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Comment by mrfredward | Hacker News Reader

Say a company buys back 2 billion in stock, rather than investing it in new equipment. Does that reduce the amount of money invested in the economy? The answer depends on what the investors who sold do with that money. If they invest it somewhere else, then the company's decision doesn't reduce the amount invested in the economy.

I don't believe private investors decide they'd rather buy a yacht than invest their money just because a company bought back shares. More likely, the share buyback just moved money from a mature company to growth stocks or startups, which is exactly what should happen in a healthy economy.

Put another way...should Dinosaur Oil Inc use their profits to build another refinery even when they don't think it makes financial sense...or should they buy back stock, make their investors happy, and then be in a more vulnerable position when the investors turn around and fund Shiny Solar Inc?

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Much of the money isn't going to startups. It goes to savings. The top 1% save ~40% of their income. The bottom 90% save 4% of their income. The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.

The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.

When you say 'save', what do you mean? They aren't putting it in a mattress in their house... they are 'saving' it in investments that fund the economy.

There's a quote from It's a Wonderful Life that I always think of in this context:

"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?"

The whole point of finance, the social purpose, is that it prevents everyone (rich or not so rich) with assets from letting them sit idle.

Money does sit idle. It's used to hedge against recessions and acquire assets when their price is the lowest. Have you ever heard of liquidity?

The whole point of finance is to maximize returns on investment. One strong strategy is to build liquidity before economic (or industry) downturns to cheaply acquire assets. This idleness happens at a much greater rate for the wealthy than the poor. And by poor, I mean the bottom 90% of society. They don't have the luxury of savings. This means it's of greater value to give them money because they spend it quickly . The economy doesn't grow when companies buy back stock, it grows when someone has enough money to pay for medical treatments or to buy a new car.

The money they're talking about isn't peoples income, it's companies buying stock. The people they buy it from turn around and invest it elsewhere. Likewise, the "40%" saved isn't sitting in a vault somewhere, it's also invested.

Unless that company is also sitting on billions in cash reserves.

Even cash reserves end up loaned to others. Unless the company puts it under a mattress. Those reserves typically end up I low risk short term bonds and the like. Low risk, but not just sitting.

The only 'saved money actually doing nothing' scenario I can think if is when it gets deposited in a bank who then turns around and hold those funds at the central bank because they have nothing else to do with it. Central banks in many currencies these days offer negative deposit rates to discourage that behaviour and thus to the extent it happens it tends to only be over a very short period of time.

Of course it doesn't mean that investors/banks who receive the money reinvest it in the same country - if there is a dearth of opportunities in eg the US and Europe then this type of activity may result in increased investment in emerging markets.

Not literal cash, it's in accounts, accounts that pay interest, interest earned from investment

Or in shell companies in the Cayman's waiting for the next payroll tax holiday.

Maybe that should be the focus of attention vs stock buybacks.

> The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

This is plain incorrect. Spending on the value-less services and goods makes the economy as a whole poorer, and the more you spend the more you impoverish.

I don't understand what you mean, because you say "the best way to spur economic growth is to give money to people who will spend it quickly". That is "trickle down economics" as I understand what people mean by the phrase, and I agree(?) that it makes no sense. Broken windows, etc.

Trickle down is associated with supply side economics; giving money for people to spend means increasing aggregate demand, which is the opposite.

"Giving money for people to spend", what does that mean though? You write a note on it? "Plz spend on chzburger, kthxbye"

Or is it like you use body language? Giving money for people to spend is done like this, while giving money for people to save is done like this.

Every time someone buys an investment, they're buying it from someone who is cashing out, quite possibly to buy a cheeseburger. It makes no sense to call this a "trickle", of course, because it's not a small fraction of the money.

If that's the policy goal would it not be much easier to just build programs to support startups and entrepreneurs?

Take the converse construction. "Let's raise taxes on companies and wealthy individuals so the government can get into the winner-picking business of investing in startups and entrepreneurs." I would personally object to that policy.

It doesn't have to be "winner picking" you could have some policy like subsidizing private sector business loans for small business, coupled with additional small business tax breaks (maybe payroll tax breaks as well?). This would accomplish the goal of encouraging small businessess without the government having to evaluate small businesses on their merits.

That's basically a planned market and those do not work without a perfect government that has total access over all information in the economy. Such a government will probably never exist.

Remember you are talking about denying a CEO the ability to decide whether to invest or not invest in additional production capacity and instead assigning this task to the government. The CEO has more information about his own company than the government, which means that the government is not capable of making this decision. The government is also insulated from the consequences of making the wrong decision, if a company loses revenue or even shuts down the government is not directly affected.

The government will also intrinsically allocate money based on political considerations, which are not necessarily congruent with practical ones.

What? How does what I commented at all resemble a planned market?

I elaborated a little on an alternative proposal for increasing investment at https://news.ycombinator.com/item?id=20665196

I think the only thing similar to planned economy here is that you're shifting tax burden and resources invested from larger companies to smaller companies. The idea being that small companies are a beneficial resource because they contribute more directly and locally to their economies.

You could argue that this is a distortion but I think it's a long way from a planned economy.

Well I guess that depends on how successful you imagine the government would be at running such a program.

If it is in the US, my intuition is that it wouldn't be very good.

So here's the issuing with buying back, it creates an artificial demand on the stock. As we know, demand increases price, so the price of the stock goes up. In order words becomes inflated. People's 401k, pension are invested in those stocks. Meanwhile, the folks CEO/Boards behind the buybacks cash out! The price of the stock doesn't reflect the real value in normal conditions. When the music stops, folks with 401k, pensions invested in those will be the ones losing big time!

This is not correct. Companies conducting buybacks do so at a low rate over a long period of time exactly to avoid having the impact that you're describing. Companies buy their shares back at the market price, and the normal transaction volume of a large companies shares dwarf the size of buybacks it may be conducting.

This is my understanding as well, but is there any law to this effect?

Why would there be a specific law covering this situation? It's an obvious violation of fiduciary responsibility to buy back shares in an inefficient, price-elevating fashion.

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