Buybacks Are The Only Force Propping Up The Stock Market
The S&P 500 is barely in the green this year, but this is thanks exclusively to the greatest surge in stock buybacks in U.S. history. CNBC cites datafrom TrimTabs showing that S&P 500 corporations have bought back a record $433.6 billion in stock in the second quarter at the same time that investors dumped a record amount in stock market-focused funds.
The stock market’s modest gains this year are entirely dependent on stock buybacks, financed by a corporate tax cut this country can ill afford. But this doesn’t worry Steven Rattner, the financier and Morning Joe talking head. He has taken to the New York Times to defend American captains of industryand the American financial system, arguing that these figures do not suggest that they are blinkered by short-term thinking.
“The easiest path for companies to goose earnings would be to cut back on investment,” he writes. “However, business investment has remained between 11 percent and 15 percent of gross domestic product since 1970.” This is narrowly true, though misleading. In reality, corporate investment has been treading lower for decades, and remains below levels seen in 2014, when the corporate tax rate was significantly higher and the economy was performing worse by any measure.
Rattner also tries to claim that corporate investment in research and development is the highest it’s ever been, relying, it would appear, on the Commerce Department’s measure of spending on intellectual property as a proxy for R&D. Again, this is deceptive. Actual R&D spending is notoriously difficult to track—the concept itself is not clearly defined, and public companies are not required to report it. But economists who have studied the topic say that, this too, has been declining for decades, and that public-market, short-term thinking is to blame.
He goes on to hold up today’s stock market leaders like Apple, Amazon, Google, Microsoft and Facebook as paragons of long-term thinking. That they are the top five firms in terms of market capitalization proves, according to Rattner, that the U.S. economy and stock market reward careful planning. But these are the exceptions that prove the rule, rather than evidence that financial markets are working to create a balanced economy. The number of public companies in America is half what it was twenty years ago, and most innovation today is funded by a venture capital industry that is obsessed with funding companies that can potentially be bought by these big five firms, a dynamic that severely limits what kinds of companies are funded.
As entrepreneur Luke Kains has argued, companies that don’t have a shot of getting bought out or going public don’t get venture capital. “This is a striking constraint, given how much of our economy consists of small, profit-generating businesses that generate jobs and cash locally,” he writes. “Bank loans do ok at providing funding for low-risk actions by mature companies, and VC does well at funding high-risk companies with the chance to be huge, but there’s a huge gap in the middle that struggles to get any funding.” Meanwhile, the monopoly power of companies like Amazon, Google, and Facebook continue to make it difficult for small businesses to dream of profits in a wide range of industries from retail to media, and there is a conspicuous lack of long term thinking from policy makers about how to deal with this new monopoly power.
Rattner is right that we often overestimate the ability for America’s rivals to plan for the long-term. Observers of the Japanese economy were overeager in the 1980s to lionize companies like Sony for their long-term planning, as the relative strength of the U.S. tech sector today is evidence of. And we are likely giving Chinese policy makers too much credit for their stewardship of the economy—the debt-fueled Chinese growth model will likely come back to bite the Chinese before long. But that doesn’t mean that America isn’t plagued by its own variety of short term thinking, and there is no better evidence of it than the ongoing, debt-fueled buyback binge.