1 Productive Capabilities and Sustainable Prosperity

“Sustainable prosperity” denotes an economy that generates stable and equitable growth for a large and growing middle class. From the 1940s into the 1970s, the United States appeared to be on a trajectory of sustainable prosperity, especially for white-male members of the US labor force.Footnote ¹ Since the 1980s, however, an increasing proportion of the US labor force has experienced unstable employment and inequitable income, while growing numbers of the business corporations upon which they rely for employment have experienced anemic productivity growth.Footnote ²

Stable and equitable growth requires innovative enterprise. The essence of innovative enterprise is investment in productive capabilities that can generate higher-quality, lower-cost goods and services than those previously available. The innovative enterprise tends to be a business corporation – a unit of strategic control that, by selling products, must make profits over time to survive. In a modern society, however, business corporations are not alone in making investments in the productive capabilities required to generate innovative goods and services. Household units and government agencies also make investments in productive capabilities upon which business corporations rely for their own investment activities. When they work in a harmonious fashion, these three types of organizations – household units, government agencies, and business corporations – constitute “the investment triad.”Footnote ³

The Biden administration’s Build Back Better agenda to restore sustainable prosperity in the United States has focused on investment in productive capabilities by two of the three types of organizations in the triad: government agencies, implementing the Infrastructure Investment and Jobs Act of 2021, supplemented by the CHIPS and Science Act of 2022 as well as the Inflation Reduction Act of 2022,Footnote ⁴ and household units, envisioned by the American Families Act, which, blocked in the Senate, fell by the wayside during the first two years of Joe Biden’s presidency.Footnote ⁵ Largely absent, from the Build Back Better agenda have been policy initiatives to ensure that, given government and household investment in productive capabilities, the executives who control resource allocation in major US business corporations have both the abilities and incentives to invest in innovation.

This lacuna is problematic because many of the largest industrial corporations in the United States place a far higher priority on distributing cash to shareholders in the form of dividends and share repurchases for the sake of higher stock yields than on investing in the productive capabilities of their workforces for the sake of innovation. Based on analyses of the “financialization” of major US business corporations, I argue that, unless the Biden administration includes an effective policy agenda to ensure corporate investment in innovation, its program for attaining stable and equitable growth will fail.

What does the investment triad do?

• Household units invest in the education of the young with a view toward providing them with the knowledge and aptitudes that they will need to function as productive adults. Later, these younger adults may use the income from productive employment to raise families of their own. Critical determinants of household investments in productive capabilities are the employment incomes earned by parents, their provision of household services, the quality of education available to the young, and the number of years over which they receive their education. Household units also invest in critical physical infrastructure in the form of homes. A productive society requires these investments from the supportive family.

• Government agencies support investments in productive capabilities made by household units by providing schooling that households could not afford on their own. A well-financed primary, secondary, and tertiary education system is a necessary condition for society to embark on a path of sustained development that can enable most of the population to attain higher living standards.Footnote ⁶ By supporting basic and applied research, government agencies can also be charged with investing in the creation of new scientific and engineering knowledge that would otherwise not come into existence. As a critical component of investment in productive capabilities, government agencies provide services for public and personal health. In addition, government agencies invest in physical infrastructure such as transportation systems, communication systems, energy systems, and water and waste systems. Government investments in productive resources, both human capabilities and physical infrastructure, manifest the presence of the developmental state.

• Business corporations make use of the capabilities and infrastructure provided by government and household investments as foundations for further in-house investment in human resources in combination with expenditure on plant and equipment. Their purpose is the generation of goods and services to be sold in product markets at prices that exceed costs. In high-tech fields, business corporations may need to make specialized in-house investments in capabilities to absorb the advanced knowledge resulting from investments by government agencies. In many cases, government agencies make strategic investments in knowledge creation through business corporations in the form of research contracts, procurement contracts, and financial subsidies. It is typically through on-the-job experience in business corporations and government agencies that individuals build on their formal educations and accumulate the productive capabilities that enable them to contribute to the innovation process. The development and utilization of these productive capabilities are the essence of innovative enterprise.

The fundamental weakness of the neoclassical theory of the market economy, which dominates the conventional view of how an advanced economy should function to achieve superior economic performance, is that it lacks a theory of innovative enterprise.Footnote ⁷ Indeed, the conventional “theory of the firm” that posits “perfect competition” as the ideal, even if unattainable, foundation for superior economic performance is based on the obviously absurd argument that the more unproductive the firm, the more efficient the allocation of the economy’s resources.Footnote ⁸ This view of the world promotes government policies that seek to make “the market” omnipotent and “the firm” impotent in the resource-allocation process.Footnote ⁹

If a society wants to attain higher living standards, it needs highly productive, and powerful, business corporations that transform technologies and access markets to generate higher-quality, lower-cost products – the definition of innovative enterprise. The most successful of these corporations inevitably gain substantial power over the allocation of the economy’s resources and the operation of its markets. If left unchecked, these powerful corporations can fall prey to “predatory value extraction,” as certain parties, including senior executives and activist shareholders who extract far more value from the corporations than they contribute to value creation by the corporation, exercise strategic control over the allocation of the corporation’s vast resources.Footnote ¹⁰ For the sake of attaining stable and equitable growth, these large and powerful corporations must be governed for the common good. The centrality of the investment triad to innovative enterprise provides an economic as well as moral basis for the implementation of institutions of corporate governance for achieving these social objectives.Footnote ¹¹

With appropriate governance institutions in place, the investment triad enables innovative enterprise to function as a foundation for sustainable prosperity. Stable and equitable growth occurs when the investment strategies of households, governments, and businesses interact as supportive families, developmental states, and innovative enterprises. Households and governments interact through investments in education. Governments and businesses interact in the development of the high-tech knowledge base. Businesses and households interact through the employment relationship.

Business corporations provide adults in household units with employment that, with sufficient productivity, should enable them to support their families. Through formal and on-the-job training, business corporations also invest in the capabilities of people whom they employ. A corporation has an incentive to retain the people whom it has trained. It generally does so through pay increases and promotions to jobs that require superior functional capabilities and greater hierarchical responsibilities. Indeed, households’ living standards rise over time primarily through augmented pay and promotions for valued employees in stable employment relations at innovative enterprises. It is through the employment relations of innovative enterprises, not labor-market supply and demand, that a nation such as the United States can generate the stable and equitable growth that supports a thriving middle class.Footnote ¹²

In short, the investment triad puts in place the productive capabilities that are essential to a prosperous economy. Investments in human capabilities and physical infrastructure by household units, government agencies, and business corporations must be financed. Investments in educating the labor force and the housing stock in which families reside are generally funded by some combination of after-tax household incomes supplemented by household debt, along with government tax revenues supplemented by debt issues at the local, state, and federal levels. To some extent, business corporations finance the education of the labor force through corporate taxes, philanthropic contributions, and direct payments to employees for their own educations or their children’s schooling as part of employment benefits. Corporate taxes can also be important for funding government investments in physical infrastructure.

Ultimately, the ability of household units and government agencies to afford investments in productive resources requires that business corporations utilize and further develop those investments in human capabilities and physical infrastructure. These business corporations must produce and sell competitive – high-quality, low-cost – products to survive. The innovative enterprise generates these competitive products, making it central to the triadic investment system that can put a society on a path to sustainable prosperity.

The business corporations that dominate the US economy are very large. Table 1 shows the distribution of US business-sector civilian employment by firm size for 2019. Business-sector employment is about 85 percent of total civilian employment in the US economy. In 2019, 2,230 corporations with 5,000 or more employees in the United States, with an average of 21,223 people on the payroll, accounted for 35.6 percent of all US business-sector employees and 40.7 percent of payrolls. Just 540 corporations with 20,000 or more employees, averaging 58,357 employees, represented 23.7 percent of all business-sector employees and 26.1 percent of all payrolls.

The resource-allocation decisions of these large corporations have a preponderant influence on the operation and performance of the US economy, including investment in the productive capabilities of the labor force that are integral to the investment triad. In Section 2, drawing on the experience of the US economy over the past seven decades, I summarize how the United States moved toward stable and equitable growth from the late 1940s through the 1970s under a “retain-and-reinvest” corporate resource-allocation regime at major US business corporations. Companies retained a substantial portion of their profits to reinvest in the productive capabilities under their control, including those of employees, who (unlike plant and equipment) could at any point in time take their “human capital” elsewhere but who had the realistic expectation of a stable, well-paid career with one company (CWOC).

In contrast, since the early 1980s, under a “downsize-and-distribute” corporate resource-allocation regime, unstable employment, inequitable income, and sagging productivity have characterized the US economy.Footnote ¹³ In the transition from retain-and-reinvest to downsize-and-distribute, many of the largest, most powerful corporations have adopted a “dominate-and-distribute” regime: Based on the innovative capabilities that they have previously developed, they dominate their industries but prioritize shareholders in the allocation of corporate resources.

The practice of open-market share repurchases – aka stock buybacks – at major US business corporations has been central to the dominate-and-distribute and downsize-and-distribute regimes. Since the mid-1980s, stock buybacks have become the prime mode for the legalized looting of the business corporation. I call this looting process “predatory value extraction”Footnote ¹⁴ and contend that it is the fundamental cause of the increasing concentration of income among the richest household units and the erosion of middle-class employment opportunities for most Americans.

I conclude the Element by outlining a policy framework that, by directly confronting predatory value extraction, could stop the looting of the business corporation and put in place social institutions that support sustainable prosperity. The agenda includes (a) a ban on stock buybacks done as open-market repurchases, (b) changes in incentives for senior corporate executives that disconnect their compensation from the company’s stock yields, (c) representation of workers and taxpayers as directors on corporate boards, (d) reform of the tax system to reward innovation and penalize financialization, and, (e) guided by the investment-triad framework, government–business collaborations to support “collective and cumulative careers” of members of the US labor force. Sustained investment in human capabilities by the investment triad, including business corporations, would make it possible for an ever-increasing portion of the US labor force to engage in productive careers that underpin upward socioeconomic mobility, manifested by a growing, robust, and hopeful American middle class.

