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Say a company buys back 2 billion in stock, rather than investing it in new equipment. Does that reduce the amount of money invested in the economy? The answer

Say a company buys back 2 billion in stock, rather than investing it in new equipment. Does that reduce the amount of money invested in the economy? The answer depends on what the investors who sold do with that money. If they invest it somewhere else, then the company's decision doesn't reduce the amount invested in the economy. I don't believe private investors decide they'd rather buy a yacht than invest their money just because a company bought back shares. More likely, the share buyback just moved money from a mature company to growth stocks or startups, which is exactly what should happen in a healthy economy. Put another way...should Dinosaur Oil Inc use their profits to build another refinery even when they don't think it makes financial sense...or should they buy back stock, make their investors happy, and then be in a more vulnerable position when the investors turn around and fund Shiny Solar Inc?

foota 7y ago
If that's the policy goal would it not be much easier to just build programs to support startups and entrepreneurs?
- sokoloff 7y ago
  Take the converse construction. "Let's raise taxes on companies and wealthy individuals so the government can get into the winner-picking business of investing in startups and entrepreneurs." I would personally object to that policy.
  - foota 7y ago
    It doesn't have to be "winner picking" you could have some policy like subsidizing private sector business loans for small business, coupled with additional small business tax breaks (maybe payroll tax breaks as well?). This would accomplish the goal of encouraging small businessess without the government having to evaluate small businesses on their merits.
- jaredklewis 7y ago
  Well I guess that depends on how successful you imagine the government would be at running such a program. If it is in the US, my intuition is that it wouldn't be very good.
- imtringued 7y ago
  That's basically a planned market and those do not work without a perfect government that has total access over all information in the economy. Such a government will probably never exist. Remember you are talking about denying a CEO the ability to decide whether to invest or not invest in additional production capacity and instead assigning this task to the government. The CEO has more information about his own company than the government, which means that the government is not capable of making this decision. The government is also insulated from the consequences of making the wrong decision, if a company loses revenue or even shuts down the government is not directly affected.
  - WalterBright 7y ago
    The government will also intrinsically allocate money based on political considerations, which are not necessarily congruent with practical ones.
  - foota 7y ago
    What? How does what I commented at all resemble a planned market? I elaborated a little on an alternative proposal for increasing investment at https://news.ycombinator.com/item?id=20665196 https://news.ycombinator.com/item?id=20665196 I think the only thing similar to planned economy here is that you're shifting tax burden and resources invested from larger companies to smaller companies. The idea being that small companies are a beneficial resource because they contribute more directly and locally to their economies. You could argue that this is a distortion but I think it's a long way from a planned economy.
dumbfoundded 7y ago
Much of the money isn't going to startups. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal. The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions. I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.
- perl4ever 7y ago
  I don't understand what you mean, because you say "the best way to spur economic growth is to give money to people who will spend it quickly". That is "trickle down economics" as I understand what people mean by the phrase, and I agree(?) that it makes no sense. Broken windows, etc.
  - danmaz74 7y ago
    Trickle down is associated with supply side economics; giving money for people to spend means increasing aggregate demand, which is the opposite.
    - perl4ever 7y ago
      "Giving money for people to spend", what does that mean though? You write a note on it? "Plz spend on chzburger, kthxbye" Or is it like you use body language? Giving money for people to spend is done like this, while giving money for people to save is done like this. Every time someone buys an investment, they're buying it from someone who is cashing out, quite possibly to buy a cheeseburger. It makes no sense to call this a "trickle", of course, because it's not a small fraction of the money.
- cortesoft 7y ago
  When you say 'save', what do you mean? They aren't putting it in a mattress in their house... they are 'saving' it in investments that fund the economy.
segmondy 7y ago
So here's the issuing with buying back, it creates an artificial demand on the stock. As we know, demand increases price, so the price of the stock goes up. In order words becomes inflated. People's 401k, pension are invested in those stocks. Meanwhile, the folks CEO/Boards behind the buybacks cash out! The price of the stock doesn't reflect the real value in normal conditions. When the music stops, folks with 401k, pensions invested in those will be the ones losing big time!
- dodobirdlord 7y ago
  This is not correct. Companies conducting buybacks do so at a low rate over a long period of time exactly to avoid having the impact that you're describing. Companies buy their shares back at the market price, and the normal transaction volume of a large companies shares dwarf the size of buybacks it may be conducting.
  - nootka 7y ago
    This is my understanding as well, but is there any law to this effect?
    - dodobirdlord 7y ago
      Why would there be a specific law covering this situation? It's an obvious violation of fiduciary responsibility to buy back shares in an inefficient, price-elevating fashion.

