tag:theconversation.com,2011:/fr/topics/buyback-2601/articlesBuyback – The Conversation2019-08-04T21:47:05Ztag:theconversation.com,2011:article/1200602019-08-04T21:47:05Z2019-08-04T21:47:05ZCould a national buyback program reduce gun violence in America?<p>Americans own nearly half of the <a href="http://www.smallarmssurvey.org/fileadmin/docs/T-Briefing-Papers/SAS-BP-Civilian-Firearms-Numbers.pdf">world’s guns</a>, with approximately 120 firearms for every 100 U.S. residents. </p>
<p>Gun control policies may someday restrict new gun sales. But what impact can they have when Americans already own millions of guns?</p>
<p><a href="https://reason.com/2019/06/27/on-gun-control-democratic-presidential-candidates-offer-nothing-but-empty-promises/">Some have pointed to gun buybacks</a> as a potential solution to this problem. </p>
<p>I have spent years studying American attitudes toward guns and gun policies, including <a href="https://www.sciencedirect.com/science/article/pii/S2211335516300353">smart guns</a> and <a href="https://www.tandfonline.com/doi/abs/10.1080/13669877.2017.1422781">open carry</a>. I know that gun owners <a href="https://www.pewsocialtrends.org/2017/06/22/americas-complex-relationship-with-guns/">feel strongly</a> about their identities as gun owners, making it difficult to create a strategy for taking guns off the streets.</p>
<h2>US gun stock</h2>
<p>The sheer number of guns is part of the challenge. The United States has the largest <a href="http://www.smallarmssurvey.org/fileadmin/docs/T-Briefing-Papers/SAS-BP-Civilian-Firearms-Numbers.pdf">civilian-owned stock of guns</a> in the world. At the end of 2017, the Small Arms Survey reported that there were an estimated 393 million firearms in the United States – and that’s not even counting guns owned by the police and military. That represents <a href="http://www.smallarmssurvey.org/fileadmin/docs/T-Briefing-Papers/SAS-BP-Civilian-Firearms-Numbers.pdf">45.8%</a> of the world’s civilian-owned guns. </p>
<p>Yemen has the second-highest rate of gun ownership per person in the world, with just 52.8 firearms per 100 residents.</p>
<p><a href="https://www.pewsocialtrends.org/2017/06/22/americas-complex-relationship-with-guns/">More than 40%</a> of U.S. adults live in a household with at least one gun. <a href="https://www.theguardian.com/us-news/2016/sep/19/us-gun-ownership-survey">About half</a> of all civilian-owned guns in the U.S. are owned by just 3% of U.S. adults. These gun owners have an average of 17 guns each. Most other gun owners average about three guns at home.</p>
<h2>Reducing numbers</h2>
<p>Gun buyback programs are designed to reduce the number of firearms by purchasing guns from private owners, and typically destroying them. </p>
<p>Gun buyback programs are not new. </p>
<p>Following a mass shooting in 1996, <a href="https://www.vox.com/2015/8/27/9212725/australia-buyback">Australia banned automatic and semi-automatic rifles and shotguns</a> and instituted a national gun buyback program. </p>
<p>In a year, Australia purchased about 650,000 firearms from private residents, <a href="http://faculty.publicpolicy.umd.edu/sites/default/files/reuter/files/gun%20chapter.pdf">estimated</a> to represent about 20% of the country’s privately owned guns. <a href="https://www.vox.com/2015/8/27/9212725/australia-buyback">Research</a> evaluating the effects of the buyback found a 42% decrease in homicide rates and a 57% decrease in suicide rates in the seven years after the legislation passed. But <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1540791">some researchers</a> are still uncertain whether this decrease was due to the buyback, or whether it was simply part of an existing downward trend. </p>
<p>U.S. cities have experimented with buybacks on a much smaller scale, even though the <a href="https://www.pewsocialtrends.org/2017/06/22/americas-complex-relationship-with-guns/">Pew Research Center</a> reports that more than 70% of gun owners say they could never imagine themselves not owning some sort of firearm.</p>
<p>One of the earliest examples occurred in <a href="https://news.google.com/newspapers?nid=1350&dat=19741208&id=INFOAAAAIBAJ&sjid=KgIEAAAAIBAJ&pg=6867,3250859">Baltimore</a>, Maryland. In 1974, Baltimore police paid residents US$50 per firearm, collecting roughly 13,500 over a two-month period. Rather than reduce crime, homicides and assaults spiked during the buyback. It is unclear why, but two months is a short time period for a clear pattern to emerge and crime rates in cities across the country were increasing through much of the 1970s.</p>
