The Progressive Ensign

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Category: Stock Buybacks (Page 1 of 2)

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.

Labor is Our Most Productive Asset

 

Image: progressivebumperstickers.com

“Nothing will work unless you do” – Maya Angelou

On Labor Day it is a good time to reflect on our labor force – the people who make our economy go. What has become of labor in America? Does labor hold equal power with capital? No.

Wall Street, the citadel of capital,  wields supreme power focused on profit throughout our economy and control of our government. Corporations pander to financial leaders with ever higher profits manipulated by stock buybacks juicing the value of share prices. Management ensures investors are pleased with financial results using loose financial gimmicks and laying on record debt. While workers have seen their wages stagnate for 30 years since the 1980s.

Executives are handsomely compensated at 300% of the average worker’s wage. Why? They think they ‘are’ the company. At a $400 million biotech firm, this author listened to a VP extoll the value of management over workers, “we have all the power; we decide wages, allocation of resources, when and how work is done, and we can fire them anytime”.  Yet, workers make the company go.  Nothing works until the employees make it work. Managers don’t do the work, they manage the work that is getting done.

Managers are doing what they are compensated to do – increase profits and reduce costs. In Western accounting labor is viewed as an expense while money and machines are viewed as assets. Wait, aren’t employees assets? CEOs are always telling employees at ‘all hands’ meetings they are the companies’ most important asset. Do they treat employees that way?  What about when things get tough; instead of selling equipment, moving out of buildings or reducing executive benefits they lay off employees who can least afford it. Executives need to start treating employees like they are an asset.

Maybe we need to start recognizing labor as an asset from an accounting perspective. When we label capital an asset and labor a cost we are fundamentally placing a higher value on money and a lower value on people. That framework us wrong – if anything it should be the other way around. Because people create value in corporations not money. Money does not come up with the latest innovation or new process or service – people do. We need to require corporations to report on how they are building employees as assets and worker contribution to increasing company value.  The next step is for Wall Street to recognize social responsibility in their investments as Blackrock, CEO Larry Fink, has in a letter to CEOs of companies in their portfolio that he will be looking beyond profit, for implementation of policies by management in sustainability and worker advancement.

Unfortunately labor power is at an all-time low when in a great ‘boom’ economy now the 80 % in income have experienced declining wages since the Great Recession. On Labor Day we need to dig deep and renew our commitment to recognizing labor must share equally in all corporate prosperity.

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