Robert Reich's CEO Pay Chart Is Wrong. Here's the Real Math.

The former U.S. labor secretary presents economic data in deceptive ways.

By Aaron Brown of Reason. 

"Robert Reich, an emeritus professor at the University of California, Berkeley, and a former U.S. labor secretary, makes popular economics videos arguing that the U.S. economy is rigged against workers.

One of his recent pieces caught my eye because it makes heavy use of numbers and charts. The video is a great example of how to misuse economic data to support a preconceived narrative—in this case, a fairy-tale account of evil CEOs stealing wealth from their employees.

At the outset of the video, Reich presents a chart showing that in 2024 the "typical worker" earned $36.49 per hour, while CEOs made—"ready for this?" Reich asks viewers—$431.80!

There are lots of problems with this chart, starting with the fact that it's labeled "CEO Salaries," but that's not what the $431.80 figure represents. Though he rarely sources his work, Reich's chart matches data from a report by the Economic Policy Institute (EPI), which measures what the leaders of the largest 350 public corporations in America earn, not all CEOs.

There are about 4,000 publicly traded corporations headquartered in the U.S., and even more privately held companies. They all have CEOs. Reich has cherry-picked the wealthiest and most successful faces in the crowd. This is like measuring what the highest-paid actors earn, setting aside all the struggling performers waiting tables, and claiming that acting is the world's most lucrative profession.

If you broaden the lens to include CEOs at ordinary-sized companies, Bureau of Labor Statistics (BLS) data show their pay looks a lot like that of other professionals: Median CEOs make about $200,000 a year, and their pay is growing at about the same pace as everyone else's.

Another problem is that the $431.80 is compensation realized in 2024. Most of it came from stock options granted for performance in previous years. In the prior five years, stock prices had roughly doubled, allowing CEOs to cash in compensation from past years. It's a lot of money, but perhaps not out of proportion to five years of service steering the world's largest and most successful businesses through the pandemic and doubling shareholder wealth. And only the CEOs who survived the turmoil and delivered the doublings were around to collect it. In a down year for the stock market, you might see compensation drop by 80 percent.

The CEOs of the largest American companies have seen their compensation grow at an extraordinary pace, but that's because the businesses they run have grown so large. A highly regarded paper by economists Xavier Gabaix and Augustin Landier, "Why Has CEO Pay Increased So Much?" showed that CEO compensation should scale with firm size, and that this effect explains the entire rise in CEO pay.

Today, Nvidia's market cap alone is more than two and a half times the entire S&P 500's market cap when it was created in 1957, adjusted for inflation. Comparing CEO pay at the largest firms in 1968 vs. what they make today is like equating the director of a late-night commercial for a personal injury law firm to the director of a Hollywood blockbuster. Nvidia CEO Jensen Huang impacts more economic value in an afternoon in 2026 than James Roche did as the CEO of General Motors in all of 1968.

The same compensation explosion has occurred across every winner-take-all field, affecting top athletes, movie stars, and best-selling authors. The highest NBA salary in 1968 was Wilt Chamberlain's $250,000-a-year deal with the Lakers, and the team also agreed to cover his taxes. Chamberlain's salary alone works out to roughly $2.2 million in today's dollars. Compare that to Steph Curry's record-setting $62.6 million pay package in the upcoming NBA season.

Yet Reich claims that "the system is rigged." Is the NBA also rigged in favor of Curry? Against whom?

Reich has more evidence that the economy is rigged against workers. He presents another chart showing, in his words, that "big corporations chronically underpay workers compared to the workers' productivity on the job. Productivity, that is, the value of their output, has soared and resulted in record corporate profits."

The source of Reich's chart, which shows the productivity-pay gap, was once again the EPI, which compares workers' earnings over time to the productivity of the U.S. economy.

The measure they used for worker pay doesn't include all employees. It's just "nonsupervisory workers," so it excludes management. The EPI says that it uses this dataset because it represents "the typical worker," or "roughly 80% of the U.S. workforce." The purpose of the chart, they explain, is to answer "a crucial question: Do typical workers in the United States share in the benefits of economic growth?"

The problem is that the EPI is drawing on an untrustworthy dataset. In 2005, the BLS published a note in the Federal Register repudiating its measure of nonsupervisory workers' earnings, stating that it had "limited value."

The agency also noted that the distinction between a "supervisory" and "nonsupervisory worker" was "not meaningful to survey respondents" and "that it is not possible to tabulate their payroll records" to reflect this distinction.

In 2003, Patricia Getz, who was in charge of employment statistics at the BLS, noted that "records are not kept for these groupings of workers," so employers weren't filling out this portion of the survey.

And this series only counts regular paychecks. Bonuses, profit sharing, and stock grants, which represent how a growing share of American workers are paid over the exact period this chart covers, are excluded entirely. 

The BLS sought to discontinue this data series altogether in favor of the all-employee series. In the end, it continued to collect and publish data on nonsupervisory workers, but the poor data quality renders this chart essentially worthless.

The wage measure favored by the BLS tracks compensation for all employees at all levels, not only because this is a more trustworthy dataset, but on the logical assumption that a company's gains in productivity reflect the combined efforts of all employees, including its officers and supervisors.

Reich also cites gross productivity before depreciation. Consider an Uber driver whose passengers pay $85,000 over a year, of which $30,000 goes toward expenses such as gas, insurance, and fees. The driver's gross productivity is $55,000. But her car might have depreciated $15,000, so the net productivity is $40,000. That $15,000 wasn't stolen from her paycheck by a greedy CEO; it's a true loss in economic value.

This matters because over the period Reich discusses, corporate assets shifted from slow-depreciation assets such as steel mills to faster-depreciating assets such as computers and software. Depreciation has risen from 12 percent of national income to 17 percent. Reich is counting that 5 percent difference as stolen from workers, but in fact, it disappeared.

Regardless, if we use the data favored by the BLS and compare all worker compensation to productivity, the divergence between pay and productivity disappears.

Reich's theory that workers are getting shafted has a third component: He claims that CEOs are "siphoning" profits into stock buybacks to boost their own compensation.

"Stock buybacks," he claims, "reduce the number of shares available for investors to purchase, which drives up the value of the remaining shares. Just simple supply and demand."

This is an elementary accounting error. Take a $10 billion market-cap company with 100 million shares trading at $100 each. It decides to do a 10 percent buyback, spending $1 billion to buy 10 million shares for $100 each. The $1 billion cash it spends makes it a $9 billion company. It now has 90 million shares outstanding. The stock price is the same $100 per share outstanding.