2 Innovative Enterprise

An economy cannot attain stable and equitable growth unless its major business corporations focus on investing in productive capabilities for the sake of generating higher-quality, lower-cost – that is, innovative – products. Innovative enterprise is a necessary condition for a nation’s population to attain higher living standards on a sustainable basis. The innovation process that can generate a higher-quality, lower-cost product is uncertain, collective, and cumulative. Hence, a theory of innovative enterprise must comprehend these characteristics of the innovation process.Footnote ¹⁵

• Uncertain: When investments in transforming technologies and accessing markets are made, the product and financial outcomes cannot be known in advance. If they were, the result would not be innovation. Hence the need for strategy.

• Collective: To generate a higher-quality, lower-cost product, the business enterprise must integrate the skills and efforts of large numbers of people with different hierarchical responsibilities and functional capabilities into the learning processes that are the essence of innovation. Hence the need for organization.

• Cumulative: Collective learning today enables collective learning tomorrow. These organizational-learning processes must be sustained continuously over time until financial returns can be generated through the sale of innovative products. Hence the need for finance.

Strategy, organization, and finance are generic activities in the operation of any business corporation. But it is the social content of these generic activities, embodied in distinctive social relations, that can transform the interaction of strategy, organization, and finance into innovative performance. Even a relatively small company is a highly complex social organization. What I call the “social conditions of innovative enterprise” framework provides a conceptual guide to empirical company-level investigation of how a business enterprise operates and performs over time. Specifically, in the implementation of the three generic business activities, strategic control, organizational integration, and financial commitment are social conditions that can enable the corporation to manage the uncertain, collective, and cumulative character of the innovation process.

• Strategic control: For innovation to occur in the face of technological, market, and competitive uncertainties, executives who control corporate resource allocation must have the abilities and incentives to make strategic investments in innovation. Their abilities depend on their knowledge of how strategic investments in new productive capabilities can enhance the corporation’s existing capabilities. Their incentives depend on alignment of their personal interests with the corporation’s purpose of generating innovative products.

• Organizational integration: Implementation of an innovation strategy requires integration of people working in a complex division of labor into collective and cumulative learning processes. Work satisfaction, promotion, remuneration, and benefits are important instruments in a reward system that motivates and empowers employees to engage in collective learning over a sustained period of time.

• Financial commitment: For collective learning to accumulate over time, the sustained commitment of “patient capital” must keep the learning organization intact. For a young company that, because it is a “start-up,” has not yet been able to turn a profit, various forms of “venture capital” can provide financial commitment. For a going concern that has achieved sustained profitability, retained earnings – leveraged, if need be, by debt issues – are the foundation of financial commitment.

The uncertainty of an innovation strategy is embodied in the fixed-cost investments required to develop the productive capabilities that may, if the strategy is successful, result in a higher-quality product. Fixed cost derives from both the size and the duration of the innovation investment strategy. If the size of investment in physical capital tends to increase the fixed cost of an innovation strategy, so too does the duration of the investment required for an organization to engage in the collective and cumulative – or organizational – learning that, by transforming technologies and accessing markets, can result in innovative products.

An innovation strategy that may eventually enable the enterprise to develop a higher-quality product may place that company at a competitive disadvantage if it only attains low levels of output. The high fixed cost of an innovation strategy creates the company’s need to attain a high level of utilization of the productive resources it has developed – that is, “economies of scale.” Given its existing productive capabilities, the innovating firm may experience increasing cost to maintain the productivity of variable inputs it buys as needed on the market to expand production. To overcome the constraint on its innovation strategy posed by reliance on the market to supply an input that results in increasing cost, the innovating firm integrates the production of the supply of that input into its internal operations. The development of the productive capability of this newly integrated input, however, adds to the fixed cost of the innovation strategy. The innovating firm is now under even more pressure to expand its sold output to transform high fixed cost into low unit cost.

The company’s higher-quality product enables it to access a larger portion of the market than its competitors. The fixed cost of the innovation strategy depends, however, on investments in not only transforming technology but also accessing markets. Besides distribution facilities, accessing a larger market share may entail fixed costs for branding, advertising, distribution channels, and a salaried sales force. Learning about what potential buyers want, and convincing potential buyers that the company’s product is actually “higher quality,” add to the fixed cost of the innovation strategy.

Indeed, in some industries, the fixed cost of accessing a larger market share is greater than the fixed cost of investing in the transformation of product and process technologies. An increase in fixed cost of accessing the market requires an even larger extent of the market to convert high fixed cost into low unit cost. A potent way for an innovating firm to attain a larger extent of the market is for the company to share some of the gains of this cost transformation with its customers in the form of a lower product price.

Along with investment in plant and equipment, investment in productive resources entails training and retaining employees. When a company enhances an employee’s productive capability, through either formal or on-the-job training, the employee’s upgraded capability represents a fixed-cost asset that can improve the quality of the innovating firm’s product, which in turn can enable the company to attain a larger extent of the market to transform the increased fixed cost of its investment in human resources into low unit cost. When the company succeeds in generating a higher-quality, lower-cost product, innovation drives its growth.

To retain and motivate the employees whom the company has hired and trained, the innovating firm can offer them higher pay, more employment security, superior benefits, and more interesting work, all of which add to the fixed cost of the asset that an employee’s labor represents. If these rewards to employees result in innovative products, the gains of employees may represent contributions to value creation that make the company an even more profitable business enterprise. The innovating firm shares the gains of innovation with its employees by making investments in what I have called their “collective and cumulative careers.” Individuals develop their own productive capabilities as members of collectivities organized by the corporation (in some cases in collaboration with other business corporations or with government agencies). And the specialized knowledge that enables individuals to become more productive over time cumulates through their ongoing involvement in collective learning processes. Over the course of their careers, individuals may change employers, making it necessary for them to engage in collective and cumulative learning, in a coherent and continuous manner, across a series of business, government, and civil-society organizations.

Career employees, therefore, can become more productive because of their sustained involvement in processes of collective and cumulative learning.Footnote ¹⁶ In rewarding employees for this engagement, the innovating firm makes its employees better off. It can afford, and indeed profit from, the increased labor expense when the employee’s productive capability enables the company to gain a competitive advantage by generating higher-quality, lower-cost products than had previously been available. Under such circumstances, increases in labor income and increases in labor productivity tend to show a highly positive correlation.

When the innovating firm is successful, it may come to dominate its industry. The company’s output is far larger and its unit cost, and hence potentially its product price, is far lower than would be the case if a large number of small firms with lower-quality products and lesser-scale economies populated the industry. The overall gains from innovation depend on the relation between the innovating firm’s cost structure and the industry’s demand structure, while the distribution of those gains among the company’s various stakeholders depends on their relative power to appropriate portions of these gains.Footnote ¹⁷

It is theoretically possible (although by no means inevitable) for the gains of an innovative enterprise to permit, simultaneously, higher pay, more stable employment, and better work conditions for its employees; a stronger balance sheet for the firm; more secure paper for creditors; higher dividends and stock prices for shareholders; more tax revenues for governments; and higher-quality products at lower prices for consumers. To some extent, what is theoretically possible has been, in certain times and places, historical reality. In the rise of the United States to global industrial leadership during the twentieth century, a retain-and-reinvest resource-allocation regime enabled a relatively small number of business enterprises in a wide range of industries to grow to employ tens of thousands, or even hundreds of thousands, of people and attain dominant product-market shares.Footnote ¹⁸

The fifty largest US industrial corporations by revenues in 1957 averaged 87,080 employees worldwide in 1957, 117,393 in 1967, and 119,093 in 1977. In total, these fifty companies employed 4.4 million people worldwide in 1957, 5.9 million in 1967, and 6.0 million in 1977. Table 2 shows the changes in employment over this period for the twenty largest employers in both 1957 and 1977. These twenty companies employed 3.1 million people worldwide in 1957, 3.8 million in 1967, and 4.0 million in 1977.

The sectors with the largest employers included automobiles, tires, steel, electrical machinery, electronics, aerospace, oil refining, and chemicals. Over this period, as it became the world’s dominant computer company, IBM increased its employment five-fold, rising from the twenty-fourth largest employer in 1957 to the fifth largest in 1977.

Not all the top twenty companies in 1957 increased their employment over the subsequent two decades. The two steel companies in Table 2 downsized substantially from the 1950s to the 1970s, while the two aircraft manufacturing companies had highly cyclical employment, with Douglas having a huge increase in its labor force when it merged with McDonnell in 1967. Two companies, ITT and Gulf & Western, grew to be very large during the 1960s conglomerate movement, which in historical retrospect represented the first important stage in the financialization of the US corporate economy, with corporate growth being driven by acquisition of companies in industries that were unrelated to one another in terms of technologies or markets.Footnote ¹⁹

Notwithstanding conglomeration, most of the companies in Table 2 were in retain-and-reinvest mode during these two decades. Companies retained corporate profits and reinvested them in productive capabilities, including processes of collective and cumulative learning. Companies integrated personnel into learning processes through career employment. Into the 1980s, the norm of a “career with one company” prevailed at major US corporations.Footnote ²⁰ A steady stream of dividend income out of profits and the prospect of higher future stock prices based on the next generation of innovative products gave shareholders an interest in retain-and-reinvest.

In the immediate post–World War II decades, the beneficiaries of a retain-and-reinvest corporate resource-allocation regime, with its CWOC norm, were mainly white males, be they high-school-educated blue-collar workers or college-educated white-collar workers. At the blue-collar level, the presence of industrial unions helped to ensure that employees would experience employment stability and income equity. At the white-collar level, when a company trained employees early in their careers, it sought to retain them by offering the promise of a career with the company, topped off with healthcare coverage and a corporation-funded, nonportable defined-benefit pension based on the employee’s years of service.

