How American CEOs got so rich

Summary

The script delves into the history and impact of stock buybacks, tracing their origins to the 1929 stock market crash and their resurgence in the 1980s under Reagan's administration. It highlights how buybacks, initially a means for corporations to manipulate stock prices, have evolved into a significant driver of wealth disparity, with companies prioritizing shareholder returns over reinvestment and wage growth. The narrative underscores the widening pay gap between CEOs and workers, the decline of the American middle class, and the political debate surrounding buybacks, suggesting a potential return to the economic inequalities of the 1920s.

Takeaways

• 📉 The 1929 stock market crash led to a panic in the New York Stock Exchange and a sharp decline in the value of American companies.
• 🛍️ Corporations initiated stock buybacks to artificially inflate their stock prices without making substantial improvements to the company.
• 🛑 The Securities and Exchange Act of 1934 was enacted to curb manipulative practices and insider trading, which led to a halt in stock buybacks for a time.
• 💼 Post-WWII, American companies primarily reinvested profits into the business and wages, leading to increased productivity and the growth of the middle class.
• 📈 Productivity continued to rise, but wages stagnated as a new economic philosophy emerged that favored less government intervention.
• 🔄 Under Reagan's administration, the SEC rules were changed by John Shad, allowing companies to resume stock buybacks and favoring investor returns over reinvestment and wages.
• 💰 The shift in CEO compensation to include bonuses tied to stock price increases incentivized the frequent use of stock buybacks to boost share value.
• 📊 By 2008, American companies were spending a significant portion of their profits on stock buybacks, reaching 77% just before the recession.
• 💡 The practice of stock buybacks has contributed to a widening pay gap between CEOs and workers, with the ratio growing from 15:1 to 220:1.
• 🏭 The impact of stock buybacks can be seen in companies like General Motors, where market share decline and plant closures have led to significant job losses and community impact.
• 🏛️ Politicians are now considering policy changes to address the issue of stock buybacks, with proposals ranging from tax incentives for reinvestment to stricter regulations and oversight.

Q & A

What significant event occurred on October 24, 1929, in the American stock market?

On October 24, 1929, the American stock market crashed, an event commonly known as Black Thursday, which marked the beginning of the Great Depression.

What is a stock buyback and how does it affect stock prices?

A stock buyback is when a company repurchases its own shares from the market. This reduces the number of shares available for purchase, thereby increasing the stock price due to the reduced supply.

Why did companies start buying back their own stocks during the 1929 crash?

Companies started buying back their own stocks to manipulate the stock prices upwards without necessarily improving the company's performance or value, as a means to retain or increase their wealth during the economic downturn.

What was the reaction of the New York Times in 1932 regarding stock buybacks?

In 1932, the New York Times reported on the 'many abuses alleged' among companies doing stock buybacks, such as insider trading, where corporations used their funds to buy shares from directors, officers, and other management-friendly individuals.

What law was enacted in response to the stock buyback abuses and insider trading?

In response to the abuses, the Securities and Exchange Act of 1934 was signed into law, which aimed to crack down on market manipulation and insider trading.

How did the Securities and Exchange Act of 1934 change corporate behavior regarding stock buybacks?

The Act made corporations wary of engaging in stock buybacks, leading them to largely stop the practice and instead focus on reinvestment, wage increases, and dividends for investors.

What were the three options available for American companies to use their profits after the Securities and Exchange Act of 1934?

The three options were to reinvest profits back into the company, raise wages for employees, or issue dividends and hand over profits to investors.

How did the political and economic philosophy shift in the United States during the Reagan era?

The shift during the Reagan era emphasized that government was not the solution but the problem, leading to deregulation and a change in corporate practices, including the reintroduction of stock buybacks.

What impact did the Reagan administration have on stock buybacks?

Under Reagan's administration, the rules were changed in 1982 by John Shad, allowing companies to buy back shares of their own stock from investors without fear of government repercussions, effectively bringing buybacks back into vogue.

What was the percentage of profits spent on stock buybacks by the largest American companies in 1982 and by 2008?

In 1982, the largest American companies spent less than 1 percent of their profits on stock buybacks. By 2008, this had increased to 77 percent.

How have stock buybacks contributed to the growing pay gap between CEOs and workers in the United States?

Stock buybacks have contributed to the pay gap by allowing companies to allocate more profits to executives and shareholders through buybacks, leaving less for reinvestment and wage increases for workers.

What was the impact of General Motors' stock buybacks on the Lordstown, Ohio plant and the local community?

General Motors' stock buybacks led to the closure of the Lordstown plant, causing job losses, affecting local suppliers and businesses, and having a ripple effect on the local economy and community.

