As Layoffs Rise, Stock Buybacks Consume Cash

[OhioChick]

Published: Tuesday, 22 Nov 2011 | 9:59 AM ET

When Pfizer cut its research budget this year and laid off 1,100 employees, it was not because the company needed to save money.

In fact, the drug maker had so much cash left over, it decided to buy back an additional $5 billion worth of stock on top of the $4 billion already earmarked for repurchases in 2011 and beyond.

The moves, announced on the same day, might seem at odds with each other, but they represent an increasingly common pattern among American corporations, which are sitting on record amounts of cash but insist that growth opportunities are hard to find.

The result is that at a time when the nation is looking for ways to battle unemployment, big companies are creating fewer jobs, and critics say they are neglecting to lay the foundation for future growth by expanding into new businesses or building new plants.

More: http://www.cnbc.com/id/45400632

[Lorien]

1. The unemployed can't buy your crap medications, Pfizer

This is the real cause of unemployment; corporate short sightedness and greed.

[unblock]

2. obviously we should eliminate the capital gains tax entirely

because companies create jobs when they have a huge tax incentive to buy back stock instead of hiring and expanding.

:sarcasm:

[Igel]

3. So they buy back $9 billion in stock.

And ...?

Here's the problem.

Right now there's a lot of investment money in that company's stock. If the company buys back the stock, that frees up $9 billion of investment money *not* in that company's stock.

Where does that $9 billion in investment money go? Into a mattress? Unlikely. It goes to buy other stocks or bonds, increasing demand for those. Some will go into various Treasury instruments. Some will go into demand deposits, where it's available for shorter-term investment or loans. Some will go into start-up funds or to fund start ups. Some will go to buy up IPOs.

It'll still be investment money, at least most of it. True, it'll drive up the price of the company's stock, making the remaining shareholders happy. It'll also make the management folk who get stock options and stock as part of their compensation happy (remember: much of the stock-as-compensation fiasco was a reaction to previous rounds of attempting to limit CEO/management salaries). But it'll also reduce the amount that the company has to pay out from future revenues, increasing the bottom line in the future (which will allow them to have flexibility in future investments, if opportunities arise) *and* allow them to issue stock later if they need it.

In other words, yeah, they're taking money and not investing it. But it doesn't mean that (a) it doesn't produce money for them to invest later or (b) remove $9 billion in investment money from the overall pool of monies available for investment. They're just not doing what we think they should do with their cash.

[unblock]

4. nice theory, but false in practice.

the biggest and most obvious effect is that passing money through from corporations to investors, whether through capital gains (buybacks) or dividends is that it avoids a lot of taxes given the unfairly low rate for that form of type of income.

in theory, if the problem in the economy were inappropriate allocation of investment money, then passing through money to investors MIGHT alleviate that situation. however, in practice, there are few good investment opportunities (at least in the u.s. while the consumer is just trying to survive and pay down debt), and even fewer good investment opportunities that corporations aren't already in a position to invest in.

mostly what is happening in practice, is the allocation of HOARDING is being shifted. so instead of having corporations hoarding cash and other conservative financial instruments, investors take the money and hoard commodities, driving up prices for everyone, including the corporations.


one of the biggest meta-problems our economy faces is too many solutions to problems that exist in theory or exist other times and other situations. there's not enough accurate diagnosis and treatment of the problems we actually face -- first and foremost, a lack of demand.