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Hot Topic (More than 10 Replies) Is This a New Take on the Broken Window Fallacy? (Read 510 times)
wyattstorch2004
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Is This a New Take on the Broken Window Fallacy?
Feb 4th, 2019 at 8:43pm
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https://www.nytimes.com/2019/02/03/opinion/chuck-schumer-bernie-sanders.html

Quote:
One way in which this pervasive corporate ethos manifests itself is the explosion of stock buybacks.

So focused on shareholder value, companies, rather than investing in ways to make their businesses more resilient or their workers more productive, have been dedicating ever larger shares of their profits to dividends and corporate share repurchases. When a company purchases its own stock back, it reduces the number of publicly traded shares, boosting the value of the stock to the benefit of shareholders and corporate leadership.

Between 2008 and 2017, 466 of the S&P 500 companies spent around $4 trillion on stock buybacks, equal to 53 percent of profits. An additional 40 percent of corporate profits went to dividends. When more than 90 percent of corporate profits go to buybacks and dividends, there is reason to be concerned.

This practice of corporate self-indulgence is not new, but it’s grown enormously. Fueled by the Trump tax cut, in 2018, United States corporations repurchased more than $1 trillion of their own stock, a staggering figure and the highest amount ever authorized in a single year.


Why exactly is this "staggering"?

Senators Sanders and Schumer seem to think they are better than businesses at managing their affairs.  It is a corporate nanny-state-ism.

It is a stupid idea even if the economics were sound.  But they aren't.

The argument they are making is that share buybacks occur to the detriment of investment in research, equipment and labor.

And this is where the broken window fallacy comes in.

I would ask the senators what they do with the money they receive when they sell shares in their retirement accounts.  For the money almost certainly doesn't just sit idle in their mattress.

If the companies are forced by this Randian legislation to direct their profits as the state sees fit, into internal investment, then what happens to the investment that would have occurred on the part of the investor who sold the shares back to the company?  Surely that investment can no longer happen.  So all else equal, this policy fails to have any positive effect on the economy as a whole (sure, some individuals will benefit from the government protectionism -- this, basically, the same as a tariff in terms of the effects).

But, it is worse than a zero effect.

Because what if a company is not in need of new equipment or research?  What if the market rate for their employees is already being paid to them?  Then they are just inefficiently dumping and destroying resources.

These resources could be more efficiently invested by.....investors.  People who would dedicate the resources to maximum economic gain, rather than some remote, central government directive.

But even worse, under such a plan, investment funds might never reach a company in the first place if the investors know that the government will limit their ability to recognize a return.

This is just terrible legislation.

On top of all of this, in a piece in which the senators claim to be concerned with businesses making themselves more resilient, we see this quote:

Quote:
Recently, Walmart announced plans to spend $20 billion on a share repurchase program while laying off thousands of workers and closing dozens of Sam’s Club stores.


Companies don't just close stores to stick it to people.  They do it to make their company more resilient by eliminating unprofitable or risky ventures.

What the senators really want is to force businesses to be as productive as they are and then some, while doling out the returns to their voters, whether through tax policy transfers or standard fascism.

Unfortunately for those of us in the real world, you cannot suspend economics with bad policy.
  
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wyattstorch2004
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Re: Is This a New Take on the Broken Window Fallacy?
Reply #1 - Feb 5th, 2019 at 11:18pm
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Bumping this one, since I know there are folks that like to hate on the idea of stock buy backs.

This wrong-headed logic and legislation ought to be a good thing to those folks.

Nevermind that barring companies from buy backs actually leaves more resources with these "bad" companies and prevents them from returning the money to investors who, by virtue of selling the shares, seek to allocate those resources somewhere else and, likely, with companies that are better run.
  
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Re: Is This a New Take on the Broken Window Fallacy?
Reply #2 - Feb 6th, 2019 at 9:28am
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Well said, Wyatt.

The economics of the issue clearly suggest this legislation is misguided. The broken window fallacy is the perfect metaphor.

Our would be do gooders simply are ignoring the unseen and for want of understanding think that a little policy intervention will make the world a better place.
  

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Re: Is This a New Take on the Broken Window Fallacy?
Reply #3 - Feb 6th, 2019 at 6:42pm
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TowardLiberty wrote on Feb 6th, 2019 at 9:28am:
Well said, Wyatt.

The economics of the issue clearly suggest this legislation is misguided. The broken window fallacy is the perfect metaphor.

Our would be do gooders simply are ignoring the unseen and for want of understanding think that a little policy intervention will make the world a better place.


It is funny to think about, but, if we are going to get involved in this sort of central planning of the economy, I would think that the better policy wouldn't be to bar these firms from buying back shares, it would be to force them to buy back shares.  to put funds into the hands of investors who can direct resources away from these bad actors.
  
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Re: Is This a New Take on the Broken Window Fallacy?
Reply #4 - Feb 6th, 2019 at 8:18pm
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- investors reinvest the money in new companies with new technologies
- leftist socialists are only interested in controlling Americans and ending freedom and ending property rights
  

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Re: Is This a New Take on the Broken Window Fallacy?
Reply #5 - Feb 7th, 2019 at 9:08am
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wyattstorch2004 wrote on Feb 6th, 2019 at 6:42pm:
It is funny to think about, but, if we are going to get involved in this sort of central planning of the economy, I would think that the better policy wouldn't be to bar these firms from buying back shares, it would be to force them to buy back shares.  to put funds into the hands of investors who can direct resources away from these bad actors.

