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COVID-19 stimulus proposals revive stock buyback debate

Amy Scott Mar 20, 2020
Sen. Chuck Schumer said U.S. airlines are short on cash because "they spent billions on stock buybacks." Alex Wong/Getty Images

COVID-19 stimulus proposals revive stock buyback debate

Amy Scott Mar 20, 2020
Sen. Chuck Schumer said U.S. airlines are short on cash because "they spent billions on stock buybacks." Alex Wong/Getty Images

As Congress continues to hammer out the details of a proposed trillion-dollar stimulus package, one question is what kind of strings to attach to any corporate bailout money.

Democrats — along with consumer and labor advocates — are pushing for a ban on share buybacks as a condition of any financial assistance. And though many Republicans are opposed, President Donald Trump says he’s “OK” with such a condition.

Companies spent billions of dollars after the 2017 tax cuts doing exactly that — buying back their own stock at the expense of spending on research and development or paying higher wages.

On the Senate floor earlier this week, minority leader Chuck Schumer of New York summed up the backlash.

“One of the reasons, let’s not forget, that many airlines are so short of cash right now is they spent billions on stock buybacks — money they had to send out when they should have been saving it for a rainy day,” Schumer said.

In the last decade, according to Bloomberg, the big U.S. airlines spent more than 95% of their free cash flow buying back their own shares. Companies do this to boost their stock price and reward shareholders and executives, who get paid more when shares are worth more.

Airlines aren’t alone.

“In most industries, a majority of companies are spending more than 50% of their profits on buybacks,” said Irene Tung, senior researcher at the National Employment Law Project. “That’s sort of a central weakness of the U.S. economy right now as we go into this economic downturn.”

Not just because companies don’t have enough rainy day funds, but because their workers don’t.

“If companies had been paying workers more, then people wouldn’t be living paycheck to paycheck the way that they are now, leaving them as vulnerable as they are, when all of a sudden that paycheck disappears,” she said.

But buybacks don’t just enrich shareholders and company executives.

“The money goes out to investors who by and large are reinvesting this in other companies,” said Ric Marshall, who researches corporate governance at MSCI. “This is all money that’s returning back into the larger economy.”

Charles Elson, professor of finance at the University of Delaware, said the blame on buybacks is misplaced.

“Even had you not bought any stock back, you would never have had enough cash on hand to support the kinds of revenue declines that we’re seeing,” Elson said. “You’re talking 60%, 70% decline in revenue. That’s catastrophic.”

And he said unlike the bank bailouts during the financial crisis, this particular catastrophe wasn’t the companies’ fault.

COVID-19 Economy FAQs

What’s the outlook for vaccine supply?

Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.

How has the pandemic changed scientific research?

Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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