JUDY WOODRUFF: This week has marked the longest
period of uninterrupted gains in the stock market in U.S. history. There are a variety of reasons, including
a steady economic recovery that is 9 years old. But one of the drivers for the stock market
rise has been the increase in what’s known as stock buybacks, or companies purchasing
their own shares. The benefits of that for the larger economy
are very much in question, as our economics correspondent, Paul Solman, explains, part
of his weekly series, Making Sense. DONALD TRUMP, President of the United States:
Corporations are literally going wild over this. PAUL SOLMAN: When President Trump signed the
Tax Cut and Jobs Act last December, a key provision was cutting the corporate tax rate
from 35 to 21 percent. Republicans argued the savings would be used
to create more and better-paying jobs. REP. PAUL RYAN (R-WI), Speaker of the House: This
gets us better wages, bigger paychecks, a simpler tax system. PAUL SOLMAN: That was House Speaker Paul Ryan
late last year. And here’s administer economist Kevin Hassett: KEVIN HASSETT, Chairman, Council of Economic
Advisers: But I can tell you that, if we get this bill through, it’ll be great for American
workers. PAUL SOLMAN: And, indeed, the unemployment
rate is at an 18-year low. But Jared Bernstein, an economist in the Obama
administration, was convinced the tax cut money would be used not to create jobs and
hike wages, but to benefit shareholders through stock buybacks. JARED BERNSTEIN, Former Chief Economist to
Vice President Joe Biden: It’s happened big time. We have seen a real escalation in share buybacks. PAUL SOLMAN: Stock buybacks are expected to
hit a record $1 trillion this year, an almost 50 percent increase over 2017. So, what is a stock buyback? Harvard Business School’s Charlie Wang puts
it simply: CHARLIE WANG, Harvard Business School: The
company is repurchasing certain number of shares outstanding from the shareholders,
and by doing so, they’re distributing cash back to the universe of shareholders. PAUL SOLMAN: In recent years, firms have been
repurchasing their own stock with a vengeance. Apple approved a new $100 billion repurchase
program in the spring. And from eBay to Pepsi in the years 2015 to
2017, companies spent almost 60 percent of their profits on buybacks. But, now, why do companies buy back their
stock? Because it typically boosts the stock price
in the short run. Irene Tongue with the National Employment
Law Project explains: IRENE TUNG, National Employment Law Project:
By buying back a company’s stock, the company is removing from the open market a number
of shares, creating an artificial scarcity of shares, which then temporarily drives up
the price. PAUL SOLMAN: It’s the appearance of better
financials, which insiders can and do take advantage of, says Republican economist Douglas
Holtz-Eakin. DOUGLAS HOLTZ-EAKIN, Former Congressional
Budget Office Director: There are some compensation clauses for executives that are tied to share
prices. And they might think it’s going to help them
and help the company, and they will do it. PAUL SOLMAN: But if stock buybacks are sometimes
connected to short-term stock manipulation for the benefit of corporate insiders, that’s
concerning. And, in fact, it’s why buybacks were illegal
from after the crash of ’29 right up to the Reagan administration. JARED BERNSTEIN: Much CEO compensation is
a function of the share price. Well, all the sudden, you have a massive incentive
to inflate your share value. PAUL SOLMAN: And it has been happening, according
to a study by the Securities and Exchange Commission, says Irene Tung. IRENE TUNG: Once these executives announced
to the world that they would buy back stock from their company, they themselves quietly
would sell off their own personal shares and take advantage of the bump in stock prices
that they themselves engineered. PAUL SOLMAN: but, hey, most of the buyback
money doesn’t go to insiders, and all of it gets re circulated back into the economy,
says Professor Wang. CHARLIE WANG: To fuel the growth and investment
and employment in smaller and younger public firms, as well as private companies. PAUL SOLMAN: But what if the shareholders
who are getting the money from the buybacks are simply using it to buy, I don’t know,
yachts or bigger yachts? CHARLIE WANG: If they’re buying yachts, there
are companies and employees that work in these yacht companies, and they stand to benefit. PAUL SOLMAN: OK, maybe some yacht workers
benefit, maybe some smaller firms, but what about the average American? Right now, overall wage growth in the U.S.
isn’t even keeping up with inflation. Irene Tung looked at buybacks in the restaurant,
retail and food industries in the three years before the tax cut was enacted. IRENE TUNG: If they took all of the money
that they spent on stock buybacks, and instead invested it in raises, McDonald’s, they could
have given each of their workers $4,000 more each year, Starbucks $7,000. In retail, Home Depot, Lowe’s and CVS could
all give their workers at least $18,000 a year more. PAUL SOLMAN: But, instead, the money went
to shareholders, who make up barely half the American public. Moreover, 84 percent of the value of stock
market wealth is held by the richest 10 percent of us. JARED BERNSTEIN: What part of the economy
do share buybacks boost? That precise part. So they’re lifting the more unequal side of
the economy, at the expense of the more equal or the wage share of the economy. PAUL SOLMAN: Remember, though, says Douglas
Holtz-Eakin, the tax cut is a long-term strategy. DOUGLAS HOLTZ-EAKIN: We will judge the Tax
Cuts and Jobs Act and other things based on whether the final use of those funds has been
effective in raising wages and productivity. That’s going to be the ultimate test. PAUL SOLMAN: As of July, however, more than
half the corporate savings from the tax cut have gone to shareholders as either stock
buybacks or dividends, compared to 18 percent going to job creation commitments, and just
7 percent going to employees in the form of wage increases, bonuses,or benefits. So, the bottom line, as with so many policies,
you have to wait for a verdict. This is economics correspondent Paul Solman.

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