What did the non-partisan Congressional Research Service find regarding the effects of the 2017 corporate tax cut on workers and stock buybacks?

The Congressional Research Service found very little growth in wage rates among ordinary workers after the tax cut, but there was a record-breaking amount of stock buybacks announced by the end of 2018.

What proposals have been made by politicians to address the issue of stock buybacks?

Politicians like Senator Marco Rubio have suggested giving tax breaks to companies that reinvest profits instead of doing buybacks. Senators Elizabeth Warren and Bernie Sanders have called for eliminating the Reagan-era rule that protects companies doing buybacks and have proposed giving workers mandatory seats on corporate boards.

Outlines

00:00

📉 The 1929 Stock Market Crash and the Birth of Stock Buybacks

This paragraph details the events of the 1929 American stock market crash and the panic that ensued. In response, corporate leaders began buying back their own stock, artificially inflating stock prices without actual improvements in their companies. This practice, known as stock buybacks, was an attempt by corporations to maintain their wealth amidst the Great Depression. The paragraph also highlights the resulting economic transformation, the ethical questions raised about corporate greed, and the early recognition of abuses like insider trading, leading to regulatory action in the form of the Securities and Exchange Act of 1934.

05:03

🏭 The Decline of General Motors and the Multiplier Effect

This paragraph focuses on the impact of stock buybacks on General Motors (GM) and its employees. It describes how GM's focus on buybacks led to reduced reinvestment in the company and its workforce, contributing to the decline in market share and the eventual closure of plants like the one in Lordstown, Ohio. The shutdown triggered a 'multiplier effect,' causing job losses among suppliers and local businesses, and deeply affecting the community. The paragraph also reflects on the broader economic and social consequences of GM's financial choices, including the hardships faced by local schools and businesses, and the disruption to the lives of workers and their families.

Keywords

💡Stock Market Crash

The term 'Stock Market Crash' refers to a sudden dramatic drop in stock prices, often signaling a broader economic downturn. In the video's context, it's used to describe the event of October 24, 1929, which marked the beginning of the Great Depression. The crash is pivotal as it sets the stage for the subsequent discussion on stock buybacks and their impact on the economy.

💡Stock Buyback

A 'Stock Buyback' is when a company purchases its own shares from the market, reducing the number of shares available and potentially increasing the stock price. The video explains how this practice was initially used by companies post-crash to manipulate stock prices without making substantial business improvements, and later became a significant factor in wealth distribution and economic disparity.

💡Insider Trading

'Insider Trading' is the illegal practice of trading on the stock exchange by individuals with access to non-public information. The script mentions that companies were accused of using their funds for stock buybacks from insiders, which is an abuse highlighted by the New York Times in 1932 and eventually led to the Securities and Exchange Act of 1934.

💡Securities and Exchange Act of 1934

This act is a significant piece of legislation aimed at preventing market manipulation and insider trading. The video describes how it was enacted in response to the abuses of stock buybacks and how it influenced corporate behavior for decades, effectively stopping buybacks until regulatory changes in the 1980s.

💡Reinvestment

Reinvestment refers to the act of putting profits back into a company to finance growth, such as building new factories or creating new products. The script contrasts this with stock buybacks, illustrating a shift in corporate priorities from reinvestment and wage growth to shareholder returns.

💡Productivity

Productivity is a measure of the efficiency of production, often expressed as the ratio of output to inputs. The video notes the increase in American worker productivity post-World War II, but also points out the disconnect between rising productivity and flatlining wages, indicating a change in how economic gains are distributed.

💡Wage Stagnation

'Wage Stagnation' describes a situation where wages do not increase over time despite improvements in productivity. The script uses this concept to highlight the disparity between rising corporate profits and the lack of corresponding wage growth for workers.

💡CEO Compensation

CEO Compensation refers to the remuneration package of a Chief Executive Officer, which can include salary, bonuses, and stock options. The video discusses how changes in compensation structures incentivized CEOs to perform stock buybacks to increase their own pay, contributing to economic inequality.

💡Market Share

Market Share is the portion of the total market for a particular product or service that a company controls. The script uses General Motors' declining market share as an example of the consequences of prioritizing stock buybacks over reinvestment and wage growth.

💡Multiplier Effect

The 'Multiplier Effect' in economics refers to the phenomenon where a change in spending leads to a larger change in the economy's total income. The video describes how job losses at GM's Lordstown plant had a ripple effect on the local economy, leading to further unemployment and business closures.

