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.