YouSaid · the spoken record

William Lazonick

lines on the record: 18
first: 2019-04-29
most recent: 2019-04-29
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Oil companies would love it, especially older companies. They'll sit on these huge piles of cash, and with no good use for them and tell you, hey, nothing we can do about it. You know who else would love it? Bankers, because now that cash will be burning a hole in your pocket and you have to do deals. And so if you're doing this to punish bankers, they're going to end up being the beneficiaries of this process because all these old companies with a lot of cash will have to spend the cash. And guess what, they'll spend the cash on? Big acquisitions. And guess what happens in your big acquisitions? It's a motherload of all deal making. So if you pass a law against buybacks, I can almost promise you that five or ten years from now, they're going to be unintended consequences that you look at and say, I didn't see that coming, but you should have because in a sense when you take a big action like that, there are always going to be consequences.”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“the expansion of younger businesses and new businesses. So I think the role for policy is create that favorable environment and provide the foundation for that kind of growth and development to happen.”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“There are implications of these issues for inequality, of income and of opportunity. And in this regard, let me make one point. Younger and smaller businesses, they have a tendency to hire younger and less educated workers. Let's think about what that means. That means if we ban stock buybacks, for example, we're forcing that capital to stay in mature typically larger firms. Now, as I just made the point, mature, larger firms tend to hire more experienced, more educated, more skilled workers. So if we really want to provide good job opportunities, good earnings opportunities for people at the lower end of the earnings and skill distribution, a great way to do that is to facilitate the creation of new jobs.”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“So, if you look at this type of resource reallocation that's being proposed, again, restricting the use of cash, do you think that's going to improve income inequality, worsen it? How do we put it in the broader context?”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“We'd like the economy to do, what we'd like the capital market to do is to take the amount that investors are willing to invest and allocate it to the best uses, the uses that are going to drive innovation and job creation and growth. The second big point about this, and this is directly related to much of my research and what people often fail to appreciate, is there are enormous differences in productivity and investment opportunities across firms. So we really want the capital to get allocated to where it can do the most good in terms of new innovations, new jobs. We undermine it when we ban stock buybacks because they interfere with the ability of the economy to allocate investable resources to their banks. Uses.”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“I think the narrative's largely wrong. The first big piece to understand is that stock buybacks and bans on stock buybacks don't have much effect on the amount of investment in the economy. What they do affect is where that investment goes. And to see that point, think about, suppose I'm an investor and I've got $100,000 in my stock portfolio because that's how much I want to put in stocks. If one of those companies buys back $10,000 worth of my shares, that doesn't change how much I want to invest in stocks. So I'll take that $10,000 and invest it in some other stock. If it doesn't affect the level of investment in the economy, what it instead does is trap funds, trap resources in companies that don't think they have great uses for it. Because if they had great uses for the funds in terms of... They would invest it internally.”
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“And that brings us to some of the most important potential consequences of any policy aimed at curbing buybacks, which is that it could actually make it harder to start new businesses, lead to fewer jobs, and worsen income inequality. Here's Stephen Davis, professor at the University of Chicago Booth School of Business. We know that stock buybacks aren't an area of research for you, but there's a narrative that by allowing companies to bring cash back into the US and then restrict them from giving that cash back to shareholders, essentially by banning stock buybacks, companies will basically, they'll invest more, they'll build more, they'll create more jobs. Can you give us a sense given your work on business formation, job creation, where that narrative could be right or wrong?”
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“That's a fair question. The question is, you know, we said many of these companies have bad projects because they're not competitive. They can't earn a decent return. So it's true in the short term, if you paid your employees more, they're going to be happier, but you're actually going to make yourself even less competitive. So it's actually going to create a vicious cycle where initially wages are going to go up, but they're going to hire far fewer people. They're going to find even fewer projects to take in the future. You might actually set these companies in a cycle where they shrink even faster than they're shrinking right now. You can't have it both ways. You might have some very well-paid employees who remain in the company, but it's going to be a subset, a much smaller set of employees, and it's going to be at the cost of actually employment in a larger scale. You can't say, I want the unemployment rate to be low, I want new jobs to be created, and I want you to pay $25 an hour to all your existing employees. It's not going to happen.”
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“Demateron has somewhat of a different take. He worries that any attempts to constrain companies' buybacks could actually end up backfiring on workers. Can companies be investing more in their employees? Can't they be paying more? Can't they be providing better benefits?”
