needs of all parties represented to reign in profligate borrowing .  Certainly, corporate executives did not start the trade war but they have borrowed way too much placing their firms in peril. It is management’s responsibility to look out for the interests of all effected by company success or failure.

Only 27 % of Workers Received Raises in Past Year

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Photo: fortune.com

Last month, Bankrate.com completed a survey of 1,000 workers from all income levels across the U.S. and found that only 27 % of existing full time and part time workers had received wage increases. For all the recent news about wage inflation, from the worker perspective they just aren’t seeing the wage increases.  The wage inflation reported by government surveys is an average and does not take into account income levels.  The higher paid workers are getting the raises so the average moves up.

Sources: Bankrate.com, Marketwatch – 12/14/18

If a worker changed jobs then the pay raise figure rises by 5 %, though from our perspective that still seems low.  When  workers change jobs shouldn’t they be receiving a raise in this tight labor market?  This trend seems to indicate that wage leverage for workers is still quite low compared to the power businesses have over wage increases.  As we have noted in the past businesses enjoy leverage over workers by automating jobs, Internet access to hundreds of candidates nationwide and outsourcing of non-core functions.  Plus, executive power is increasingly concentrated with mergers and acquisitions cutting down the number of competitors that workers can chose to work.

Pew Research reports most pay raises going to the top 10 %,while non-supervisory and production workers barely received any wage increases.

Sources: U.S. Bureau of Labor Statistics, Pew Research – 8/7/18

Real wages (taking into account inflation) have risen 4.3 % since 2000 for the lower quarter in income. Yet, for the top 10 % wages have increased by 15.7 % or $2,112 per year. Some of the pressure employers feel is from increased health insurance costs and adding non-wage benefits to keep pace with competitors.  The reality is that wages are what workers have to use to make the majority of their payments for housing, food, and necessities.  Plus, wages for the top 10 % keep going up anyway, so why don’t workers get the same rate of wage increases?

Wage stagnation has been happening for years.  Since 1964 an analysis of wages for production and non – supervisory workers by Pew Research shows that today’s wages have just not kept up with inflation.

Source: U.S. Bureau of Labor Statistics, Pew Research – 8/7/18

Next Steps:

For all the discussion in the financial media about a wage inflation spiral the reality is that structurally workers in the lower 80 % income bracket are not getting their fair share of the economic pie. While, there have been federal laws proposed for limiting CEO pay Portland, Oregon has passed a law with a limit for executives at 150 % of worker pay or tax penalties are paid. Regulating pay in this way seems to be micro managing pay scales. However, we have a fundamental issue with pure capitalism of the American economy not delivering wealth to the vast majority of workers. In the 1970s, 1980s workers were receiving wage increases at 6 %, 7 % and sometimes 8 %.  After the Great Recession workers are just averaging 2 % to 2.5 % in wage increases.  Globalization caused outsourcing of manufacturing jobs held by the working class which hallowed out good paying lower education jobs. Millions of manufacturing job have been lost and not replaced.  Our economy is 70 % services based with highly educated knowledge workers receiving most of the benefits. Ending stock buybacks would certainly put more cash into corporate coffers to distribute to workers – but will executives raise wages?  Raising wages is an expense on the corporate ledger, and executives are paid to increase profits not reduce them. Executives are at the pinnacle of their power. Yet, as a society we have to fundamentally rethink how we make the economy work for all not just the few at the top of the corporate pyramid.

Drug Companies Want a $4 Billion Break: No Way!

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Image: youtube.com

Major drug companies are lobbying Congress to reduce the $4 billion increase in costs due to raising the discount for seniors purchasing drugs at the ‘donut hole’ level in Medicare Part D to 70 % from 50 %. The provisions for an increase in the discount was included in a spending bill passed by Congress last February.

Pharma companies and major corporations with billions of dollars stashed overseas said that if tax rates were cut on dollars transferred to the U.S they would raise wages, increase R & D spending and reduce prices.  Most companies did not deliver on their promises or benefits to patients either. Instead, they increased the size of their stock buybacks by 4 to 5 times in the case of the largest stock buyback company, Amgen.

Sources: SEC, The Wall Street Journal – 12/6/18

Only two of the top ten companies actually reduced share buy backs since January of this year.  Corporations overall are expected to complete over $1 trillion of stock buy backs by December 31st Goldman Sachs estimates.

Over a dozen Democratic members of the House ofRepresentatives sent letters to five top pharma companies with data showing new increases in drug prices while increasing share buy backs.  The drug industry responded that they were reducing prices, increasing R & D spending and raising employee wages.  Merck, CEO, Kenneth Frazier said in a reply, “We view the legislation (tax cut) as providing us with more flexibility to deploy capital in support of our strategy to invent new medicines that address key unmet medical needs, ultimately benefiting patients.”  The reality is that prices for the most popular drugs are still going up.

