Another Failure of American Capitalism: Profits and Stock Buyback

A fundamental rationale and justification for the appropriation of profit by the capitalist class rests on the assumption of productive reinvestment. This is also the basis for the argument that while cutting taxes on corporations and the rich will concentrate wealth in the short-run, it will inevitably “trickle down” in the long run. The experience of the US economy over the last thirty years has exposed this claim as fraudulent. The following table shows the dramatic disconnect between profits and net investment over this period, and particularly after 2000.

There are a variety of explanations for the growing gap -- profits secured through outsourcing/offshoring, financialization, intensification of work, wage suppression, government tax breaks/subsidies. An excellent piece of journalism in the in the Boston Globe provides more precise evidence of a particularly pernicious financialization-related maneuver – company profits plowed into the stock market to buy back shares of their own company. 

Reporting on the networking company Cisco, and its Boxborough Massachusetts facility:
The Boxborough workers learned that at the same time they were being laid off the company was continuing to spend billions of dollars to buy back its own stock, a move designed to reduce the number of shares on the open market and perhaps boost its relatively stagnant share price.

The Globe further notes:
This stock buyback boom, while obscure to much of the public, has become one of the most pervasive and divisive practices in corporate America. It affects jobs, investment, and the health of the economy, all in the search for higher share prices. It is also a major driver of the widening economic divide in this country, which could make it a prominent issue in the 2016 presidential election.

This buyback practice is a direct cause of the long-term “trickle up” (not down) tendency in the United States, since stock ownership is highly concentrated among the top 10%. It is also closely associated with the socially irresponsible “shareholder value” principle which led managers, parroting a slogan they learned in business school classes, to claim that “my only obligation is to my shareholders”.

We should all now be well aware there is no guarantee that the accumulation of private profit will advance the public good. Unfortunately, economic development policies in the United States continue to be based on this assumption.