Of course, in real life, things are not so neat. Investors tend to take a buyback announcement as good news; the insiders think the stock is undervalued, and bid the price up a few percent. There are other cases where investors take the opposite view: The buyback is a sign the company has no better use of its cash and is fading. But the point is it's not "simple supply and demand"; it's a signal that might or might not help the stock price.

Moreover, Reich misunderstands the purpose of a stock buyback. Companies have two ways of transferring profits to their shareholders: They can pay a dividend or they can do a buyback. The economic effect is the same.

Reich sees buybacks as a way of diverting profits to themselves rather than sharing them with their workers. "Corporations and their CEOs are instead siphoning them off into stock buybacks," he says.

They're not "siphoning" money. They're paying out profits to their owners. All investors, even greedy ones, are entitled to a share of the earnings of the companies they own. That's the deal. And without it, nobody would invest in the first place.

"Stock buybacks used to be considered illegal stock manipulation until Ronald Reagan came along," Reich says. "CEOs can now effectively give themselves a raise while workers get the shaft."

Stock buybacks were never "considered illegal stock manipulation." In 1982, the SEC clarified a gray area, simplifying the legal treatment of stock buybacks and making it easier for companies to use them as an alternative to paying dividends.

Reich claims that stock buybacks are worse than paying dividends because they're a way for CEOs to enrich themselves. "These rising share prices bump up CEO pay because increasingly part of their compensation is in shares of stock," he says.

The problem with this theory is that boards of directors, not CEOs, decide whether to pursue stock buybacks. These are the same directors who negotiate CEO compensation. Buybacks are an item on the negotiation checklist, like benefits and contract length, not something CEOs sneak in afterward to inflate their earnings.

What's the evidence on how buybacks affect CEO compensation? A study in the Journal of Accounting and Economics found the relationship between buybacks and CEO compensation was spurious. Research by a compensation consulting firm that examined S&P 500 buybacks from 2018 to 2021 found the same picture from inside the boardroom: Pay packages rest on multiple performance metrics, and the companies making the largest buybacks adjust their incentive targets to cancel out the share-count effect.

So what does Reich conclude from all of this misinformation and misconceived data? That we need a slew of policies to rein in American capitalism. He says we should "raise the federal minimum wage," "strengthen labor unions," "use antitrust laws to break up big corporate monopolies," "raise taxes on corporations," and "ban stock buybacks."

Apart from his misinformed discussion of stock buybacks, Reich doesn't address those issues in his video. Instead, all he's done is cherry-pick the compensation of the top CEOs in America and use a faulty data series to claim the economy is rigged against workers.

The charts and numbers we use to argue about important questions in public life are too often presented in deceptive ways. It doesn't get much more deceptive than this video."

The Proxy Advisers Strike Back

ISS and Glass Lewis join New York City in trying to stop Exxon from moving to Texas

WSJ editorial. Excerpts:

"Activists with little stake in companies have abused the shareholder proxy process to drive their environmental, social and governance (ESG) political agenda. This includes resolutions requiring CO2 emission cuts and workforce diversity audits. Plaintiff firms and government pension funds are using shareholder lawsuits to shake down companies.

It’s often less expensive for companies to settle lawsuits than defend against them. One reason is courts in states like Delaware and New Jersey have become unpredictable. Recall how a Delaware judge in 2024 invalidated Tesla CEO Elon Musk’s pay package—which shareholders had twice approved—on the dubious rationale that it violated the state’s “fairness” standard. 

All of this explains why Exxon is joining a parade of companies, including Tesla, Space X, Coinbase and Dillard’s, that have moved their legal homes to Texas."

"Glass Lewis and ISS, which control 90% of the proxy advisory market, also fear their power over companies will wane if activists face a higher burden to bring ESG resolutions."

"Limiting access to the proxy ballot for political activists who don’t have a stake in a company’s long-term success is in the interest of shareholders."

"“substantial portion of the S&P 500 including the majority of Delaware incorporated issuers, maintain exclusive-forum provisions designating a single court for internal affairs litigation.”" 

America’s IPO Mini-Boom

Too bad SpaceX and others didn’t go public sooner, but they are a tribute to the U.S. capitalist system

WSJ editorial. Excerpts:

"Companies are staying private longer because of the 2002 Sarbanes-Oxley Act’s burdensome regulations, shareholder litigation and abundant financing available in private markets. The number of public companies has shrunk by half in three decades.

This means ordinary Americans who invest in the stock market, either directly or through retirement accounts, are sharing less in America’s wealth creation."

"One reason the U.S. boasts the world’s most valuable companies and promising startups is because the government doesn’t seek to punish success—or handcuff entrepreneurs with regulation as the Europeans do. China boasts enormous human capital, but Beijing’s financial markets are stunted by the desire for political control." 

ESG May Be Eating Away at Your Investments

Trump and the SEC affirm fiduciary duty, benefiting even shareholders with nonfinancial objectives

By Phil Gramm and Jeb Hensarling. Excerpts:

"Pursuing ESG objectives without the investor’s expressed consent has been part of a thinly veiled attempt by progressives to coerce investment managers and private corporations to advance their political goals and not the investors’ interest. This process began in 2006 when United Nations Secretary-General Kofi Annan announced the Principles for Responsible Investment initiative. Loud activists with anticarbon and pro-DEI agendas have colluded with asset managers to push through hundreds of corporate stockholder resolutions contrary to the financial interests of general investors."

"ESG constraints produce lower returns while delivering few environmental or social benefits"

"ESG investment funds have often fostered the illusion that investors are supporting more “sustainable” environmental outcomes while earning similar risk-adjusted returns. Rarely is that the case over extended periods. ESG investment funds routinely rely on unproven and inconsistent analytics. Weighting investments in companies based on carbon or DEI metrics means, logically, that more important factors of financial performance are underweighted. The predictable financial underperformance of ESG funds is made worse by higher management fees."

"In most ESG investing, no systematic effort is made to verify the claimed nonpecuniary impact of the investment, and government regulators have, as far as we can tell, assumed impact investors have opted out of fiduciary protections. Conflicts of interest among advisers are rampant. Proxy adviser Institutional Shareholder Services, for example, advises companies on shareholder ESG proposals and then turns around and sells the same companies ESG ratings."

"ESG investments are “not making much difference to companies’ actual ESG performance” and that they “perform poorly in financial terms.”" 

Should Policy Restrict Share Buybacks?

By Jeffrey Miron.