AbbVie raised the price of Humira by 9.7 % in January the Democrats pointed out in their letter to the firm.   Inflation for this past year is 2.4 % that drug increase is nearly 4 times the rate of overall consumer price increases in the U.S. economy. AbbVie sent a reply to the Congressmen outlining many programs using their tax cut funds including: a $1000 salary increase to non-executive employees, plans to invest $2.5 billion in capital projects in the U.S. over the next five years, $100 million healthcare and housing for people in Puerto Rico, an $100 million to the Ronald McDonald House to fund lodging for pediatric cancer patients and their families.

Next Steps:

Drug costs hit seniors particularly hard because they need the medication, and they are on fixed incomes.  Drug companies have to do better by ending what the SEC called, “stock price manipulation”,  before the Safe Harbor policy in 1982 allowed stock buybacks. Billions of dollars are wasted to goose the price of stocks to benefit executives and big investors.  Investors are misled by earnings reports using fewer stock shares to compute earnings per share, often used to assess company performance. Patients are hurt by price increases, Humira costs patients $50,000 per year for the standard treatment if they have no insurance coverage.  Stock buybacks by pharma companies must stop, the price gouging of patients and insurers needs to end.

Another economy that drug companies should adopt is to end direct-to-consumer advertising of prescription drugs.  Over 150 countries do not allow prescription drug advertising, only the U.S. and New Zealand allow advertising directly to patients to create “pull” sales from patients requesting a drug from their doctor.  According to Kantar media, drug manufacturers spent $6 billion on direct to consumer television advertising in 2017, a 64 % jump from 2012. The billions being spent on DTC advertising are better spent on reducing drug prices. We applaud the moves by AbbVie in raising employee salaries, donations to Puerto Rico and Ronald McDonald house, these are excellent steps.  Many drug firms have foundations that offer patients with low incomes a way to obtain their medicines for free or little cost.  The difficult aspect of most of these drug-for-free programs is they require large volumes of paper work, with major time delays when the patient needs to the drug immediately. Drug company executives need to see the light on what is happening, the price gravy train and waste of stock buyback funds gleaned from patients needs to end.   Why wait for legislation? We appeal to CEOs – make the right moves now. See that taking responsibility for solving the cost crisis you have created will be far better for your firm, patients and insurers. You may get a solution you don’t want if you wait for Congress to pass legislation.

GM: Case Study to End Share Buy Backs

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Image: GM Lordstown plant to be closed – gmauthority.com

Yesterday, GM announced a series of plant closings and layoffs of 15,000 workers in North America.  GM attributed the need to shift its focus to electric car development, trucks and SUVs that consumers were buying, as sedan sales are falling.  Actually, auto sales worldwide have been dropping for the past year.

Source: Bloomberg – 11/27/18

Jesse Colombo, analyst at Clarity Financial notes that while GM’s announcement focused on electric car development the plant shutdowns and layoffs really were driven by of slowing auto sales.  The auto market has been shifting rapidly with the development of driverless cars, ride sharing reducing the need to own a car, and urbanization causing policy makers to fund more public transit. The auto maker announced that it will end production of the Chevy Volt electric sedan with sales falling short of targets. GM has targeted gig economy drivers for ride sharing companies like Uber and Lyft by offering an on demand service for the Chevy Volt at $225 per week in Austin.  It is not clear what will happen with this on demand service marketing beta test with Volt production being halted.  GM has partnered with Lyft, and made a $500 million dollar investment in the ride sharing company 2 years ago.  Thus, GM has made some investments in key new markets and technologies, yet is behind in adjusting to sedan sales which fell by 11 % in third quarter.

At the same time the auto market is undergoing rapid change, GM executives have been taking care of themselves as a first priority.  Wolf Richter, editor of the Wolf Report blog reports that GM spent $13.9 billion in stock buy backs since 2014.

Sources: Wolf Richter, Wolfstreet.com, Y- Charts, Marketwatch – 11/27/18

GM stock purchases took shares off the market to reduce supply, while expecting stock demand would move the share price up.  However, as Richter notes GM share price has actually fallen 10 % in that four year period. So, much for boosting the price of shares to pad the executive stock compensation plan.  Instead of investing in new technologies, research, new plants, employee training, increasing wages and other key transition programs GM completely wasted $13.9 billion dollars.  Poor management judgement is now causing 15,000 workers to lose their jobs in the U.S. and Canada.  While we will not know over the last four years if good business investments would have prevented all the layoffs it is certain the economic damage to Midwest and Canadian communities could have been significantly mitigated.