foota 7y ago

If that's the policy goal would it not be much easier to just build programs to support startups and entrepreneurs?

sokoloff 7y ago
Take the converse construction. "Let's raise taxes on companies and wealthy individuals so the government can get into the winner-picking business of investing in startups and entrepreneurs." I would personally object to that policy.
- foota 7y ago
  It doesn't have to be "winner picking" you could have some policy like subsidizing private sector business loans for small business, coupled with additional small business tax breaks (maybe payroll tax breaks as well?). This would accomplish the goal of encouraging small businessess without the government having to evaluate small businesses on their merits.
jaredklewis 7y ago
Well I guess that depends on how successful you imagine the government would be at running such a program. If it is in the US, my intuition is that it wouldn't be very good.
imtringued 7y ago
That's basically a planned market and those do not work without a perfect government that has total access over all information in the economy. Such a government will probably never exist. Remember you are talking about denying a CEO the ability to decide whether to invest or not invest in additional production capacity and instead assigning this task to the government. The CEO has more information about his own company than the government, which means that the government is not capable of making this decision. The government is also insulated from the consequences of making the wrong decision, if a company loses revenue or even shuts down the government is not directly affected.
- WalterBright 7y ago
  The government will also intrinsically allocate money based on political considerations, which are not necessarily congruent with practical ones.
- foota 7y ago
  What? How does what I commented at all resemble a planned market? I elaborated a little on an alternative proposal for increasing investment at https://news.ycombinator.com/item?id=20665196 https://news.ycombinator.com/item?id=20665196 I think the only thing similar to planned economy here is that you're shifting tax burden and resources invested from larger companies to smaller companies. The idea being that small companies are a beneficial resource because they contribute more directly and locally to their economies. You could argue that this is a distortion but I think it's a long way from a planned economy.

dumbfoundded 7y ago

Much of the money isn't going to startups. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal. The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions. I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.

perl4ever 7y ago
I don't understand what you mean, because you say "the best way to spur economic growth is to give money to people who will spend it quickly". That is "trickle down economics" as I understand what people mean by the phrase, and I agree(?) that it makes no sense. Broken windows, etc.
- danmaz74 7y ago
  Trickle down is associated with supply side economics; giving money for people to spend means increasing aggregate demand, which is the opposite.
  - perl4ever 7y ago
    "Giving money for people to spend", what does that mean though? You write a note on it? "Plz spend on chzburger, kthxbye" Or is it like you use body language? Giving money for people to spend is done like this, while giving money for people to save is done like this. Every time someone buys an investment, they're buying it from someone who is cashing out, quite possibly to buy a cheeseburger. It makes no sense to call this a "trickle", of course, because it's not a small fraction of the money.
cortesoft 7y ago
When you say 'save', what do you mean? They aren't putting it in a mattress in their house... they are 'saving' it in investments that fund the economy.

segmondy 7y ago

So here's the issuing with buying back, it creates an artificial demand on the stock. As we know, demand increases price, so the price of the stock goes up. In order words becomes inflated. People's 401k, pension are invested in those stocks. Meanwhile, the folks CEO/Boards behind the buybacks cash out! The price of the stock doesn't reflect the real value in normal conditions. When the music stops, folks with 401k, pensions invested in those will be the ones losing big time!

dodobirdlord 7y ago
This is not correct. Companies conducting buybacks do so at a low rate over a long period of time exactly to avoid having the impact that you're describing. Companies buy their shares back at the market price, and the normal transaction volume of a large companies shares dwarf the size of buybacks it may be conducting.
- nootka 7y ago
  This is my understanding as well, but is there any law to this effect?
  - dodobirdlord 7y ago
    Why would there be a specific law covering this situation? It's an obvious violation of fiduciary responsibility to buy back shares in an inefficient, price-elevating fashion.