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Americans may be wondering why they’re forced to spend more than $4 per gallon at the pump while energy companies are raking in record profits.

Even more aggravating: Exxon and Chevron announced last week they’d spend billions of dollars of their earnings buying back their own stock, fattening investors’ portfolios.

Oil companies are hardly alone, but they’ve helped thrust buybacks back into the spotlight. The debate about stock buybacks has been raging on and off for four decades, and Democrats are trying to rein them in.

But a recent paper from a bipartisan think tank suggests buybacks may not be quite as harmful to everyday people without money in the market as critics suggest.

What’s a buyback?

Buybacks, which raise the value of a company’s stock and immediately reward shareholders and executives, have been a hot button political issue since they were legalized in 1982. That’s when the Securities and Exchange Commission passed a rule allowing companies to purchase their own shares without being charged with stock manipulation.

They’re also incredibly common. Last year, companies in the S&P 500 repurchased a record $882 billion of their own shares. Executives sell more stock in the eight days following a buyback announcement from their companies than at any other time, according to SEC data.

These buybacks have soared in recent years as US corporations recorded huge gains and excess profits in the largest expansionary period since WWII. Democrats in Washington also refocused their scrutiny of the practice after former President Donald Trump lowered corporate tax rates to 21% from 35%. The change led to a rapid growth in buybacks. In 2019, the largest American companies spent $728 billion purchasing their own stock, up 55% from 2018, according to the Senate Finance Committee.

What critics say

Critics and legislators argue that buybacks allow ultra-wealthy executives to manipulate markets while funneling corporate profits into their own pockets instead of the economy. Corporate stock is owned largely by wealthy Americans: the top 10% of US households by wealth own about 90% of corporate equity. Money would be better spent on companies’ long-term growth and on employees, they say.

Senate Democrats like Sherrod Brown of Ohio and Ron Wyden of Oregon proposed instituting a 2% tax on buybacks at the time.

Now, as the country teeters on the precipice of recession and faces historically high rates of inflation, the practice is back in the spotlight.

Policymakers, worried that companies are using their money to aid shareholders instead of consumers and workers, are proposing increased oversight of the practice.

The White House proposed new rules intended to curb stock buybacks as part of its $5.8 trillion 2023 budget plan. The plan would require company executives to hold on to shares of corporate stock for a certain number of years and prohibit them from selling shares for a certain amount of time after a planned buyback. The White House did not specify the exact number of years.

Discouraging stock buybacks “would align executives’ interests with the long-term interests of shareholders, workers and the economy,” said the proposal, which echoes a long argued Democratic position that buybacks manipulate stock prices and divert money from companies’ growth and innovation.

The SEC has also proposed requiring disclosures of detailed information around buybacks including the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts.

The big picture

Corporations counter that they use repurchases as a way to efficiently distribute excess capital.

They might have a point: Last week the Bipartisan Policy Center released a white paper that challenged the need for the SEC rule and concluded that “share repurchases provide significant economic benefits to society.”

Its argument largely hinges on a trickle-down effect from shareholders to the rest of society. “Repurchases provide investors, including those beneficiaries with 401ks and pensions that are invested market wide, with additional financial resources that they otherwise would not have had,” they write. “These additional resources may in turn be reinvested or saved, which can provide needed capital for small companies and others to facilitate innovation and growth.”

Claims that buybacks detract from other forms of investment are also flawed, says Jesse Fried, a professor at Harvard Law School.

Between 2007 to 2016, Fried found that S&P 500 firms distributed $7 trillion via buybacks and dividends, or over 96% of their aggregate net income, promoting claims of “short-termism.” But during that decade, he found, investment in their businesses substantially increased even while cash balances ballooned.

“In short, S&P 500 shareholder-payout figures cannot provide much basis for the notion that short-termism has been depriving public firms of needed capital,” he wrote.

Buybacks are waning

At the beginning of the year, Goldman Sachs estimated that 2022 would see a record-breaking $1 trillion in buybacks. That’s unlikely to happen. To date, 58% of companies have reported their second quarter buybacks, and they’ve fallen by 12.9% since the first quarter (though they’re still up by about 7% since last year), according to data from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

JPMorgan halted its buyback program in July, signaling a more cautious outlook as the economy flirts with recession. The suspension also came after the largest US bank failed the Federal Reserve’s stress test, sending it scrambling to generate more capital.

Bank of America and Citigroup also fared poorly in the test, which assesses a bank’s ability to lend during a severe global recession with unemployment hitting 10% and a large drop in asset prices.

Large banks accounted for 19.5%, or $54.7 billion, of all buybacks in the first quarter of 2022. Buybacks among the financial sector are currently running 56.4% lower than they were last quarter and 50% lower than they did last year.