Why Buybacks are Not Bad
A company will try to use its available funds to best improve its business, such as by expanding its operations, hiring additional workers, opening new factories and offices, research & development including creating new products, paying down debt, or acquiring new companies. But when it decides that it has more money than it could put to good use in its business, it can use the money in various ways. It could pay dividends. But another option is to buy back some of its shares on the open market. But progressives somehow believe that they know better about a company than the company itself and want to dictate what a company can choose to do with its own cash, especially with regard to buybacks.
What seems like a rather mundane topic for the average person is actually very important, particularly because several progressive Democrats such as Chuck Schumer and Bernie Sanders are threatening to prevent buybacks and will soon be in a strong position to influence policy. Unfortunately, because they are so economically ignorant, their policies could have a negative impact on the broader economy.
In a widely-publicized NYTimes Op-Ed last year, Schumer and Sanders penned a missive against buybacks, calling them “corporate self-indulgence.” Their solution is a bill to forbid buybacks unless and until companies first do things such as “paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.” In other words, Schumer and Sanders openly demand these preconditions to be met before a company can even engage in a buyback program. They have decided that they know better about a company’s needs more than the companies themselves. The hubris here is astounding.
A company has a duty to use its money in the most responsible and productive way possible. Getting the most out of available resources creates the best possible outcome for the economy, the company, and its workers. For instance, if the best use of money is to expand and increase R&D in its industry or build more shops or hire more workers, they will do it. But if this option is not worthwhile, that is, will not produce an adequate return on investment – for reasons such as a lack of growth in the industry or excessive government regulation – then the best option may be to buyback shares or pay dividends. In doing so, they are taking cash out of the company to give to the shareholders who will look for better opportunities. Sometimes this option is absolutely necessary in order to make the company stay both relevant and solvent for the sake of the company and its workers.
Freedom is at stake here, both philosophically and economically. Not only should a company have the freedom to do what it wants with its own money, but it won’t have the freedom to grow if the government is interfering, rather than allowing the free market figure out where to go. This is the worst of both worlds. Buybacks are an important tool despite those who wish to restrict buybacks under some progessive bloviations not rooted in economic reality.