How American CEOs got so rich

On October 24, 1929, the American stock market crashed. The New York Stock Exchange is in panic! Frantic investors have rushed to dump their shares. Fortunes disappeared overnight and the value of American companies plummeted. But those responsible for those companies had an idea. They began buying shares of their own company from investors. Which meant there were fewer shares available for other people to buy. And when there is less of something, the price goes up. Normally, to boost their stock prices, these companies would have had to do something that excited investors: invent a new product or a different way of doing things.

But with this the corporations had discovered a kind of magic trick. They could increase their stock price without actually doing anything. This is a share buyback. An attempt by the owners of America's largest corporations to preserve their wealth while the rest of the country suffered the worst Depression in history. This practice helped fundamentally reshape the American economy and set the stage for a century-long struggle we are still fighting. It was a choice. And it was about greed. Someone has forgotten the human element. A fight over where American wealth comes from and who should keep it. You could have saved these jobs, but you chose not to.

In 1932, the New York Times reported on the “many alleged abuses” among companies carrying out this new stock buyback. Abuses such as “using corporation funds to purchase shares of” directors, officers, and other people friendly to management,” also known as insider trading. The president signed a new law to stop them: the Securities and Exchange Act of 1934. He cracked down on manipulation and insider trading. Corporations took that to mean their buyback days were over. And they practically stopped doing it. And without buyback options, corporations basically had three options for what to do with their profits. Option one: reinvest back into the company.

Build new factories. Create new products. Option Two: Raise Employee Pay Option Three: Issue a Dividend and Give Profits to Investors Most American companies did a combination of all three, putting most of the profits into reinvestment and salaries. Over time, technology improved. The workers did more things. The productivity of American workers nearly doubled in the thirty years after World War II. And so did hourly wages. This helped build the American middle class. But things didn't stay that way. Productivity continued to rise, but wages remained stable. A new political and economic philosophy had taken hold. The government is not the solution to our problems.

The government is the problem. By the time Ronald Reagan was elected, the Securities and Exchange Act had managed to scare companies away from buying back stock for fifty years. But that changed after Reagan appointed a former investment banker named John Shad to the top law enforcement job. Shad wanted companies to allocate less of their profits to reinvestment and salaries. He thought more should go to investors. Then, in 1982, he changed the rules. For the first time since the 1930s, companies could buy back shares from investors. They didn't have to worry about the government coming after them. Buybacks are back.

It was a really good time to be an investor. Investors wanted to keep that money flowing. So they changed the way CEOs were paid. Instead of simply earning a salary, CEOs could earn a bonus if the company's stock price rose. The quickest way to increase the stock price was to do a buyback, so CEOs started doing it all the time. In 1982, the largest American companies spent less than 1 percent of their profits on stock buybacks. In 2008, just before the recession, that proportion had jumped to 77 percent. Fast forward to today, and companies are spending 65% of their profits buying back shares of their own stock.

The pay gap between CEOs and American workers has grown from 15:1 to 220:1 in less than a lifetime. The uniquely American phenomenon can be seen by comparing the compensation of the CEO of General Motors with that of her counterparts at Volkswagen in Germany and Toyota in Japan. And you can see part of the reason for this gap when you look at how much of their profits three companies spend on buybacks. Volkswagen hasn't made any since 2012, and Toyota's biggest buyback years are about the size of GM's smallest. The more profits GM gave to executives and shareholders, the less was left for reinvestment and for workers.

In 2000, GM had the largest market share of any automaker in the world. By 2017, it had fallen to No. 4. And as its market share shrank, GM closed plants across the United States and tens of thousands of workers lost their jobs. For decades, this General Motors plant in Lordstown, Ohio, was the county's largest employer. It opened in the 1960s and began manufacturing large sedans and powerful cars. When people's preferences changed or a model was discontinued, GM retooled the plant to make a different type of car. But in 2015, GM promised investors another massive share buyback. To cut costs, they began eliminating shifts at the Lordstown plant.

Another cut: the second shift will be eliminated in two months. Where am I going to go? Everyone has to find a place now. It's the end of the line for the General Motors plant in Lordstown, Ohio. The cuts come as the automaker reports a near-record profit of $12 billion last year. A few months after the GM plant closed, the local supplier that manufactured the rear suspensions closed. The same goes for the local factory that built the seats. Plans to build a new hospital in the city were put on hold. When salaries dried up, a local restaurant closed its doors.

Economists call it the "multiplier effect." One study predicted that every four jobs lost at GM's Lordstown plant would lead to the loss of three more jobs among suppliers and other local businesses. That's why laid-off auto workers aren't the only ones in Lordstown who understand the effects of GM's decisions. The teachers too. There were some students who simply changed greatly. All this is a tremendous upheaval for them. When you look around, you drive through our city, there's a lot of agriculture, but General Motors is pretty much the city. There was a time when the budget was mostly made up of General Motors.

If we lose that revenue from General Motors, it will be very difficult for us. I hesitate to use the word traumatic, but it is. Because when something so sudden happens, it shakes your world. A year before GM closed the Lordstown plant, President Trump and Republicans in Congress reduced the corporate tax rate from 37 percent to 21 percent. Those who supported the cuts predicted that corporations would reinvest those tax savings and that workers would benefit the most. The vast majority of companies are going to do exactly what we say: reinvest in their workers, reinvest in their factories. Pay people more money.

When our companies pay less taxes, they reinvest that money into their companies. But according to the nonpartisan Congressional Research Service, that's not what happened. The CRS studied the effects of the new tax law a year and a half after its approval. And they found “very little growth in wage rates” among ordinary workers. What they did find was evidence of “a record number of share buybacks, with $1 trillion announced by the end of 2018.” For decades, share buybacks have been done in secret. shaping the American economy. And now politicians are realizing it. Republican Senator Marco Rubio has suggested giving additional tax breaks to companies when they reinvest their profits instead of making buybacks.

Democratic Sens. Elizabeth Warren and Bernie Sanders have called for getting rid of the Reagan-era rule that protects companies when they conduct buybacks. They want to make it easier for the SEC to investigate these companies, hoping that they will be too afraid to make buybacks, just as they were in the 1930s. Warren also calls for a new rule that would give workers mandatory seats on corporate boards. That way, they would have the opportunity to vote on those big bonuses that CEOs receive when a company's stock price rises. This is how German companies have done things for decades, and buybacks there are much less common.

But in the United States they have a long history. The buybacks began in an era when less than 1 percent of the American population owned nearly a quarter of its wealth. Today, buybacks are back. And the American economy looks a lot like it did in the 1920s. The question now is whether we want it to continue like this.