<p>Baltimore is not unique. A 2008 review of the existing research by Matthew Makarios and Travis Pratt in the journal <a href="https://doi.org/10.1177/0011128708321321">Crime & Delinquency</a> found that gun buyback programs have generally been ineffective in reducing crime in the U.S. Challenges include the types of guns purchased, the involvement of law enforcement, and the costs involved.</p>
<h2>Types of guns purchased</h2>
<p>Gun buyback programs often place no restrictions on the types of guns that can be purchased. Civilians frequently bring in old firearms, guns in disrepair, rifles, or shotguns. <a href="https://injuryprevention.bmj.com/content/4/3/206.short">Sacramento</a>, California, implemented a gun buyback program in 1993. Nearly a quarter of all guns submitted were not in working order.</p>
<p>The <a href="https://www.ajpmonline.org/article/S0749-3797(13)00452-2/pdf">Boston</a> Police Department also attempted a gun buyback program in 1993 without a restriction for weapon type. Only about half of submitted firearms were handguns. That’s significant because we know from existing <a href="https://www.nij.gov/topics/crime/gun-violence/pages/welcome.aspx#note3">crime data</a> that although <a href="https://www.nytimes.com/2019/08/03/us/mass-shootings.html?action=click&module=Spotlight&pgtype=Homepage">some mass shooters use more powerful weapons</a>, handguns are the type of firearm most often used in violent crime and in youth violence. If the goal is to reduce crime, getting shotguns or broken firearms off the street will likely have little effect. </p>
<p>Guns obtained through a 1994 to 1996 buyback in <a href="https://injuryprevention.bmj.com/content/8/2/143.short">Milwaukee</a> also differed from those typically used in suicide and homicide.</p>
<p>The Boston Police Department tried again in 2006. Learning from their past mistakes, the police offered a <a href="https://www.ajpmonline.org/article/S0749-3797(13)00452-2/pdf">$200 gift card for each handgun</a> – but no cash or gift card for rifles or shotguns. At the conclusion of the program, the Boston Police Department reported that more than 85% of submitted firearms were handguns, closely matching the types of guns used in crime.</p>
<p>The number of shootings <a href="https://www.ajpmonline.org/article/S0749-3797(13)00452-2/pdf">decreased</a> by 14% in Boston in the year after the buyback and continued to decrease through 2010.</p>
<p>Other jurisdictions followed Boston’s example. In 2015, 13 police departments in <a href="https://cdn.journals.lww.com/jtrauma/Abstract/2017/08000/Are__goods_for_guns__good_for_the_community__An.12.aspx">Massachusetts</a> instituted a buyback program with higher amounts paid for types of firearms more frequently used in crime. As a result, they were able to collect more handguns. But three out of five people who sold their guns said they still had one or more guns at home.</p>
<h2>Cost and profit</h2>
<p>Experience shows that some people will attempt to profit from gun buybacks by submitting inexpensive or broken firearms worth less than the cash incentive offered through the buyback. </p>
<p>In <a href="https://twitter.com/CairnsKcairns/status/1074759034513838081">Baltimore</a>, one buyback participant claimed she was going to use the buyback money to purchase a larger weapon. </p>
<p>In <a href="https://www.foxnews.com/politics/firearms-enthusiasts-crash-gun-buyback-to-hunt-bargains">Oregon</a>, private citizens waited outside the gun buyback locations to purchase firearms and ammunition from owners before they could go inside to submit them to law enforcement.</p>
<p>Gun buybacks are financed by taxpayer dollars and are generally <a href="https://www.thetrace.org/2015/07/gun-buyback-study-effectivness/">paid for</a> by local agencies rather than through state or federal funding. A local jurisdiction’s budget will limit the amount of firearms it can purchase and destroy, reducing the likelihood that a gun buyback will have an observable impact on local crime rates.</p>
<h2>Law enforcement involvement</h2>
<p>Typically, gun buyback programs are run by law enforcement. Understandably, criminal offenders may be hesitant to come to the local police station or interact with law enforcement – even if they are promised exemption from prosecution for weapon possession. </p>
