Vermont junior Senator Bernie Sanders and Senate Minority Leader Charles “Chuck” Schumer are proposing new legislation that would bar corporations from buying back their own shares unless they first satisfy a few conditions, including hourly pay of at least $15, paid time off, and health benefits for workers.
The two staunch Democrats detailed their plan in the New York Times on Sunday, arguing that the new restrictions would only help companies long-term:
“Our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital.”
2018 was a huge year for buybacks following President Trump’s late 2017 corporate tax cut, with companies announcing more than $1 trillion in stock repurchases – something that Sanders and Schumer criticized as many of the companies buying back shares ended up announcing layoffs within the same year.
The op-ed from the senators cited a study from the Roosevelt Institute in particular, which argued that Walmart – who laid off hundreds of workers and closed down Sams Club locations – could have used their $20 billion buyback to increase hourly wages to $15 for low level employees.
Harley-Davidson, another target of their misguided corporate wrath, similarly announced a buyback amid plans to close a plant in Kansas City, Missouri. Wells Fargo was singled out as well for “openly plotting” to cut 10 percent of its workforce after spending billions on buybacks.
The senators said, “At a time of huge income and wealth inequality, Americans should be outraged that these profitable corporations are laying off workers while spending billions of dollars to boost their stock’s value to further enrich the wealthy few.”
Down with the bourgeois, up with the proletariat…
…Sound familiar, comrade?
Coming to the rescue earlier this morning was Kevin Hassett, chairman of President Donald Trump’s Council of Economic Advisors, who blasted the proposal that seeks to handcuff corporations:
“I wish some economist would go and talk to these guys on how buybacks work,” said Hassett on Squawk Box, CNBC’s pre-market morning show. “It’s very disappointing that over and over again I see the Democrats pursue really economically illiterate proposals just because they think they sound good politically.”
And in this case, Hassett is absolutely correct. Corporate stock buybacks are (99% of the time) not used to artificially boost stock prices or line the pockets of company higher-ups – something that Schumer, Sanders, and scores of Democrats believe.
Each and every buyback is unique, and contrary to what this new proposal alleges, are done with the shareholder’s best interest in mind. Buybacks, more than anything else, are a simple financial decision on how to best allocate the use of excess funds.
Yes, that’s right – excess funds. Not funds that have already been dedicated to R&D (research and development) or dividends.
Schumer and Sanders allege that companies like Harley-Davidson, who “greedily” bought back stock, should’ve instead dumped that money into a failing plant that was hemorrhaging dollars (that they were going to close anyway, with or without a late 2017 tax cut). They argue that corporations don’t know the best course of action to continue growing, and that by pouring excess cash into “money pit” assets that will only hurt their bottom line long-term, it will eventually help the company, its employees, and the economy.
News flash, fellas – companies don’t grow when they spend their surplus funds on projects that lose money. They grow by leveraging the cash they have on hand in intelligent ways, whether that’s through R&D, new equipment, or yes, even those darn stock buybacks.
If a company is already properly filling all of its departmental buckets evenly (most notably those focused on future growth) and pays a nice dividend, then a stock buyback makes perfect sense – especially during last year, where most corporations issuing buybacks had extremely low-interest long-term debt. When interest rates are so low, it can make sense to buyback stock instead of paying down debts, and that’s exactly what we saw.
So, while Sanders and Schumer’s proposal might “feel good” when taken at face value, and even make sense as a measure to protect workers, the truth is that putting restrictions on stock buybacks will severely hurt a company’s financial flexibility. The biggest qualifier in their new plan, the $15 an hour wage minimum, is the real crux of the issue, with the rest of the proposal simply serving as a vessel by which the senators hope to mandate higher minimum wages across the country.
If you want to have that conversation, fine, go ahead – it’s not something I’m going to get into in this column – but please, senators, don’t drag stock buybacks into the crossfire. Just by releasing the op-ed in the New York Times, Sanders and Schumer may have dealt a massive blow to the market, killing the post-Christmas rally in one fell swoop as Wall Street tries to make sense of what their proposal could mean for companies long-term.
It’s an extremely ham-fisted maneuver from two gentlemen that likely consider themselves economic know-it-alls, which is extremely disheartening when you realize the powerful positions they occupy. In the end, Hassett’s analysis is accurate – that this new proposal is a political move to appease the masses, nothing more. If their “big idea” eventually becomes a law, the long-term damage inflicted upon stocks, companies, and eventually the American economy could be immense, and ultimately serve as the turning point for the next big recession.
I hope that we as Americans find enough wisdom in the coming months and years to ignore frivolous proposals like the one offered by Schumer and Sanders – two political “pot stirrers” who only seek to put more pressure on Donald Trump, a president that continues to lead the U.S. towards unexpected economic prosperity, as evidenced by another sterling jobs report for the month of January.
However, based on what we’ve seen recently, irrational anger is on the rise once again in these United States, and the anti-billionaire rhetoric being parroted by men in positions of power will only intensify the hatred – not defuse it like they hypocritically claim is their mission. On the current path, we’re headed for a major clash, likely in 2020, and I’m afraid that the horrors we’ve witnessed in the political arena over the last 6 years will pale in comparison to what lies ahead. The effect that could have on the stock market would be dire, and if investors aren’t careful, they might find themselves (and their portfolios) caught up in the wake of another ideological breakdown.