"Many politicians believe that corporate share buybacks create “perverse” incentives for firms to prioritize short-term investments over future ones. The 2022 Inflation Reduction Act included a 1 percent tax on all buybacks, and President Trump recently issued an executive order to prohibit share buybacks for underperforming defense contractors.

Recent research, however, shows that

legalizing share repurchases increased investment by 8.0–9.8 percent among public firms … [and] improved public companies’ access to equity capital.

Moreover, the firms receiving these investments

tended to be younger, smaller, and higher-growth, and typically held less cash … suggest[ing] that legalizing share repurchases allowed capital to flow from cash-rich, mature firms to cash-needy firms with greater growth opportunities.

These results make sense: Shifting cash from firms that do not have immediate productive uses to firms that do is good for economic efficiency. Inhibiting this shift stifles corporate investment and growth."

End the SEC’s Access Rule, Don’t Mend It

Activists love it, but it is counterproductive, has no basis in statute, and could be unconstitutional

By Joseph A. Grundfest. He is a professor emeritus at Stanford Law School. He served as an SEC commissioner, 1985-90. Excerpts:

"Investors owning as little as $2,000 of a company’s stock—about 16 billionths of the average market capitalization of an S&P 500 company—can force a vote. Average monthly rent for a New York City apartment is roughly $3,500, 75% more than the rule’s minimum. This holding requirement might be the only thing in America not suffering an affordability crisis.

Only 11% of the proposals that proceeded to a vote in the 2025 proxy season gained majority support from voting stockholders. If a proposal is approved, the corporation’s board typically declines to implement it anyway. The Access Rule thus generates toothless, performative votes.

The rule is wildly popular with governance gurus and policy advocates. It’s a free soapbox that forces management to address issues they’d rather not discuss. To buy peace, executives will often make concessions in exchange for the activists’ withdrawing their proposals. If a proposal fails, activists still demonstrate to supporters a willingness to confront the corporation. Just because a proposal is performative doesn’t mean it’s ineffective."

"The Access Rule . . . commandeers the corporate proxy to compel votes on shareholder proposals, an encroachment not authorized by federal securities law." 

In Defense of Share Buybacks

By Spencer Jakab of The WSJ. Excerpts:

"businesses that are told how to spend their money instead of putting it to its highest and best use ultimately hurt their shareholders and the economy by investing in dud projects. That’s especially true when politicians nudge them."

"Four large defense contractors—Lockheed Martin, RTX, General Dynamics and L3Harris—paid out $156 billion in the past decade combined via dividends and buybacks. That was more than three times their capital expenditures."

"Their return on invested capital—what they earned on the money not paid out—has averaged a little over 10% recently: good, but not as much as shareholders earned just redeploying contractors’ surplus cash into an index fund the past few years.

What would the returns have been if the companies had invested four times as much? Almost certainly lower."

"Defense companies would have had to diversify into products they didn’t understand as well."

"The overall proportion of their earnings returned to shareholders has been pretty steady over the decades" 

Insider Trading Bans are Ineffective

By Jeffrey Miron and Jacob Winter.

"A Senate committee recently advanced a bill that would ban members of Congress from trading individual stocks. Federal law already prohibits federal employees from insider trading.

The case for insider trading bans is weak, partly because enforcement is difficult. A recent study illustrates by examining

whether the stock trades of high-ranking IRS officials are associated with tax-related information.

The authors found

that IRS officials’ trades, predominantly their purchases, generated abnormal returns of 0.7–3.5 percent 60 to 120 days after the trade. These findings suggest that IRS officials had relevant information that the market had yet to fully incorporate into stock prices.

Furthermore, their

findings suggest that IRS officials’ purchases of a stock predict more favorable tax enforcement outcomes against that firm, while sales predict less favorable tax enforcement outcomes.

As with other prohibitions that are difficult to enforce, insider trading bans privilege those who can avoid getting caught. For other reasons why these bans are bad policy, see a prior piece by one of us."

CNN and Sen. Bob Casey’s Economic Illiteracy

The network spins short-selling into a hit piece on Republican challenger Dave McCormick’s business record

WSJ editorial. 

"You can tell the Pennsylvania Senate race is tightening because CNN on Wednesday rolled out a hit piece on GOP Senate candidate Dave McCormick’s record as former CEO of Bridgewater Associates. The story happens to fit perfectly with Democratic Sen. Bob Casey’s campaign strategy vilifying private business. 

“Senate candidate Dave McCormick led hedge fund that bet against some of Pennsylvania’s most iconic companies,” reads the headline, which Mr. Casey tweeted. The Democratic incumbent and his allies in the press can’t find any wrongdoing during Mr. McCormick’s five years (2017-2022) running Bridgewater, so they’re peddling economic illiteracy disguised as investigative reporting.

The piece claims that Bridgewater under Mr. McCormick shorted the stocks of roughly four dozen companies headquartered in Pennsylvania, including Hershey Co., U.S. Steel, Comcast and Penn National Gaming. Short-selling is when an investor borrows a security and then sells it with the intent of buying it back at a lower price.

Well-diversified investors take short positions to hedge risks in their portfolio. As the Biden Securities and Exchange Commission explained last year, “short selling provides the market with important benefits, such as providing market liquidity and pricing efficiency.”

Yet the CNN story makes short-selling sound nefarious. “Short positions, which are essentially bets that the companies’ stocks will drop, can hurt corporations by depressing their stock prices, making it harder to gain new financing, invest or hire more workers, according to experts,” CNN says. “For financial institutions, short positions can be lucrative.”

Yes, and so can long positions. The goal of investing is to make money, but short sellers can also lose money if the price of stocks they short rise before their short bets come due.

In any case, there’s no indication that Bridgewater was betting against Pennsylvania companies. Its investment managers don’t take short positions in particular stocks. Rather they short industries. Pennsylvania companies happened to be in baskets of stocks its investment fund managers shorted.

Mr. McCormick’s campaign says long positions accounted for 61% to 98% of Bridgewater’s investments in nine of the largest publicly traded firms headquartered in Pennsylvania between 2017 and 2021. They are AmerisourceBergen/Cencora, Hershey, U.S. Steel, Comcast, Penn National, PNC, Lincoln National, PPG and Aramark.

CNN acknowledges 18 paragraphs into the story that Bridgewater “did invest in stocks of some of the same Pennsylvania companies it shorted in other years, and overall, it reported spending more money buying stocks of Pennsylvania companies than shorting them in four of the five annual reports reviewed by CNN.” That’s a long way of saying its short-selling story is political spin.