For minorities and women, who had been largely left out of this postwar CWOC bargain, access to more stable employment and more equitable income was supported by the Civil Rights Act of 1964 and the launch of the Equal Employment Opportunity Commission (EEOC) the following year. At that point, it was assumed that the surest path to upward socioeconomic mobility for both blue-collar and white-collar workers was through career employment in one of the major business corporations that dominated the US economy.Footnote ²¹ This CWOC norm was, for example, the point of departure for a thirty-one-volume study, The Racial Policies of American Industry (RPAI), carried out at Wharton in the last half of the 1960s and early 1970s, on the implementation of equal employment opportunity, with a focus on upward mobility along hierarchical job structures within major business corporations.Footnote ²²

In a project supported by the Institute for New Economic Thinking, Philip Moss, Joshua Weitz, and I have documented in detail how by the 1970s hundreds of thousands of African Americans with no more than high-school diplomas were attaining middle-class status through employment in unionized semi-skilled jobs in mass-production industries such as automobiles, steel, and electronics manufacturing. As a result, a Black blue-collar middle class began to emerge.Footnote ²³ During this period, however, white males maintained privileged access to intergenerational upward mobility from blue-collar jobs to white-collar jobs as the sons of blue-collar workers obtained higher educations followed by CWOC white-collar employment in business corporations.

In the 1970s, females with college educations (disproportionately white) also gained significantly increased access to career employment in business corporations. Their upward mobility was obstructed, however, by the persistence of the “glass ceiling,” set in place by the ideology that they would give up or interrupt their careers when children arrived in order to assume the traditional middle-class “stay-at-home-mother” role.Footnote ²⁴ Thus, even women who chose not to have children, or who had household arrangements for childcare that enabled them to devote themselves to careers in business corporations or government agencies, continued to face gender discrimination based on presumptions concerning the household division of labor.

From the late 1970s and continuing to the present, however, for masses of Americans, including white males, the quantity and quality of employment opportunities that could support upward mobility within major business corporations have eroded, while the distribution of income within the companies has grown increasingly unequal.Footnote ²⁵ By the first half of the 1980s, some acute observers of blue-collar employment relations perceived that the US income distribution was taking a “great U-turn.”Footnote ²⁶ In retrospect, we now know that since that change in direction in the early 1980s, the United States has continued down the road to extreme income inequality and the erosion of middle-class employment opportunity. The social-conditions framework provides insights into this historic change in the direction of US economic performance – essentially the end of the national quest for sustainable prosperity – by focusing on the transformation of the dominant regime of resource allocation among major US industrial corporations from retain-and-reinvest to downsize-and-distribute.

3 From Retain-and-Reinvest to Downsize-and-Distribute

Under a retain-and-reinvest regime, the corporation retains earnings and reinvests them in the productive capabilities of its labor force. Under downsize-and-distribute, the corporation lays off experienced, often more expensive, workers and distributes corporate cash to shareholders.Footnote ²⁷ Since the beginning of the 1980s, employment relations in US industrial corporations have undergone three major structural changes, summarized as “rationalization,” “marketization,” and “globalization,” by means of which corporations have downsized their US labor forces, resulting in downward rather than upward socioeconomic mobility.Footnote ²⁸

From the early 1980s, rationalization, characterized by plant closings, terminated the jobs of high-school-educated blue-collar workers, most of them well-paid union members. From the early 1990s, marketization, characterized by the end of a CWOC as an employment norm, placed in jeopardy the job security of middle-aged white-collar workers, many of them college educated. From the early 2000s, globalization, characterized by the accelerated movement of even advanced employment opportunities offshore to lower-wage nations, especially China and India, left all members of the US labor force vulnerable to displacement, whatever their educational credentials and work experience.Footnote ²⁹

As documented in my book, Sustainable Prosperity in the New Economy?, the offshoring of employment in the information-and-communication-technology (ICT) industries had begun in the 1960s and was operating on a large scale in the context of the microelectronics revolution of the 1980s and 1990s. Most of the offshoring through the 1980s was to gain access to low wage but literate female labor for testing and assembling of semiconductors and other electronics components in Hong Kong, Singapore, South Korea, Taiwan, and Malaysia. US multinational electronics companies employed indigenous engineers and managers (all males) to run these Asian plants, thus launching many technology and management careers in those nations.

Large numbers of young Asians with undergraduate degrees, especially in science and engineering, also came to the United States for graduate education and work experience. During the 1990s, there was an enormous increase in the employment of college-educated Asians, particularly from India and China, by ICT companies operating in the United States under H-1B, L-1, and employment-based permanent-resident visas. By the 2000s, highly educated Asians had become central to the competitive capabilities of US-based ICT companies.Footnote ³⁰ Large numbers of these personnel, however, also returned to their home nations, especially China and India, armed with more education and experience, to contribute to the upgrading of global value chains and engage in indigenous innovation.Footnote ³¹

Initially, structural changes in employment through rationalization, marketization, and globalization were business responses to changes in technologies, markets, and competition. During the onset of the rationalization phase in the early 1980s, plant closings as well as cost-cutting by offshoring component manufacture were reactions to the superior productive capabilities of Japanese competitors in consumer-durable and related capital-goods industries in which US companies employed large numbers of unionized blue-collar workers. During the onset of the marketization phase in the early 1990s, the erosion of the CWOC norm among white-collar workers was a response to the dramatic technological shift from proprietary systems to open systems, integral to the microelectronics revolution. This shift favored younger workers with the latest computer skills acquired through higher education and transferable across companies over older workers with many years of firm-specific experience. During the onset of the globalization phase in the early 2000s, the sharp acceleration in the offshoring of high-end jobs was a response to the emergence of large supplies of highly educated but lower-wage labor in developing nations such as China and India. Linked to the United States through inexpensive communication and transportation networks, this alternative labor pool could perform increasingly sophisticated activities that had previously been carried out in the United States.Footnote ³²

Once US corporations transformed their employment relations, they often pursued rationalization, marketization, and globalization to cut current costs rather than to reposition their organizations to produce innovative products. Corporate profits ceased to provide funds for reinvesting in the growth of the firm and instead became “free cash flow” that could be distributed to shareholders to “maximize shareholder value.” Defining superior corporate performance as ever-higher quarterly earnings per share, companies turned to massive open-market stock repurchases to “manage” their own corporations’ stock prices. Trillions of dollars that could have been spent on investment in productive capabilities in the US economy since the mid-1980s have been used instead to buy back corporate shares for the purpose of manipulating stock prices.Footnote ³³

In 1997, buybacks first surpassed dividends in the US corporate economy, and have far exceeded them in recent stock-market booms.Footnote ³⁴ As a form of distribution to shareholders, buybacks done as open-market repurchases are much more volatile than dividends, with buybacks booming when stock prices are high. As Figure 1 shows, since the early 1980s, major US corporations have been doing stock buybacks in addition to (not instead of) making dividend payments to shareholders.

Figure 1 Stock buybacks and cash dividends, 1981–2019, in 2019$ billion, for the 216 business corporations in the S&P 500 Index in January 2020 that were publicly listed for all thirty-nine years.

Source: S&P Compustat database and company 10-K filings, compiled by Mustafa Erdem Sakinç and Emre Gömeç of the Academic-Industry Research Network

Figure 1 charts dividends and buybacks for the 216 companies included in the S&P 500 Index in January 2020 that were publicly listed from 1981 through 2019. Coming into the 1980s, buybacks were minimal, and from 1981 to 1983, buybacks for these 216 companies absorbed only 4.4 percent of net income, with dividends representing 49.7 percent. From 2017 to 2019, buybacks for the same 216 companies were 62.2 percent of net income and dividends 49.6 percent.

Table 3 displays the data on buybacks and dividends in Figure 1 as percentages of net income for the 216 companies for 1981–1984 – just before and after the adoption of SEC Rule 10b-18 gave US business corporations a “license to loot”Footnote ³⁵ – and then for five-year periods from 1985 to 1989 through 2015–2019. The proportions for 2005–2009 and 2015–2019 capture the surges in buybacks during years in which, except for 2008 and 2009, profits were high and the stock market was booming. From 2003 to 2007, the value of buybacks done by S&P 500 Index companies quadrupled. In general, these publicly listed companies have done buybacks when stock prices have been high and rising, as they have competed with one another to give manipulative boosts to their stock prices. These data show that even as buybacks have absorbed a large proportion of net income, these companies have paid ample dividends. The half-decade 2015–2019 is particularly noteworthy for the extent of distributions to shareholders in the years preceding the onset of the Covid-19 pandemic.Footnote ³⁶

For the decade 2012–2021, 474 corporations that were included in the S&P 500 Index in January 2022 repurchased shares valued at $5.7 trillion, equal to 55 percent of their net income, while also paying out $4.2 trillion in dividends, another 41 percent of net income.Footnote ³⁷ These distributions to shareholders come at the expense of rewards to employees in the form of higher pay, superior benefits, and more secure jobs as well as corporate investment in the new products and processes that can sustain a company as an innovative enterprise. These distributions are a prime cause of the concentration of income among the richest households and the erosion of middle-class employment opportunities.Footnote ³⁸ Massive payouts in the form of buybacks and dividends are also integral to resource-allocation strategies that have caused US corporations to fall behind global competitors in major technology sectors, including ICT, pharmaceuticals, and aviation – sectors in which the United States once possessed world leadership.Footnote ³⁹

As these data on distributions to shareholders show, since the mid-1980s, among corporations listed on US stock markets – of which the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ) system are by far the most important – trillions of dollars have been extracted from business corporations in the form of stock buybacks in addition to dividends. The two types of distributions to shareholders both drain corporate treasuries, but they differ in terms of how the gains from them are realized and the implications for corporate investment in productive capabilities. Shareholders who purchase shares of a company on the stock exchange can get a dividend yield on that portfolio investment by holding shares. Open-market repurchases (representing the vast majority of buybacks), in contrast, increase the gains of sharesellers who, as professional stock traders, are in the business of timing the buying and selling of shares, often benefiting from access to nonpublic information on the precise days on which the company is executing buybacks. These privileged sharesellers include senior executives of the company doing the buybacks, Wall Street bankers, and hedge-fund managers.Footnote ⁴⁰

Stable shareholders who buy corporate stocks for dividend yields should be opposed to buybacks. Instead, they should want corporate management to reinvest in the productive capabilities of the company as a basis for creating the next round of competitive products that can generate the profits out of which a stream of dividends can continue to be paid. If the company is successful in making these investments in innovation, its shares should rise in value, giving shareholders a capital gain if and when they decide to sell some or all of their shares.

