The Rise of Stock Buybacks: A Century-Long Tug-of-War Over Wealth and Power

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On October 24, 1929, chaos struck the American economy as the stock market collapsed in a historic crash that became known as Black Thursday. Investors panicked, fortunes vanished overnight, and the value of American companies plummeted. Amidst the devastation, corporate leaders devised a strategy that seemed like a financial "magic trick"—they began repurchasing shares of their own stock.

This maneuver, known as a stock buyback, wasn't about inventing new products or boosting productivity. Instead, it artificially inflated stock prices by reducing the number of shares available for purchase. By creating scarcity, companies drove up prices without adding any real value. It was a tactic born out of desperation, but it came at a cost to the broader economy—a choice driven by greed rather than growth.

Stock buybacks quickly became a tool of wealth preservation for the elite, even as the rest of the country spiraled into the depths of the Great Depression. Public outrage eventually led to the passage of the Securities and Exchange Act of 1934, which curtailed this practice by cracking down on insider trading and market manipulation. For the next 50 years, buybacks remained rare, and corporations focused their profits on three pillars: reinvesting in their businesses, raising employee wages, and issuing dividends to investors.

This era of reinvestment coincided with an unprecedented economic boom in post-World War II America. Productivity soared, wages nearly doubled, and the American middle class flourished. But this golden age was not to last. By the 1980s, a new political and economic ideology—one that prioritized investors over workers—gained traction.

The Reagan Revolution and the Return of Buybacks

When Ronald Reagan became president, he ushered in a new era of deregulation. In 1982, the Securities and Exchange Commission (SEC), led by former investment banker John Shad, loosened restrictions on stock buybacks. This decision reopened the floodgates, allowing corporations to repurchase their shares without fear of government scrutiny.

The timing couldn’t have been better for corporate executives. Around the same time, companies began linking CEO compensation to stock performance. This created a powerful incentive for executives to prioritize short-term stock price gains over long-term investments. By the early 2000s, stock buybacks had become the dominant use of corporate profits. In 1982, less than 1% of profits were spent on buybacks. By 2008, that figure had skyrocketed to 77%.

The Human Cost of Buybacks

While stock buybacks enriched executives and shareholders, they often came at a steep cost to workers and local communities. General Motors (GM) offers a sobering case study. Once the world’s largest automaker, GM used its profits to fund massive buybacks instead of reinvesting in factories or product innovation. This short-term focus contributed to a decline in market share and led to plant closures, such as the shuttering of the Lordstown, Ohio plant in 2019. The closure devastated the local economy, triggering a ripple effect of job losses among suppliers and small businesses. Schools lost funding, hospitals delayed expansion plans, and families faced financial ruin.

This pattern isn't unique to GM. Across industries, companies that prioritize buybacks often neglect long-term growth, innovation, and the well-being of their employees. Meanwhile, the gap between CEO and worker pay has exploded. In the 1950s, CEOs earned about 15 times more than the average worker. Today, that ratio has ballooned to over 200:1.

A Century-Long Debate

The resurgence of stock buybacks has reignited debates about the purpose of corporations and the distribution of wealth in society. Critics argue that buybacks are a symptom of a broken system—one that prioritizes the interests of a wealthy few at the expense of everyone else. Proponents, however, defend buybacks as an efficient way to return capital to shareholders.

Politicians on both sides of the aisle are beginning to take notice. Republican Senator Marco Rubio has proposed tax incentives for companies that reinvest profits instead of buying back shares. On the Democratic side, Senators Elizabeth Warren and Bernie Sanders have called for stricter regulations to curb buybacks, drawing inspiration from Germany’s corporate governance model, where workers hold seats on company boards.

History Repeats Itself?

The story of stock buybacks is one of choices—choices that have shaped the American economy for better or worse. In the 1920s, unchecked corporate greed contributed to the Great Depression. Nearly a century later, the widespread use of buybacks has left the American economy looking eerily similar to that era, with wealth concentrated in the hands of a few while wages for ordinary workers stagnate.

The question we face today is simple: Do we want history to repeat itself, or can we learn from the past to build a more equitable future?