Next Steps:

Goldman Sachs estimates that S & P 500 corporations will complete $1.0 trillion dollars in stock buybacks this year.  One trillion dollars will be wasted by U.S. corporations as productivity investments have lagged over the past 5 years, and average real wages have been stagnant for the 80 % in income since the Great Recession.  As the GM example demonstrates, besides hurting employee wages, making U.S. companies less competitive and inflating stock prices now workers are losing jobs due to executive mismanagement and myopia on stock price.

Prior to 1982, the Securities Act of 1934 held that stock buybacks were a form of ‘stock price manipulation’ and were not allowed by the SEC.  This policy was overturned by an E.F. Hutton executive, John Shad as SEC Chairman appointed by President Reagan.  He created a ‘safe harbor’ policy where corporations could purchase their own stock, only a certain times during the trading day, with disclosure quarterly and blackout periods prior to earnings reports. Corporations have used buy backs since then but stock buy backs took off in 2015 to $695 billion and almost doubled to $1 trillion for 2018.

We recommend an end to the stock buyback safe harbor provisions and a return to the pre-1982 policy, management in many corporations has lost their bearings on why the company exists – first priorities being workers, their families, customer communities, society and the nation not their own compensation plan. Making the corporation profitable and valuable to shareholders is a means to achieving our societal goals of a decent wage, quality housing, and the ability of families to support their children.  In October, we posted an analysis on how major corporations like Boeing, GE and American Airlines underfunded their pension plans while executing  billions of dollars in stock buy backs. Executives need to take responsibility for full funding of all pensions not wasting money on stock buy backs. It  is time with so many middle class and economic investment needs that corporations receive a direct SEC policy shift to end stock buy backs.

Memo To CEOs: Invest in the Company, Not Yourself

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Photo: wikipedia.org

To: CEOs – S & P – 500

From: The Progressive Ensign

Subject: Stock Buybacks Are Out of Control

Date: November 5, 2018

Congratulations, this past quarter you knocked earnings out of the park, profits were higher in particular, though revenues lower and you did well by raising stock prices to new highs in September via stock buybacks.

Source: Standard & Poors – 11/4/18

Ok, you did well on stock compensation too with soaring stock prices.  You can take that trip to Cancun, buy a boat and a villa for extended stays.  You have worked hard, your team has gone all out to make your companies successful, and worked harder.  Remember, while you were traveling and making decisions on sales, financing, product development and marketing they are actually designing, building, shipping, selling and supporting your products and services.

Sources: The Labor Department, The Wall Street Journal, The Daily Shot – 11/5/18

Next, you have not been making the investments in capital equipment , R & D and innovation to move companies along and be prepared for more overseas competition or increase productivity. Thanks for moving wages higher for less than high school educated workers recently they still aren’t enough to keep up with inflation though. If you can increase productivity we can give workers raises without it hitting the bottom line an increasing cost, and earning would be stabilized or even get better. You wouldn’t need to use financial gimmicks like stock buy backs to take stock off the market, and goose the price so earnings look better on a per share basis.  Between 2010 and 2017 S & P companies spent 51 % of their operating earnings on stock buy backs.  That’s money just hyping stock nothing else.  Note that business investment is continuing to decline with lower highs and investments flat since 1998.

Sources: The Wall Street Journal, The Daily Shot – 11/5/18

Your joy ride on $1 trillion of stock buybacks needs to end.  We want to see a plan by the end of the month on how you will use that $1 trillion dollars in meaningful long term ways such as raising wages, job training, purchasing new equipment and systems, and innovating new products.  You are basically taking away the future of your workers and the country for your short term gain. Show by quarter how you will implement the plan and get your businesses actually growing again (in real dollars not financial gimmicks), workers supporting their families in sustainable lifestyle and making America stronger.

P.S. By the way, it is time to end your constant borrowing, rates are going up, and you spent most of the money on stock buybacks or other goodies not investing in the company.  You are mortgaging the future of the business by taking on a record amount of debt.  Please submit a plan for retiring this debt as part of your financial plan for investing in the company by the end of the month.

P.P.S.  For those of you ( a minority) who are not doing stock buybacks, thank you, and you who are spending on capex and raising wages thanks a lot!  Just submit a set of graphs showing your investments so we can show the other CEOs how it is done – as a best practice.

Major Corporations Underfund Pensions While Pocketing Stock Buybacks

 

Photo: marketplace.org

Five major corporations, among many others were examined by Danielle DiMartino Booth, in the Quill Intelligence blog,  The Daily Feather – Boeing, GE, American Airlines, Lockheed Martin and AT &T on their spending for pensions versus stock buybacks.

