Q&A: Nick Hanauer Believes Stock Buybacks Are The Root Of American Inequality
Over the past thirty years, it seems the rich have gotten richer and the poor have gotten poorer. All the data support this: Homelessness has spiked in urban areas, while CEO pay has skyrocketed over the past three decades.
Meanwhile, wages for the middle class have become abysmally stagnant. The overall level of inequality is now approaching “the extreme level that prevailed prior to the Great Depression,” notes Stanford’s Center on Poverty and Inequality.
So what has driven these rampant levels of inequality and income redistribution?
Economists have pointed to several possible factors, from the rise of globalization to tax schemes that are favorable to the super-rich. But Nick Hanauer, an entrepreneur and venture capitalist, has a simpler answer for one of the major causes of economic inequality: Stock buybacks. “Buybacks are among the most corrosive and corrupt practices in an already pretty corrosive and corrupt economy,” Hanauer says.
On Wall Street and corporate boards, buybacks are often lauded as a way to “return capital” to shareholders. That, according to Hanauer, is one big lie.
On his website, Hanauer describes himself as “an unrepentant capitalist.” Nick was the first nonfamily investor in Amazon, founded aQuantive (which sold to Microsoft for $6.4 billion) and has managed, founded or financed over 30 companies. He is worth well into the nine figures. But, perhaps even more uniquely, he happens to be extraordinarily concerned—and a vocal critical—of the state of the global economy.
In 2014, Hanauer made international waves when he published a piece in Politico magazine titled “The Pitchforks Are Coming… For Us Plutocrats.” In it, he wrote: “Our country is rapidly becoming less a capitalist society and more a feudal society...Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France.”
Since then, he’s authored pieces in The Atlantic (Stock Buybacks Are Killing the American Economy) and given a highly-cited TED talk that’s been viewed 1.5 million times. Nick is based in Seattle, where he is the founder of Civic Ventures, a self-described “small group of political troublemakers devoted to ideas, policies, and actions that catalyze significant social change.” In 2000, he co-founded the League of Education Voters (LEV) and authored two books: “The True Patriot” with co-author Eric Liu, and “The Gardens of Democracy.”
We spoke with Nick about his views on stock buybacks and the American economy—and how we might solve the problem of inequality. Here is a lightly edited transcript of our conversation.
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Worm Capital: First off, could you walk me through your background a little bit—and also how you came to be so vocal on the issues that you're clearly passionate about?
Nick Hanauer: I grew up in a a family manufacturing business that made bed pillows and down comforters. I started working there when I was a little kid, and I worked there through all of junior high school and high school and college, and then went to work for the family business after college. My dad was super supportive, but I had very entrepreneurial outlook.
I had a really super early interest in the Internet for a variety of reasons, and I had this incredibly lucky break, which was that I had a friend who also shared my interest in the Internet and e-commerce, and his name was Jeff Bezos. I became the first non-family investor in Amazon, and helped with that company for the first bunch of years of its existence.
Out of that experience, I started starting other Internet technology companies and founded a company called aQuantive that we sold to Microsoft ten years later for six and a half billion dollars, and then became essentially a tech entrepreneur and venture capitalist.
I think that one of the sort of unusual parts of my business career is how broad my business experience is. So most people -- they go to work for a company, or if they start a company and they kind of stay in the same sector or industry or whatever. But I've done like, everything; I've run manufacturing businesses, retail businesses, tech businesses, banks, healthcare, biotech -- this really crazy, broad range of business industries and types.
So that set of experiences about capitalism I think really informs my perspective on political economy and economics. Frankly, I got immensely wealthy at a relatively young age, and decided that I didn't want to devote the rest of my life just to piling up ever much more money. I devote most of my time now to civic and political and philanthropic things.
Alsin: Why do you think you’re so passionate about these endeavors?
Because I'm quite sure that the sort of crony capitalism, late capitalism thing that we've ended up with in the United States is not the true and best form of capitalism. It essentially is eating itself. If we want to have a thriving economy and a stable democracy, we need to do things a bit differently.
Economic inequality, I think is one of the core problems the country faces. Because ultimately, concentrations of income and wealth lead to essentially a death spiral of falling demand. Because if nobody is paid any money, then who will buy the stuff? It's pretty simple.
The most important dynamic in a market economy is the feedback loop between consumers and businesses. The more consumers are paid, the more stuff they buy, and that's what makes the world go round.
Alsin: You did one interview that I thought was really interesting from a couple of years ago with Bloomberg. In it, you talk about having worked in a few different companies where you've seen and done buybacks yourself. I think your perspective on that is really invaluable. How did it make you feel to do stock buybacks?
NH: I've been on a bunch of company, corporate and public company boards. I've been part of board room discussions and voted in favor of stock buybacks a whole bunch of times in my business career, and I will tell you that for the longest time, I hated it; I just hated doing it, but I couldn't successfully articulate for myself why I thought it was so corrosive and evil, until I saw the data.
