Stock buybacks, often urged on by activist investors, are the latest rage, totaling $700 billion last year. That's not a good thing, says entrepreneur/venture capitalist Nick Hanauer.
"In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment," he writes in The Atlantic.
"But today, these buybacks drain trillions of dollars of windfall profits out of the real economy and into a paper-asset bubble, inflating share prices while producing nothing of tangible value."
Corporate executives utilize buybacks to manipulate their earnings-per-share numbers, which often determine much of their compensation.
"Shareholders aren't providing capital to the corporate sector, they're extracting it," Hanauer says."This practice is not only unfair to the American middle class, but is also demonstrably harmful to both individual companies and the American economy as a whole."
To solve the problem of business disinvestment, "this sort of stock manipulation" must be discouraged, he says.
William Lazonick, a professor of economics at the University of Massachusetts Lowell, opposes buybacks too. "Buybacks are just a manipulation of the market," he tells Institutional Investor.
He cites Cisco as an example of the folly, saying it has spent money on buybacks that it could have instead put to use on productive investment. "It should be the world's leading technology company," Lazonick said. "It's not even innovative anymore."
Cisco may beg to differ with that assessment. The computer network company reporting spending of $12.2 billion on research and development in 2013-14, according to Institutional Investor.