Why, then, are companies doing these massive distributions to shareholders? In my article “Profits Without Prosperity: Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off,” published in Harvard Business Review in 2014,Footnote ⁴¹ I argue that the stock-based remuneration of senior executives who exercise strategic control over resource allocation in these US business corporations incentivizes them to manipulate their companies’ stock prices. Figure 2 shows the average total compensation of the 500 highest-paid executives in the United States in each year from 2006 to 2021, ranging from $15.9 million in 2009, of which, even with the stock market depressed, stock-based pay was 60.2 percent of the total, to $47.4 million in 2021, of which, with the stock market booming, stock-based pay was 88.2 percent of the total.

Figure 2 Average total remuneration ($ millions) and its proportional components, 500 highest-paid executives of US business corporations in each year, 2006–2021 (total direct pay labels in $ millions)

Notes: Vested stock awards and stock options exercised are realized gains from these two types of stock-based compensation. Omitted from these averages are the following executives whose extraordinarily high remuneration in certain years would have, if included, significantly skewed the results: 2012, Mark Zuckerberg ($2.3 billion), Richard Kinder ($1.1 billion); 2013, Mark Zuckerberg ($3.3 billion); 2016, Elon Musk ($1.3 billion); 2021, Elon Musk ($23.5 billion).

Source: S&P ExecuComp database, calculations by Matt Hopkins of the Academic-Industry Research Network.

Stock-based pay mainly takes the form of stock options and stock awards. Stock options were much more widely used than stock awards in the 1990s. Since the mid-2000s, stock awards have increased in popularity, largely because, in the context of new rules that require companies to expense stock-based pay on their financial statements, awards require fewer shares than options to generate the same realized gains from stock-based pay.Footnote ⁴² In 2006, with the average total compensation of the 500 highest-paid executives at $25.6 million, realized gains from stock options represented 56 percent of the total, while realized gains from stock awards represented 17 percent. In 2021, with the average total compensation of the 500 highest-paid executives at $47.4 million, realized gains from stock options were 44.2 percent and realized gains from stock awards were 44.0 percent. This stock-based pay incentivizes US corporate executives to boost their companies’ stock prices and amply rewards them for doing so. In stock buybacks, they have at their disposal an instrument to “maximize shareholder value” and, in the process, enrich themselves. In their massive and widespread use of this instrument, senior corporate executives have been participating in the looting of the US business corporation.Footnote ⁴³

Senior corporate executives have embraced shareholder-value ideology since the late 1980s, but they have not acted alone. In Predatory Value Extraction, Jang-Sup Shin and I classify senior executives as value-extracting insiders, asset managers (aka institutional shareholders) as value-extracting enablers, and shareholder (aka hedge-fund) activists as value-extracting outsiders.Footnote ⁴⁴ As we detail in our book and as I summarize in the concluding section of this Element, there now exists in the United States a corrupt proxy-voting system that obliges asset-fund managers to vote the proxies for the stocks in their securities portfolios, enabling shareholder activists with a stake of, say, 1 percent of a company’s outstanding shares to assert immense pressure on corporate executives and directors to engage in downsize-and-distribute.

The stock-based pay of US corporate executives is an important reason for the extreme concentration of income that has occurred since the 1980s among the richest households in the United States. Based on data from household federal tax filings, Figure 3 shows the share of income in the hands of 0.1 percent of all households with the highest incomes, including capital gains, from 1916 to 2011. In 1975, the share of the top 0.1 percent was 2.56 percent of all US incomes, the lowest proportion over the entire ninety-six-year period. The highest proportion was 12.28 percent in 2007, just before the financial crisis. During the 2008 stock-market crisis, the share of the top 0.1 percent declined, but with the recovery, their share bounced back. In 2012 (not included in Figure 3), the share of the top 0.1 percent was 11.33 percent, the fourth highest proportion recorded.Footnote ⁴⁵ Clearly, from the late 1970s, on a dramatic scale, there was a reversal in the trend toward a somewhat falling share of income of the top 0.1 percent that had occurred in the decades after World War II.

Figure 3 Share of total US incomes and its components of the top 0.1 percent of households in the US income distribution, 1916–2011

Notes: The category “salaries” includes compensation from realized gains on exercising stock options and the vesting of stock awards. The data are not available in categories that permit the extension of this analysis of the components of the pay of the top 0.1 percent beyond 2011.

Source: F. Alvaredo, T. Atkinson, T. Piketty, and E. Saez, “The World Top Incomes Database,” Paris School of Economics, www.parisschoolofeconomics.eu/en/news/the-top-incomes-database-new-website/ (top 0.1 percent income composition, 2011).

Note that in Figure 3 a large part of the explosion of the share of the top 0.1 percent was in the form of “salaries,” which includes realized gains from stock-based pay (stock options and stock awards) that appeared in the summary statistics of an executive’s Form 1040 tax returns (the source of these data) as “Wages, salaries, tips, etc.” Since 1976, virtually all realized gains from stock-based pay have been taxed at the ordinary income tax rates and hence are not included in the capital-gains portion of the incomes of the top 0.1 percent as shown in Figure 3.

Top executives of US business corporations, both industrial and financial, are well represented among the top 0.1 percent of the US income distribution, with much, and often most, of their compensation coming from realized gains from exercising stock options and the vesting of stock awards. When this mode of compensating top executives is combined with the fact that Wall Street has, since the 1980s, judged the performance of corporations by their quarterly stock yields, the importance of stock-based pay in executive compensation is clear. Stock-based pay gives top executives powerful personal incentives to boost, from quarter to quarter, the stock prices of the companies that employ them. In stock buybacks, these executives have found a potent instrument for stock-market manipulation from which they can benefit personally, even if the stock-price boosts are only temporary.

Most household income comes from working in paid employment. Figure 4 shows the relation between the cumulative increase in hourly labor productivity and the cumulative increase in real hourly wages in the business sector of the US economy from 1948 to 2021. From the late 1940s to the mid-1970s, rates of increase in real wages kept up with rates of increase in labor productivity – an indicator of “shared prosperity.”Footnote ⁴⁶ The prime reason for the trend toward more equality was the retain-and-reinvest regime of corporate resource allocation that prevailed in the post–World War II era, characterized by CWOC employment relations.Footnote ⁴⁷ From the late 1970s, however, the productivity-growth rate began to outstrip the wage-growth rate, and over the ensuing decades, the gap between the two grew wider and wider, as shown in Figure 4.

Figure 4 Index of cumulative annual percent changes in productivity per hour and real wages per hour (1979 = 100), 1948–2021

Source: Economic Policy Institute, “The Productivity-Pay Gap,” October 2022, https://www.epi.org/productivity-pay-gap/.

In the late 1970s, the gap appeared as corporations looked for ways to suppress wage growth as profits were being eroded by inflation. During the following decades, the transformation of corporate employment relations through rationalization, marketization, and globalization served to widen the productivity-pay gap. In terms of the actual distribution of income, however, this gap resulted not only from the power of major corporations to suppress wages but also the siphoning of corporate productivity gains, amounting to trillions upon trillions of dollars, to shareholders in the form of dividends and buybacks.Footnote ⁴⁸ Of particular importance to the distribution of corporate income between employees and shareholders is Rule 10b-18, adopted by the SEC under the radar in November 1982. Rule 10b-18 transformed the SEC from a body that is supposed to mitigate stock-market manipulation to one that actively encourages it.Footnote ⁴⁹

4 Shareholder-Value Ideology and the Looting of the US Business Corporation

Stock buybacks incentivized by the stock-based pay of senior executives are the clearest manifestations of the financialization of the US business corporation. This financialized mode of corporate resource allocation has been legitimized by the ideology that a business corporation should be run to “maximize shareholder value” (MSV). Through stock options and stock awards, corporate executives who make the resource-allocation decisions to distribute cash to shareholders are themselves prime beneficiaries of the focus on rising stock prices, earnings per share, and total shareholder yield (dividends plus stock-price gains) as the sole measures of corporate performance. As rationalization, marketization, and globalization have undermined stable and remunerative employment structures, the financialization of the US corporation has entailed the distribution of corporate cash to shareholders through stock repurchases, usually in addition to generous cash dividends. Over the past two decades, at an accelerating rate, hedge-fund activists have joined senior corporate executives in the feeding frenzy in a process that can only be described as the legalized looting of the US business corporation.Footnote ⁵⁰

The dramatic change in trajectory from retain-and-reinvest to downsize-and-distribute that has occurred in the United States over the past four decades did not have to happen. Rather, it was imposed upon the US labor force by the dominance of a highly damaging and fallacious ideology of the relation between corporate governance and economic performance. In the name of MSV, US business executives have favored extracting value that workers have already created while also neglecting to invest in productive capabilities that can enable workers to create new sources of value in the future. In so doing, they have shifted, often dramatically, the distribution of income within the business corporation from employees to shareholders.

Fundamental to this reversal was the capture of the SEC by free-market Chicago-School economists in 1981, following Ronald Reagan’s election as president of the United States. Reagan’s appointment of E. F. Hutton executive John Shad as SEC chair put the agency that was supposed to eliminate fraud and manipulation from the nation’s financial markets under the leadership of a Wall Street banker for the first time since Joseph Kennedy was the inaugural holder of that position in 1934–1935.