<p><a href="https://www.ajpmonline.org/article/S0749-3797(13)00452-2/pdf">Boston</a> attempted to address this concern in 2006 by designating sites like churches as drop-off locations. <a href="https://abc7news.com/news/buyback-event-saturday-for-residents-to-turn-in-firearms-for-cash/434806/">Other jurisdictions</a> have held gun buybacks run by nonprofit groups, but law enforcement officials are frequently on-hand as security, or to help take the guns to be destroyed after the buyback.</p>
<h2>No sizeable US impact</h2>
<p>So far, gun buybacks in the United States have been a community-based, grassroots endeavor with limited impact. Their feasibility on a state or nationwide scale is unclear. </p>
<p>Cost alone may be a prohibiting factor. Assuming a $50 per firearm incentive, reducing the <a href="http://www.smallarmssurvey.org/fileadmin/docs/T-Briefing-Papers/SAS-BP-Civilian-Firearms-Numbers.pdf">U.S. gun stock</a> by 1% would cost $196.5 million. Inevitably, only some of the guns purchased would have been used in future crimes.</p>
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<p class="fine-print"><em><span>Lacey Wallace does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More than 40 percent of U.S. adults have a gun in their household, making it hard to get guns off the streets – even if new gun restrictions are passed.Lacey Wallace, Assistant Professor of Criminal Justice, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/623392016-09-21T00:01:44Z2016-09-21T00:01:44ZHow corporate America can curb income inequality and make more money too<figure><img src="https://images.theconversation.com/files/138530/original/image-20160920-12465-1a525a0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Share a little?</span> <span class="attribution"><span class="source">Two fish via www.shutterstock.com</span></span></figcaption></figure><blockquote>
<p>Scorpion met Frog on a river bank and asked him for a ride to the other side. “How do I know you won’t sting me?” asked Frog. “Because,” replied Scorpion, “if I do, I will drown.” Satisfied, Frog set out across the water with Scorpion on his back. Halfway across, Scorpion stung Frog. “Why did you do that?” gasped Frog as he started to sink. “Now we’ll both die.” “I can’t help it,” replied Scorpion. “It’s my nature.”</p>
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<p>This centuries-old <a href="http://www.aesopfables.com/cgi/aesop1.cgi?4&TheScorpionandtheFrog">parable</a>, which has been retold by <a href="https://www.youtube.com/embed/iPDgGxLb2OM">Orson Welles</a> and many others and sometimes refers to a turtle rather than a frog, is usually meant to show how a bad nature cannot be changed – even if self-interest and preservation demand it. </p>
<p>It’s also an apt metaphor for the <a href="https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf">growing scourge</a> of <a href="https://theconversation.com/us/topics/economic-inequality-15917">income inequality</a>, one of the defining issues of our age. A standard explanation for why income inequality is increasing, to borrow a <a href="http://www.vanityfair.com/news/2011/05/top-one-percent-201105">quote from Nobel-winning economist Joseph Stiglitz</a>, is that “wealth begets power and power begets more wealth.” </p>
<p>That is, because the rich and corporate CEOs use their influence to promote their self-interest, inequality is built into the very DNA of capitalism. And to return to our metaphor, the rich scorpions sting the rest of us – by exacerbating income inequality through pay policies, stock buybacks and other actions – because it’s simply their nature. </p>
<p>But there’s plenty of evidence <a href="http://www.oecd.org/els/soc/Focus-Inequality-and-Growth-2014.pdf">income inequality undermines the economy</a> and, as a result, harms companies and the wealthy too. Eventually, we all sink together. </p>
<p>A <a href="http://positiveorgs.bus.umich.edu/research-review-articles/">growing body</a> of research in the emerging area of “positive organizational scholarship” suggests a different lesson from the scorpion fable: <a href="http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm">everyone can benefit if they work together</a>. That is, companies can invest in their workers, help reduce income inequality and make more money, all at the same time. </p>
<p>But they need a new perspective to see how.</p>
<h2>Age of rage</h2>
