Don't Fear Stock Buybacks, Celebrate Them
Tim Worstall,
Given that it’s election season there’s much economic illiteracy upon the prowl. Some part of which is this worrying over the way that publicly traded corporations spend a lot of their profits on stock buybacks and dividends. Apparently this means that they don’t invest and by golly gosh, we’ve got to do something about this. The problem for this is that returning money to shareholders is what a publicly traded corporation is for. Complaining that they’re doing what they’re designed to do seem a little odd really.
But there’s another level to this argument as well. I’m broadly in agreement with Matt Levine here:
My naive optimistic model of buybacks is that big public companies did their innovating in the past, and that public capital markets are largely about returning money to shareholders, but that those shareholders can then take that money and reallocate it to smaller private companies whose innovation is in the future, or at least the present.
I would add something more to it though. The general movement away from conglomerates to single purpose companies has been driven by the increasing efficiency of the finance sector. Efficiency in the financial sense, in that it’s just cheaper to raise money now than it used to be, not the economic sense. For 50 years ago, if you made a profit then it was generally assumed to be a good idea to keep it in that company. So that you could plan a move into a new business area perhaps. These days we’re not so keen on that happening. If there’s a new business opportunity then a new business which raises money on its own is the preferred solution. Simply because it’s now a great deal cheaper to raise money for such a new business in a new opportunity.
Levine then leads into JW Mason who says this:
Anyway, it seems unlikely that the behavior of privately held corporations is radically different from publicly traded one; I have a hard time imagining a set of institutions that reliably channel funds to smaller, newer firms but stop working entirely as soon as they are listed on a stock market.
Not really sure about that. I rather think we’ve a whole sector which does nothing but that, we call them Venture Capitalists. But the error in the argument is I think here:
In the simplest version of the capital-reallocation story, payouts from old, declining industries are, thanks to the magic of the capital markets, used to fund investment in new, technology-intensive industries. So the obvious question is, has there in fact been a shift in investment from the old smokestack industries to the newer high-tech ones?
And he then goes on to show:
As you can see, the decline in high-tech investment is consistent across the high-tech sectors. While the exact timing varies, in the 1980s and 1990s all of these sectors saw a rising share of investment; in the past 15 years, none have. [3] So we can safely say: In the universe of publicly traded corporations, the sectors we think would benefit from reallocation of capital were indeed investing heavily in the decades before 2000; but since then, they have not been. The decline in investment spending in the pharmaceutical industry — which, again, includes R&D spending on new drugs — is especially striking.
Where has investment been growing, then?
The red lines show broad and narrow investment for oil and gas and related industries — SICs 101-138, 291-299, and 492. Either way you measure investment, the increase over the past 15 years has dwarfed that in any other industry. Note that oil and gas, unlike the high-tech industries, is less R&D-intensive than the corporate sector as a whole. Looking only at plant and equipment, fossil fuels account for 40 percent of total corporate investment; by this measure, in some recent years, investment here has exceeded that of all manufacturing together.
Ah. What I think has been missed here is fracking. That technological revolution of the past decade or so which has entirely upended the global oil market, and before that the natural gas market in the US. And while things like smartphones are great I think I’d probably try to argue that fracking for tight oil has had greater macroeconomic effect just recently than anything coming out of Silicon Valley.
In more detail what has been done is that certain sectors have been counted as being the sort of high tech stuff where we’d like more investment to be going and certain others have been marked off as being not quite the high tech sectors where we’d like the extra investment to be going.
But it’s not actually true that we want investment to go into a, the or some high tech sectors. What we want investment to be going into is sectors more productive than the ones we’re currently in. And working out how to get tight oil out of the ground has shown itself to be a remarkably productive manner of employing capital. Thus we’re just absolutely delighted that investors have thrown money at it.
In fact, that the fracking revolution has been able to attract great gobs of funding from the capital markets is actually the proof that we’re looking for to show that the capital markets are funding new technologies. Rather than the disproof of the contention which is the way that Mason is using it.
Thus the problem in the argument is the way in which desired or beneficial investment has been defined. Far from capital flowing into unconventional oil showing that we’ve not been investing in higher productivity processes, it’s the evidence we need to show that we have been.
forbes.com |