In the second year of Shad’s chairmanship, the SEC promulgated Rule 10b-18, which gives a company a safe harbor against manipulation charges in doing open-market repurchases.Footnote ⁵¹ Rule 10b-18 states that a company will not be charged with stock-price manipulation if, among other things, its buybacks on any single day are no more than 25 percent of the previous four weeks’ average daily trading volume (ADTV). Under Rule 10b-18, moreover, there is no presumption of manipulation if the corporation’s repurchases exceed the 25 percent ADTV limit.Footnote ⁵² Its adoption in 1982 was called a “regulatory about-face” from previous SEC views on the detection and prevention of manipulation of a company’s stock price through open-market repurchases.Footnote ⁵³ Under Rule 10b-18, many large publicly listed companies can do hundreds of millions of dollars of open-market repurchases per day, trading day after trading day, for the sole purpose of giving manipulative boosts to their stock prices (see Table 4).

Research undertaken by the Academic-Industry Research Network, supported by the Institute for New Economic Thinking, has analyzed the damage wrought by buybacks done by many of the companies listed in Table 4, which shows the top twenty repurchasers among industrial (or nonfinancial) corporations for 2010–2019.Footnote ⁵⁴ Of these twenty companies, thirteen distributed more than 100 percent of net income to shareholders over the decade while the other seven distributed 75 percent or more.

Coming into the pandemic, eleven companies on the list – Apple, Oracle, Microsoft, Cisco, Walmart, Intel, Home Depot, Johnson & Johnson, Amgen, Qualcomm, and Gilead – were in dominate-and-distribute mode, using the profits from their still-dominant market positions primarily to support their stock prices; while seven – Exxon Mobil, IBM, Procter & Gamble, General Electric (GE), Merck, McDonald’s, and Boeing – were in downsize-and-distribute mode, distributing corporate cash to shareholders as they downsized their labor forces. Pfizer had been in downsize-and-distribute mode through 2018, but, in 2019 began to eschew buybacks and augmented its labor force for the sake of investment in innovation. Although Pfizer had long been one of the most financialized companies, it entered the pandemic with a new orientation to retain-and-reinvest – and then reaped bonanzas from its collaboration with Germany-based BioNTech in the development, manufacture, and delivery of the mRNA Covid-19 vaccine and its internally developed Paxlovid antiviral pill. Also, Disney had pivoted to retain-and-reinvest in the years just prior to the pandemic.

Table 4 also shows the buybacks done by these twenty companies from April 2020 through June 2022, representing the core period of the SARS-CoV-2 pandemic. Apple, Oracle, Walmart, Home Depot, Procter & Gamble, and Amgen spent 54 percent or more of net income on buybacks during this period. For Microsoft, Cisco, Intel, and Qualcomm, this proportion was in the 29–39 percent range. These ten companies benefited from very strong demand for their products and high profits during the pandemic.

Notwithstanding a sharp downturn in stock prices in March 2020, when the World Health Organization declared the spread of SARS-CoV-2 a pandemic, the US stock markets boomed during this social crisis. The last three columns of Table 4 show the generous ADTV “limits” for the twenty largest repurchasers among industrial companies, 2010–2019, at three points in time: in October 2019, in advance of the pandemic; in June 2021, when the Delta variant of SARS-CoV-2 was dominant in the United States, and in March 2022, when the highly transmissible Omicron variant emerged as widespread, prolonging the pandemic.Footnote ⁵⁵ Except for McDonald’s, the ADTV values had all risen, in many cases substantially, by June 2021 compared with October 2019, reflecting combinations of higher stock prices and higher trading volumes. The movement of ADTV from June 2021 to March 2022 was more mixed; most noteworthy was the continued explosion of the value of daily repurchases that Apple and Microsoft could do while availing themselves of Rule 10b-18’s safe harbor.

Of the seven companies that entered the pandemic in downside-and-distribute mode, the financial condition of IBM, GE, and Boeing deteriorated further during it, constraining their financial capacity to do buybacks and even to pay dividends. IBM was known through the 1980s for its commitment to “lifelong employment,” but in the early 1990s, in the name of MSV, the company’s resource-allocation regime transformed rapidly and dramatically to downsize-and-distribute.Footnote ⁵⁶ GE’s corporate financialization, which originated in the conglomerate movement of the 1960s and continued during the reigns of CEOs Jack Welch (1981–2001) and Jeffrey Immelt (2001–2017), was given a coup de grâce by the predatory attack launched by hedge-fund activist Nelson Peltz (of Trian Partners) from October 2015, leaving GE with no choice but to dramatically reduce buybacks from 2018 and dividends from 2019.Footnote ⁵⁷ As for Boeing, which became highly financialized after its merger with McDonnell Douglas in 1997, the obsession of the company’s senior executives with stock yields bears much of the blame for the crashes of its 737 MAX planes in October 2018 and March 2019. From January 2013 through March 2019 – up to the week before the second crash on March 10 – Boeing did $43.4 billion in buybacks, equal to 118 percent of net income over this period, on top of 43 percent of net income distributed as dividends.Footnote ⁵⁸

Exxon Mobil was also financially constrained from doing buybacks in the years prior to the pandemic. Since the mid-1980s, high profits from high oil prices have funded the company’s stock buybacks, while its dividends have perpetually increased, whether oil prices are high or low.Footnote ⁵⁹ For the decade, 2005–2014, Exxon Mobil averaged $22.0 billion in buybacks annually – by far the highest of any company over that period (second highest was IBM with a $12.3 billion annual average) – representing 61 percent of Exxon Mobil’s exceedingly high profits, reaped from high oil prices. As oil prices declined dramatically from mid-2014 to mid-2020, cash-strapped Exxon Mobil had to rein in its buybacks, which declined yearly from $4.0 billion in 2015 to $155 million in 2021.

The explosion of crude oil prices during the pandemic, from $23.65 in March 2020 to $116.96 in May 2022,Footnote ⁶⁰ turned Exxon Mobil’s loss of $22.4 billion in 2020 into a profit of $23.0 billion in 2021 and $43.0 billion in the first nine months of 2022. Aiding the inflation of Exxon Mobil’s bottom line was the slashing of its labor force from 72,000 in 2020 to 63,000 in 2021. With rising oil prices giving Exxon Mobil soaring profits during the first nine months of 2022, this company reverted to financialized form by gifting shareholders $11.4 billion in dividends and sharesellers $10.1 billion in buybacks.

Three companies – Disney, Pfizer, and Intel – explicitly abandoned buybacks before or during the pandemic for the sake of investing in the productive capabilities of their companies. Disney had decided to cancel its stock-repurchase program in August 2018 in anticipation of the heavy debt load that it would assume when it acquired Twenty-First Century Fox.Footnote ⁶¹ The company did no buybacks in the fourth quarter of fiscal 2018 (ended September 29). The acquisition was completed in March 2019, and Disney’s revenues rose substantially in the second half of that fiscal year, while its profits declined. Disney’s buyback program remained in suspension as the company entered the pandemic. With $2.9 billion in losses in 2020, Disney almost halved its previous dividend in fiscal 2020 by paying no dividends in the second half of fiscal year (ended October 3, 2020). Indeed, from April 2020 through September 2022, Disney distributed no corporate cash to shareholders, even though its revenues soared and profits recovered in 2022. Disney had cut employment from 223,000 at the end of fiscal 2019 to 190,000 at the end of fiscal 2021, but then, with its revenues rising from $67.4 billion in 2021 to $87.7 billion in 2022, increased its year-end labor force to 220,000.

A highly financialized corporation from the late 1980s, Pfizer committed to doing $8.9 billion in buybacks in early 2019, to be completed by August 1 of that year.Footnote ⁶² After this buybacks binge, however, the company ceased doing buybacks as it turned its strategic attention to conserving a portion of its profits to finance investment in its drug pipeline. Previously, Pfizer’s strategy had been to acquire other companies with lucrative drugs on the market that had years of patent life left and to extract the profits from these drugs to fund its distributions to shareholders. By the late 2010s, however, with Big Pharma acquisition targets unavailable and the patents on a number of Pfizer’s major drugs expiring, the board recognized that Pfizer itself could be taken over by another Big Pharma company unless it could develop high-revenue drugs internally.

For the sake of internal drug development, Pfizer refrained from doing buybacks from August 2019 through February 2022. Indeed, in an unusual move among US corporations, in January 2020 Pfizer publicly announced its commitment to forego buybacks that year, and it did so again in January 2021. The company did, however, increase its dividend in 2019, 2020, 2021, and the first nine months of 2022, paying out 48 percent of its substantial net income as dividends during the pandemic period, as defined in Table 4.

The implementation of this change in Pfizer’s investment strategy followed the end of Ian Read’s tenure as Pfizer CEO as of January 1, 2019, in favor of current CEO Albert Bourla. As CEO from 2011, Read had engaged in downsize-and-distribute.Footnote ⁶³ In an earnings call with stock-market analysts in January 2020, Bourla made an extraordinary admission of the company’s financialized past, declaring that Pfizer had stopped doing buybacks so that the company could invest in innovation:

Bourla did not explain why the “old” Pfizer – which, less than twelve months before, had done $8.9 billion in buybacks – “had to do what we had to do even if that was financial engineering, purchasing back ourselves.” But his rambling statement to the analysts is a very rare recognition by a CEO of a major US corporation that stock buybacks are the enemy of investment in innovation.