<p>The issue of income and wealth inequality has received a lot of attention in recent months, particularly on the campaign trail, as <a href="http://money.cnn.com/2015/10/13/news/economy/clinton-sanders-income-inequality/">candidates</a> <a href="http://www.pressherald.com/2016/07/01/income-inequality-widens-as-top-1-see-greatest-growth/">have argued about</a> whose policies would be most effective at lifting wages of the working class. </p>
<p>And no wonder. The percentage of total income received by the top 1 percent of earners in the U.S. has risen from under 8 percent in the 1970s to over 18 percent today. The percentage of total wealth held by the richest 0.01 percent (the elite 1 percent of the 1 percent) has soared from under 3 percent to over 11 percent over this interval. </p>
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<p>We haven’t seen extremes like these since the start of the Great Depression. So the response, consisting of <a href="https://berniesanders.com/issues/income-and-wealth-inequality">speeches</a> by political candidates, <a href="http://www.scientificamerican.com/article/economic-inequality-it-s-far-worse-than-you-think/">articles</a> by pundits, <a href="http://inequality.stanford.edu/cpi-research/area/income-and-wealth">research</a> by academics and <a href="http://www.bloomberg.com/news/articles/2011-11-09/occupy-wall-street-protests-inject-income-inequality-into-political-debate">angry outbursts</a> by the public, is hardly a surprise. </p>
<h2>How inequality hurts growth</h2>
<p>Let us consider two important ways income inequality undermines the economy: (1) by diminishing worker motivation and (2) by reducing the velocity of money.</p>
<p>The demotivating impact of income inequality occurs when workers see the gains of productivity going almost entirely to executives. </p>
<p>Since 1973, <a href="http://www.epi.org/productivity-pay-gap/">productivity has increased</a> by over 73 percent, while (inflation-adjusted) hourly worker pay has risen by only about 11 percent and <a href="http://www.epi.org/publication/top-ceos-make-300-times-more-than-workers-pay-growth-surpasses-market-gains-and-the-rest-of-the-0-1-percent/">CEO compensation has soared</a> by 1,000 percent. </p>
<p>Who can blame people for being reluctant to work harder when they know the proceeds will go to someone else? <a href="http://www.psychologicalscience.org/index.php/news/releases/are-humans-hardwired-for-fairness.html">Extensive behavioral research</a> has shown that people will forego personal gain to prevent outcomes they perceive as unfair. In work settings, this leads to demotivated workers working below their potential, even when it leads to smaller raises or bonuses. The result is reduced productivity, lower quality and less creativity, all of which undermine corporate profit and economic growth. </p>
<p><a href="http://www.usnews.com/opinion/blogs/economic-intelligence/2013/09/12/record-high-income-inequality-threatens-us-growth">Another way</a> inequality affects the economy is by reducing the velocity of money by <a href="http://www.dal.ca/content/dam/dalhousie/pdf/faculty/science/economics/seminars/Alvarez-Cuadrado%20SavingInequalityLast.pdf">shifting cash</a> to people who spend it more slowly. Working-class people who are stretching to make ends meet spend their income quickly – usually pretty much all of it – while wealthy people whose resources exceed their immediate needs <a href="https://www.dartmouth.edu/%7Ejskinner/documents/DynanKEDotheRich.pdf">tend to save substantial portions</a> of their income. </p>
<p>Consequently, whenever a company takes a dollar out of the hands of a worker and puts it into the hands of an executive or investor, the number of times that dollar will be spent in the economy is reduced. The result is less business for capitalists and less employment for workers. </p>
<p>These two observations imply that policies that decrease income inequality also <a href="http://voxeu.org/article/effects-income-inequality-economic-growth">bolster the economy</a>. Since this benefits both rich and poor, such policies offer opportunities for the rich, and the businesses they control, to be <a href="http://www.the-crises.com/income-inequality-in-the-us-1/">part of the solution</a> rather than part of the problem of income inequality. </p>
<h2>Ford’s famous $5</h2>
<p>The most straightforward opportunities are workforce investments to increase motivation and productivity of workers. </p>
