I'm no economist, just some guy who reads The Economist, so this is just a hare-brained idea that I would like some feedback on. But it seems awfully strange to me: In this article, actually about something else, the author casually mentions that stock buy-backs are currently sucking up a pile of cash every year that amounts to 2.3% of the GDP. Yes, that is one of the things giant corporations are doing with the giant mountain of cash they are sitting on.
While searching for the article online to link to, I ran across a couple of other articles that are actually about buy-backs. In one of them, the author explains how one specific buy-back made no sense in terms of shareholder value, and actually says "In short, such a purchase destroys value." In another article, the author says that the trend recently has been for most buy-backs being done to counteract the dilution caused by executives exercising their stock options, rather than being done to actually reduce the number of shares, as would happen if the supposed rationale for a buy-back were true. According to the author, buy-backs that just counteract dilution from exercised options are "a transfer of wealth from outside shareholders to executives."
To my admittedly ignorant eye, it looks like this. Corporations are spending 2.3% of our GDP transferring the existing wealth incorporated in the stock market, out of pension funds, 401Ks, IRAs, etc, and into the hands of millionaire and billionaire executives. Our economy, like most of the rest of the developed world's economies, is struggling to grow its GDP more than 1% every year. But every year 2.3% of the GDP is being spent on making sure that inflation caused by executive stock options only hurts you and me, the people whose stock purchases DIDN'T cause that inflation. What could that 2.3% of the GDP do to grow our GDP if it was invested in infrastructure, research and development, and job training? Am I just ignorant, or is it true that an annual investment of 2.3% of the GDP in infrastructure would be the same thing as growing the GDP by 2.3% that year? But instead, 2.3% of the GDP is being used to destroy value. Seems just crazy to me.
All you KOS economists and MBs out there, please help me understand this better! I'm looking forward to your comments :)