How the stock market destroyed the middle class – MarketWatch

How the stock market destroyed the middle class – MarketWatch

MarketWatch

Nonfinancial corporations haven’t raised any net capital in the stock market for 21 straight years.

WASHINGTON (MarketWatch) — There’s something seriously wrong with an economy that nurtures a few billionaires but can’t sustain the middle class.

Many factors have been blamed for the plummeting fortunes of the American middle class: globalization, technology, deregulation, easy credit, the winner-take-all economy, and even the inevitable tide of history.

But one under-appreciated factor is a pervasive business model that encourages top managers of American corporations to loot their company for short-term gains, depriving those companies of the funds they need to build and enlarge, and invest in their workers for the long haul.

How do they loot their company? By using large stock buybacks to manage the short-term objectives that trigger higher compensation for themselves. By using those stock buybacks to manipulate the share price, which allows them to use inside information to time their own stock sales. By using buybacks to funnel most of the company’s profits back to shareholders (including themselves).

They use the stock market to loot their companies.

“The ‘buyback corporation’ is in large part responsible for a national economy characterized by income inequality, employment stability, and diminished innovative capacity,” wrote William Lazonick, an economics professor at the University of Massachusetts at Lowell in a new paper published by the Brookings Institution.

Lazonick argues that corporations — which once retained a sizable share of profits to reinvest (including investing in their workforce by paying them enough to get them to stay) — have adopted a “downsize-and-distribute” model.

It’s not just lefty academics and pundits who think buybacks are ruining America. Last week, the CEOs of America’s 500 biggest companies received a letter from Lawrence Fink, CEO of BlackRock BLK, +0.65% the largest asset manager in the world, saying exactly the same thing.

“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Fink wrote, adding that favoring shareholders comes at the expense of investing in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

Other CEOs are beginning to agree.

How did we get here?

In the early 1980s, in response to a crisis of non-competitiveness in American industry, a theory of “shareholder value” began to dominate American business, law and regulation.

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How the stock market destroyed the middle class – MarketWatch

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