<p>This is what Henry Ford did a century ago with his <a href="http://www.henryford150.com/5-a-day/">famous US$5 a day wage</a> – at a time when typical manufacturing wages were about $2.25 a day – which <a href="http://www.thedailybeast.com/articles/2014/01/06/henry-ford-understood-that-raising-wages-would-bring-him-more-profit.html">he called</a> “one of the finest cost-cutting moves we ever made.” In the present day, businesses ranging from tiny cleaning company Managed by Q to giant retailer Costco are using high wages as part of what Zeynep Ton of MIT calls a <a href="http://mitsloan.mit.edu/newsroom/articles/the-good-jobs-strategy-a-q-and-a-with-mit-sloans-zeynep-ton/">“good jobs strategy”</a> to drive productivity, quality and profits. </p>
<p>But isolated actions by individual companies are too small to have a significant impact on the velocity of money across the economy. To realize the full economic benefit of some income inequality-reducing policies, businesses need to implement them collectively. </p>
<p><a href="https://www.amazon.com/dp/B001ULOPO0/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1#nav-subnav">This happened</a> to a degree with Ford’s high-wage policy. Despite the legend that he raised wages to enable his workers to buy his cars, Ford’s original goal was to improve retention and productivity. However, when other employers followed suit, their collective wage increases produced a working class that could buy more cars and more of everything else. </p>
<h2>One way companies make inequality worse</h2>
<p>A contemporary example of a situation that calls for collective action is the increasingly common practice of <a href="http://fortune.com/2016/04/25/buybacks-stock-market/">stock buybacks</a>. </p>
<p>These are used by public companies to boost their stock prices by reducing the total number of shares, which in turn increases earnings per share. However, because this enhances <a href="http://www.theatlantic.com/politics/archive/2015/02/kill-stock-buyback-to-save-the-american-economy/385259">stock-based executive compensation</a> without benefiting workers, <a href="https://hbr.org/2014/09/profits-without-prosperity">stock buybacks amplify income inequality</a>. </p>
<p>An alternative for boosting stock price without aggravating income inequality is investing in worker compensation as part of a productivity enhancement strategy. But, since productivity investments take time to produce results, it is likely that the buyback strategy will generate a greater increase in stock price, and executive compensation, at least in the short term. So, from a pure self-interest perspective, management has incentive to adopt the buyback strategy rather than the workforce investment strategy. </p>
<p>The fact that stock buybacks exceeded $500 billion in 2015 suggests that many businesses made precisely this choice.</p>
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<span class="caption">A case of nature vs. self-interest?</span>
<span class="attribution"><span class="source">Scorpion frog via www.shutterstock.com</span></span>
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<h2>Stop stinging the frog</h2>
<p>Unfortunately, because buybacks divert money away from investments in productivity <a href="http://www.reuters.com/investigates/special-report/usa-buybacks-pay/">without improving firm performance</a>, they ultimately lead to less profit, fewer jobs, lower wages and a smaller overall economy. Furthermore, if other firms are using them to boost executive compensation, a company that wants to recruit and retain top managerial talent will be seriously tempted to use buybacks as well. </p>
<p>An option for breaking this economically destructive cycle, which almost never gets considered, is for firms to lobby to take the buyback option off the table for everyone. If, for example, stock buybacks were restricted, as they were prior to 1982, management would have greater incentive to make genuine investments in their businesses, including in their workforces.</p>
<p>In addition to producing productivity gains within businesses, the increase in worker compensation would result in a velocity-of-money induced stimulus to the economy as a whole. The combined effect over time could even be large enough to make both executives and workers better off than they would be under the buyback strategy. </p>
<p>While collective lobbying for sensible regulations may sound like business heresy – in a world where corporate lobbying usually seeks narrow favors or to stymie regulations in general – it is a rational response to a situation in which legal and profitable actions by individual companies create negative consequences, or “externalities,” on the rest of the economy, and thereby wind up hurting the companies themselves. </p>