That makes sense on multiple levels.

For one, the left tends to demonize firms "sitting on piles of cash" and buybacks help mitigate that as cash gets traded for stocks. So that's a win if you care about "hoards of idle money." (we won't mention that those hoards are actually invested through the banking system)

And it also makes sense if you care about reallocating resources to where they are most urgently needed. Why should firms invest in more capital goods, tools, buildings, etc if they do not need these assets? They could be better used elsewhere.

And buybacks are one way that happens.

So whether we use our economic reasoning or the biases of those left of the dial, either way, banning buy backs seems counterproductive.
« Last Edit: Feb 7th, 2019 at 9:31am by TowardLiberty »  

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Re: Is This a New Take on the Broken Window Fallacy?
Reply #6 - Feb 7th, 2019 at 10:47am
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The legislation is misguided, in that it is addressing the symptom, not the disease.

Stock buybacks are not, in and of themselves, a misallocation of resources.  They are a sign that markets aren't functioning -- that there is insufficient competition facing certain companies, so they can charge more and win higher earnings than their costs/investments would normally win.  It is also a sign that we have set up incentives that overemphasize stock price over things like market penetration, long-term development, sustainable growth, etc.

A company which decides a buyback is the best allocation of its cash has decided that research, marketing, product development, etc all offer a lower return on investment.  That company has basically peaked.  It is sitting on top of its market, and no longer feels competitive pressure to fight for marketshare.

Unless, of course, key execs and board members have rigged things to goose stock prices temporarily and then exit.  Happens all the time.  It helps stockholders "today", but hurts all other stakeholders over time.  In a system of corporate governance which ignores all other stakeholders, this isn't seen as a problem, but that is not a universal view of how these things should work.

Beyond that, buybacks are a sign that these companies have no need of corporate tax cuts.  They have demonstrated that they won't hire or invest, even if they have more cash.  So cutting their taxes will not move them to reinvest.
  

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Re: Is This a New Take on the Broken Window Fallacy?
Reply #7 - Feb 7th, 2019 at 11:47am
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Companies buy back stock for any number of reasons. May be to have shares as part of an employee incentive plan. May be they want to retain more control over the company. May be the are confident in their future and are willing to use cash to buy shares they feel are undervalued.

Interference in this process is the worst legislators can do. But many, being lifelong politicians who have never led anything, do not understand this.
  
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Re: Is This a New Take on the Broken Window Fallacy?
Reply #8 - Feb 7th, 2019 at 12:12pm
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forgotten centrist wrote on Feb 7th, 2019 at 10:47am:
The legislation is misguided, in that it is addressing the symptom, not the disease.

Stock buybacks are not, in and of themselves, a misallocation of resources.  They are a sign that markets aren't functioning -- that there is insufficient competition facing certain companies, so they can charge more and win higher earnings than their costs/investments would normally win. 


That's a fair point.

And it's one libertarians and free market folks have been making for a very long time. We have way too many checks on competition and they tend to benefit the biggest firms.

If companies have lots of idle resources that they do not know what to do with, that does strike me as a sign the competitive pressures in their industry are somewhat weak.

I'd say the biggest bang for our buck, as it regards solving that problem, is to take a hard look at occupational licensing and intellectual property privileges.
  

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Re: Is This a New Take on the Broken Window Fallacy?
Reply #9 - Feb 7th, 2019 at 2:37pm
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forgotten centrist wrote on Feb 7th, 2019 at 10:47am:
The legislation is misguided, in that it is addressing the symptom, not the disease.

Stock buybacks are not, in and of themselves, a misallocation of resources.  They are a sign that markets aren't functioning -- that there is insufficient competition facing certain companies, so they can charge more and win higher earnings than their costs/investments would normally win.  It is also a sign that we have set up incentives that overemphasize stock price over things like market penetration, long-term development, sustainable growth, etc.

A company which decides a buyback is the best allocation of its cash has decided that research, marketing, product development, etc all offer a lower return on investment.  That company has basically peaked.  It is sitting on top of its market, and no longer feels competitive pressure to fight for marketshare.

Unless, of course, key execs and board members have rigged things to goose stock prices temporarily and then exit.  Happens all the time.  It helps stockholders "today", but hurts all other stakeholders over time.  In a system of corporate governance which ignores all other stakeholders, this isn't seen as a problem, but that is not a universal view of how these things should work.

Beyond that, buybacks are a sign that these companies have no need of corporate tax cuts.  They have demonstrated that they won't hire or invest, even if they have more cash.  So cutting their taxes will not move them to reinvest.


Tax rates should not be based on "need" just as tax hikes shouldn't be based on "ability".

Raising taxes on someone just because they can afford it is destructive.

If they don't need it because they don't currently have an investment to meet, then giving the money back to investors makes perfect sense.

The logic of preferring investment within a firm over investment outside the firm without consideration for where the investment would be more beneficial seems so wildly ridiculous to me.

TowardLiberty wrote on Feb 7th, 2019 at 12:12pm:
That's a fair point.

And it's one libertarians and free market folks have been making for a very long time. We have way too many checks on competition and they tend to benefit the biggest firms.

If companies have lots of idle resources that they do not know what to do with, that does strike me as a sign the competitive pressures in their industry are somewhat weak.

I'd say the biggest bang for our buck, as it regards solving that problem, is to take a hard look at occupational licensing and intellectual property privileges.


Exactly.  If we really want to treat the disease, it is done by stopping the government from manipulating markets and protecting market share with all their intrusions into the activities of participants.
  
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