If Mr. Casey disapproved of Bridgewater’s investment strategy, why did he tap the hedge fund to manage government worker pension investments when he was state treasurer some two decades ago? CNN tries to dress up its non-scoop by opining that Mr. McCormick’s investment strategy was “politically risky” even if it was “financially smart.”

The implication seems to be that Mr. McCormick shouldn’t have managed his investment funds in the best interest of investors, including pensioners, because risk-mitigation strategies could later be twisted by his opponents if he made a future bid for political office. But if Bridgewater had lost money under Mr. McCormick’s leadership, you’d be hearing about that from Mr. Casey and CNN too.

This episode goes far to explain why Congress is filled with lawyers and political lifers who’ve never met a payroll. Any business person who runs for office these days can expect his record to be distorted as somehow scandalous. It’s far easier to run as a cipher with no record of accomplishment like Mr. Casey. No wonder Washington is a mess."

Collecting Jurisdiction: The SEC’s Wrongheaded Expansionary Approach to NFTs

By Jennifer J. Schulp and Jack Solowey of Cato.

"What do Yankees tickets and Pokémon cards have in common? If you guessed wish list items for elementary school kids, you wouldn’t be wrong. But another thing they share is that Securities and Exchange Commission (SEC) Chairman Gary Gensler has been asked to opine on whether they are securities during congressional testimony.

To most people, the answer to that question seems easy: Pokémon cards aren’t traded on the New York Stock Exchange—and neither are Yankees tickets—so they must be different from securities like Walmart or Tesla stock, right? That’s hardly a technical analysis (and decidedly not legal advice), but it reveals a piece of common sense underlying our intuitions about securities laws: If we buy something that has some use—even if we hope that it may become more valuable—it is usually not treated as a security subject to all of the rules and regulations that go along with offering and trading investment assets.

But, in yet another example of Gensler’s expansive view of SEC jurisdiction, his answers to Rep. Ritchie Torres (D‑NY) on whether items like Pokémon cards and baseball tickets are securities were not definitive and seemed to rest on an incoherent theory that takes into account whether the assets are in some way stored on a blockchain. That doesn’t sound like the “technology neutral” regulator the SEC claims to be.

Unfortunately, this isn’t just the idle musing of an agency head dreaming of enlarging its fiefdom. The SEC has settled several actions asserting that NFTs (i.e., non-fungible tokens) granting holders certain rights to digital art and exclusive restaurant access were unregistered securities. (The SEC has also issued a Wells Notice, indicating that it intends to file an enforcement action, against a platform that facilitates NFT trading.)

The stated rationale for these actions is that purchasers of the NFTs were led to expect profits when the token appreciated in value based on the efforts of the NFT issuer. In the Commission’s view, this ostensibly meets the criteria set out by the Supreme Court for when something qualifies as an investment contract subject to SEC jurisdiction. But as SEC Commissioner Mary Uyeda has noted, considering “any item sold whose value is based on the efforts of others” to be a security “would appear to scope in many common transactions in the non-digital world, including pre-purchase commitments, collectibles, art, and land.” That’s exactly what the SEC appears to be doing.

NFTs are unique digital tokens that typically are employed to represent (though not necessarily legally confer) ownership of a physical or digital asset. NFTs and cryptocurrencies use the same underlying blockchain technology, but they differ in important respects, most notably in that cryptocurrencies are fungible—meaning that two units of the same cryptocurrency are interchangeable—whereas NFTs are not.

While in one sense NFTs can be thought of as assets themselves, they also can be thought of as something like “certificates of authenticity” that provide a way of verifying that the NFT holder has an ownership claim, access right, or connection to another asset or file that the NFT is linked to (such as a piece of art, digital content, or membership pass). However, the legal rights of a token holder, such as intellectual property and other ownership rights, cannot be assumed based on possession of the token alone and may require reference to additional off-chain legal frameworks.

NFTs can serve a variety of functions, such as representing ownership of real-world or digital assets like art, facilitating benefits like access to a real-world or digital social club or automated royalty payments, or eligibility for discounts associated with customer loyalty rewards, to name a few. Buyers of NFTs may want to collect them, receive the benefits associated with them, or speculate that their future value may rise.

But the fact that someone buys something in hopes that it will appreciate—like a Pokémon card collector or reseller of Yankee playoff tickets—does not turn the item into a security. Where an item has a use unconnected to its appreciation in value, as many NFTs do, it’s even easier to see this because a purchaser may not intend to use the item as an investment. 

The securities laws evolved in no small part to address the risks posed to investors by a managerial body’s ability to possess information that investors do not and that body’s capacity to act at odds with investors’ best interests. Yet, as SEC Commissioners Hester Peirce and Mark Uyeda recognized when dissenting from the Commission’s settlement with Flyfish Club, LLC—which offered NFTs that granted holders access to its restaurant—this type of securities analysis is “inapt because holders of Flyfish NFTs had a reasonable expectation of obtaining wonderful culinary experience and other exclusive member experiences based on the managerial and entrepreneurial efforts of Flyfish and its principals. Whether their expectations will be met should not be judged by a securities regulator” (emphasis added).

The SEC claims to be looking at the “economic reality” of the NFT offering to determine that it falls within the securities laws. But as Commissioners Peirce and Uyeda remarked when dissenting from the settlement with Stoner Cats 2, LLC, which sold NFTs connected to digital art (of stoned cats): “The Stoner Cats NFT purchasers received what they paid for—a still image of a character from the series, access to all six episodes of the Stoner Cat series, and the excitement of being part of a popular phenomenon.” This economic reality isn’t enough to bring a project within the SEC’s jurisdiction because, if it was, every sale of fine art would fall within the SEC’s purview—something that the SEC has acknowledged is not the case. 

That’s not to say that NFTs can never fall within the ambit of the securities laws but rather that it is far from a given that any particular NFT does. The SEC’s jurisdictional grabs—from collectibles to digital art markets to social club memberships—deter artists and other creatives from experimenting with methods to monetize their work. Uncertainty about whether they will face an SEC investigation may chill experimentation, in part by prohibitively raising costs related to legal counsel (or more proactively, for taking legal action against the SEC for clarity). 

Recently, Rep. William Timmons (R‑SC) floated legislation, the “New Frontiers in Technology Act,” seeking to exclude NFTs that relate to works of art, collectibles, loyalty points, and tickets (among other things) from coverage under the securities laws. Whether as a result of legislation or otherwise, though, the SEC needs to walk back from its untenable position that anything purchased that may rise in value is a security—a position that needs to be revised not only for NFTs but for technological innovation more broadly."

The Exxon Directors and the Proxy Abusers

Progressives retaliate after the company fights back against a shareholder resolution that would harm other investors

WSJ editorial. 