Shortly thereafter, SARS-CoV-2 was declared a pandemic, and Pfizer found itself in what turned out to be a very lucrative partnership with BioNTech to develop, manufacture, and deliver the Covid-19 mRNA vaccine. Even though Pfizer’s revenues almost doubled from $41.9 billion in 2020 to $81.3 billion in 2021, with profits soaring from $9.6 billion to $22.0 billion, the company refrained from doing buybacks, while the dividend payout ratio declined from 88 percent to 40 percent. With revenues and profits continuing to explode in the first nine months of 2022, bolstered by sales of Paxlovid (given emergency use authorization by the Food and Drug Administration in December 2021), Pfizer did $2.0 billion in buybacks, all of them in March. We can assume that Pfizer timed these repurchases to give a manipulative boost to its sagging stock price.Footnote ⁶⁵ If so, it apparently worked; on March 1, Pfizer’s stock price had sunk to $45.75 but was then pumped up to $55.17 on April 8. With the release of its results for the second quarter of 2022, however, Pfizer stated that the company “does not anticipate any additional share repurchases in 2022.”Footnote ⁶⁶ Pfizer’s self-restraint may be based in its senior executives’ recognition that Pfizer’s windfall profits from its Covid-19 medicines are unlikely to last.Footnote ⁶⁷

As the case of Pfizer clearly illustrates, even within a business corporation that has become a leading repurchaser of its own stock, there is an ongoing tension between innovation and financialization, with specific sets of circumstances determining the outcome.Footnote ⁶⁸ Intel, No. 9 in buybacks in Table 4, offers another example of a shift in corporate strategy, entailing cessation of buybacks, from financialization to innovation in an advanced-technology industry.

Once the world leader in chip fabrication, a financialized Intel found itself falling behind in the face of innovative global competition. Under new leadership, however, Intel is now seeking to invest in advanced nanometer fabrication facilities with the goal of catching up with industry frontrunners TSMC and Samsung Electronics.Footnote ⁶⁹ Intel ceased doing stock buybacks from the second quarter of 2021 after replacing CEO Robert Swan, a finance expert, with Pat Gelsinger, a technology expert.Footnote ⁷⁰ In a 60 Minutes interview, Gelsinger said that a condition of his taking the top Intel job was assurance from the company’s board that Intel would “not be anywhere near as focused on buybacks going forward as we have in the past.”Footnote ⁷¹

In a subsequent interview with CNET in November 2021, Gelsinger was much more expansive and emphatic.Footnote ⁷² He recounted how, before taking the CEO job, he had written a strategy paper for Intel’s board, for which he got their unanimous agreement. “I was concerned,” Gelsinger said in the interview, “about how we get the process roadmap back in shape.” He continued:

During 2022, Gelsinger was in the forefront of lobbying for the CHIPS and Science Act, signed into law on August 9, 2022. The Act provides $52.7 billion in federal government subsidies to semiconductor companies operating in the United States for research development, manufacturing, and workforce development.Footnote ⁷³ Through the first nine months of 2022, Intel refrained from doing buybacks. For its part, the Biden administration has stated that the distribution of the funds under the Act “come with strong guardrails” including “preventing companies from using taxpayer funds for stock buybacks and shareholder dividends.”Footnote ⁷⁴ For the time being, Intel has erected its own guardrail by eschewing buybacks, but it remains to be seen whether, in meting out CHIPS subsidies, the US government will regulate distributions to shareholders by corporate recipients.Footnote ⁷⁵

A key point of this overview of the payouts to shareholders of the largest repurchasers is that individual companies make decisions concerning their level of buyback activity, and hence an analysis of the relation between stock buybacks and corporate performance must examine particular corporate trajectories, including changes in strategic control. The theory of innovative enterprise provides an analytical framework for conducting this company-level research while recognizing the importance of the institutional and industrial contexts within which a particular corporation operates.

By the same token, analyses done at the industrial-sector level can be misleading because of, at times, large variation in distributions to shareholders among companies within the same sector. In semiconductors, for example, while Intel has been paying substantial dividends and was among the largest repurchasers in the United States for the last two decades, its rival Advanced Micro Devices (AMD) has never paid a dividend in its fifty-three-year history, and prior to 2020, the only open-market repurchases that it had done amounted to $77 million in 2001, after its board authorized a $300-million repurchase program. Given Intel’s large-scale distributions to shareholders from the late 1990s, if one were to take average dividends and buybacks of Intel and AMD in the 2000s and 2010s as indicative of payouts in the US semiconductor industry, one would know nothing about the actual distribution policies of either company.

Moreover, in 2021, just as Intel refrained from doing buybacks, AMD became devoted to them. In 2020, AMD did $78 billion in buybacks to cover employee withholding taxes on vesting of employee equity grants. On May 19, 2021, however, with its profits during the pandemic at about seven times its profits in each of 2018 and 2019 (which were good years for the company), AMD announced a $4-billion repurchase program.Footnote ⁷⁶ Then, for the sole purpose of giving manipulative boosts to its stock price, AMD did $256 million in buybacks under its new program in the second quarter of 2021, another $748 million in the third quarter, and $758 million in the fourth quarter. In February 2022, the AMD board authorized an additional $8 billion in buybacks,Footnote ⁷⁷ and in the first nine months of 2022, still paying no dividends, AMD did $3.5 billion in open-market repurchases, 2.7 times its net income during this period.

While stock prices can increase because of innovation and speculation, increasing numbers of companies, within and across industries, compete in stock-price performance by manipulation via buybacks.Footnote ⁷⁸ In the history of predatory value extraction, no company has set the manipulation bar as high as Apple, No. 1 in Table 4, whose buybacks over 2010–2019 were triple those of Oracle as No. 2 and Microsoft as No. 3. As shown in Table 4, Apple’s extraordinarily high ADTV “limit” of $1.6 billion per trading day in October 2019 exploded to $2.5 billion in June 2021 and $4.1 billion in March 2022 during the pandemic. From October 2012 through September 2022, Apple threw away $553 billion – 93 percent of its enormous net income – on open-market repurchases, the sole purpose of which was to manipulate the company’s stock price. In addition, Apple funneled $129 billion in dividends to shareholders, absorbing another 22 percent of net income.

Apple calls these distributions to shareholders its “Capital Return Program.”Footnote ⁷⁹ But how can Apple “return” cash to those who have never given the company anything? The only money that Apple has raised from the public stock market in its forty-six-year history was the $97 million realized from its initial public offering (IPO) in 1980.Footnote ⁸⁰ When, in the summer of 2013, corporate predator Carl Icahn purchased $3.6 billion worth of Apple shares on NASDAQ and then, in the winter of 2016, sold that stake on NASDAQ for a $2-billion gain, shares outstanding on the stock market simply passed from one stock trader to another.

Not one cent of the $3.6 billion that Icahn spent on acquiring these outstanding shares went to Apple. It would be ludicrous, therefore, to call Icahn an “investor” in Apple as a value-creating company. To the contrary, apparently succumbing to Icahn’s wealth, visibility, hype, and influence, Apple CEO Tim Cook and his board of directors helped the hedge-fund activist reap those financial gains by doing $45.0 billion in buybacks in fiscal 2014 (ended September 27) and $35.3 billion in fiscal 2015 – the first and third largest annual expenditures on buybacks ever executed by any company at that time (Exxon Mobil’s buybacks in 2008 were $35.7 billion).Footnote ⁸¹

Then, in the winter of 2016, as Icahn was dumping his Apple shares, Warren Buffett, using Berkshire Hathaway money, started buying Apple shares on NASDAQ until by September 2018 he had shelled out $36.3 billion, giving him 5.1 percent of Apple’s shares outstanding. In May 2018, Buffett enthused in an interview: “I’m delighted to see [Apple] repurchasing shares. I love the idea of having our 5 percent, or whatever it is, maybe grow to 6 or 7 percent without our laying out a dime.”Footnote ⁸² After having repurchased $32.9 billion in 2017, Apple granted Buffett his wish, as the company’s buybacks were $72.7 billion in 2018, $66.9 billion in 2019, $72.4 billion in 2020, $86.0 billion in 2021, and $89.4 billion in 2022 (fiscal year ended September 24).

By January 2022, Buffett’s Apple shares were valued at $160 billion, even after he had sold 12 percent of his original stake for $13 billion and had raked in another $3 billion in dividends.Footnote ⁸³ He now held almost 5.6 percent of Apple’s stock outstanding, a figure that would have been 6.3 percent if Buffett had not sold some of his shares. While Buffett was remarkably candid in saying that he could increase his percentage of Apple’s outstanding shares “without our laying out a dime,” he might have added that not one cent of the $36.3 billion that he paid to buy Apple’s shares on the market flowed into the company to invest in its productive capabilities or for any other purpose.

With the help of $433 billion in Apple buybacks since the winter of 2016, when Buffett began accumulating the company’s stock, through fiscal 2022, Berkshire Hathaway has profited immensely from the greatest treasury robbery in US corporate history. The looting has, as far as we know, been perfectly legal because of SEC Rule 10b-18, adopted without public comment on November 17, 1982 – the real birth date, in historical retrospect, of the pernicious and flawed ideology that, for the sake of economic efficiency, a business corporation should be run to “maximize shareholder value.”Footnote ⁸⁴

This is not the first time that Apple’s top management has been guided by MSV as its corporate goal. In 1985, after founder Steve Jobs was ousted from the company, Apple CEO John Scully sought to drive up the company’s stock yield, and his own pay, with dividends and buybacks. By 1996 and 1997, Apple was taking huge losses and, to avert bankruptcy, had to be bailed out by Microsoft in the form of a $150-million purchase of preferred shares.Footnote ⁸⁵ It was in this context that Jobs regained strategic control of Apple and reinstituted a retain-and-reinvest regime – eschewing distributions to shareholders in order to reinvest profits in Apple’s productive capabilities – culminating in the launch of the iPhone in 2007.

Jobs passed away in October 2011. During his tenure as Apple CEO from September 1997 to August 2011, the company’s share price had risen by 7,000 percent. Innovation had amply rewarded loyal Apple shareholders, in part because Jobs invested in productive capabilities instead of doing buybacks to manipulate the company’s stock price. Tim Cook, Jobs’ successor as CEO, had previously been Apple’s chief supply-chain executive, with his most profound contribution to the company having been outsourcing its manufacturing to Foxconn in China. In the fourth quarter of fiscal 2012, Apple paid dividends for the first time since 1996, and, in the first quarter of fiscal 2013, the current buybacks spree commenced.