<p>Metaphorically, such scenarios are analogous to a large number of tiny scorpions (businesses) riding across the river on a giant frog (economy). When a single scorpion stings the frog, it derives pleasure from doing what comes naturally and barely harms the mammoth frog. But when every scorpion does the same, the frog dies and so do all the scorpions. </p>
<p>But humans aren’t scorpions, so we can choose to stop the self-destructive stinging and allow everyone to cross the river.</p><img src="https://counter.theconversation.com/content/62339/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wallace Hopp does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rather than pursue self-interested policies that widen the gap between rich and poor, companies can invest in their workers, curb income inequality and make more money all at the same time.Wallace Hopp, Associate Dean, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/321232014-10-08T03:24:18Z2014-10-08T03:24:18ZLong-term growth is the victim of short-term buyback schemes<figure><img src="https://images.theconversation.com/files/61009/original/zpqcvfyy-1412658796.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We need entrepreneurs with vision beyond the current reporting period</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>When Lord John Maynard Keynes wrote <a href="http://www.simontaylorsblog.com/2013/05/05/the-true-meaning-of-in-the-long-run-we-are-all-dead/">“In the long run we are all dead”</a>, he was not just expressing his frustration at mainstream economists who blindly believed in self-adjusting markets.</p>
<p>I am convinced that he was trying to do something much more important. He was alerting the economics profession against the danger of a subtle enemy: Father Time. Yes, because time in economics is a troublemaker and it causes all sorts of problems.</p>
<p>When time enters the picture, individuals and firms suddenly become either too impatient or too patient. The result destroys resource allocation and fosters inter-generational conflicts. Private and public agents start developing expectations that inevitably turn out to be wrong. The government is revealed to be “dynamically inefficient”, which is just a fancy way to say that it will break its promises and cheat individuals. </p>
<p>No wonder that in economics, time is a big challenge.</p>
<h2>Repurchasing stocks, neglecting the future</h2>
<p>Lord Keynes was certainly not inviting us to just forget about the future. Yet, our human nature is to be more concerned with today than tomorrow, to focus on the short-term more than the long-term.</p>
<p>The problem is that sometimes what one does in the short-term is bad for the long-term. Also, what can make the long-term better may make the short-term worse. </p>
<p>When this conflict arises, usually the short-term wins. Ask those governments who cancel a carbon tax because it might hurt manufacturing competitiveness in the short term. Or those other governments that sell public assets in a frenzy to get rid of a debt problem that does not really exist.</p>
<p>But myopia and short-termism are not just the prerogative of governments. We find examples everywhere in the economy. </p>
<p>One example is the Australian investor’s preference for dividend returns. A new report by <a href="http://www.theaustralian.com.au/business/crunch-coming-for-higher-dividend-ratios-boston-study/story-e6frg8zx-1227083392007">Boston Consulting Group</a> finds Australia’s top 200 listed companies pay nearly double the proportion of earnings in dividends as their global peers. This is despite lagging them in earnings per share growth. According to the report, this push for dividend payouts is causing Australian companies to risk investment opportunities and is leading to a “growth crisis”.</p>
<p>Another example that is particularly subtle and still potentially very damaging relates to a new fashion in corporate finance: stock repurchasing.</p>
<p>In the United States, corporates started to buyback considerable amounts of their own shares in the 1990s. This practice has now reached massive proportions since the global financial crisis.</p>
<p>According to the <a href="http://online.wsj.com/articles/companies-stock-buybacks-help-buoy-the-market-1410823441">Wall Street Journal</a>, in the first six months of 2014, US corporates repurchased US$338.3 billion of their stocks. This is the largest volume of buybacks for any semester since 2007. In Australia, A$3.7 billion of buybacks were announced in the latest reporting season.</p>