"Progressives are abusing the shareholder proxy process to drive their climate and social agenda, and now they want to punish Exxon Mobil for daring to fight back.

California Public Employees’ Retirement System (Calpers) on Monday said it would vote against all of Exxon’s directors at its shareholder meeting next week. Proxy adviser Glass Lewis last week recommended that shareholders reject Exxon’s lead independent director Joseph Hooley’s re-election, citing “unusual and aggressive tactics” against activist investors.

Majority Action, a leftist outfit, is also prodding institutional investors to oust CEO Darren Woods and Mr. Hooley for “attacking shareholder democracy and failing to address climate risk.” Far from protecting shareholder rights, these agitators want to punish Exxon and its investors for refusing to surrender.

Exxon filed a federal lawsuit in January to block a shareholder resolution by Follow This and Arjuna Capital that sought to force steep cuts to the company’s CO2 emissions, including any from the combustion of its products. As Exxon explained in its suit, the resolution would force it to “change the nature of its ordinary business or to go out of business entirely.”

Follow This and Arjuna invest in companies to drive their anti-fossil-fuel agenda. As Follow This says, “we buy shares in order to work on our mission to stop climate change, not to make a financial profit,” and to make producers “stop exploring for more oil and gas and start exploring for new business models.”

The Securities and Exchange Commission’s longstanding rules let public companies block shareholder resolutions that affect a company’s “ordinary business operations.” But current SEC Chair Gary Gensler has declined to let companies nix resolutions if they have a “broad societal impact.” Read: political impact.

As a result, annual proxy voting has increasingly become a shareholder plebiscite on environmental, social and governance (ESG) matters. All shareholders pay for the costs that companies incur responding to such resolutions, which the SEC estimates at $150,000 per proposal. They also distract boards from more important business.

Arjuna and Follow This in February dropped their resolution, perhaps worried that they might be required to pay legal damages if they lost. Yet Exxon has continued its lawsuit because it says “the underlying issue remains and must be resolved.” That is, can progressive activists harass companies with ESG resolutions that seek to harm other shareholders?

“Until the courts weigh in, activist investors will continue, with the SEC’s approbation, to inundate public corporations with proposals designed to push an ideological agenda divorced from the success of the corporation,” the U.S. Chamber of Commerce and Business Roundtable wrote in a friend-of-court brief for Exxon.

Courts have ruled that cases aren’t moot unless it’s clear that defendants won’t resume their allegedly wrongful behavior. Arjuna and Follow have twice pursued unsuccessful resolutions to force Exxon to reduce its emissions. Who doubts that they will introduce similar proposals in the future?

This explains the retaliation against Exxon because progressives fear a judge could stop their corporate harassment. “Decades of shareholder rights are under threat from a lawsuit filed by the leaders of a powerful U.S. corporation, designed to punish two small groups that dared to speak truth to power,” Calpers leaders said Monday.

The real threat to shareholders is progressive investors with minor stock holdings who want to commandeer and destroy companies for their own political ends."

The SEC’s Latest Insider-Trading Theory

The agency rewrites the law to invent a new offense: ‘shadow trading.’

WSJ editorial.

"Congress has never clearly defined insider trading in stocks, but that hasn’t stopped the Securities and Exchange Commission and prosecutors from finding the meaning in statutory penumbras. Chairman Gary Gensler’s SEC is at it again in a civil trial next month that will try to extend its reach to punish trading in the shares of another company about which the defendant had no insider information.

Federal law doesn’t explicitly ban trading on confidential information. But courts have said that insiders defraud companies by “misappropriating” private information for personal gain. In a classic case, an insider trades in his company’s stock based on proprietary information or tips off someone else who then trades and cashes in. While courts have circumscribed insider-trading liability, regulators keep inventing new theories.

In 2021 the SEC charged Matthew Panuwat, an employee at the biopharmaceutical firm Medivation, with insider trading for a timely and lucrative options trade on another pharmaceutical company’s stock. Having developed a highly effective prostate-cancer drug, Medivation was shopping itself to large drug companies in 2016.

The SEC alleges that Mr. Panuwat started purchasing call options for a different company, Incyte, soon after Medivation’s CEO sent an internal email announcing an imminent deal to be acquired byPfizer. While Incyte and Medivation didn’t directly compete, the SEC alleges that their stock prices were correlated, and that Mr. Panuwat knew this.

After news of Medivation’s acquisition broke, the share prices of Incyte and several mid-sized pharmaceutical companies popped. Mr. Panuwat sold his Incyte options for a roughly $107,000 profit. The SEC says Mr. Panuwat committed insider trading by allegedly using confidential Medivation information to bet on Incyte’s stock. Medivation had a company policy that forbade such trades, but violating a company policy isn’t the same as violating a federal statute.

In his defense, Mr. Panuwat says it was publicly known that Medivation was on the sale block, so information about its potential acquisition wasn’t private. He also claims he bet on Incyte because he believed the company was undervalued by the market.

Disagreement over facts aside, the major problem with the SEC case is that it writes new insider-trading law by enforcement with no limiting principle. An executive could be charged with investing in the shares of any stock in his industry group. Yet everyone knows stocks in the same industry often move up or down based on the news of a single firm.

A

Nvidia

employee who knew his company had a strong earnings quarter and bought stock in tech companies, or even a tech-focused ETF, could be charged under this SEC theory. A 2021 academic study dubbed this practice “shadow trading” and “an undocumented and widespread mechanism that insiders use to avoid regulatory scrutiny.”

***

The SEC seems determined to prosecute Mr. Panuwat as a way to send a message across the market that such shadow trading is banned. But it’s an abuse of the law to punish someone after the fact for acts that he didn’t know at the time to be illegal.

In 2014 Justice Antonin Scalia, joined by Justice Clarence Thomas, lambasted the SEC’s penchant for defining insider trading however it wants (in denying a cert petition in Whitman v. U.S.). “Only the legislature may define crimes and fix punishments. Congress cannot, through ambiguity, effectively leave that function to the courts—much less to the administrative bureaucracy,” Justice Scalia wrote.

“When King James I tried to create new crimes by royal command, the judges responded that ‘the King cannot create any offence by his prohibition or proclamation, which was not an offence before,’” Justice Scalia wrote. “James I, however, did not have the benefit of

Chevron

deference.” Mr. Gensler may not have Chevron for long either. The High Court in January heard a challenge to the court-made Chevron doctrine, which requires judges to defer to regulators’ statutory interpretation when the law itself is ambiguous.

