Perverted Financial Incentives vs. Investment

Here are a couple (not-that recent) articles that suggest how perverted the economic system has begun. Companies buy back their stocks rather than investing. As a result, their stock becomes more scarce. As the stock values rise, executives with stock options prosper, while much of the rest of society ….. You know what I mean.

McDonald, Ian. 2006. “Big Companies Put Record Sums Into Buybacks.” Wall Street Journal (12 June): p. A 1.

“In the year ended March 31, they [companies in the Standard & Poor’s 500-stock index] spent a record $367 billion on so-called stock buybacks, an amount so large it could cover this year’s Medicare budget.”

“Thanks to surging corporate profits in recent years, companies have plenty of money to spend these days. The cash on the books of S&P 500 companies adds up to 7.4% of their stock-market value, the highest level in almost two decades. It is nearly triple the level of 1999.”

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Cooper, James C. 2007. “The Real Economic Threat: Weak Capital Spending.” Business Week (9 April): pp. 23-24.

23: “Business outlays for new equipment and facilities have slowed sharply over the past year. That’s important because when businesses expand their operations they also add to their payrolls. Job growth over the past couple of years has been the primary support under consumer spending, so any sharp slowdown in capital spending would most likely have an even broader impact on consumers than the weakness in housing.”

24: “Companies aren’t wary only about spending. They also seem unwilling to borrow for anything other than financing stock buybacks and taking their businesses private. Recent Fed data show that nonfinancial corporations last year, on net, retired a record $602.1 billion in equity. In the fourth quarter alone, they set aside $701.2 billion, measured at an annual rate, far more than the additional $604.6 billion they borrowed in the credit markets. Companies seem interested in cutting their overall cost of capital, but they don’t seem very hot on taking advantage of cheaper capital to invest in expanding their operations.”

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