Sources : Bloomberg, Quill Intelligence – 10/22/18

The underfunded pensions ranged from just 62.4 % funded to a high of 79.6% for Boeing. Compared to explosive stock buybacks the pension underfunding is not acceptable.  This typifies the character of corporate America taking care of its own executives who are well compensated in stock plans versus workers who are given the financial leftovers.  When corporations purchase their stock from the open market  the price of the stock often goes up because the shares are effectively taken off the market.  Most executives have earnings and stock price targets as part of their compensation plans.

Goldman Sachs forecasts for all of 2019 about $1 trillion in stock buybacks.  Stock buyback funds are not going into raises for workers – which are the lowest they have ever been in a growing economy 2.5 % over the past 10 years.  When inflation is considered the wage raises are basically stagnant causing workers to fall further behind financially.  Workers are strapped by the high cost of auto loans, credit card debt and increasing healthcare premiums.

Stock buybacks means that corporations are not investing in innovation to increase productivity.  Productivity has stagnated since the Great Recession between 1.5 to 2.3 % per year, not enough to boost wages or keep prices in check for many sectors.  With 70 % of the U.S. economy provided by services businesses it is increasingly important that businesses invest in services innovation because services are a challenge to reduce costs or increase quality.

Next Steps:

We have been against stock buybacks from a pure transparency and valuation perspective to begin with – stock prices have been artificially inflated by as much as 20 % some experts believe.  Soaring valuations mislead investors into thinking a company on an earnings per share basis is performing better than it actually is. Stock buybacks do exactly nothing for the economy except to line the pockets of  executives who already make 300 % more than the average employee.  The trillion dollars going into stock buybacks are better spent on pensions to ensure workers can retire, or receive wage increases to make ends meet, or invest in equipment or innovation in research and development to increase productivity.   Stock buybacks were allowed by a former E.F. Hutton executive, named to head the SEC during the Reagan administration.  Now, would be a good time to end the malpractice and for the good of workers and the economy invest stock buyback funds in the future of America.

End Offshore Corporate Tax Havens

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

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In 2016, multinational U.S. corporations booked over 50 % of their foreign profits in overseas tax havens.  Whether the profits are made in Casablanca or Singapore corporations are using lax US tax laws and accommodative offshore tax haven laws to book profits where they can’t be taxed at fair share rates.  Note that pre-tax profits viewed as a percentage of wages paid ranged from 200 % in Singapore to 800 % in Ireland!

Sources: The Wall Street Journal, The Daily Shot – 9/12/18

Combine this tax information with the soaring use of stock buybacks by moving dollars from these offshore accounts to juice the price of their stock and we see corporate executives doing a great job of increasing their stock based compensation.

Sources: Compustat, Bloomberg Finance LP, Deutsche Bank, The Wall Street Journal, The Daily Shot – 9/12/18

The US stock market has dramatically diverged from overseas markets where China markets are down in bearish territory at 20 % for the year and emerging markets down close to 18 %. Yet, the  S & P 500 Index of U.S. stocks is up 7.4 % for the year.  With all the uncertainty in emerging country currencies, trade wars, lack of wages, falling home and care sales, the U.S. stock markets keep rising being propped up by stock buybacks. Nearly $1 trillion of buy backs have been announced for the year. Buy back dollars are not going toward raising employee wages which are 312 times lower than CEO wages.

Sources: The Wall Street Journal, The Daily Shot – 9/12/18

Little wonder workers are not getting a fair wage in many industries with corporate executives stashing money overseas where it is out of reach of U.S. tax laws.  Plus, executives are compensated for increasing profits, not increasing wages that would cut into profits.

Next Steps:

Corporations received a windfall from the Tax Bill last year which did not change taxation of U.S. corporate profits overseas, but instead gave corporations a huge one-time tax break on repatriated funds from the listed rate of 35 % to 15.5 % for cash related assets and 8% for illiquid assets.  Many corporations did bring funds back to U.S. this year, yet 70 % of the funds were used for dividends and stock buybacks. Only a small percentage of repatriated funds went to raising worker’s wages which is what CEOs promised they would do when lobbying for the Tax Bill.

It is time for corporate leaders to understand they need to start paying their fair share of U.S. taxes for entities overseas, and they need to pay a share of the cost of our armed forces overseas.  They benefit directly from having safe countries, government protection through embassies and staff and safe passage of cargo worldwide.  Plus, the U.S. government working in partnership with corporations provides businesses opportunities that firms from other countries with less presence don’t enjoy.  U.S. corporations need to pay up, and recognize profits in their respective countries where they do business with a share going to the U.S. government for the offshore benefits they receive.

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