White House economist: Limiting buybacks could create ‘zombie’ firms

If lawmakers restrict stock buybacks, that could backfire on the American economy, White House economic adviser Kevin Hassett warned on Friday.

Hassett argued that buybacks are a reasonable way for companies to return excess cash to shareholders — who can then invest in faster-growing startups.

“It’s a natural way our economy recycles cash from old successful firms to new entrepreneurial firms,” Hassett told CNN’s Poppy Harlow. “If we were to stop share buybacks, or slow them down, we would be slowing down the cash flow to entrepreneurs.”

Worse, a crackdown on buybacks could “trap the money in old firms,” said Hassett, who is chairman of the White House Council of Economic Advisers.

He held up “zombie firms” in Europe as a potential consequence of what can happen when companies don’t recycle their cash.

Hassett’s defense of buybacks comes in the face of growing calls in Washington to dissuade companies from spending gobs of money on shareholder rewards.

Share buybacks are a common practice where companies repurchase their own stock as a way to return excess capital. Buybacks boost demand for a company’s stock and also artificially inflate per-share earnings. It’s a win-win for Wall Street.

US companies announced a record-shattering $1 trillion of buybacks in 2018, the first full year since the corporate tax cut took effect, according to TrimTabs Research. However, business spending on job-creating investments like new factories has not grown nearly as fast.

And Corporate America has continued to aggressively repurchase its shares this year. Major companies including Coca-Cola, Cisco, Best Buy and Johnson <><><><><><><><> <><><><><><><& Johnson have recently announced large buyback plans./ppAlthough that's a windfall for Wall Street, even some in finance think the buyback boom has gone too far. Veteran hedge fund manager a href="https://www.cnn.com/2019/02/10/investing/stocks-week-ahead-buybacks-mark-yusko/index.html" target="_blank"Mark Yusko recently told CNN Business /athat buybacks should be "illegal," in part because they are part of a "self-perpetuating loop that benefits one small group of people."/ppWorried about deepening inequality, Democratic Senator Cory Booker introduced a bill last year that would require companies that do buybacks to pay a commensurate sum to its workers. And last month Senators Bernie Sanders and Chuck Schumer urged fellow lawmakers to limit buybacks./ppHassett isn't a fan of Rubio's buyback proposal/ppa href="https://www.cnn.com/2019/02/12/investing/rubio-stock-buybacks-tax/index.html" target="_blank"Even some Republicans/a have criticized the practice. Republican Senator Marco Rubio recently called for ending the tax advantages that buybacks enjoy over dividends./pp"We have too often failed to make the well-being of working Americans the terms for market success," a href="https://www.rubio.senate.gov/public/index.cfm?p=Press-Releases><><><><><><><><><><><>id=BC6C0054-7C4E-4012-A1FD-26A24AE16C0D” target=”_blank”Rubio wrote in a February report. /a/ppHassett previously told CNBC that Democrats’ proposals to limit buybacks area href=”https://www.cnbc.com/2019/02/04/hassett-warren-ocasio-cortez-tax-proposal-economically-illiterate.html” target=”_blank” “economically illiterate”/a and said proponents should be “ashamed.”/ppAsked by CNN if would say the same of Rubio’s proposal, Hassett said: “I will call a bad economic argument a bad economic argument — regardless of who makes it.”/ppHe held up Apple, one of the most voracious buyers of its own stock, as a prime example of how it should work. During the first three months of 2018, Apple spent $22.8 billion on buybacks — a href=”https://money.cnn.com/2018/05/01/investing/apple-stock-buybacks-record/index.html” target=”_blank”more than any company in any quarter in American history,/a according to S<><><>P Dow Jones Indices./pp”The fact is, share buybacks are a sign of a healthy economy,” Hassett said. “Apple has all this cash, repurchases shares and the money goes out to new entrepreneurial firms that need equity capital to come up with the next great thing.”/p