<p>There may be a variety of reasons why corporates do this. Buybacks can be used to sustain the market value of shares when they are under-priced, to return cash to shareholders in a more tax efficient way than paying cash dividends, and to increase earnings per share in the presence of large amounts of employees’ stock options. This latter practice is particularly popular among chief executives because their incentive pay is often linked to earnings per share.</p>
<p>To some extent, the market seems to be rewarding companies that repurchase their stock. Analysis at <a href="http://quotes.wsj.com/UK/BARC">Barclays</a> shows that companies with the largest buyback programs by dollar value have outperformed the market by 20%. </p>
<p>But this apparent short-term benefit comes with large long-term costs for both shareholders and the economy.</p>
<p>When firms repurchase their stock, they divert cash away from investment. This has two implications.</p>
<p>First, less investment means lower long-term earnings. Hence buybacks do not really increase the value of the firm for shareholders: those who keep a stake in the firm are likely to see the performance of the firm deteriorate in the long-term.</p>
<p>Second, in an economy where the private sector is the engine of economic activity, less corporate investment means lower future growth. This in turn means poorer labour market outcomes, such as increased unemployment.</p>
<p>Furthermore, buybacks may increase earnings per share above actual profit. When this happens, markets receive a distorted price signal and resources or savings are less efficiently allocated.</p>
<h2>Visionary entrepreneurs needed</h2>
<p>One could argue this is a case where ill-designed CEO payment schemes and accounting practices have a real negative impact on the long-run economic performance of the country. </p>
<p>The problem is deeper and more general. Corporate short-termism, of which buybacks are a symptom, arises from a lack of “entrepreneurial spirit”. </p>
<p>What contributes to the economic fortunes of a country is not a short-sighted corporate executive who takes excessively risky behaviour in response to the myopic preferences of shareholders. Neither is the executive who cuts company research and development to increase current earnings expectations.</p>
<p>Economically advanced countries achieved their current living standards thanks to generations of entrepreneurs that were willing to innovate, invest and produce value. They did this not because they were good Samaritans serving the community, but because they understood the very interest of their company and shareholders extended beyond the present.</p>
<p>If economic growth is not to become a thing of the past, we cannot just rely on government policy and reforms. We need entrepreneurs that combine “greed” (<a href="http://www.imdb.com/character/ch0012282/quotes">Gordon Gekko’s</a> copyright) with a vision that does not just end with the current reporting period.</p>
<p>However the question remains, do they still exist?</p><img src="https://counter.theconversation.com/content/32123/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics.</span></em></p>When Lord John Maynard Keynes wrote “In the long run we are all dead”, he was not just expressing his frustration at mainstream economists who blindly believed in self-adjusting markets. I am convinced…Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/59392012-03-20T03:46:08Z2012-03-20T03:46:08ZHow to spend $100 billion: Apple announces dividend, buyback plans<figure><img src="https://images.theconversation.com/files/8780/original/c67pmsdv-1332213613.jpg?ixlib=rb-1.1.0&rect=7%2C12%2C981%2C638&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Apple will pay a dividend to shareholders for the first time since 1995, as it considers how to spend its amassed warchest.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Apple today announced it would pay its first shareholder dividends in almost 20 years, marking a distinct break from the late Steve Jobs’ “no dividends” policy.</p>
<p>The world’s biggest corporation by market capitalization – now worth $US560 billion – will spend $US45 billion of its enormous $US100 billion cash stockpile, paying $US2.65 per share, commencing in Apple’s fiscal fourth quarter (September 2012). Apple will also engage in a share buy-back scheme, totalling $US10 billion.</p>