💡Corporate Tax Cuts

Corporate Tax Cuts involve reducing the tax rate that businesses pay on their profits. The script discusses the 2017 tax reform in the U.S., which supporters claimed would lead to reinvestment and wage growth, but the Congressional Research Service found instead led to a record amount of stock buybacks.

Highlights

On October 24, 1929, the American stock market crashed, leading to frantic investors unloading stocks and a significant drop in company values.

Corporations initiated stock buybacks to artificially inflate stock prices without making substantive company improvements.

Stock buybacks were seen as a form of greed, exacerbating wealth disparity during the Depression.

The New York Times in 1932 reported on abuses related to stock buybacks, including insider trading.

The Securities and Exchange Act of 1934 was enacted to curb stock manipulation and insider trading.

Corporations largely ceased buybacks after the Act, focusing on reinvestment and wage increases.

Post-WWII, American worker productivity doubled alongside hourly wages, contributing to the growth of the middle class.

Despite continued productivity growth, wage increases stagnated with the rise of a new political-economic philosophy.

The Reagan administration and John Shad's SEC tenure led to a revival of stock buybacks in the 1980s.

CEO compensation became tied to stock performance, incentivizing frequent buybacks to boost stock prices.

By 2008, the proportion of profits spent on stock buybacks by major companies had risen to 77%.

The current trend of companies spending 65% of profits on buybacks has significantly impacted wage growth and reinvestment.

Comparing compensation of CEOs in the U.S., Germany, and Japan reveals stark differences influenced by buyback practices.

General Motors' aggressive buybacks and cost-cutting measures led to plant closures and widespread job losses.

The multiplier effect of GM's job losses in Lordstown, Ohio, impacted local businesses and the community.

The 2017 tax cut predictions of reinvestment and worker benefits did not materialize, with record buybacks instead.

Political figures like Marco Rubio, Elizabeth Warren, and Bernie Sanders are proposing changes to address the impact of stock buybacks.

Proposals include tax incentives for reinvestment and stricter regulations on buybacks to prevent economic disparity.

The resurgence of buybacks has drawn parallels between the current economy and that of the 1920s, raising questions about economic sustainability.

Transcripts

On October 24, 1929, the American stock market crashed.

The New York Stock exchange is in a panic!

Frantic investors have scrambled to unload their stocks

Fortunes disappeared overnight, and the value of American companies tanked.

But the people in charge of those companies had an idea.

They started buying shares of their own company's stock from investors.

Which meant there were fewer stocks out there for other people to buy.

And when there’s less of something, the price goes up.

Normally, to raise their stock prices, these companies would have had

to do something to get investors excited:

invent a new product, or a different way of doing things.

But with this, corporations had discovered a kind of magic trick.

They could jack up their stock price without really doing anything.

This is a stock buyback.

An attempt by the owners of America’s biggest corporations to hang on to their wealth

while the rest of the country suffered the worst Depression ever.

This practice helped fundamentally reshape the American economy,

and it set the stage for a century long fight

we’re still having.

It was a choice.

And it was about greed.

Someone has forgotten about the human element.

A fight about where American wealth comes from,

and who should keep it.

You could have saved these jobs, but you chose not to.

In 1932, the New York Times reported on the “many abuses alleged” among companies

doing this new stock buyback thing.

Abuses like “using the corporations’ funds to buy shares from “directors, officers,

and other persons friendly to the management,” — also known as insider trading.

The President signed a new law to make them stop: The Securities and Exchange Act of 1934

It cracked down on manipulation and insider trading.

Corporations took that to mean that their buyback days were over.

And they pretty much stopped doing them.

And without buybacks for an option, corporations basically had three choices for what to do

with their profits.

Option one: reinvest back in the company.

Build new factories.

Create new products.

Option two: raise wages for employees

Option three: issue a dividend and hand profits over to investors

Most American companies did a mix of all three, with the bulk of profits going towards reinvestment

and wages.

Over time, technology improved.

Workers made more stuff.

The productivity of American workers nearly doubled in the thirty years after World War II.

And so did hourly wages.

This helped build the American middle class.

But things didn’t stay that way.

Productivity kept rising, but wages flat lined.

A new political and economic philosophy had taken hold.

Government is not the solution to our problems.

Government is the problem.

When Ronald Reagan was elected, the Securities and Exchange Act

had successfully been scaring companies away

from doing stock buybacks for fifty years.

But that changed after Reagan appointed a former investment banker named John Shad

to the top enforcement job.

Shad wanted companies to put less of their profits into reinvestment and wages.

He thought more should go to investors.

So in 1982, he changed the rules.

For the first time since the 1930s, companies could buy back shares of their own stock from

investors.

