Share Buybacks

Telis Demos’ FT story about how cash-rich firms are planning an unusually large degree of share buybacks this season gives me yet more bad feelings about the economic outlook. Managers of profitable public firms regularly need to set the balance between taking their earnings and giving them to shareholders in the form of dividends and buybacks and investing them in expanded firm operations. The “return to shareholders” choice is a perfectly legitimate and often correct one. But from an economy-wide perspective, a general perception among firms that increased buybacks are the way to go is a sign of a world in which the people running successful businesses don’t see profitable investment opportunities.

The problem is that this kind of thing becomes self-fulfilling. If I’m running a store in a town where I know some major employers are planning to expand operations, then I think I may need to increase my own staffing level to take advantage of the uptick in business. Maybe it’s even time to open a new branch. But if nobody else is expanding, then it’s hard to see why I should.

All in all, it’s another sign of the crisis of demand in the developed world. A Martin Wolf column earlier this week showed this useful chart:

Basically the run-up in federal debt in the United States is being offset by a surge in private savings. In a happy story, private savings is good because it’s turned into investment that expands the production frontier. But the private sector doesn’t seem to want to do much investing, so we ought to be taking the opportunity to invest in some public projects until the private sector seems to want to use the money.