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“High productivity out of your workers employs by paying them more, by training them, by getting them to work together, all the things you need to transform technologies, access market, produce competitive products. I think the evidence will show that your profits are going to be higher in the future. But the biggest part is when a company makes profit, it worries about, and we keep the people here and motivate the people and reward the people who help generate the profit and that your employees. It recognizes that that's not a matter of, well, it would be nice for workers to have more pay. It's in fact they're generating the value in these companies that is being taken away from them and that has all kinds of consequences. This is a major problem and a fundamental problem, in fact.”
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“There's many, many studies that show that companies that pay their work is better get better productivity and can remain competitive. Their profits might not be as high. And they might refrain from doing things like stock buybacks. But their productivity is higher, and often they out-compete companies in the same industry.”
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“You can look as hard as you want. You can make the next CEO, Steve Jobs. You can't change these businesses. One of my favorite devices for talking about companies is a life cycle. Companies are born, they grow up, they become mature, then they become middle aged, and they get old. So when you look at the companies buying back stock, many of them are aging companies, companies in the late stages of their life cycle. You can't reverse aging. These companies, even if they looked harder, are not going to find investments. Are there some companies that are buying back stock that shouldn't be absolutely? Because that force of inertia is a big force. Have you been buying back stock, if suddenly your business changes and you have good investments because you're so used to buying back stock, you might continue to do it. That does trouble me, but that requires a scalpel, not a bludgeon. So to try to protect yourself against those few companies that do stupid things, you shouldn't be using.”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“Companies that are buying back stock are investing less. But this is one of the great myths about buybacks, that the cash that is used for buybacks last year, for instance, US companies bought back $800 billion worth of stock. The question I asked people is where do you think the $800 billion went? Did it go into a black hole somewhere? Did it go to somebody's house? It basically went back into the market. It's not that companies are investing less. It's different companies are investing. And you could argue that that is actually the better use for the money. If you restrict buybacks, you're going to get Europe because Europe is full of walking dead zombie companies that continue to invest back in bad businesses. I think it's healthy for an economy when companies that don't have investments give the cash back. The mythology that if you buy back stock, there's less investment just takes the first part of that equation and misses the rest of the equation.”
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“I also reached out to Aswat de Moderon, professor at NYU Stern School of Business. He agrees that buybacks are not cannibalizing investment, and he makes the case that returning cash to shareholders actually leads to more productive investments than we would have seen otherwise. Thank you so much for agreeing to do this. So, is there any reason to be concerned though about the trend of companies investing less as opposed to returning more cash?”
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“Which wasn't the case coming into the 1980s, but became increasingly the case in the 1980s, really as everybody went like toward this notion of companies should be run to my shareholder value, buybacks became a favored way of doing this. And so that's what we have today.”
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“Elsewhere. The other thing was the election of Ronald Reagan on a platform of deregulation that had a major change in bringing free market economics into policy and something that wasn't well known was adoption of November 1982 by the Security and Exchange Commission of Rule 10B18, which I call a licensed duloop. It was a rule which basically said that companies can buy back of any single day through open market repurposes and be protected by a safe harbor against any charges of manipulation of the stock market. And buybacks tend to be done contrary to what some people believe, but they tend to be done when prices are high, not when they're low. And this fits in with this notion that companies are competing to keep their stock prices up. And so that, as they became evaluated,”
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“So there was really a major transformation in the ideology of corporate governance that occurred in the 1980s that was a part of a larger change in the politics and economics of what was going on in the U.S. economy. On the economics side, there were increasing challenges to corporations in part because of agglomeration movement that occurred in the 1960s and it became unwound in the 1970s where there was this really beginning of what I would call financialization of buying companies and thinking you can manage them by the numbers. And that led to people say, well, let's just bust up these companies. Let's take the money out of these companies. They're not investing very well. And the other thing was Japanese competition. So that also fit into the notion of companies aren't investing properly and just take the money out and distribute it.”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT
“What became really clear as I delved into the debate is that there are some very strong and very different views on the topic. I'll start with that of William Lazonik, who's a former professor of economics at the University of Massachusetts. He's also a vocal critic of buybacks. He argues that returning cash to shareholders comes at the expense of investment and innovation, and he believes you can see a multi-decade shift in corporate priorities by looking back at how he got here. Hi, Bill, it's Alison Ethan from Goldman Sachs. So why don't we start? The first question I'm interested in hearing your response to is why have buybacks become such a popular tool for U.S. companies over the last several decades? And what implications has this had?”
2019-04-29 · Goldman Sachs Exchanges · Buyback Realities · IDENTIFIED FROM THE TRANSCRIPT