So if one company out of thousands does a stock buyback in a unique situation, it might not be a thing which is corrosive to the common good, and nefarious. As an individual director at a public company, all you know is what you know. But then I saw William Lazonick's data, and realized that every single public company in the country was doing stock buybacks.
It amounted to 700 billion dollars a year. Then you have this "oh, f*ck" moment, where you're like -- oh, my god. All that bullsh*t we told ourselves in the boardroom about how this was a special circumstance and how our stock was undervalued and we were going to go out and buy it; Then you realize that all it is, is a way to surreptitiously increase the value to shareholders and executives -- and wash out the equity of giant stock grants. That's all it is.
We realize that 55% of corporate profits, now, are devoted to stock buybacks. In a world in which you had told yourself that profits were essential for growth and that the more profits companies made, the more they invested, and all this other stuff -- and then you realize that when you add stock buybacks and dividends together, you're left with 8-9% to invest.
That the whole thing was just a lie; it's a story that rich people told poor people so that they could steal from them. It's just terrible.
Alsin: Can you talk a little more about your experience of executing stock buybacks yourself?
What happens is you're basically extorted by Wall Street. You get these calls from dealers, or the guys who own your stock, and they're like -- you know, your stock's a little undervalued.
You're like -- 'I don't know; is it?'
And they're like -- 'Yes, if you bought ten gazillion shares with the cash you have on your balance sheet, then... Then it would be fairly valued.'
And you're like -- 'I thought the cash on our balance sheet was for our investments and . . .'
And they're like -- 'No, no no. The only purpose of stock on your balance sheet is to juice the shares, so I can earn a bigger commission.' [laughs]
And -- 'Hint, hint, nudge, nudge, if you don't buy your own shares, I'll sell your stock.'
Alsin: Right. So there is that sort of threat looming over you. How do you police this behavior? Because I think once you agree on the premise, what is the next step here?
NH: All you can do is change the regulations. You're certainly never going to get there by shaming people. They have no shame. [laughs]
So all you can do is make it illegal to do nefarious things. Stock buybacks are very nefarious things. They are a practice that creates no social or economic utility, other than enriching the super rich.
In a more sensibly organized economy, it would be illegal to do it, and dividend tax rates would be extremely high, and corporate tax rates would be reasonable and immune from shenanigans. That would put huge pressure on corporate executives to find more constructive ways of using free cash flow than enriching themselves. What they would do is probably go back to what we used to do, which is invest and expand businesses and pay workers more fairly.
You're not going to get there by asking people nicely.
Alsin: Can you talk a little about the scope of the problem?
The nation now spends on the order of twice as much on stock buybacks as it does on all R&D.
You can not build the kind of high-growth economy that we deserve, if you're pissing away 4%... You're basically burning 4% of GDP on stock buybacks, in this giant shell game. This sort of financial merry-go-round benefiting a few owners, a few corporate executives, and Wall Street.
It's among the most corrosive and corrupt practices in an already pretty corrosive and corrupt economy.
Alsin: How do you think about both innovation and disruptive companies and growth companies in the scope of buybacks? And if buybacks weren't necessarily allowed, if they were deemed to be true market manipulation and financial engineering and outlawed -- would maybe companies be a little more innovative and disruptive?
Look, one of the reasons that productivity is low, and business cycles are relatively anemic is that we went from a regime where it was very, very difficult and expensive to take money out of companies to reward shareholders and executives, to a world where it's incredibly easy.
So just by way of anecdote -- when I grew up in my family business, we had this fantastic tax-evasion strategy that my dad employed, which was we invested everything back in the business.
We kept profits to a minimum, because if we had high profits, we would have to pay high taxes. So at every opportunity, we bought another machine or we opened another plant or we hired more people, to try to build long term value through expansion because that was the way you avoided tax.
Dividends were impossibly expensive. Buybacks -- you couldn't do that. Corporate tax rates were very, very high. All of that's gone away, and now you've basically given corporate executives and owners incentives to just suck all the money out of businesses and into their own pockets, and stock buybacks are a really big component of that.
Corporate executives are always complaining about -- well we have to do something with the cash, because there's no place to invest the cash. Well, one of the reasons there's no place to invest the cash is that wages as a percentage of GDP have fallen by so much that workers can't afford to buy anything any more. If instead of doing stock buybacks with that 700 billion dollars, that corporations use that 700 billion dollars to raise wages for workers, those workers would then buy a ton more, which would require capital to go out and expand to meet that demand.
Alsin: How do you think about the future in relation to the economy and inequality?
I'm as optimistic a person that you'll ever meet. But I think we're in for some very, very tough times. I think that the growing gap, I think economic inequality, the growing gap between rich and poor, the fact that we have created an economy where a few people, mostly concentrated in fantastic pluralistic urban environments like Seattle and New York and San Francisco are doing incredibly well, and huge swaths of the rest of the country are doing terribly -- it’s creating a dynamic that is destroying the social cohesion that makes democracy possible.
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