The Buyback Fallacy

Many commenters on the revenue enhancement neb repeat the worry that companies volition simply utilisation 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 alongside

"What they [CEOS] are planning to practise is stock buybacks, to trouble the pockets of shareholders."

(She as well as then moved on to a enquiry virtually guaranteed to hit retweets of partisan admirers, as well as to the lowest degree probable to hit an interesting answer,

"I'll enquire yous plainly, are yous living inward a fantasy world?"

NBC as well as then wonders that it is charged alongside partisan bias.)

Peggy Noonan, in an otherwise thoughtful column, echoed the same worry:

"Big corporations tin scope the sack create got the gift of the revenue enhancement cutting ... as well as practise superficial, pleasing populace relations kind of things, piece actually focusing on buying dorsum stock as well as 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 seat 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 scope the sack apply to a company, but non to the whole economy.

an before post, non to facial expression "repatriation" of corporate profits to brand much departure to investment. Apple Republic of Ireland could already seat coin inward a banking company that lends to a the States banking company that lends to Apple US, if that money's best utilisation was inward the US. The marginal profitability of investment is all that matters.

Now, allow me besides rapidly grant that at that topographic point are second-order effects as well as frictions. Perhaps due to "agency costs," internally generated cash is a cheaper rootage of investment funds than cash obtained yesteryear issuing stock or borrowing. In that case, financing decisions practise matter. Tracking downwardly this kind of thing is what makes economic science fun. But proficient economical analysis e'er starts alongside the relevant budget constraint or neutrality theorem, as well as and then adds the frictions. Neither Ms. Guthrie nor Ms. Noonan had such a mo gild financing friction inward mind.

Do non create got this transportation equally criticism of either author. They simply happened to repeat the charge, which is floating some equally purpose of the larger talking-point battle surrounding the revenue enhancement cuts. Ms. Guthrie is an anchor trying to lob nasty questions, as well as Speaker Ryan could create got answered this way. He chose a ameliorate reply inward fact, recognizing that similar "fantasy world" it was non a serious question. Ms. Noonan is a political commentator, as well as this fry fallacy does non detract from her interesting, larger, political point: Forget that returning cash to investors who quietly seat it inward ameliorate companies is economically efficient. If large companies are seen to simply paw out presents to investors rather than to invest the funds internally, the political optics of the revenue enhancement cutting volition live on bad for its defenders. Sometimes paying attending to fallacies tin scope the sack live on proficient P. R. It is, however, the chore of economists equally populace intellectuals (subject of an upcoming post) to patiently signal out this kind of thing, thence mayhap someday voters volition non confuse P. R. stunts alongside progress.

The Buyback Fallacy

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