While sipping cold beer and sitting comfortably beneath a purple and gold canopy on the day of an LSU football game, a Louisianan is naturally thinking more about the prospects of a second plate of jambalaya than how a global trade war could raise the prices of the rice and meat he used to make the jambalaya.
This fan isn’t thinking about how executives across the country had been allocating trillions of idle cash from the corporate tax cut toward stock repurchases instead of wage increases or long-term capital investments. Life is good for this Louisianan and the many other dedicated fans sprawled out among the Parade Ground.
The economy is running like a well-oiled machine, and one could reasonably assume that corporate strategy couldn’t single-handedly derail it. What effect could the decisions a corporate executive in Silicon Valley possibly have on someone down in the bayou?
It’s a question that doesn’t even cross the minds of a vast majority of Americans in the first place — whether they be at a football tailgate or at a corporate office. The economy is currently booming, with GDP growth for the second quarter of 2018 at 4.2 percent and the unemployment rate at 3.7 percent, its lowest level since 1969.
What happens when the party ends, and the economy slows down? Most Americans will find themselves in a financially precarious situation because middle class Americans have neither recognized stock market returns in the past decade nor will they recognize the returns that stock repurchases will contribute to the stock earnings in 2018. Thus, Americans are extremely exposed to financial instability in the event of an economic downturn, especially if an inflationary trade war erodes wages.
Meanwhile, investors, who comprise just over half of Americans, have the luxury to simply cash in on their investment made following the financial crisis of 2009.
Consider that the S&P 500, for example, has quadrupled in value over the past decade. This explains why the wealth gap has grown so considerably during the longest bull market in U.S. history.
This bleak economic scenario is soon to be a harsh reality for many Americans. Most economists predict that an escalating global trade war and rising interest rates will trigger a market correction by 2020.
Caught between a trade war and the false promises of a corporate tax cut, Americans will soon feel the pinch between the rising cost of living and depressed wages. Depressed wages, in particular, will deal significant damage to the financial stability of the average American.
Corporate short-termism is to blame for these depressed wages. Short-termism means corporate tax cuts won’t “trickle down” into the bank accounts of middle class Americans.
Theoretically, “trickle-down economics” could work if companies distributed some of that money to workers, both through salary increases and job training, while investing the rest of the idle cash into long-term investments such as capital expenditures and research and development.
The money Americans were supposed to receive following the recent corporate tax cut has instead been allocated to earnings per share enhancers. Corporations have invested trillions of idle cash into short-term investments, most notably stock repurchases, that won’t yield any long-term growth. Companies may so graciously give a one-time bonus, but they won’t increase salaries to avoid permanently increasing fixed costs.
While most Americans can’t tell you what a stock buyback is, some have become more wise and are leading the charge against these smoke and mirror accounting techniques.
For example, Sen. Tammy Baldwin recently introduced the Reward Work Act, which would reclassify stock buybacks as stock market manipulation — a classification that was removed in 1982 with the passage of Rule 10b-18 amendments to the Securities and Exchange Act of 1934.
Senators aren’t the only ones taking matters into their own hands when it comes to curbing corporate short-termism. Long-term focused executives and value investors alike are posting their 95 Theses on corporate boardroom doors.
Another way to prevent executive short-termism is to make the quarterly earnings report a bi-annual report instead. “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” wrote Berkshire Hathaway chairman Warren Buffett and JP Morgan Chase CEO and chairman Jamie Dimon.
In their column in the Wall Street Journal, Buffett and Dimon suggest eliminating or reducing quarterly earnings reports because of how myopic its focus can make executive decision-making. They argue that only long-term investments drives innovation and economic growth, and America needs those now more than ever.
Even President Donald Trump has taken notice of the issue, having tweeted out that after meeting with business leaders he’s asked the SEC to look into ending the quarterly earnings report.
Ultimately, corporate executives shouldn’t be allowed, much less have incentive, to put Wall Street’s interests above Main Street’s welfare, specifically when those interests are at the expense of the working class and long-term economic sustainability.
In order to ensure that doesn’t happen, U.S. companies need to adhere to stringent new rules and regulations. The working class deserves an explicit guarantee that corporate executives won’t jeopardize America’s future using accounting gimmicks to mask earnings growth.
Best-selling author and New York Times columnist Thomas Friedman argues we are at an inflection point in technological innovation, and there’s simply too much at stake for corporate investment to stall behind innovations such as artificial intelligence and renewable energy.
Making America great again means reasserting ourselves at the forefront of innovation and productivity. The only way to get there is if a bipartisan coalition will unify behind corporate responsibility and accountability to ensure strategic long-term investment.
Patrick Gagen is a 21-year-old mass communication and finance senior from Suwanee, Georgia.
