STEVE INSKEEP, HOST:
Earlier this year, Apple's chief financial officer said the company would buy back shares of stock, $100 billion worth. Wow. When you have a trillion dollar company, you can do that. This is part of a bigger trend of American companies engaging in stock buybacks. To explain what exactly they are and why they're sometimes controversial, we turn to Rhaina Cohen and Stacey Vanek Smith of the Planet Money team.
STACEY VANEK SMITH, BYLINE: Before we get into the whole debate over buybacks, we should, you know, explain what they are probably (laughter).
RHAINA COHEN, BYLINE: OK. It's when a company decides it's going to buy its own stock. And it buys that stock from the people who own the stock, from its shareholders.
VANEK SMITH: And generally, the company will pay its shareholders a little premium for those shares. So why do companies do this? We put this question to John Cochrane.
JOHN COCHRANE: I'm a senior fellow at the Hoover Institution at Stanford. And I also have a blog, The Grumpy Economist.
VANEK SMITH: And here's what grumpy John says about buybacks.
COCHRANE: A company makes a lot of profits, either 'cause they're, you know, Apple and Facebook and money is pouring in the front door, or the corporate tax cut increased their profit. So they got money sitting around. You're seeing the sign of a company well-managed, that they're not going to take this stream of profits and make crazy investments they don't know how to make. They're going to give it back to the owners.
VANEK SMITH: So they can give cash back to the owners, aka the company shareholders, which seems fine, right? I mean, it's better than wasting the money.
COHEN: Lenore Palladino is an economist at the Roosevelt Institute. She says that when companies are giving all of their extra cash to shareholders, it means they're not investing more money in workers. She's looked specifically at what Walmart could've done with the money it's planning to spend on buybacks in 2018. She calculated it could've increased the pay of 1 million full-time workers by about $10,000 per year.
LENORE PALLADINO: So when Walmart says they really can't afford to pay their workers so that families can live above a poverty line, we have to look at what they're using their money for and say that that's simply not true.
VANEK SMITH: But John Cochrane says companies are supposed to answer to their shareholders. It's actually their duty. It is not their duty, he says, to benefit the wider economy.
COCHRANE: The point of the company is to make money on behalf of its shareholders. This does benefit workers because when a company is run efficiently, it has to hire people and it has to make those people productive. And in the end, high productivity is how wages are bid up. But I think it's a misunderstanding to think that the company makes money and then decides who to give presents to. And maybe it gives presents to workers, or maybe it gives presents to owners, or maybe it decides to give a bonus to the electric company just to be nice to them. That's just not how it works.
COHEN: So while this debate has been happening, buybacks have grown by a lot. Back in the early 80s when rules around buybacks were relaxed by the Reagan administration, companies in the S&P 500 were spending about 4 percent of their profits on buybacks. In the past few years, Lenore says that's jumped to more than 50 percent.
PALLADINO: It'll be probably $1 trillion spent on stock buybacks this year. That's more than President Obama spent on the Recovery Act, and that's just in 2018 alone.
VANEK SMITH: Big stock buybacks have come under increasing scrutiny from leaders on Wall Street and even from lawmakers. In fact, a few months ago, legislation was introduced into the Senate that would restrict stock buybacks.
COHEN: And take us right back to the 1980s.
(SOUNDBITE OF MUSIC)
INSKEEP: Rhaina Cohen and Stacey Vanek Smith of Planet Money. Transcript provided by NPR, Copyright NPR.