Today's quote: "Senator John McCain, in an appearance on CNN, cited the intervention of Russia in Syria as “a sign of a possible unraveling of the world order that was established after World War II,” in other words, an end of the dominant position of the United States." Patrick Martin, WSWS
American manufacturers have chosen a different path. Their CEOs grow wealthy by financially strip-mining their own companies, aided and abetted by elite financiers who have only one goal: extracting as much wealth as possible from the company while putting back as little as possible into production and workers.
The heroin driving their addiction is stock buybacks—a company using its own profits (or borrowed money) to buy back the company’s own shares. This directly adds more wealth to the super-rich because stock buybacks inevitably increase the value of the shares owned by top executives and rich investors. Since top executives receive the vast majority of their income (often up to 95%) through stock incentives, stock buybacks are pure gold. The stock price goes up and the CEOs get richer. In this they are in harmony with top Wall Street private equity/hedge fund investors who incessantly clamor for more stock buybacks, impatient for their next fix.
For the few, this addiction is the path to vast riches. It also is the path to annihilating the manufacturing sector. (For a definitive yet accessible account see “Profits without Prosperity” by William Lazonick in the Harvard Business Review.)
Wait, wait, isn’t this stock manipulation? Well, before the Reagan administration deregulated them in 1982, stock buybacks indeed were considered stock manipulation and one of the causes of the 1929 crash. Now they are so ubiquitous that upwards of 75% of all corporate profits go to stock buybacks. Over the last year, 37 companies in the S&P 500 actually spent more on buybacks than they generated in profits, according to Buyback Quarterly.
Little wonder that stock buybacks are a major driver of runaway inequality. In 1980 before the stock buyback era, the ratio of compensation between the top 100 CEOs and the average worker was 45 to 1. Today it is a whopping 844 to 1. (The German CEO gap is closer to 150 to 1.)
Germany holds down its wage gap, in part, by discouraging stock buybacks. Through its system of co-determination, workers and their unions have seats on the boards of directors and make sure profits are used to invest in productive employment. As a result, in Germany stock buybacks account for a much smaller percentage of corporate profits.
Between 2000 and 2015, 419 U.S. companies (on the S&P 500 index) spent a total of $4.7 trillion on stock buybacks (annual average of $701 million per firm). During the same period, only 33 German firms in the S&P350 Europe index conducted buybacks for a total of $111 billion (annual average of $211 million per firm). (Many thanks to Mustafa Erdem Sakinç from the Academic-Industry Research Network for providing this excellent data.)
Let’s do the math: U.S. firms as a whole spent 42 times more on stock buybacks than German firms!
Little wonder that our manufacturing sector is a withering appendage of Wall Street, while German manufacturing leads the global economy.