Analysis

Why tech giants don't invest tax cuts in American jobs: Don Pittis

If share prices of U.S. tech giants continue to decline, American taxpayers may have reason to be bitter about out how some industry leaders spent their tax-cut windfalls that were supposed to help create jobs.

And if share prices continue to decline, where did the money paid to wealthy investors go?

Tech stocks are taking a hit, despite the fact some industry giants spent billions of dollars buying back their own shares in a bid to drive up their value. (Brendan McDermid/Reuters)

More than $100 billion US in tax cuts that were supposed to "make America great again" went into the pockets of well-off investors in U.S. tech companies, according to new research by one of the world's most influential business newspapers.

Just as tech share prices show signs of weakness, there are growing worries that instead of investing those tax breaks into something that would last, much of that cash has just been gambled on what economist John Maynard Keynes described as casino capitalism.

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done," Keynes wrote in his groundbreaking 1936 opus, The General Theory of Employment, Interest and Money.

Markets run amok

Canadian Keynes scholar Louis-Philippe Rochon is sure that when Americans look back at the tax money removed from public revenue and used for the sole purpose of creating a temporary jump in share prices, there will be profound regret.

"We live in an era of capitalism gone amok," says Rochon, an economics professor at Laurentian University in Sudbury, Ont., and a founding editor of the Review of Keynesian Economics. In casino capitalism, he says, "What goes up must come down."

Certainly if shares were to continue their recent declines, all that money removed from government revenue and used to bid up stocks using share buybacks and dividend payments could simply disappear into thin air. Meanwhile, taxpayers will be left with a bigger national debt and increased calls for cuts to public spending to balance the budget.

As Keynes observed, the purpose of capitalist markets is not to make a fortune in a matter of weeks or months on stock speculation, but instead to raise money for wise and productive investment in the economy.

North America has lost jobs because of high wage costs, but even in lower wage places such as China, companies are investing in automation technology. (Reuters)

And that was exactly what was supposed to happen with the tax cuts. 

As sold to the American public, giving the tech giants a tax break would encourage them to bring their money home from overseas tax shelters and allow them to invest in the U.S.

Instead of making iPhones in China, for instance, Apple could spend the money on the research and the machinery to create North American jobs.

While the U.S. might have had trouble competing on wages, even companies in China are automating their factories. According to President Donald Trump's MAGA rationale, there is no reason why those factories, the new technology to run them, and the high-paying jobs to make it all happen could not be located in the U.S. instead of China.

In fact, the name of the bill said it all. When the tax-cutting legislation was presented to Congress at the end of last year it was introduced as the Tax Cuts and Jobs Act.

Yet, despite the plunging U.S. unemployment rate, jobs continue to go abroad while investors get rich on speculation.

'Good for shareholders'

Calculations by the London Financial Times show that so far this year, five of the biggest U.S. technology companies, including Apple and Google parent Alphabet, spent a combined total of $115 billion buying back their own shares.
That's about double the amount those companies spent on share buybacks in the previous year, before Trump's tax cuts kicked in. And it represents only a fraction of the estimated $1 trillion US paid back to shareholders of tech and non-tech companies.

"Most companies are using cash to buy back stock and make acquisitions, rather than invest in new facilities," Allianz investment manager Walter Price told the Financial Times. "I think this is good for shareholders and management."

In theory, the money that goes to buybacks could eventually return to the economy, and certainly some of it does. For example, shareholders might sell their stocks and spend the money on restaurant meals, recirculating the cash into the economy. Or they could take the money and use it to hire people for a startup business.

Failure to invest in the future

But according to Rochon, in a "financialized" economy neither of those things tend to happen. The very rich who own most of the stock don't circulate much of their wealth into the real economy. And when they sell shares, rather than investing in something entrepreneurial, they tend to use the money to buy some other financial investment in hope of further speculative returns.

Rochon says short-termism compounds the problem. Rather than waiting for a long-term investment to pay off at five to seven per cent a year, shareholders and managers — who are paid bonuses tied to their stock price — want to see shares rise now. Share buybacks solve that dilemma.

This photo from the New York Stock Exchange in 1947 shows bulletin clerk Dolores Hennessy changing bid and ask prices. By then, the market had begun to recover from the so-called casino capitalism of the 1920s and '30s. (Dan Grossi/Associated Press)

"These companies are going to have a problem," he says. "We're going to see old technology, the need for reinvestment, and we're going to look back and say, 'We should have invested 20 years ago instead of buying back.'"

What applies to the individual companies applies to the wider economy as well. Failure by the private sector to invest in new U.S. technology, new U.S. plants, new robots and new jobs will mean the U.S. will find it harder to compete with global challengers, including China.

And any of the buyback money that disappears as share prices fall might just as well have been left in the public purse to invest in things like infrastructure and health care and education for the poorest — things that really could make America great again.

Follow Don on Twitter @don_pittis 

Corrections

  • A previous version of this story mistakenly identified Louis-Philippe Rochon as Jean- Philippe Rochon.
    Nov 14, 2018 9:22 AM ET

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.