<p>To a certain extent, Apple has caved to shareholder pressure; investors have long urged the company to deliver dividends back to shareholders. Former CEO Steve Jobs always resisted dividend pay outs, arguing Apple needed “rainy day” money in case the computer maker needed to burn cash during a downturn.</p>
<p>To pacify shareholders, Jobs delivered stock splits instead, increasing the value of existing portfolios, while encouraging new investors to buy new, cheaper Apple shares.</p>
<p>The Cupertino, California company will be forced to use its domestic cash to implement the dividends and buy-back schemes. The bulk of Apple’s treasure chest is held offshore in cash and short-term investments. Like Microsoft and Google, Apple is refusing to repatriate billions of dollars, unless it receives a tax holiday.</p>
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<img alt="" src="https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=694&fit=crop&dpr=1 600w, https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=694&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=694&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=872&fit=crop&dpr=1 754w, https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=872&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/8781/original/hfbgjprp-1332214049.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=872&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Tim Cook is reversing Steve Jobs’ no dividend policy.</span>
<span class="attribution"><span class="source">AAP</span></span>
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<p>During an presidential election year, when corporate taxes remain a controversial domestic issue, Apple and other tech behemoths have powerful friends in US Congress who argue that up to $US1 trillion could be invested in US jobs, if the Obama administration relaxed tax rules, even temporarily.</p>
<p>Multinational tech firms like Apple and Google generate tremendous profits from their global revenues, particularly in markets such as Europe, Japan and China. However, their cash stockpiles are double-edged swords, as they cannot repatriate their cash without facing substantial tax bills in the US.</p>
<p>However, critics argue that when tax holidays are granted, they do not make substantial contributions to jobs growth. Under the provisions of the US Homeland Investment Act (2004), passed by a Republican-majority Congress, US firms repatriated over $US350 billion. However, subsequent studies have demonstrated that corporations employed the cash largely to engage in shareholder payouts, rather than new investment in plant or R&D.</p>
<p>Nevertheless, it’s not as if shareholders don’t spend, save or invest at least some of their earnings in the US. Consequently, it’s scarcely surprising US lawmakers want American corporate cash repatriated, rather than sitting in a bank in Brussels.</p>
<p>Apple will use a significant part of its $45 billion to pay for current and future executive stock options and employee share purchase options. In January this year, CEO Timothy Cook was granted $US376 million in stock options, worth even more since Apple’s share price surpassed $US600. </p>
<p>At the end of 2010, CEO Steve Jobs held over 5.5 million in Apple shares in a trust, valued at almost $US1.8 billion, although he never realised the value of them prior to his death in October 2011. Conversely, CEO Cook, former Chief Financial Officer Fred Anderson and dozens of other Apple executives have realised tens of millions of dollars after exercising share options over the past 10 years, without ever delivering dividends to shareholders.</p>
<p>Investing in Apple just became much more attractive to mutual funds, as well as individual shareholders, and AAPL has risen $15.53 (2.65%) in the few hours since the dividend was announced. Under Jobs, Apple delivered innovation, growth, revenue and astounding stock price growth; under Cook, shareholders may get some value.</p><img src="https://counter.theconversation.com/content/5939/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Remy Davison owns one share in Apple.</span></em></p>Apple today announced it would pay its first shareholder dividends in almost 20 years, marking a distinct break from the late Steve Jobs’ “no dividends” policy. The world’s biggest corporation by market…Remy Davison, Jean Monnet Chair in Politics and Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.