Proposals to Curb Share Repurchases Could Hurt Workers, Economy
A recent New York Times Opinion piece by Senators Chuck Schumer (D-NY) and Bernie Sanders (I-VT) proposes to block share repurchases unless the company has satisfied certain wage and investment criteria. If enacted, then the result is likely slower economic growth due to wasted resources, as well as fewer jobs for minorities and young workers.
To see this, it helps to understand what a share repurchase is, and, more fundamentally, what a corporation is. Many people think of corporations as evil things that don’t pay enough taxes, and others view corporations as wonderful things that provide lots of jobs and products for us to use.
Neither of those conceptions helps us understand why the repurchase proposal is unwise. Instead, think of corporations like Bank of America and Ford Motor Company as just a collection of goodies. Some of those goodies are tangible, or things we can kick, like trucks or corn or an inventory of wood that will eventually be turned into furniture, and some are intangible, like a strong brand name.
Economists don’t call them goodies, of course. They call them “assets.” And the important question isn’t what we call them. It’s who owns them.
The answer? Shareholders own them. It’s their money.
What does a business, whether a multinational corporation or a one-person business in someone’s garage, try to do with those assets?
The answer is, turn those assets into a bigger pile of assets. Take, say, $100 worth of something—plastic and electronics, perhaps—and turn them into something worth $600—a phone, for example. Almost everyone agrees that would be good because society is better off by $500.
Of course, it would be even better if the company could turn that $100 into $650 instead of $600. How can it do that? That’s hard to say. It’s even harder to do. Maybe the company could invest in research and development to make better phones so that customers will happily pay $650 for them.
Maybe it’s finding a way to produce the original $600 phone for just $50 instead of $100 so that the extra $50 gain to society comes from reducing costs. Maybe it’s an entirely new product that makes phones obsolete, the way modern phones made iPods obsolete. Who knows? Business is hard.
One thing we do know, though, is that if the company knew how to turn the assets that comprise the company into a bigger pile of assets, then it would do it. The owners would like that because they’d be better off, and society would like that, too, because we’d have better products or lower costs. That’s uncontroversial.
At some point, though, investing additional resources in something just doesn’t make sense. It might make sense to spend $100 to train your employees so that they avoid making a $200 mistake, or to increase wages by $100 so you can hire more skillful people who can produce an extra $200 worth of products. But it doesn’t make sense to spend another $100 to train people to avoid making a $50 mistake.
Shareholders sell their shares back to the firm in exchange for the company’s excess cash. That’s better than wasting resources.
It doesn’t make sense to increase wages by another $100 if it only helps the employees to produce an extra $50. The company’s owners would be poorer, and society would be, too. If the company doesn’t have any more investment opportunities to increase the size of the pie, then it shouldn’t make any. Instead, it should return the money to the owners—it’s their money, after all—and let them decide what to do with it.
A share repurchase does just that. Shareholders sell their shares back to the firm in exchange for the company’s excess cash. That’s better than wasting resources. That’s uncontroversial, too.
Or, at least, it should be uncontroversial. The proposed restrictions on share repurchases, though, would prevent companies from returning their shareholders’ own money to them, unless they have satisfied certain wage and investment criteria. The proposal would require bureaucrats to determine the best way to produce everything from software to steel.
If you, as a manager, don’t want to spend an extra dollar on research that won’t yield a dollar in return, or to pay your employees an extra dollar an hour to produce nothing extra, then that’s just too bad. Under this proposal, then you’d have to do it, anyway. You and society would be worse off for having wasted resources.
Is it really that bad? No, it’s worse. The plan lacks details, but early reports suggest it will impose one-size-fits-all rules. A $75 million energy company and an $800 billion tech company have radically different labor forces and assets. Yet, both would be required to comply with the same rules.
And after you, the manager, comply with the proposed law and waste those resources, then what happens? If it turns out that the company needs to raise money later, then it’ll be harder to do it. After all, who would want to give money to a company that, by law, must waste part of it before it’s allowed to return it? Expansion will be difficult.
Perhaps most insidiously, companies will lay off employees and hire fewer new ones. This is because the proposal essentially sets a minimum wage of $15. If a company doesn’t pay that much, then it has to waste resources to satisfy the terms of the proposed legislation. A company with experienced, highly skilled employees won’t be affected too much, but companies that rely on entry-level, lower-wage employees, such as McDonald’s, will have to adjust.
Instead of customers placing orders with a cashier and having her enter orders on a screen, McDonald’s will just turn the screen around and let customers do it themselves. That means one less employee filling one less job. Kiosks are already replacing workers in many areas. Making humans more expensive can only hasten the day when these workers, often young minorities, will be fired, or never hired in the first place. They will not have the chance to develop and demonstrate their interpersonal skills, their punctuality, and their other abilities that would let them advance.
Of course, if a worker’s current wage is almost as large as the higher minimum, then her employer might well simply raise her wage and be done with it. The disruption of having one less worker might be worse than paying the slightly higher wage. In this case, though, the gain to the worker is also very small. Certainly, her chances of getting laid off if business conditions worsen are higher, and the chances of an unemployed worker being hired if conditions improve are lower.
Will the proposal become law? Time will tell. Is it good for the economy and workers? Absolutely not.
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