The SEC’s shadow insider-trading theory looks like another example of how regulators exploit vague laws to expand their power and undermine legal due process. If Congress wants to ban the practice, it can. But Mr. Gensler isn’t King James I, even if he sometimes acts as if he is."

The SEC’s Market Surveillance System Implicates the Fourth and Fifth Amendment Rights of Investors

By Brent Skorup, Anastasia P. Boden, and Jennifer J. Schulp of Cato.

"In this “smart” and digitized world, nearly everything we do could be captured, stored, and made accessible to the government. The time we wake up (using our phone’s alarm), the places we go (using our car’s built‐​in GPS), the news stories we read, the snacks we purchase for our kids, the route of our daily run, and even the temperature at which we prefer to keep our homes is routinely collected and stored by commercial companies.

Normally, the government cannot access that information, absent a manual process such as issuing a subpoena, obtaining a search warrant, or making a formal, emailed request to a company for customer information. The Securities and Exchange Commission’s (SEC) consolidated audit trail (CAT) system threatens to change all of that by both collecting data on every stock and options trade made in the United States and personally identifying information of the individual who made the trade. The CAT system gives government agencies a blueprint for pervasive and constant government surveillance:

1) it requires regulated parties to collect data daily and retain immense amounts of sensitive information about their customers; 

2) it offers no chance to opt out; and 

3) it demands unfettered access to customers’ data on the theory that the government might need the information for future law enforcement. 

Cato and the Investor Choice Advocates Network have filed, in an 11th Circuit Court of Appeals case called American Securities Association v. SEC, an amicus brief urging the court to set aside the 2023 SEC order funding the CAT system, which implicates the Fourth and Fifth Amendment rights of American investors.

The Supreme Court reiterated in Utility Air Regulatory Group v. Environmental Protection Agency that in evaluating the authority of agencies, courts must “expect Congress to speak clearly if it wishes to assign to an agency decisions of vast ‘economic and political significance.’” Congress has not clearly given the SEC authority for an invasive surveillance system like the CAT system, which raises questions of “vast political significance.”

First, the CAT system may violate investors’ and brokers’ Fifth Amendment right against compelled self‐​incrimination. As Justice Samuel Alito wrote when he was Deputy Assistant Attorney General, “the compulsory organization, filing, and creation of documents are acts that clearly are testimonial and may be self‐​incriminating.” While the government can sometimes compel the production of documents that are “customarily kept,” much of the information the SEC demands for its CAT system is entirely new and, therefore, potentially testimonial. Government agencies cannot be allowed to mandate new “customs” of records collection and then use those “required customs” to violate Americans’ Fifth Amendment rights.

Second, the CAT system may violate Americans’ Fourth Amendment rights against unreasonable searches and seizures of their “papers” and “effects.” Investors and brokers may have a possessory and privacy interest in the digital financial records they produce for collection in the CAT repositories. One’s “effects” almost certainly include financial records, as founding‐​era legal dictionaries, for example, specifically contemplate and define one’s financial records as one’s “effects.”

Further, the SEC, without a warrant, absent a showing of even reasonable suspicion, is acquiring and (in the SEC’s own words) searching massive amounts of investors’ and brokers’ personal information and transactions stretching back years. This information is mandated by, not voluntarily conveyed to, the SEC for future warrantless searches and therefore appears to violate investors’ and brokers’ Fourth Amendment rights.

Because Congress has not spoken clearly about the agency’s authority to create this type of surveillance system, the order funding the CAT system should be set aside."

Cleveland-Cliffs, Tariffs and Stock Buybacks

The steel maker plows tariff-padded profits into buying its own shares. Paging Sherrod Brown

WSJ editorial. 

"Ohio Sen. Sherrod Brown supported the Inflation Reduction Act’s new excise tax on corporate stock buybacks. He’s also lobbied for tariffs to protect domestic steel makers from foreign competition. So we wonder what he thinks of the decision by Ohio-based steel makes Cleveland-Cliffs to plow its tariff-padded profits into share buybacks.

Cleveland-Cliffs’s stock jumped 7% Tuesday after CEO Lourenco Goncalves announced plans to “put a stronger focus on aggressive share buybacks.” He says it’s a good time to buy the company’s shares, which he thinks are undervalued despite a rich price-earnings ratio of 26.

Perhaps the CEO doesn’t believe investors are properly valuing tariffs and the subsidies for domestic steel in the 2021 infrastructure bill and Inflation Reduction Act. Federally funded public works must be built with U.S. steel, and green energy developers get a 10% bonus tax credit if they use domestic steel.

President Biden has kept the 25% Trump tariff on foreign steel. And Cleveland-Cliffs, the United Steelworkers union and Mr. Brown last year lobbied for more tariffs on tin-mill steel. In September the Commerce Department slapped duties of 122.5% on Chinese tin and lower margins on imports from Germany (6.9%), Canada (5.3%) and South Korea (2.7%).

Cleveland-Cliffs and

U.S. Steel

are the only two major U.S. producers of tin-mill and specialized steel used in electric-vehicle motors, so the tariffs give them an effective duopoly. This is why auto makers opposed Cleveland-Cliffs’s bid last year to buy U.S. Steel, which would have given the Ohio company tremendous pricing power.

Mr. Goncalves is unhappy that U.S. Steel accepted a better offer from Japanese steel maker Nippon. During a call with investment analysts on Tuesday, the CEO claimed U.S. Steel’s board “was hell bent to sell to a foreign entity” and “their goal was to break the back of the United Steelworkers,” which supported Cleveland-Cliffs’ bid.

He also suggested that Nippon’s acquisition could be torpedoed by the Committee on Foreign Investment in the United States over national security. Is Mr. Goncalves trying to goad the Administration into blocking the deal? He wouldn’t be the only one. Mr. Brown has also lobbied against it.

Share buybacks are fine with us, and they help with the efficient allocation of capital. But the Cleveland-Cliffs buybacks betray the conceit by protectionists in both parties that tariffs are all about U.S. manufacturing and jobs. They’re about lifting profits for some firms and shareholders over others."

The GameStop Meme Stock Craze Hits the Cinema

The lesson of ‘Dumb Money’ is that a wise crowd can easily turn into a stupid, dangerous mob

By Clifford S. Asness. Excerpts:

"The film is being hailed as a David-vs.-Goliath story, the little guy’s triumph over the Wall Street elite. That’s true only if you define triumph as a mob gleefully taking down one hedge-fund manager—Melvin Capital’s Gabe Plotkin—for short-selling the videogame company’s stock. Never mind that his demise came as thousands of people who gullibly bought during the “moonshot” phase of GameStop’s dramatic rise almost certainly lost money in the aggregate."

