Profits without Prosperity

Returning off shored money to the US was a way to create jobs politicians promised and promoted back in 2004.  But not so much was the result.  From Forbes:

Many in Congress are argueing that corporations are leaving billions of dollars abroad at the expense of bringing it home to invest in jobs. However, says Douglas Shackelford, tax and accounting professor at the MBA program at the University of North Carolina, “there’s been no compelling evidence that it produced jobs. It is true that multinationals are sitting on massive amounts of cash offshore and they brought it back in they’d be hit with as much as a 35% cut right off the bat. As a result of that rate, the U.S. is getting no revenues from those companies. The way the 2004 law was written, you had to demonstrate that you were going to hire more workers in the U.S. Instead, they paid out more in dividends and bought back more company shares.”

Beginning again in 2009 to the present repatriation of money held outside the US by American companies in Offshore Voluntary Disclosure Programs (OVDP) was also touted as good for growing the economy. (This of course does not address transfer pricing and the current trend to inversions).

The Harvard Business Review describes where another whole lot of money is being spent…stock buy backs.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results…