Politicians in the Democratic Party and labor unions will badmouth corporations frequently during this year’s election campaign. In both cases, self-interest is at work. Democrats demonize and demagogue big corporations to pick up votes from economically illiterate voters who are ensnared by emotive appeals to envy. Unions bash corporations—often, the very corporations who employ their members—for the simple reason that they want to divert as many dollars as possible away from the corporation’s legal owners (shareholders of stock) and executives into their own pockets.
Stock Buybacks
Having succeeded a few years ago in introducing a 1 percent tax on stock buybacks, President Joe Biden is now proposing to quadruple that rate to 4 percent. A tax on stock buybacks amounts to an arbitrary confiscatory penalty on corporations’ sound money management. Management buys back stock that it perceives as undervalued, believing that stockholders will profit more from the buyback than from deploying that capital elsewhere. Deploying capital profitably is management’s legal fiduciary duty to stockholders.What drives the left nuts is that corporate executives, who already earn far more than the corporations’ unionized workers, will make even more money from this strategy—either from their personal ownership of shares or from contractual bonuses for higher share prices. Unions in particular assert that money used for buybacks should go to them rather than being used to increase the investment return to the company’s legal owners, the stockholders.
But forget the economic literature. You can see the Marxian error for yourself through this simple thought experiment: Ask yourself if you would pay more for an ounce of gold that was produced at a gold mine, where dozens of laborers used expensive machinery to extract that ounce of gold from the Earth’s crust, than you would if a child had found it while playing in a field. The value of gold—like the value of all other economic goods—does not hinge on how many hours of labor it took to produce it, but on supply and demand based on the utility and scarcity of the product.
High CEO Pay
Labor unions, ideological egalitarians, and demagogic politicians chronically complain about the immense gap between the compensation received by CEOs and “the average employee” in their businesses. The exact multiple varies according to the source and fluctuates from year to year, but typical are reports such as “American CEOs make 351 times more than workers” or “CEOs now make 399 times more than the average worker.” Those are eye-catching numbers, but they are highly skewed.The key question is: Why do CEOs earn so much? Answer: Because brilliant management can be the difference between a corporation earning or losing billions of dollars. Very few human beings have the skillset to successfully manage a sprawling business (or set of businesses), to produce and provide goods and services in a competitive marketplace at prices consumers will accept—all the while coping with ever-changing government regulations, ever-shifting market conditions, ever-evolving technologies, etcetera.
It is a lot easier to find people who can perform a skilled or semi-skilled task over and over than the relatively rare individuals who can successfully navigate an ever-changing marketplace. Laborers don’t have to make tough decisions about R&D. They don’t have to know anything about accounting, business law, capital markets, advertising, etc. All they need to do is show up when they are supposed to, perform their task(s), and go home. They get a regular paycheck whether the business employing them earns a profit or suffers a loss. Like it or not, large profits aren’t created by ordinary workers, but by those rare humans who have extraordinary entrepreneurial vision and/or the managerial talent to devise ways of arranging the factors of production profitably.
If workers are dissatisfied with their compensation, they have options. They are free to go to work for another employer who will pay them more. Another option would be to start their own business, either alone or with partners, and then pay themselves whatever they think is fair. When union workers stay in their job, it must be because they don’t find any of the other options open to them attractive enough to leave. They are more comfortable working X hours per week for their current employer than taking a chance on change. They don’t have the CEO’s skills, nor do they bear the CEO’s stresses and responsibilities, so why should they covet the CEO’s compensation? Such an attitude is nothing more than envy cloaked in economic ignorance. Unfortunately, we’ll be hearing a lot of that in this election year.
