Biden endorsed this professor’s ideas to rein in corporate greed. But he ignored them after his election.
How one economist’s campaign to rein in stock buybacks caught Washington's attention — and then got left behind.
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“Profits without prosperity.” That was the title of the seminal 2014 article written by economics professor William Lazonick that made a small wave.
In the Harvard Business Review piece, Lazonick unpacked the contradictions of an economy that had largely recovered from the Great Recession, but whose benefits were not being shared equally. While the stock market and corporate profits were soaring, everyday people had seen average wages stagnate — part of a decades-long trend. This wasn’t what was supposed to happen in a healthy economy.
Lazonick pointed his pen at a culprit: corporate stock buybacks, the practice by which companies use profits to buy their own stock off the market, driving up share prices in the short term and increasing returns for shareholders — particularly who hold a lot of equity, like those at the top of the company.
But the movement towards buybacks has costs, Lazonick argued: it means that company profits are no longer being used to invest in new products or innovation. And for the workforce, it’s even worse, creating a system in which workers are no longer rewarded with higher wages, benefits, or other investment like training from the returns that result from their labor.
The share repurchasing trend is part of a shift that Lazonick traces back to the 1970s, as the economic culture of the U.S. moved away from value creation — again, innovation, investment, worker empowerment — to what Lazonick calls value extraction. And it has had massive effects, as companies increasingly prioritize financialization over core business products.
“As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity,” Lazonick wrote. “If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control.”
While Lazonick’s article did bring him and his ideas a new level of prominence, earning him an audience with officials like Joe Biden, Tammy Baldwin, and Sherrod Brown, his warnings have largely gone unheeded. Despite the lip-service that representatives on the left — and right — have paid to stock buybacks, proposals to reform the issue have languished in Washington. I reached out to Lazonick this week to talk about his ideas, where they originated, and what they mean for our new gilded age. A lightly edited and condensed version of our chat appears below.
Hard Reset: It sounds like you were paying attention to many of these structural issues a long time before other people were aware of them. When did your ideas begin to strike a nerve?
William Lazonick: I see the economy as a social process in which organizations are dominant in markets. And the type of organization I focus on most is the business corporation. Since the mid-1980s, when I saw the ideology of maximizing shareholder value come to Harvard Business School, where I was at the time, I knew that this was not good for working people and probably wasn’t good for the future of technology. And it’s not good for politics. So I’ve been a critic of this ideology for about 40 years.
The Harvard Business Review article’s full title was: “Profits Without Prosperity: How Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off.” I was surprised that they even published it. More recently, I had a book come out about what I call predatory value extraction, with Jang-Sup Shin, [an economics professor] in Singapore.
The argument that people make is that the economy should be run to maximize shareholder value. That’s the dominant ideology out there. Shareholders invest in companies and take risk, and everybody else gets a guaranteed return: workers get their wages, the government gets its taxes, and whatever’s leftover, shareholders are going to allocate.
But there are many problems with this. The gains from companies that go to propping up their stock prices through buybacks have gone mainly to the top one-tenth of 1%, who then have more money to make money out of money, and go looking for other ways of making money. They can either get more companies to do more buybacks, or they can shift them into things like private equity, mergers and acquisitions, and other types of activity.
Now of course, many people are writing about private equity, where the equivalent of the stock buyback is also a mode of predatory value extraction. And so we have a predatory economy — or one that’s run by predators.
HR: What do you make of that almost religious-like belief in the free market in the U.S.?
WL: Looking at the tech industry, some of the companies that are the greatest innovators have become the greatest predators. I’m sitting here with an Apple phone, Apple computer, AirPods, an iPad and an Apple watch. It’s been a huge innovator obviously.
But last year — this is the year ending in September 2024 — Apple spent at least $95 billion on buybacks, by far the most ever. And when the data comes out for the full year of 2025, they’ll probably exceed that by close to a hundred billion. And the reason they’re doing that is so Tim Cook and his board can keep their jobs, basically fend off hedge fund activists who would come into these companies or threaten these companies with takeover.
HR: You wrote the article about the problems with stock buybacks more than 10 years ago. Has the problem gotten better or worse since then?
WL: Whenever companies do buybacks, it’s at the expense of someone. They could be paying workers higher wages, maybe even 25% higher, like the workers at the Apple Store. That would pull up wages in the rest of the economy. But instead they’re doing buybacks. Eventually some of those companies run out of the profits to do buybacks, and then they start downsizing the labor force. And so people lose their jobs. That’s happened to many companies.