In October 2014, as shareholder Icahn was pressuring CEO Cook to do $100 billion in buybacks, I wrote an article questioning Apple’s so-called Capital Return Program, which had been stepped up in April 2014 when the Apple board had authorized a total of $90 billion in buybacks and $40 billion in dividends by December 2015.Footnote ⁸⁶ I also published an open letter to CEO Cook, suggesting ways in which, instead of doing buybacks, he could allocate Apple’s cash to innovative investments and support an equitable income distribution, including (a) more compensation for tens of thousands of employees in Apple stores (not to mention hundreds of thousands of people working at companies in Apple’s global supply chain); (b) more educational support to enhance the career opportunities for Apple employees, especially for those in dead-end jobs in Apple stores and call centers; (c) collaboration with government agencies in social investments in knowledge and infrastructure; and (d) collaboration with government agencies in social innovation to develop the technologies of the future to meet society’s needs.Footnote ⁸⁷

In October 2021, Matt Hopkins and I published an INET working paper, “Why the CHIPS Are Down,”Footnote ⁸⁸ in which we ask why the US federal government should provide the US semiconductor industry with $52 billion in subsidies under the CHIPS for America Act (subsequently passed into law as the CHIPS and Science Act),Footnote ⁸⁹ when the tech companies, including Apple, that were lobbying for its passageFootnote ⁹⁰ did about seventeen times the requested subsidy in buybacks in 2011–2020. We also note that Apple’s decisions to outsource the fabrication of its iPhone chips, first to Samsung Electronics and then, from 2015, exclusively to Taiwan Semiconductor Manufacturing Company (TSMC), have aided these two companies in their emergence as the world’s leading chip foundries.

In 2010, a prominent electronics-industry journalist, Mark LaPedus, penned an article entitled “Apple should build a fab,” addressed to Apple CEO Jobs.Footnote ⁹¹ At the time, Apple was reliant for chip fabrication on its emerging smartphone competitor, Samsung Electronics. LaPedus recognized that “in an age when real men go fabless, I concede it’s an unconventional idea. You might think it’s absurd. But an Apple A4 fab today could keep the iProduct franchise in hay – and Samsung at bay.”

But in August 2011 Jobs passed the CEO torch to Cook, and Apple investing in its own fab was a road not taken. In 2021, under pressure from US trade negotiators, Samsung and TSMC began building new state-of-the-art fabs in the United States, at a projected cost of $17 billion and $12 billion, respectively.Footnote ⁹² In comparison, the $86 billion that Apple spent on buybacks in fiscal 2021 alone was three times the combined US fab investments of Samsung and TSMC announced in that year.

When, in May 2018, Cook was asked what he planned to do with the $285 billion in cash that the company was repatriating from abroad as a result of tax breaks provided by the Republican Tax Cuts and Jobs Act of 2017, he replied:

The buybacks that Cook called “some of our stock” amounted to $73 billion in 2018 (122 percent of net income), far surpassing Apple’s previous high of $45 billion in 2014, which had been carried out at the behest of Carl Icahn. As it turned out, 2018 was the beginning of a five-year buyback binge that totaled $387 billion (106 percent of net income), to the delight of Warren “without our laying out a dime” Buffett. Certainly, we can ask CEO Cook: “Good value” for whom?

Apple’s board authorizes the company’s massive buybacks. The Apple director with the longest tenure is Arthur D. Levinson, who has been on the board since 2000 and its chair since late 2011. Levinson is a scientist who spent most of his career with the pioneering biopharmaceutical company Genentech, joining the firm in 1980 and serving as its CEO from 1995 to 2009 and as chairman of its board from 1999 to 2014.Footnote ⁹⁴ Since 2013, he has been the CEO of Calico Life Sciences LLC, the privately held venture of Alphabet. From 1990, Levinson and other Genentech employees were protected from the pressures of predatory value extractors by the majority ownership of the company by F. Hoffmann-La Roche AG, a Switzerland-based corporation better known simply as Roche, that has been both the least financialized and most innovative of the global Big Pharma companies.Footnote ⁹⁵ Calico’s parent, Alphabet, keeps corporate predators at bay by means of its treble-class (A, B, C) share structure.Footnote ⁹⁶ Given his own employment experience, at Genentech and Calico, Dr. Levinson could have advised Apple on how it might have invested a portion of the hundreds of billions of dollars that it has wasted on buybacks in supporting companies engaged in medicine innovation.

The Apple director with the second-longest tenure is Albert Arnold Gore Jr., who has been on its board since 2003. The former US vice president and Democratic candidate for president in 2000 has been one of the world’s leading activists for social awareness of the threat of global warming to human existence. In 2006, Gore released his documentary on climate change, An Inconvenient Truth, which went on to win an Oscar.Footnote ⁹⁷ But what about the inconvenient truth of the looting of Apple’s corporate treasury under his watch? Mr. Gore could have advised Apple on how it might have invested even a portion of the hundreds of billions of dollars that it has wasted on buybacks to combat climate change.

Have Cook, Levinson, and Gore so thoroughly imbibed MSV ideology that they believe that Apple is actually “returning” corporate cash to people who just buy and sell shares outstanding on the stock market? Or are they so frightened by the possibility that they might lose their positions of strategic control at Apple to hedge-fund activists that they appease them with hundreds of billions of dollars in buybacks? Their responses are, of course, most welcome.

Whatever the motives of Cook and his board in carrying out the largest looting of a corporate treasury in US history, academic cover for their actions as value-extracting insiders has come from a species of professional economists known as “agency theorists,” whose rationale for distributing profits to shareholders in the form of not only dividends but also buybacks is that shareholders, and shareholders alone, make risky investments in the business corporation, without a guaranteed return, and hence only shareholders have a claim on profits if and when they occur.Footnote ⁹⁸ The theory assumes that other stakeholders in the corporation, including workers, receive guaranteed prices (i.e., wages) for their productive contributions. Agency theory, however, overstates the risks borne by shareholders in making corporate investments, while ignoring risky investments in productive resources by not only workers but also taxpayers that can enable business corporations to generate revenues and profits.

The fact is that public shareholders do not, as a rule, invest directly in the firm. Rather, once a firm is publicly listed, households or asset managers become shareholders by purchasing shares outstanding on the stock market. In placing their funds in shares listed on a highly liquid stock market such as NYSE or NASDAQ, public shareholders take little risk; they enjoy limited liability if they hold the shares and, given the liquidity of the stock market, at any instant and at a very low transaction cost they can sell the shares at the going market price.

In other words, public shareholders are value extractors, not value creators. The generation of innovative products requires value-creating investment in productive capabilities, which are inherently illiquid, and hence the investment is risky. As we have seen, investments in innovation are uncertain, collective, and cumulative. An innovative enterprise requires strategic control to confront uncertainty, organizational integration to engage in collective learning, and financial commitment to sustain cumulative learning. When, as in the case of a start-up, financiers make equity investments in the absence of a liquid market for the company’s shares, these early investors in the company’s value-creating capabilities face the risk that the firm will not be able to generate a competitive product. Even then, however, their risk is mitigated by the existence of a highly liquid stock market on which the firm can do an IPO, permitting these financial investors to reap financial returns, often before the company has generated a commercial product, let alone a profit.Footnote ⁹⁹

To make such a speculative and liquid market available to private-equity investors, NASDAQ was launched in 1971 by electronically linking the previously fragmented, and hence relatively illiquid, over-the-counter markets. NASDAQ became an inducement to direct investment in start-ups precisely because it offered the prospect of a quick IPO taking place within just a few years after a firm was founded. For that reason, venture capitalists can use a quotation on NASDAQ as an exit strategy. In effect, through an IPO, they can exit an illiquid, high-risk direct investment by turning it into a liquid, low-risk portfolio investment. After an IPO, if the former direct investors decide to hold on to their shares, they are in the same portfolio-investor position as any other public shareholder: They can use the stock market to buy and sell shares at low transaction cost whenever they choose to do so.

As private shareholders, venture capitalists bear the risk of making direct investments in productive resources, but from the 1970s, institutions evolved in the United States that could make that risk ephemeral by enabling them to transform their illiquid private equity holdings into liquid public shareholdings. In contrast, households as taxpayers, through government agencies, and as workers, through the business corporations that employ them, also bear risk in making investments in productive resources, but without the availability of financial markets for monetizing the productive assets in which they have invested. From this perspective, households as both taxpayers and workers invest in innovation and have valid economic claims on the distribution of profits, if and when profits occur.

Through government investments in human capabilities and physical infrastructure, taxpayers regularly provide productive resources to companies without a guaranteed return. As an important example, but only one of many, the 2022 budget of the US National Institutes of Health (NIH) was $45 billion, part of a total NIH investment in life-sciences research spanning 1938–2022 that adds up to almost $1.5 trillion in 2022 dollars.Footnote ¹⁰⁰ Businesses that make use of NIH-sponsored research benefit from the public knowledge that it generates. As risk-bearers, taxpayers who fund investments in such research or in physical infrastructure such as roads, have a claim on resulting corporate profits, if and when they are generated. Through the tax system, governments, representing households as taxpayers, seek to extract this return from corporations that make profitable use of government spending.

No matter what corporate tax rate prevails, however, households as taxpayers face the uncertainty that changes in technological, market, and/or competitive conditions may prevent enterprises from generating profits and the related business tax revenues that serve as a return on the taxpayers’ investments in physical infrastructure and human capabilities. Moreover, tax rates are politically determined; households as taxpayers face the political uncertainty that predatory value extractors may convince government policymakers that they will not be able to make value-creating investments unless they are given tax cuts or financial subsidies that will permit adequate profits. Households as taxpayers face the risk that politicians may be put in power who accede to these demands for predatory value extraction.

