Sanders, Schumer and Rubio Don't Understand Stock Buybacks

What do Bernie Sanders, Chuck Schumer, and Marco Rubio all have in common? Yes, they’re all United States senators. But they also all dislike stock buybacks — and apparently, don’t understand them particularly well.

After Sens. Sanders (D-VT) and Schumer (D-NY) penned an op-ed in the New York Times attacking stock buybacks as harmful to the economy, Sen. Rubio (R-FL) followed them a week later by introducing legislation aimed at limiting buybacks by changing their tax treatment. No stranger to the anti-buybacks bandwagon, Rubio also criticized the amount of share buybacks corporations were engaging in following the passage of the Tax Cuts and Jobs Act last year. His reasoning flies in the face of economics.

The narrative promulgated by those targeting buybacks goes something like this: rather than using the savings from the corporate rate cut to benefit workers, corporations are simply rewarding wealthy shareholders by buying back their own stock and boosting stock values. And it is true that stock buybacks benefit stockholders — following the passage of the TCJA, a National Taxpayers Union Foundation analysis estimated stock buybacks after tax reform would result in the median retirement account yielding $723 more each year than they would have otherwise. 

Where the senators err, however, is in assuming that benefits to stock owners mean that workers are shortchanged. Opponents of the tax reform legislation often mischaracterize the argument for corporate tax cuts as “trickle-down economics,” meaning the belief that corporations would simply give some of the excess profit to workers out of the goodness of their corporate hearts.

That’s not the case. The reason why corporate tax cuts benefit workers is that they enable corporations to make productive capital investments that they did not have the funds for previously. These investments make each individual worker more productive — and thus more valuable to the company, causing wages to increase. 

So if that’s the case, where are the stock buybacks coming from? Research shows that corporations only engage in buybacks when they are out of productive investments to make. If corporations sell stock to raise funds for investment, buybacks are effectively the opposite — the equivalent of you putting part of your paycheck into the bank. If there are no more productive investments to make, businesses put leftover money towards having the ability to sell stock in the future, should they need to raise money. That’s why there’s no connection between the amount of corporate stock buybacks and economy-wide investment.

Buybacks also have another benefit. By buying back stock, corporations allow investors to push money towards businesses that do have productive investments to make. Buying back stock increases the capital available to investors for them to invest in businesses seeking to raise money. They’re a mechanism that allows businesses that don’t need investment to plan for the future, while simultaneously helping businesses that do need investment to raise the funds they need now.

By going after buybacks, the senators are betraying a lack of understanding of these principles. Buybacks are a sign of a healthy economy, not one that’s punishing workers.