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How the stock market destroyed the middle class; From retain-and reinvest to downsize-and-distribute

davfordavfor
edited April 2015 in Fund Discussions
William Lazonick writes that "Stock buybacks are an important explanation for both the concentration of income among the richest households and the disappearance of middle-class employment opportunities in the United States over the past three decades. Over this period, corporate resource-allocation at many, if not most, major U.S. business corporations has transitioned from “retain-and-reinvest” to “downsize-and-distribute” ". Toward the end of the paper, Lazonick further states "Senior executives who are willing to waste hundreds of millions or billions of dollars annually on buybacks are likely to lose the judgmental capacity to comprehend the types of investments in organization and technology that are required to remain innovative in their industries."

Rex Nutting comments on the paper at this link where he says "Share buybacks encourage executives to loot companies, stall innovation and depress wages":

marketwatch.com/story/how-the-stock-market-destroyed-the-middle-class-2015-04-24?dist=beforebell

Here is a link to a summary of the paper and to its full pdf version ("Stock buybacks: From retain-and reinvest to downsize-and-distribute"):

brookings.edu/research/papers/2015/04/17-stock-buybacks-lazonick

It is my impression share buybacks have been a key driver of US equity market performance in recent years. I am not sure that trend can be sustained in a positive way over the next several years. This may be worth thinking about since it impacts our portfolios.

Comments

  • Dex
    edited April 2015
    The middle class has been getting smaller since the late 1960s and stock buy backs had nothing to do with it.
    It began with US factories not modernizing after WWII, while new fuel efficient plants were built in the re-building countries. Also, those countries had lower legacy costs and wages.
    Then in the 80s China opened up. Middle class jobs fled the country and continue to do so.

    First came the above, then fewer people had money to buy stocks so the people who had money (evil rich) by default had a larger percentage of stocks.

    The shrinking middle class will continue because wages have stagnated, benefits have been eliminated and costs have increased from education to funerals.

  • Tampabay
    I think its more of a matter of having too much Cash on hand for profitable companies, and innovative ways to make money with the cash, Why not find ways to give back to Company Owners, the share holders, Bay backs are one (easy) way to do this...
    and to say this only benefits the "richest" and eliminated the middle class is a little stretch to stupidity........ wouldn't a rational person think?
  • Tampabay
    Another thought, How many Middle Class people buy Stocks (invest).... last I read it was less than 10%, How many Care or want to?
    In fact how many well educated Americans even Know how to go about buying stocks?
    Guarantee, myself as a well educated, young successful businessman with plenty of disposal money didn't have a clue....finally after years of fooling around with mutual fund companies and buying IRAs out of tax necessity.. I educated myself....
    Middle Class Doesn't do that....buying stocks....so I guess they don't benefit....
    all my guessing
  • scott
    Tampabay said:

    Another thought, How many Middle Class people buy Stocks (invest).... last I read it was less than 10%, How many Care or want to?
    In fact how many well educated Americans even Know how to go about buying stocks?
    Guarantee, myself as a well educated, young successful businessman with plenty of disposal money didn't have a clue....finally after years of fooling around with mutual fund companies and buying IRAs out of tax necessity.. I educated myself....
    Middle Class Doesn't do that....buying stocks....so I guess they don't benefit....
    all my guessing

    "In terms of types of financial wealth, the top one percent of households have 35% of all privately held stock, 64.4% of financial securities, and 62.4% of business equity. The top ten percent have 81% to 94% of stocks, bonds, trust funds, and business equity, and almost 80% of non-home real estate."

    http://www2.ucsc.edu/whorulesamerica/power/wealth.html

    Also:
    http://www.cnbc.com/id/100780163

    http://www.salon.com/2013/09/19/stock_ownership_who_benefits_partner/
  • davfordavfor
    edited April 2015
    @Tampabay
    Tampabay
    10:18AM Flag
    I think its more of a matter of having too much Cash on hand for profitable companies, and innovative ways to make money with the cash, Why not find ways to give back to Company Owners, the share holders, Bay backs are one (easy) way to do this...
    One of my takeaways from the paper's arguments is that the corporate mentality that has driven a significant portion of the buybacks has been too short term in its nature. Investments in labor (including additional technical training and other education for existing workers) and capital may take many years to fully provide a payback....particularly when the economy is struggling. But, if that part of the equation gets short changed in order to goose the stock price in the current quarter, the overall economy including the wages of its workers suffers in the long run. I am inclined to think some of that has been going on in recent years.
  • CrashCrash
    edited April 2015
    Yes, since at least the 1970s, surely. The slow erosion of the social contract between management and labor. My own aunt worked as a secretary at Monsanto for 800 years. You NEVER see that kind of loyalty from either management nor labor, today. Labor jumps to get what it can, because labor is increasingly desperate. In so many places, benefits are simply not there, not offered. Globalization has depressed wages, too. All quite deliberate.
  • Old_JoeOld_Joe
    "All quite deliberate."
    Crash, how cynical of you!!
  • CrashCrash
    Shucks, man. C'mon. It's capitalism. The motto is: "I'll get mine, screw the rest of you." But it's the only game in town. And I'm in the game, too. (See you later, I need to take a shower.) ;)
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