Through their skills and efforts, workers regularly make productive contributions to the companies for which they work that are beyond the levels required to lay claim to their current pay. However, they do so without guaranteed returns.Footnote ¹⁰¹ Any employer who is seeking to generate a higher-quality, lower-cost product knows the profound difference in the productivity levels of those employees who just punch the clock to get their daily pay – what has recently become known as “quiet quitting” among white-collar workersFootnote ¹⁰² – and those who are committed to supporting the company’s goals of generating products that can compete in terms of quality and cost. An innovative company wants workers who apply their skills and efforts to organizational learning so that they can make enduring productive contributions – including those that will enable the development of the firm’s next generation of high-quality, low-cost products.

For their part, in making these productive contributions, employees expect that they will be able to build their careers within the company, putting themselves in positions to reap future benefits at work and in retirement. Yet these potential careers and returns are not guaranteed. In fact, under the downsize-and-distribute resource-allocation regime that MSV ideology legitimizes, these careers and returns are generally undermined.

Workers, therefore, supply their skills and efforts to the process of generating innovative products that, if successful, could create value, but they take the risk that their endeavors could be in vain. Far from reaping expected gains in the form of higher remuneration, more job security, and better working conditions, employees could face cuts in pay and benefits, or even find themselves laid off. Even if the innovation process is successful, workers face the possibility that the institutional environment in which MSV prevails will empower corporate executives to cut some workers’ wages and lay off other workers – all so that the value they helped to create can be redirected to shareholders, including the senior executives themselves with their copious stock-based pay as well as hedge-fund managers whose stock-trading strategies count buybacks as money in the bank.Footnote ¹⁰³ In short, the corporate resource-allocation strategy may transform from retain-and-reinvest to downsize-and-distribute, with devastating impacts on the realized gains that committed employees had expected and deserved.

As risk-bearers, therefore, taxpayers whose money supports business corporations and workers whose efforts generate productivity improvements have claims on corporate profits, if and when they occur. MSV ignores the risk-reward relation for households as both taxpayers and workers in the operation and performance of business corporations.Footnote ¹⁰⁴ MSV implies that public shareholders derive their gains by extracting value as a reward for taking the risk of contributing to processes that create value. Thus, as we have seen, when corporations pay dividends or do buybacks, MSV mischaracterizes these distributions as “returning” capital to shareholders. The irony of MSV is that public shareholders – whom agency theory deems to be the firm’s sole risk-bearers – typically never invest in the value-creating capabilities of the company at all. Rather, they purchase outstanding corporate equities on the stock market with the expectation that dividend income will be forthcoming while they hold the shares and that the stock price will have risen to yield a financial gain when they decide to sell the shares.

Proponents of MSV may accept that a company needs to retain some cash flow to maintain the functioning of its physical capital, but they generally view labor as an interchangeable commodity that can be hired and fired as needed on the labor market. In addition, they typically ignore the contributions that households as taxpayers make to business value creation. Rooted in the neoclassical theory of the market economy, MSV assumes that markets, not organizations, allocate resources to their most efficient uses. But lacking a theory of innovative enterprise, agency theory cannot explain how the “most efficient uses” are created and transformed over time.Footnote ¹⁰⁵

It is the triad of government agencies, household units, and business corporations that invests in the productive capabilities that underpin economic growth. These investments determine both the “most efficient” uses at a given point in time and the extent to which these “most efficient” uses become more productive over time.Footnote ¹⁰⁶ Product markets, labor markets, and financial markets are outcomes, not causes, of this productivity growth.Footnote ¹⁰⁷

The MSV slogan is “disgorge the free cash flow.”Footnote ¹⁰⁸ Once we debunk the shareholder-value myth, the massive buybacks since the mid-1980s raise a significant question: How much of the cash flow that both shareholders and managers have deemed to be “free” has been misappropriation of funds that should have gone to households as taxpayers and households as workers as returns on the money and effort their members invested in the productive capabilities that generated corporate revenues and profits?Footnote ¹⁰⁹

For about three decades after World War II, income distribution became somewhat more equal, and a middle class of both high-school-educated blue-collar workers and college-educated white-collar workers thrived. In contrast, over the past four to five decades, the United States has experienced extreme concentration of income among the richest households and the erosion of middle-class employment opportunities for most of the population.Footnote ¹¹⁰ These two economic problems have been integrally related as business corporations have shifted from retain-and-reinvest to downsize-and-distribute, legitimized by the ideology that companies should be governed to maximize shareholder value.Footnote ¹¹¹

5 Reforming Corporate Governance for Sustainable Prosperity

With the election of Joseph R. Biden Jr. as president of the United States, Americans got a leader whose stated objective as a candidate was to put the nation back on a path to stable and equitable growth.Footnote ¹¹² Quite apart from the devastation wrought by the Covid-19 pandemic, that is a tall order after almost half a century of income inequality and employment instability. The Biden administration’s Build Back Better agenda includes investment in productive capabilities by two of the three types of organizations – government agencies and household units – that constitute the investment triad.

On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act,Footnote ¹¹³ through which government agencies can invest in productive capabilities. Stalled in Congress is the American Families Act,Footnote ¹¹⁴ announced as the American Families Plan in April 2021,Footnote ¹¹⁵ to support household units to invest in productive capabilities. On August 9, 2022, the CHIPS and Science Act, designed primarily to support investment in semiconductor fabrication in the United States, became law.Footnote ¹¹⁶ On August 16, 2022, Congress passed the Inflation Reduction Act, which provides business corporations with hundreds of billions of dollars in government subsidies to confront climate change. It also enables, as of 2026, Medicaid to negotiate the prices of certain high-cost prescription drugs.Footnote ¹¹⁷

Missing from the Build Back Better agenda, however, are corporate-governance reforms to ensure that the third type of organization in the investment triad – the nation’s business corporations – focus on investment in productive capabilities that can generate stable and equitable growth. The very first step in a policy agenda designed to engage major US business corporations in that investment effort would be to put a halt to the trillions of dollars that they spend on stock buybacks, at the expense of rewarding the US labor force for its prior value-creating efforts and investing in the next round of innovative products that can support sustainable prosperity over the next generation. In addition to enabling the United States to confront the scourge of socioeconomic inequality, the investment triad is of fundamental importance to putting in place the productive capabilities required for both a transition to green energy and effective responses to pathogen epidemics to prevent them from becoming pandemics. Without the full participation of major US business corporations in the Build Back Better agenda, the effort at recreating a diverse, robust, upwardly mobile American middle class cannot succeed.

When he was Vice President, Joe Biden understood that stock buybacks were undermining the productive capability of the US economy.Footnote ¹¹⁸ In a Wall Street Journal op-ed in September 2016, Biden observed: “Ever since the Securities and Exchange Commission changed the buyback rules in 1982, there has been a proliferation in share repurchases. Today buybacks are the norm.” The result has been, as he put it, “a significant decline in business investment.” Biden concluded his article by making a forceful statement of the need for regulation of buybacks as an integral, and important, component of government economic policy:

In an interview with the Las Vegas Sun on January 11, 2020, Biden, as a candidate for the Democratic nomination for president, criticized buybacks because they shortchange R&D investment and workers’ wages. As a remedy, he said: “I’m going to reinstate (the policy) that changed under the Reagan administration, when the SEC suggested there’s not a limitation on buybacks.”Footnote ¹²⁰ With the Covid-19 pandemic upon us, on March 20, 2020, candidate Biden tweeted:

During the second quarter of 2020, buybacks by companies in the S&P 500 Index fell to about $90 billion from over $200 billion in the previous quarter. But in the second quarter of 2021, with President Biden in office, they bounced right back up to $200 billion.Footnote ¹²² In the third quarter of 2021, buybacks had reached an all-time quarterly record of $235 billion, surpassing the previous peak of $220 billion in the fourth quarter of 2018,Footnote ¹²³ when share repurchases had been fueled by the Republican tax cuts.Footnote ¹²⁴ For all of 2021, at a record $882 billion, S&P 500 buybacks easily outstripped the previous annual high of $806 billion in 2018.Footnote ¹²⁵

Yet, in his first year in the White House, President Biden was virtually silent on stock buybacks.Footnote ¹²⁶ In his first State of the Union Address, on March 1, 2022, there was absolutely no mention of them.Footnote ¹²⁷ In the Budget of the U.S. Government: Fiscal Year 2023, released on March 28, 2022, the Biden administration raised the issue of buybacks in relation to stock-based executive pay.Footnote ¹²⁸ But the Budget proposed no constraints on corporations executing buybacks. As mentioned previously, the Biden administration has said that recipients of subsidies under the CHIPS and Science Act will not be able to use the taxpayer funds to do buybacks or dividends, but it is not at all clear that the companies will be forbidden from doing buybacks as a condition of government financial support.

To repeat: If the leading US industrial corporations devote all their profits and more to distributions to shareholders, the Build Back Better agenda, even if enacted, cannot succeed.

The United States can start the transition from a value-extracting economy, characterized by extreme inequality, to a value-creating economy, characterized by stable and equitable growth, through a five-part corporate-governance reform agenda,Footnote ¹²⁹ with its intellectual rationale underpinned by the theory of innovative enterprise:

• Ban stock buybacks as open-market repurchases by rescinding SEC Rule 10b-18.

• Compensate senior executives for their contributions to value creation, and not for value extraction.

• Reconstitute corporate boards by including directors who are representatives of workers and taxpayers while excluding predatory value extractors.

• Reform the tax system so that it recognizes and supports the investment triad in enhancing productive capabilities.

• Deploy corporate profits and government taxes to launch and sustain collaborations between business corporations and government agencies that support the “collective and cumulative” careers that can enable American workers and their families to contribute to and participate in an upwardly mobile society, arming tens of millions of household units with the productive capabilities to solve the nation’s existential climate, health, and security crises.

Here are brief summaries of why these reforms are needed and what changes effective policy proposals should emphasize: