Sens. Chuck Schumer, D-N.Y., and Bernie Sanders, I-Vt., have a bright idea — no, not their idea about stopping companies doing stock buybacks, that’s drivel. They’ve forgotten that people don’t invest in something in order to grow the economy and make America a better place, but to get back more than they put in.
They’ve also forgotten, if they ever knew, the most basic points about money, economies, and investing. Imagine that we luck out and invest in something that booms. For example, Nick Hanauer being allowed to put cash in Amazon sort of lucking out. OK, great. Amazon buys back stock as a result of the vast profits now being made. We get money back — what do we do with it then? The Schumer, Sanders, etc. contention is that we then burn it or stick it under a pillow. While there might be the odd Scrooge McDuck out there, this isn’t what happens in general — we either invest that money again or we spend it. Either option grows the economy, adding to either demand or investment in it.
That is, just because money flows out of companies doesn’t mean that it disappears from the economy. It’s just a different group of people making the decision over what to do with it. Instead of it being the managers the shareholders have hired to work for them, it’s the shareholders themselves.
We’ve also tested the system that works more like our trio seem to want it to work. Back in the day, American companies rarely paid dividends, didn’t conduct buybacks. They did invest it internally. It didn’t work out well, though; we ended up with conglomerates like RJR Nabisco that were run as the playthings of the CEOs. Which is why the system itself changed. Those conglomerates which invested internally went entirely out of fashion.
This occurred for two reasons: One is that they just didn’t invest very well. We found out that companies that just stuck to the one task did better, management being more concentrated upon the task at hand and all that. The company that took shareholder investment then, if successful, returned it with profit, outcompeting the internally financed one. The second is that capital markets themselves became more efficient, sending the profits back to shareholders then asking for new money if there was a great project that appeared to work better — and efficient capital markets make it efficient to do so too.
After all, we do have the example of Uber in front of us. People have invested $22 billion in an electronic form of hailing a cab. We don’t seem to have a shortage of investment in corporates going on.
But I did say that the pair have a good idea. They do, as long as we give it a little tweak: “Why should a company whose pension program is underfunded be able to buy back stock before shoring up the pension fund?“ Well, yes, that’s fair enough, we wouldn’t allow a company to make a buyback if it wasn’t paying the workers’ their legally due wages; pensions are just deferred wages, so fair enough.
But why should it just be companies? Why not the government sector too? Why should pensions there be underfunded and yet government itself allowed to expand? Why shouldn’t we have a rule that insists government cannot do anything more (no new plans or programs, no hiring, no bright ideas to be foisted upon taxpayers) until those pensions liabilities are fully funded and accounted for?
Sure, we know the reason why: Because then, we’d have no new government given the heinous state of public sector pensions. But then for us, that’s a benefit of the idea just as it’s exactly the reason that politicians will hate it.
My native English has a phrase that “the sauce for the gander is one for the goose.” Which here, we might translate as “OK, so, we’re going to place restrictions upon what companies can do with our money. That’s fine, just let’s place exactly the same restrictions upon what politicians can do with our money.”
Corporations can’t send us cash until the pensions are sorted out? Then, neither can government. The advantage here is that government won’t be able to do anything new for a generation as that’s about how long it’s going to take them to deal with those pensions liabilities. Won’t that be delightful.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