Many of the companies that are most involved in this activity are those like Apple, Cisco, Intel, Boeing, IBM and many others that we rely upon for developing critical technologies, who used to be leaders in their fields….And basically, that explains the U.S.’s loss of competitiveness in a lot of critical technologies. So in sum, the workers lose out. The critical technologies are not developed. And the companies claim that they need all these profits in order to invest when they don’t actually invest.
It’s simply that people who are on the boards, they’re all getting stock-based pay and they want to get the stock price up. So they buy into this shareholder value argument…It’s not that anybody denies that it’s greed, it’s just a question of what the greed gets us. And the greed has gotten us a lot of inequality.
HR: Where did this system originate?
WL: The starting point was the Securities and Exchange Commission in 1982 passing what’s called Rule 10b-18, which I call a “license to loot” for boards, CEOs and CFOs. [The SEC said] you can do massive stock buybacks that would normally be seen as manipulation, but we’re not going to charge you with manipulation. It has never been subjected to scrutiny by Congress.
That was pushed by the Chicago school and it was never challenged by East Coast liberals, including progressive economists who are well-known.
It’s not just greed. There’s now a complete capitulation to the people who run Silicon Valley and are now some of the richest people in the world. And not just to Trump, but to the notion that they’re entitled to all their wealth, that anybody who tries to tax that wealth is undermining innovation.
HR: You’ve advocated for reform. Were there moments you thought this would happen?
WL: At first I was surprised at how much of an impact [the HBR article] had.
A big fan of that article, with whom I met twice in 2015, was then-Vice President Joe Biden. He was thinking of entering the race for president at the time, and in September 2016, I got an email from his chief economist who said, “Hey, you’re going to like this op-ed that the vice president is putting into the Wall Street Journal.” It was called “How Short-Termism Saps the Economy,” and it was all about the problems of stock buybacks and other incentives.
In 2017, with the Trump tax cuts, both sides recognized that a lot of the extra profits from the tax cuts would go to stock buybacks…Chuck Schumer is on the record for saying he thinks stock buybacks should be abolished. [Democrats] were putting out all this material about how [the tax bill] was going to mean more stock buybacks, prop up stock prices, make the rich richer.
And the Republicans were saying, yeah, they’re going to do stock buybacks and it’s great. You’re going to get the stock market working. You’ll get all that money flowing through the economy, and this is going to be good for everybody.
I was also talking with people like Sen. Tammy Baldwin, who by 2018 had introduced a bill called the Reward Work Act, which would have gotten rid of the SEC rule. She reintroduced it in 2019, and it’s sitting there. There have even been some Republicans in the Senate who have at times spoken out against buybacks. Elizabeth Warren came up with the Accountable Capitalism Act in 2018, which I had some input into. That would’ve created a national charter for corporations and things like buybacks would’ve been under scrutiny.
HR: And what happened to this momentum?
WL: When Biden became president, there was very little about stock buybacks that he had to say. I think the people around him suppressed that discussion. I wrote an article called Where Did You Go, Vice President Joe? Under [President] Biden, stock buybacks were at absolutely record levels. [Addressing the issue] was not part of his agenda, I don’t think because of Biden, but because of the people around him telling him, “This is not going to sell.”
[Former Ohio Senator] Sherrod Brown wrote a set of essays in 2017 called Wall Street’s War on Workers, which was much more aligned with what I was arguing. I had talked to them at that time, too. If they had gone with that, and really educated workers about what was screwing them in Ohio, I think he’d still be in the Senate.
The Democrats have missed out. Once they got into power, they stopped talking about it. Kamala Harris said nothing about stock buybacks — not a word. So my article in 2014 had an impact, but people managed to forget it. Even people who had ardently agreed with me.
HR: Thanks, professor.
Here’s what else we’re reading this week:
A report from Northwestern’s Medill journalism school found that there are 213 U.S. counties without any local news source — and another 1,524 with only one news source remaining, typically a weekly newspaper. That means that some 50 million Americans have very limited or no access to local news.
OpenAI cracks down on Sora 2 deepfakes after pressure from Bryan Cranston, SAG-AFTRA (CNBC)
Sequoia’s COO, Sumaiya Balbale, who is a practicing Muslim, stepped down after at the company in August, after firm partner Shaun Maguire’s X rant accusing Zohran Mamdani of having an “Islamist agenda” went unpunished, the Financial Times reports.
What Job Is A Guy With A Nazi Tattoo Qualified For? Good piece on the Graham Platner mess from Defector.
I enjoyed this report, which struck a nice balance between critical and curious, on the use of A.I. in medicine in The New Yorker. Was interesting to see some examples, anecdotal for the most part, about A.I. actually helping people solve medical mysteries.