"the crowd of “little guys” was misled by deceptive or incompetent social-media hucksters into buying something that was very obviously overvalued"

"Third, too often we discard or warp time-honored principles to bad ends. Here I’m thinking of “HODL”—or “hold on for dear life”—the online crowd’s exhortation during the GameStop fiasco. I am a lifelong advocate of sticking with a good long-term strategy even through rare but excruciatingly tough times, so this one strikes me as nearly correct but wrong for a key reason. You see, I sneaked a word in there—“good.” Sticking with something through thick and thin works only if that thing is worth sticking to. You can’t apply it to anything, including the most obviously overvalued junk in the world, and win simply because you’ll never sell. That’s a recipe for asymptotically approaching a zero-brokerage balance.

Fourth, if you’re trading your 401(k) based on your hatred of and desire to harm a certain class of people, you’re probably letting your bias hurt your bottom line. The same dynamic applies outside the investing world.

Fifth, we often correctly marvel at the “wisdom of crowds,” but this phenomenon is based on the crowd’s members being reasonably independent of one another. Think about how effective polling the audience is on “Who Wants to Be a Millionaire?” It works only because members of the crowd don’t talk among themselves. If they were to launch into fiery speeches weighing the multiple-choice answers, you’d likely get a much different and worse result.

Crowds of independent thinkers are often very wise, even if each individual isn’t. Crowds that share information and come to a shared conclusion are often—though not always—dangerous mobs. In the meme-stock craze, as in our politics and elsewhere, the internet seems to be a perfectly designed vehicle for turning a crowd of independent thinkers into an angry mob.

GameStop’s ugly episode showed that aggrieved and ill-informed—or even sadder, desperate—“investors” can take down a single smart one. Fascinating. But we knew this before. A long-term market maxim is that “the market can stay irrational longer than you can stay solvent.” Perhaps a necessary rejoinder is that even so, the rational usually win and the irrational usually lose. Moreover, when the rational lose, the irrational often end up losing too.

We also saw that Hollywood will happily take a situation it doesn’t understand and make a movie about it, replete with cartoon heroes and villains, which only lowers our discourse and intentionally makes us hate and distrust each other even more. Oh, and the same industry will do so for money while excoriating greed. But then again, we already knew that too.

Mr. Asness is managing and founding principal of AQR Capital Management."

Warren Buffett’s Slap at Buyback Illiterates Rings True

Berkshire Hathaway CEO is talking his own book, but his criticism is fair

By Spencer Jakab of The WSJ. Excerpts:

"Warren Buffett rarely uses his annual letter to shareholders to lobby for policies that would enrich Berkshire Hathaway BRK.B 0.16%increase; green up pointing triangle or himself personally. He also generally strikes a grandfatherly tone, avoiding name-calling, though his acerbic 99-year-old business partner, Charlie Munger, is less restrained. Berkshire’s 2022 letter, released Saturday, was an exception. The topic was stock buybacks, newly subject to a 1% excise tax that President Biden recently proposed quadrupling in his State of the Union address.

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” wrote Mr. Buffett."

It’s Time to Stop Demonizing Buybacks

See Stock Buybacks Aren’t Bad. They Aren’t Good, Either by Jason Zweig of The WSJ. Excerpts:

"Don’t let a handful of anecdotal examples blind you to the broader evidence. A clear-eyed look at some of the rhetoric swirling around buybacks will show whether it holds up.

Buybacks starve companies of capital they could deploy more profitably by investing in the growth of their businesses.

This critique implies that the same management we shouldn’t trust to allocate excess capital correctly in a buyback will allocate it correctly for other purposes.

Expecting oodles of surplus cash not to burn a hole in the typical CEO’s pocket, however, is like putting a pile of raw meat in front of a lion and expecting it not to disappear.

My favorite examples come from the 1970s, when—just like now—giant oil companies had vastly more capital than they could plow back into their existing wells.

Instead of buying back shares, in 1979 Exxon Corp. bought an electric-motor maker for $1.2 billion—only to bail out a few years later, barely breaking even. Exxon also pumped at least $1 billion into futuristic office equipment—only to back out of those businesses, too, by the mid-1980s.

Exxon’s then-rival, Mobil Oil Corp., spent more than $1 billion to buy a company that made cardboard boxes and ran the Montgomery Ward department-store chain. That flopped, too.

Companies have been artificially hyping their market value by repurchasing their own shares.

A new study, “Share Repurchases on Trial,” by accounting and finance professors Nicholas Guest of Cornell University, S.P. Kothari of the Massachusetts Institute of Technology and Parth Venkat of the University of Alabama, analyzes the stock returns of thousands of companies from 1988-2020, comparing those that repurchased shares against firms that didn’t, adjusting for their size and other factors. In the year of a repurchase, companies that did large or frequent buybacks had slightly lower—not higher—returns. Over longer periods, their returns were indistinguishable.

Research published in 1967 showed similar results. 

Companies doing buybacks invest less in capital expenditures or research and development.

Younger companies with great prospects for internal growth tend to plow all their cash back into the business, leaving nothing for buybacks. As companies mature, their growth opportunities dwindle and their business generates more cash than they need, making share repurchases an appropriate choice for the surplus.

So, on average, accelerating companies don’t do buybacks, while decelerating businesses do. Investors tend to pay more for fast-growing stocks, so the short-term market performance of slower-growing companies doing buybacks turns out to be a bit lower.

In general, it isn’t that companies invest less because they’re doing buybacks. It’s that they do buybacks because they have less left to invest in.

Buybacks are on the rise because overcompensated CEOs are using them to fatten their own pay.

While the raw dollar amounts of buybacks have risen, as a percentage of the total value of the U.S. stock market they have shrunk by almost half since 2007—to roughly 0.7% from 1.3%, according to S&P Dow Jones Indices. The buyback boom has been dwarfed by the rise in stocks overall.

"What’s more, the “Share Repurchases on Trial” study finds that CEOs of companies doing buybacks don’t earn noticeably more compensation—including salary, bonus and stock options—than those at comparable companies that aren’t repurchasing shares. On average, CEOs doing buybacks don’t even earn 1% more in total pay."

No, the SEC Can’t Regulate Climate Change

If Congress wanted to authorize that, it would have said so

By Donald Kochan.

