Like Thomas Piketty, [study author William] Lazonick, a professor at the University of Massachusetts at Lowell, is that rare economist who actually performs empirical research. What he has uncovered is a shift in corporate conduct that transformed the U.S. economy — for the worse. From the end of World War II through the late 1970s, he writes, major U.S. corporations retained most of their earnings and reinvested them in business expansions, new or improved technologies, worker training and pay increases. Beginning in the early ’80s, however, they have devoted a steadily higher share of their profits to shareholders.
How high? Lazonick looked at the 449 companies listed every year on the S&P 500 from 2003 to 2012. He found that they devoted 54 percent of their net earnings to buying back their stock on the open market — thereby reducing the number of outstanding shares, whose values rose accordingly. They devoted another 37 percent of those earnings to dividends. That’s a total of 91 percent of their profits that America’s leading corporations targeted to their shareholders, leaving a scant 9 percent for investments, research and development, expansions, cash reserves or, God forbid, raises. [Emph. added.]
So to Meyerson, investors are enriching themselves at the expense of workers. I admit I haven’t a clue as to what he’s talking about. First, the “research and development, expansions, . . . or, God forbid, raises” he deems to be preferred uses of corporate resources are for the most part expenses. Which is to say, they get deducted from revenues in calculating the earnings that will ultimately be available to shareholders. So a given company might have already spent to the rafters on things like R&D, wages and salaries, and other Meyerson-approved items, but to him (and people like him) that still apparently wouldn’t be enough. Capital spending doesn’t get expensed, of course, but depreciation of prior years’ capex does and, as a practical matter, the two numbers are very often similar in size. But, again, to the Harold Meyersons of the world, no matter how big a company’s depreciation charge, it still wouldn’t seem to be enough.
Anyway, what’s left after all these expenses are deducted and taxes are paid are called earnings. And the group with the first claim on them are the owners of the business: the shareholders. What’s the matter with a company distributing its earnings to the owners?
But to people of a certain political ilk, shareholders don’t count as owners with important rights, but rather as a nuisance standing in the way of a more “equitable” distribution of a company’s profits. This is nonsense. Without shareholders—or, more, broadly, without private investors willing to put their own capital at risk—there would be no company in the first place. Nor would there be any long-suffering, underpaid workers to fairly distribute profits to. There wouldn’t be any profits to distribute.
Yet shareholder-bashing seems to be becoming fashionable lately. A key part of Thomas Piketty’s program, recall, is a global tax on wealth. A Cornell law professor, Lynn Stout, has written a whole book denouncing what she calls the “shareholder value myth.” Nor is this the first time Harold Meyerson himself has railed against the idea of shareholders getting their due. This kind of thinking is pernicious, and ought to be opposed. Economic policymakers (and their commentariat pals on the sidelines) should focus on ways to attract and reward more private risk capital, not screw it out of what it fairly deserves. By all means, companies should pay their workers a decent wage and undertake sensible and prudent capital and R&D projects. But come the end of the year, any profits that are generated ought to go to the only group that has a claim on them: the businesses owners.
What do you think? Let me know!