Apple is one of the two most valuable companies in the world, with a market capitalization of $2.5 trillion, and its products are ubiquitous. From 2015-2019, Apple's revenue grew by just 11.3 percent or 2.8 percent per year. However, its earnings per share (EPS) during that same period grew 28.5 percent, or 7.1 percent per year. The reason for this difference is that Apple bought back $238 billion of its own shares during that four year period, reducing its share count by roughly a quarter. It even borrowed money just to buy back its own shares. Why would Apple's management do this? For no other reason than that shareholders demanded it because it would be good for its stock price.
Share buybacks decrease the amount of shares available so that the same earnings get spread out over fewer shares. With less shares outstanding each shareholder owns slightly more of the company, making their investment more valuable. So during that same four year period, Apple's stock went up 164 percent, even though its revenue hardly grew at all. There were 449 companies in the S&P 500 index that were listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock. (And this was before the Trump tax cut, which triggered even more buybacks.) Dividends ate up another 37% of their earnings, which means that there was almost nothing left over for investing in their actual businesses.
Instead of establishing a rainy day fund, companies use much of their cash to buy back stocks, often at all-time highs. Then when trouble comes, their stock prices tank, making all those stock purchases look pretty stupid. Oil companies were buying back their own stock when oil was $100 per barrel in 2014. The oil price collapsed, their stocks cratered as much as 90 percent by 2020 and the companies had to slash their budgets to the bone just to survive. In yet another example of private profits but socialized risk, some of the companies who have spent billions on buybacks end up needing taxpayer money to survive. Ignoring the reality that the airline business has always been precarious, Delta Airlines spent most of its excess cash buying back its own stock. When the pandemic hit, Delta was burning through $60 million per day and had to get a bailout from the government.
I've written about the scam of trickle-down economics before. A steady stream of corporate tax cuts has not brought us anything like what we were promised - a growing economy, well-paying jobs, an increasing tax base. What these cuts have actually done will demolish our economy over the long run, and maybe our societies with it. The cuts have caused massive inequality, destroyed the dignity of work, turned the stock market into a short term casino, replaced useful productive activities with rent-seeking and financial manipulation and disincentivized business investment. It would be really hard to come up with a worse idea unless you were trying to fuck things up on purpose.
When Trump proposed his tax cut, he and his sock puppets trotted out the same old promise, that the money saved would go right into new factories and other business expansion. It never happened. Corporate tax cuts can actually be a disincentive to business investment. Back when taxes were higher, companies invested a lot into R&D and capital expenditures -e.g. a new factory or more stores being opened - in part because those costs are deductible on a company's taxes (some of these costs would be capitalized, meaning they are written off as expenses over a number of years). But as tax rates have come way down, the money has instead gone to shareholders and executives through outrageous executive compensation (in 1965, the average CEO got about 20 times the pay of his average employee; now that ratio is 320 times), buybacks and dividends. This is what has created the massive inequality we now see because only about ten percent of the population owns 89 percent of all stocks.
The tax cuts have created a race to the bottom because rates never seem to be low enough to satisfy the business class. Companies set up fake offices in the Caribbean or Ireland or Luxembourg to reduce their bill even further. All this tax cutting has been great for the stock market; the Dow is up 28 fold since 1990. But the stock market isn't a real measure of the economy. The tax regime - the capital gains 50 percent exemption, the dividend tax credit, low corporate tax rates that are half of what they used to be- distorts economic activity. It encourages a short term mindset that focuses on stock prices rather than long term business health. It incentivizes management to cater only to shareholders while ignoring its other stakeholders -employees, customers and society at large.