They didn’t have to worry about the government coming after them.

Buybacks were back.

It was a really good time to be an investor.

Investors wanted to keep that money flowing.

So they changed the way CEOs got paid.

Instead of just earning a salary, CEOs could get a bonus if the company’s stock price went up.

The quickest way to raise the stock price was to do a buyback, so CEOs started doing

them all the time.

In 1982, the biggest American companies spent less than 1 percent of their profits on stock

buybacks.

By 2008, just before the recession, that share had jumped to 77 percent.

Fast forward to today, and companies are spending 65% of their profits buying back shares of

their own stock.

The pay gap between American CEOs and workers has grown from 15:1 to 220:1 in less than

a single lifetime.

You can what a uniquely American phenomenon this is when you compare the compensation

for General Motors' CEO with her counterparts at Volkswagen in Germany and Toyota in Japan.

And you can see part of the reason for this gap when you look at how much of their profits

three companies spend on buybacks.

Volkswagen hasn’t done any since 2012, and Toyota’s biggest buyback years are roughly

the size of GM’s smallest.

The more of their profits GM gave to executives and shareholders, the less was left over for

reinvestment, and for workers.

In 2000, GM had the largest market share of any automaker in the world.

By 2017, it had fallen to number 4.

And as their market share shrank, GM shuttered plants across the US,

and tens of thousands of workers lost their jobs.

For decades, this General Motors plant in Lordstown, Ohio was the biggest employer in the county.

It opened in the 1960s, and started out making big sedans and muscle cars.

When people's preferences changed or one model was discontinued, GM would re-tool the plant

to make a different kind of car.

But in 2015, GM promised investors another massive stock buyback.

To cut costs, they started eliminating shifts at the Lordstown plant.

Another cutback— the second shift will be dropped in two months

Where am I going to go?

Everybody's got to find a place now.

It is the end of the line for the General Motors plant in Lordstown, Ohio

The cuts come as the automaker is reporting a near-record $12-billion profit last year.

A few months after the GM plant closed down, the local supplier that built the rear suspensions

went out of business.

Same with the local factory that built the seats.

Plans for a new hospital building in town were put on hold.

As paychecks dried up, a local restaurant closed its doors.

Economists call it the “multiplier effect.”

One study predicted that every four jobs lost at GM’s Lordstown plant would trigger three

more job losses among suppliers and other local businesses.

That’s why laid off auto workers aren't the only ones in Lordstown who understand the effects of GM’s choices.

So do teachers.

There were some students who just changed tremendously.

This is all tremendous upheaval for them

When you look around, you drive around our town, there's a lot of farming,

but General Motors is pretty much the town.

There was a time where the budget was made up mostly of General Motors.

If we lose that revenue from General Motors, that’s going to be really tough for us.

I hesitate to use the word traumatic but it is.

Because when something this sudden happens, it rocks your world.

A year before GM shut down the Lordstown plant, President Trump and Republicans in Congress

lowered the corporate tax rate from 37 percent to 21 percent.

Those who supported the cuts predicted that corporations would reinvest those tax savings, and that

workers would benefit the most.

The vast majority of businesses are going to do just what we say— reinvest in their

workers, reinvest in their factories.

Pay people more money.

When our businesses pay less in taxes, they reinvest that money into their companies.

But according to the non-partisan Congressional Research Service, that's not what happened.

The CRS studied the effects of the new tax law a year and a half after it passed.

And they found “very little growth in wage rates” among ordinary workers

What they did find was evidence for “a record breaking amount of stock buybacks, with $1

trillion announced by the end of 2018”

For decades, stock buybacks have been secretly re-shaping the American economy.

And now, politicians are taking notice.

Republican Senator Marco Rubio has suggested giving extra tax breaks to companies when

they reinvest their profits instead of doing buybacks.

Democratic Senators Elizabeth Warren and Bernie Sanders have called for getting rid of the

Reagan-era rule that protects companies when they do buybacks.

They want to make it easier for the SEC to investigate these companies, in the hopes

that they’ll be too scared to do buybacks, just like they were in the 1930s.

Warren is also calling for a new rule that would give workers mandatory seats on corporate

boards.

That way, they’d have a chance to vote on those big bonuses that CEOs get when a company’s

stock price goes up.

That’s how German companies have done things for decades, and buybacks there are way less common.

But in America, they have a long history.

Buybacks began in an era when less than 1 percent of America’s population held nearly a quarter

of its wealth.

Today, buybacks are back.

And the American economy looks a lot like it did in the 1920s.

The question now is whether we want it to stay that way.