When pushing through tax cuts, many politicians argued that the money would ultimately end up in the hands of workers. That’d be great. However, evidence thus far suggests that most of the money is going into stock buyback programs rather than into the pockets of workers. The economy is hot, and many boats are rising. But the yachts of the wealthy few are rising quickest of all.
So why are companies buying stocks rather than investing in their human capital? When companies buy back their stocks, they reduce the number of shares available in the market while also boosting demand for stocks. This often results in rising stock prices. Since many executives are paid handsomely with stocks and stock options, this directly benefits them. Stock buybacks also benefit the company’s major investors, who usually control the company’s board of directors.
In the first quarter of 2018, stock buybacks for the S&P 500 alone weighed in at roughly $190 billion. Before that, the last time stock buybacks reached such heights was immediately before the Great Recession of 2008. Combined with dividends, benefits directed towards investors over the last year have topped $1 trillion.
Many companies have also given their employees bonuses. These bonuses don’t raise base wages but can make a big difference at the household level. Still, the bonuses have not been as high or as widespread as hoped.
Hourly wages have been rising, and in fact were up 2.7 percent in May from the prior year. This growth is solid but not exactly inspiring, especially during such strong economic growth. Economists usually look for wages to grow by 3.5 percent to 4 percent, a healthy number that generally won’t set off rapid inflation. So far, it seems that companies have little incentive to reinvest in their workforces despite higher profits.
Unemployment rates, however, are at their lowest in years, with just 3.9 percent of the workforce unemployed. Jobs have been added at a steady clip, growing by 204,000 in April alone. Job reports have consistently met or beaten expectations.
Wage growth may yet materialize. New workers entering the workforce are seeing their wages rise by more than 5 percent. Meanwhile, turnover is also increasing as organizations poach one another for talent. Combined, these numbers suggest that wage growth should be sustained and could even accelerate.
However, multiple risks have many economists worried. The United States trade deficit remains high. This has sparked concerns among the Trump administration. Now, the United States is sparring with several of its economic rivals and historical trade partners, including China, Mexico, Canada, and the European Union. This has raised concerns of a trade war, which most economists believe would hurt the global economy.
With the United States deficits having surged to historical highs, policymakers will be hard-pressed to put together stimulus packages should the economy slow down. The most recent tax cuts weren’t paid for, meaning debt is going to rise as tax revenues shrink. Meanwhile, America’s social security system is veering towards insolvency while Medicare and Medicaid costs continue to rise in line with an aging population.
The recent round of tax cuts likely did stimulate the economy. However, with companies focusing on stock buybacks and dividends, it seems unlikely that those tax cuts will be paying for themselves. America is going to face some hard choices in the future.
