Since the horrible 2008 financial meltdown, the singularly most
significant cause of the huge growing US Deficit has been the financial
demands on the US Government due to the continuing high US unemployment
and US underemployment levels. And the same can be said for the
financial demands on US State Governments.
Thus, in the US Fiscal Cliff Debate, I think in deciding what to tax, what
not to tax, what US Government expenditures to cut and what not to cut,
the driving force behind these decisions should be what choices result
in the maximum amount of sustainable US full-time job creation, at a
livable wage, as quickly as possible, and after giving due consideration to the cost of doing so.
It is clear to me that there has been continuing severe harm to the US economy, and to US job creation, from the huge amounts of corporate stock buybacks.
CFOs, CEOs, and Corporate Board of Directors have all figured out that the best use of the company's money is to buy back their own stock.
Below here is a past post I made on companies making excessive stock buybacks.
US Big Corp Stock Buybacks
With interest rates so low, these companies have decided that an investment in their own company's stock is much more attractive than other investments they can make.
And more importantly, by buying back their own stock, these companies have discovered that their company's Earnings Per Share (EPS) gets substantially elevated due to the minor negative reduction in the numerator earnings numbers, as compared with the substantially larger positive impact from the lower denominator number of common shares outstanding.
And once they have figured out how much their EPS gets bumped up from these stock buybacks, they then pile on, after they realize it's not only the positive EPS impact from stock buybacks, but that they can also get substantial EPS growth over the prior year just by increasing the amount spent on stock buybacks over the prior year. And the higher the increase in stock buybacks over the prior year, the more dramatic the EPS increase over the prior year.
Also, this higher EPS and EPS growth from stock buybacks substantially raises the total executive compensation they ultimately receive, since a combination of EPS and EPS growth determine what their common stock trades for.
And even members of Board of Directors own a lot of common stock of the company, and thus this upward expansion of both EPS and EPS growth, driven by stock buybacks, enhances their personal wealth, as well.
Further, all stockholders love stock buybacks, because their company's stock price is increased, and thus their economic wealth is further enhanced.
And with dividend income tax rates scheduled to go up dramatically starting in 2013, corporations will be even more incentivized to increase their stock buybacks. Why? Because starting in 2013, a stockholder will much rather see an increase in stock price rather than a cash dividend, because on an after-tax basis, the stockholder comes out much better with a capital gain than with a cash dividend.
So, huge and growing corporate stock buybacks are a big win for everyone, right?
Actually, not so at all....just the opposite, for the overwhelming majority of US citizens.
Why? Because it further expands the already huge economic wealth gap between the wealthy, who own the common stocks of companies making large stock buybacks, and everyone else, who are not as fortunate to own the common stock of companies buying back their own stock.
By corporations buying back their own stock, no US jobs are created. What the US economy needs is for those corporations to invest in US capital expenditures, in US R&D, in US job creation.....this is what grows the US economy and enhances US job creation.....not doing the opposite by either taking your money and investing it in your own common stock, or by just sitting on your Cash and Investments.
Given the huge gap between what the large corporations want, which is clearly to excessively buy back their own common stock, and what the US economy needs, which is a movement away from stock buybacks to company investments in US job creation, the US Government must step in to correct this situation.
The best way to do this is with a carrot and stick approach.
The stick should be to charge companies that excessively buy back their own stock a US Economy Stoppage Transaction Fee for buying back their stock. They can still buy back their own stock, but if they do it excessively, they will be paying a stiff fee for doing so, which increases as the amount of the excessive buybacks increase.
And to add an effective porcupine sting to the stick, companies that have made excessive stock buybacks in the past should be penalized more intensely for doing so, if they decide to continue it in the future, which is only fair, since these companies have already severely harmed the US economy by their greedily overdozing on excessive stock buybacks in the past. The way this can be wisely designed is that the annual US Economy Stoppage Fee on excessive stock buybacks can be computed based on a cumulative test.
And the carrot is very strong US tax incentives for making US capital investments, US R&D investments, and US job investments.
Thus, the substantial amount of money raised by the US Government from this US Economy Stoppage Transaction Fee on Excessive Corporate Stock Buybacks should be used for the maximum amount of sustainable US full-time job creation, at a
livable wage, as quickly as possible, and after giving due consideration to the cost of doing so.
Thus, this one is double-barreled US economic stimulation.
First, you charge transaction fees for companies buying back their own stock excessively, to prevent them from doing so.
And second, you use the money raised here for explosive US tax incentives for companies to stimulate the US economy.
