The (socialist) thing about buybacks

Everyone’s bashing buybacks.

Bailouts and relief packages for Wall Street are so bad, critics say, because corporations just buy their own stocks and enrich themselves.

But what exactly is going on here, and why are buybacks such a big problem?

It’s not just ‘corporate greed’. That’s like saying the problem with circles is that they’re round. Corporations are greedy by definition in capitalism. Stock buybacks are a problem because they’re stupid and dangerous. The history of that dangerous stupidity is good for socialists to know.

‘Downsize and distribute’, dumb and dumber

Michael Roberts has a good new post on the marxist economics of the pandemic shutdown. In it, he mentions a study done by Baines and Hager on the corporate debt catastrophe.

The economists tell the story of how corporate governance changed in postwar US. Corporations used to keep their earnings in-house and reinvest them in productivity. That strategy was called ‘retain and reinvest’.

But in the 1980s—with a shift in thinking called agency theory, part of a broader neoliberal turn— corporations started sending more earnings out to shareholders at the expense of their productivity. Economists call that new strategy ‘downsize and distribute’, or shareholder capitalism, which includes large corporations using earnings to buy back their own stock. (The history behind this is here.)

Interest rates were low, and got even lower after the 2008 financial crisis, so why not?

One long-term effect of this focus on shareholders rather than labor productivity was increased corporate debt. The bastards just kept taking out loans rather than increase productivity (pretty sure the falling rate of profit has something to do with this too).

The graph of increasing corporate debt since 1980, included at the beginning of this post, is pretty staggering. Eventually, people got a little worried: what if the corporations can’t pay those debts off? What if they default? What if there’s another bubble here?

This potential corporate debt crisis was one of the biggest concerns around that looming recession everyone thought was coming but never actually did. The worry was that corporations were in so much debt that, if interest rates went up or something really bad happened, they’d default and send things into a tailspin.

The IMF called it a “timebomb” back in October, estimating it at $19 trillion internationally. Interest rates didn’t go up, but coronavirus happened. And now the bomb is basically going off, becoming a corporate credit run.

Ultimately Baines and Hager say this is a problem because medium-sized and small companies will go under, exacerbating the supply and demand shocks created by the production crisis.

The case for worker control

For socialists, whether or not a corporation buys back their own stock isn’t actually the issue here. And saying it’s just ‘corporate greed’ isn’t enough.

What’s important is who’s in control of what.

If you’re Elizabeth Warren or Matt Stoller, buybacks are an issue because it indicates ‘corruption’, or how corporations have gone astray. In their trust-busting, pro-capitalist progressivism what matters is whether and how capitalists invest in productivity.

But socialists care about more than just whether corporations are being good corporations. What matters to socialists isn’t whether capitalism is better or worse. We care about who controls the means of production; transitioning away from capitalism.

One of the demands coming out of the Sanders campaign is for workers to have more control in corporate governance. This is the kind of thinking socialists should be doing when it comes to buybacks.

What would workers do with earnings if they had majority control in corporate governance? Would they favor the shareholder, buy their own stock, and take on more and more debt putting the country and their own class at risk?

No. They’d be smarter and more sensitive to the needs of most people, rather than being dangerously stupid with resources.

The thing about buybacks is that if workers controlled the means of production, they wouldn’t be a thing.