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November 9, 2014


We saw in Part I of this essay that the superrich both here and abroad are increasing their respective takes out of both their local and the world’s economies. The next two parts will consider, among other things, one of the ways they do it, whether such an ongoing and accelerating transfer of wealth financed by the rest of us is good policy, and provide some ideas of what to do to ameliorate the harsh reality of Piketty’s r > g prediction of the collapse of capitalism if we do not “attend to it.” I think in “attending to it” we must regulate this acceleration of capital into (via merger and acquisition) fewer and fewer hands, hands whose profit objectives may not coincide with the public interest (nor, per Piketty, even their own over the long haul).

Such proposed regulation, of course, will be attacked as socialistic, but the truth is that it is designed to save capitalism from its own excesses. Corporate flacks and the business pages of the press will demagogue the issue in favor of the status quo where vast pools of capital are growing at accelerated rates relatively free of public regulation, but reformers must press on to save such status quo exponents from themselves as well as our system of market capitalism since they (per Piketty) seem not to be interested in saving it themselves. I think that modern economic systems of any variety left to their own devices without a modicum of public control will ultimately fail. Witness recent economic history in the downfall of the old Soviet Union, French capitalism in Viet Nam et al. We must therefore persevere in our attempts to save capitalism whether the capitalists like it or not.

When I alluded to the explosion in corporate stock buybacks in Part I, it was for real. Stock buybacks by major corporations in 1981 were three percent of their combined net income, but in recent years these corporations have been spending up to 95 percent of their profits on buybacks and dividends. Why the big increase in keeping profits in the family? Why haven’t these corporations spent that money for investments in new plant, new technologies, new and better products for sale, or even, perish the thought, reduced prices for their goods and services to consumers? Answer: Because then these profits wouldn’t wind up in the pockets of the corporate executives and their shareholders. Those investments of corporate profits back into our economy where they came from do not immediately increase dividends to shareholders or bonuses to executives or enhanced capital gains opportunities for both executives and shareholders. Buybacks do.

Here’s how buybacks work: Corporations buy back some of their own stock which means that the remaining shares outstanding are given an automatic boost in value which in turn means that existing shareholders can sell or collateralize their shares for more than if the corporation had not made the buyback. Dividends to shareholders are also enhanced and, of course, executives who have contracts which give them stock options at a given price (whether based on board-set performance goals or not) can cash in on the enhanced value of the stock. They can buy the new stock at the old price, which can amount to a substantial boost in their take along with (perhaps) salary increases they may enjoy, having met performance goals set by the boards (on which, typically, they sit). In other words, everybody gets rich in the back room by converting operating profits into capital gains, stock option opportunities, and performance-met goals, i.e., everybody but the rest of us, who were hoping to see some of those profits shared with workers and put back into the economy where you and I live.

This buyback game, of course, adds up to further acceleration of wealth into the hands of the few as such wealth is removed from the economy where you and I live. Thus when my followers hear from me time after time that there are two economies in this country, one for the rich and investment class and the other in which you and I number, and that the Dow doesn’t measure the one you and I live in, it can be seen from this single example in how capitalists are hijacking unshared wealth from the system just what I mean. This travesty is in need of regulation and/or amendment of corporate governance laws.

Wall Street looks kindly upon buybacks as proof of managerial success and the Dow responds accordingly, but success for whom? Not for you and me, who are victims rather than beneficiaries of back room corporate machinations to extract wealth from the economy in which you and I live without fairly sharing it with corporate workers who helped amass such new wealth. That process is not only unfair but ultimately against the interests of greedy corporations themselves since their workers will not be able to afford such corporations’ goods and services and the resulting loss of aggregate demand bodes ill for both workers and corporations. (Piketty would agree. Loss of aggregate demand is disastrous to both consumer and producer and is indicative of systemic failure down the road as capitalism, unless its excesses are “attended to,” will implode and fail.) I conclude that “attended to” requires regulation of stock buybacks in the interests of the larger economy and the people in it, including even those greed-blinded corporate executives and shareholders now profiting from promotion of such schemes.

I will set out and discuss specific domestic and international classes and the relative wealth they possess in Part III of this essay along with an endorsement of a financial transaction tax I have long favored both for purposes of revenue as well as prevention of such international economic meltdowns as we suffered not so long ago which led to the Great Recession. Stay tuned.   GERALD    E


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