Burgess COMMENTARY

Peter Burgess

Profits Without Prosperity: How Stock Buybacks Manipulate the Market, and Leave Most Americans Worse Off

target = _blank > DOWNLOAD PAPER ... LAZONICK-William-Profits-without-Prosperity-140604.pdf'>

Five years after the end of the Great Recession, corporate profits are high and the stock market is booming. Yet most Americans are not sharing in the apparent prosperity.

While the top 0.1% of income recipients, the highest-ranking corporate executives among them, reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into shared prosperity.

For this lack of shared prosperity, the allocation of corporate profits to stock buybacks bears considerable blame. From 2003 through 2012, 449 S&P 500 companies dispensed 54% of earnings, equal to $2.4 trillion, buying back their own stock, almost all through open-market repurchases. Dividends absorbed an additional 37% of earnings. Scant profits remained for investment in productive capabilities or higher incomes for hard-working, loyal employees.

Large-scale open-market repurchases can give a manipulative boost to a company’s stock price. Prime beneficiaries of stock-price increases are the very executives who decide the timing and amount of buybacks to be done. In 2012 the 500 highest paid executives named on proxy statements averaged remuneration of $24.4 million, with 52% coming from stock options and another 26% from stock awards. With ample stock-based pay, top corporate executives can gain from boosts in stock prices even when for most of the population economic progress is hard to find. If the United States is to achieve economic growth with an equitable income distribution and stable employment opportunities, government rule-makers and business decision-makers must take steps to bring both executive pay and stock buybacks under control.