If you look at the biggest multinational corporations' financials for the last two decades, you'll see that revenues have flattened out (as in the Apple example above). This is mostly because wages have stagnated for the last 30 plus years, which means that aggregate demand has stagnated as well. Working people can't afford what they used to so the demand for products isn't growing much. If companies aren't able to grow revenues, the only things they can do to keep earnings up is a) cut costs, i.e. labor and b) gin up their numbers by buying back their own stock with either their cash reserves or money borrowed at ultra low interest rates. But as they shed more workers, aggregate demand shrinks because unemployed/underemployed people don't have much money to spend. Buying back stock mainly benefits wealthy people, who only spend a small portion of their wealth, so that actually hurts demand as well. It's a self-reinforcing negative feedback loop.
While the low taxes do encourage startups, the piles of passive money sloshing around means their valuations quickly spiral out of control, which creates even more distortions and problems for our economy. Uber has lost roughly $25 billion since it came into existence and it has never made an operating profit in any single year. This should tell you that the company probably has a flawed business model, but you would never know it looking at the stock price - Uber's market cap is $87 billion, which is a higher value than 82 percent of the companies in the S&P 500, all of whom have made money for at least most of the last 10 years. So the company doesn't make money; its drivers, whom the company deems independent contractors, don't really make money, either, if you do a full accounting of the actual costs they are incurring - fuel, repairs, insurance, depreciation. But the company has sold investors a story that goes something like this: Uber is going to dominate transportation in the future. Once self-driving cars arrive, everyone will be taking Uber and without having to pay all those drivers, Uber will make zillions of dollars because they have first mover status and will be able to fend off most, if not all, competition. Investors are willing to take the risk that this will really happen.
You can see this all over the stock market - insane valuations based not at all on earnings but on some tale of future domination. In sectors like the cloud, cyber security, electric vehicles, etc, money flows into companies that can best sell investors a compelling story. Most of these companies aren't trying to create a stable, long term business; they just want to do enough to be taken over by another company. This used to be called speculation; you threw a few bucks at a junior oil company hoping it became CNRL. Occasionally it worked out, most of the time it didn't. The difference is now there are literally a few trillion dollars dumped into speculative "growth" stocks whose valuations are completely divorced from reality.
Warren Buffet once famously said that "our favorite holding period is forever." With so much wealth in the hands of a few people, capital stays invested in stocks. What is the impact on the real economy of all this money tied up in stocks? Jeff Bezos, founder of Amazon, is worth roughly $200 billion and almost all of it is in Amazon stock. He has no interest in selling because when he does he'll have to pay taxes on his huge capital gains. It's more money than any human being could spend even if he lived to be as old as Methuselah. In fact, Bezos could give one Amazon share - which are worth about $3700 as of this writing - to every one of the 32 million households in the US who make less than $30,000 a year. That $3700 would likely be spent immediately by those families on things they can't currently afford and this would be a boon to the economy. Basically, Bezos could create his own stimulus package and he'd still be left with $80 billion.
Now, I'm not advocating that we confiscate Bezos' money. But this example gives an idea of how all the capital passively invested in stocks is essentially frozen and out of circulation. A good measure for how an economy is really doing is what's called the velocity of money. Without getting into the technical details, the velocity of money measures how quickly currency circulates through the economy. The quicker money moves , the more economic activity is happening. It peaked in 1997 and has been on a severe decline ever since, falling by roughly 50 percent. So despite what the right-wingers want you to believe, inequality in our society actually hurts our economy. All these passive investments are their own feedback loop as higher returns attract even more capital because the rate of return on stocks has far exceeded the rate of growth in the economy. Investing today is completely divorced from value creation, and this disconnect can only go on for so long.
The situation was avoidable if we had listened to real economists and not been duped by the trickle-down scam. Think of the sheer stupidity of what we have done: we have increased the tax burden on the people we should have cut taxes for - the lower and middle classes - and instead cut taxes for the wealthy, who didn't need the cuts at all. Now that capital is fully mobile and can move easily and surreptitiously throughout the world, simply trying to revamp our tax system probably won't fix this. It's likely we won't figure out how dangerous and damaging this runaway greed is until we can't avoid the consequences any longer. In the end, reality can't be denied, no matter how hard you try.
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