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The Buyback Fallacy

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Many commenters on the revenue enhancement nib repeat the worry that companies volition simply utilization revenue enhancement savings to pay dividends or purchase dorsum shares rather than brand novel investments.

Savannah Guthrie, interviewing Paul Ryan on the Today Show, idea she had a existent gotcha amongst
"What they [CEOS] are planning to practise is stock buybacks, to trouble the pockets of shareholders."
(She too hence moved on to a enquiry close guaranteed to arrive at retweets of partisan admirers, too to the lowest degree probable to arrive at an interesting answer,
"I'll enquire yous plainly, are yous living inwards a fantasy world?"
NBC too hence wonders that it is charged amongst partisan bias.)

Peggy Noonan, in an otherwise thoughtful column, echoed the same worry:
"Big corporations tin hand the axe direct maintain the gift of the revenue enhancement cutting ... too practise superficial, pleasing world relations kind of things, piece actually focusing on buying dorsum stock too upping shareholder profits."
(Just how taking less of your coin is a "gift" is a enquiry for some other day.)

So, having established that this is a bipartisan worry, let's position the fallacy to bed. It is the fallacy of composition, that actions of i fellowship mirror actions of the economic scheme equally a whole. It is the fallacy of "paper investments" vs. "real investments." That distinction tin hand the axe apply to a company, but non to the whole economy.

an before post, non to hold off "repatriation" of corporate profits to brand much departure to investment. Apple Republic of Ireland could already position coin inwards a banking concern that lends to a U.S.A. banking concern that lends to Apple US, if that money's best utilization was inwards the US. The marginal profitability of investment is all that matters.

Now, allow me likewise apace grant that at that topographic point are second-order effects too frictions. Perhaps due to "agency costs," internally generated cash is a cheaper rootage of investment funds than cash obtained past times issuing stock or borrowing. In that case, financing decisions practise matter. Tracking downwards this kind of thing is what makes economic science fun. But adept economical analysis ever starts amongst the relevant budget constraint or neutrality theorem, too and hence adds the frictions. Neither Ms. Guthrie nor Ms. Noonan had such a mo society financing friction inwards mind.

Do non direct maintain this postal service equally criticism of either author. They simply happened to repeat the charge, which is floating some equally utilization of the larger talking-point battle surrounding the revenue enhancement cuts. Ms. Guthrie is an anchor trying to lob nasty questions, too Speaker Ryan could direct maintain answered this way. He chose a ameliorate reply inwards fact, recognizing that similar "fantasy world" it was non a serious question. Ms. Noonan is a political commentator, too this fry fallacy does non detract from her interesting, larger, political point: Forget that returning cash to investors who quietly position it inwards ameliorate companies is economically efficient. If large companies are seen to simply mitt out presents to investors rather than to invest the funds internally, the political optics of the revenue enhancement cutting volition hold upwards bad for its defenders. Sometimes paying attending to fallacies tin hand the axe hold upwards adept P. R. It is, however, the chore of economists equally world intellectuals (subject of an upcoming post) to patiently signal out this kind of thing, hence perhaps someday voters volition non confuse P. R. stunts amongst progress.


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