"Justice Antonin Scalia cautioned more than 20 years ago that Congress doesn’t “hide elephants in mouseholes.” When Congress chooses not to pursue a certain policy or delegate a new authority, it isn’t inviting administrative agencies to step in and fill the empty space. But federal agencies are increasingly attempting to impose major climate regulations with no mandate from Congress.

In its June 2022 decision in West Virginia v. Environmental Protection Agency, the Supreme Court made clear that federal agencies may not assert “highly consequential power beyond what Congress could reasonably be understood to have granted.” The EPA couldn’t find a provision in the Clean Air Act in which Congress gave the agency sweeping authority to restructure the country’s mix of electricity generation with its Clean Power Plan. Under the so-called major-questions doctrine, an agency action of political and economic significance—such as regulating carbon emissions—requires clear congressional authorization. The EPA didn’t have it, so the Clean Power Plan had to go.

With its recently proposed climate change policies, the Securities and Exchange Commission is similarly trying to exercise authority it doesn’t have. In an April 2022 rulemaking, the SEC proposed a set of expansive and costly regulations that would require public companies registered with the SEC to publish information about “climate-related risks” in annual reports and audited financial statements if those risks are “reasonably likely to have a material impact” on a company’s “business, results of operations, or financial condition.” The SEC also proposed requiring disclosure of registrants’ direct greenhouse-gas emissions as well as those from its purchases of electricity and its supply-chain partners.

This isn’t mere “disclosure.” It’s a heavy regulatory burden designed to serve climate policy goals, and it goes beyond the SEC’s statutory authority.

Climate change involves some of the biggest and most complicated policy debates of our day. A financial regulator empowered by Congress only to police fraud and protect investors isn’t equipped to engage with the policy questions surrounding climate change. That’s a mousehole of authority. There’s no room in it for a climate elephant to hide.

West Virginia v. EPA clearly poses a problem for the SEC’s climate proposal—and the commission knows it. Chairman Gary Gensler acknowledged that the case is “significant and meaningful,” and former Commissioner Joseph Grundfest noted that the SEC “was thrown for a loop” by the high court’s ruling. Nevertheless, the commission seems determined to dictate broad-reaching climate rules. In January, the SEC asserted that its climate disclosure requirements will be promulgated as a final rule in April 2023.

West Virginia v. EPA should serve as a clear warning to the SEC and other federal agencies—including the National Aeronautics and Space Administration, the Defense Department and the General Services Administration—not to act outside their purviews. If Congress had wanted them to have such broad power, it would have given it to them.

Mr. Kochan is a professor and executive director of the Law and Economics Center at George Mason University’s Antonin Scalia Law School."

Biden’s Stock Buyback Tax Would Hit the Little Guy

Mutual-fund investors would pay, and the result would be less-efficient allocation of capital.

By Burton G. Malkiel. Excerpts:

"Stock buybacks don’t take money away from pro-growth investments. Most buyback funds are reinvested in the stock market and in private equity, where they can be put to more productive use."

"If the company undertakes an investment with a lower expected return, it will destroy shareholder value."

"If the dollar value of such projects is less than the cash available, any excess cash should be returned to shareholders. The preferred method of returning these excess proceeds is to engage in buying back the firm’s stock (on which the purchase will earn the company’s cost of capital) or by declaring a special dividend. Buybacks are typically preferred to increasing dividends since the company doesn’t have to commit to continuing repurchases. Buybacks also provide flexibility with respect to timing. Unlike a regular dividend, there is no expectation that the buyback will continue."

"Critics say that buybacks substitute for productive investments, thereby harming the economy and its growth prospects. But a study published in the Harvard Business Review covering the years 2007-16 showed that research and development and capital expenditures soared over the same period when shareholder payouts and stock buybacks were rising sharply. The disconnect between robust investment and large cash payments is explained by offsetting equity issuance. Moreover, stockholders who sell their shares use much of the cash received to invest in other companies. Indeed, buybacks permit shareholders to redirect funds to smaller and higher-growth companies, which can improve the economy’s capital allocation by reallocating capital from older, established firms to more innovative ones."

"there is no evidence that firms that engage in buybacks reduce their investments. The Tax Foundation reported that firms that buy back their stock tend to outperform their peers over the next several years."

"Most common stock is held by the mutual (and exchange-traded) fund industry and by a variety of public and private pension plans. Entities such as the California Public Employees’ Retirement System as well as state-run pension plans own enormous amounts of common stocks. These institutions usually reinvest the proceeds from buybacks, and they rely on returns from the stock market to preserve the viability of their programs."

A Convenient Political Target: President Biden’s proposed tax hike on stock buybacks is misguided

By Allison Schrager.

"Finance professor Ken French once said about stock buybacks: “Buybacks are divisive. They divide people who do understand finance from those who don’t” Put Joe Biden and his administration in the “those who don’t” category. In last night’s State of the Union, the president proposed quadrupling the tax on corporate stock buybacks “to encourage long term investments instead.”

The concept of stock buybacks—when a public corporation uses its profits, or sells debt, to buy its own shares—may seem like a bad thing. After all, in theory, the company could have used that money to invest in its growth or to pay higher wages. But technically, a share repurchase is simply returning money to shareholders—just like paying a dividend, but more tax efficient.

AQR Capital Management’s Cliff Asness estimated that net investment did not decrease as stock buybacks became more popular. A corporation may buy back shares when it sees no profitable investment opportunities. In this case, it is better to return the money to shareholders; they can then invest that money in a company that might have better investment prospects.

Take oil companies. Biden is angry that oil companies did buybacks this year after raking in large profits. He says they should have used that money for more exploration and expanding refining capacity to boost the supply of oil. But why would an oil company invest in infrastructure to increase production when the administration has openly stated that it hopes to eliminate fossil fuels in the next decade? A rational response—one that maximizes shareholder value—is to return money to shareholders, not to make a large investment in something that may be worthless in the not-too-distant future. Biden should be delighted the profits are getting returned to shareholders, who will now invest in industries his administration finds more palatable.

True, most of the buybacks in the pre-pandemic period were financed by debt. While that sounds like a risky way to increase share prices, it’s just a way for a firm to recapitalize by switching from equity to debt, which, in a low-interest-rate environment, is a reasonable thing to do. Also, stock buybacks do not raise stock prices all that much. Research finds that they may push them up by 1 percent to 2 percent, but there’s nothing artificial about this increase. Instead, a buyback sends a signal that management thinks the company’s stock is undervalued, or that profits will improve by having more tax-favorable debt financing, or that investors are happy to hear that the firm is not chasing unprofitable investments.

Stock buybacks may make a convenient political target, but in principle and practice they’re morally and economically justified."