A recent House subcommittee hearing was the latest example of the anti-growth approach of many national Democrats. The hearing was supposed to be devoted to promoting “investor protection, entrepreneurship and capital markets,” but the goofy ideas being floated were about anything but.
One of the four labor-backed bills under discussion sought to limit the ability of publicly traded corporations to repurchase their own stock. Such “share buybacks” have become a focal point of Democrats in Washington. Publicly traded businesses repurchased a record $770 billion shares in 2018. Because this record followed on the heels of the Republicans’ late-2017 law restructuring corporate taxation, the Democrats smell a populist line of attack.
But what the Democrats characterize as a bug is really a feature. A significant percentage of 2018 share repurchases came from cash “repatriated” from overseas — money that multinational corporations had been parking abroad to avoid previously onerous rates of U.S. corporate taxation.
And when investors sell shares for cash, they typically reallocate the money into other investments. (More than 70 percent of shareholders are institutional investors.)
This isn’t some “pyramid scheme,” as it was characterized by the subcommittee’s youngest member, Rep. Alexandria Ocasio-Cortez (D-N.Y.). Rather, the return of capital to shareholders is how capital markets shift societal resources to highest-value use.
Five of the world’s six largest companies — Microsoft, Apple, Amazon, Alphabet (Google) and Facebook — simply did not exist 50 years ago. Three of them did not exist 25 years ago.
In contrast, 100 years ago, the Dow Jones Industrial Average was populated by companies such as Studebaker, Baldwin Locomotive Works and the American Can Company. The Democrats’ vision of throwing corporate earnings into tin cans and Studebakers, rather than iPhones and Surface tablets, may have nostalgic appeal but it’s not a recipe for economic growth.
Of course, corporations that wish to distribute earnings to shareholders need not do so through share repurchases; they also can pay corporate dividends.
But share repurchases allow investors to time the taxation of their share of corporate profits. And corporate boards — who know their company’s prospects intimately — are well-positioned to know if the company’s stock is underpriced. So, over time, companies that buy back their own shares have tended to outperform those that do not.
Aside from the share-buyback bill, committee Democrats also floated three bills calling for new mandatory corporate disclosures — on the ratio between chief executives’ and median workers’ pay raises, on the number of jobs overseas, and on workforce diversity and other measures of “human capital management.”
Criticizing the disclosure bills seems counterintuitive: isn’t more information good? The answer is, “not necessarily.” American law long has recognized that “some information is of such dubious significance that insistence on its disclosure may accomplish more harm than good.” (That’s from a 1976 Supreme Court decision authored by Justice Thurgood Marshall — hardly a conservative reactionary.)
The Democrats’ bills are aptly characterized as promoting “disclosure as soundbite” rules. These disclosures are being supported by the United Auto Workers and AFL-CIO precisely because they will generate news stories that enable the unions to beat up on companies and pressure them in labor negotiations.
But that doesn’t mean the data will be useful to investors pricing securities. Over the past decade, shareholders routinely have considered and rejected proposals suggesting the publication of the diversity and “human capital” data being sought in one of the labor-backed bills.
The other proposed disclosures would be utterly meaningless. The “outsourcing” bill asks companies to list the number of workers abroad, which will make companies with wholly owned foreign subsidiaries appear to have more overseas presence than those contracting with foreign firms — even when the latter are much more reliant on overseas labor. Similarly, the “pay raise” bill would generate data suggesting higher ratios of executive-to-worker pay in companies with in-house, lower-wage workforces, relative to those that subcontract such work — even when the former pay their wage laborers more.
Executives’ pay indeed has gone up in recent decades. That’s because institutional investors have pushed corporate boards to tie CEO pay to stock returns, to align managers’ and owners’ incentives. That idea has paid off. Since such compensation became routine three decades ago, the stock market has grown tenfold.
The Democrats’ bad ideas jeopardize those gains. To be sure, not all Americans have shared in recent economic growth. Lawmakers should think about how policies affect those who work 9-to-5 jobs, rather than merely the investor class. But throwing wrenches into the world’s most efficient capital markets isn’t a pro-growth strategy. It just generates soundbites.
James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute. This article was adapted from his May 15 testimony before the House Committee on Financial Services, Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. Follow on Twitter @ManhattanInst.