Are we at the end of the Reagan Revolution?

If Democrats can regain control of the House of Representatives and even the U.S. Senate, they will be able to create some important changes. Will this end the Reagan Revolution? Time will tell.

I've been studying stock buybacks and other things which have ruined The American Dream for most Americans. Much of the reason these things happened are ancient history, but the majority of the problems began with Ronald Reagan's presidency. He didn't invent the problem ideas, but they were instituted then.


Analyzing the problem:

First, why have the rich gotten so much richer and 99% of Americans have seen their wages stagnate for 38 years? There are many reasons: from more women in the workforce earning part-time minimum wage and fewer union employees and more non-union and off-shored work. But, one key thing was about the distribution of wealth at the spigot:  union busting and Rule 10b-18.

Let's start with rule 10b-18. Prior to Reagan, SEC rule 10b-18 maintained that corporate CEOs who did stock buybacks might be culpable of manipulation of the market, but when it was changed stock buybacks became much safer and more common. It was changed in 1982, without any public comment (most unusual). Here are the Chairmen and Commissioners of the SEC during the first Reagan term.

Reagan	*John Shad (R), Chairman	5/6/81	6/18/87	5/6/81	6/18/87
	Bevis Longstreth (D)	7/29/81	1/13/84
	James C. Treadway, Jr. (R)	9/13/82	4/17/85
	Charles C. Cox (R)	12/2/83	9/30/89

From this list it would appear John Shad and Bevis Longstreth and James C. Treadway, Jr were in charge. It's safe to say Longstreth was a carry-over from the Carter years. The very offensive Charles C. Cox had yet to arrive. But, when he arrived stock buybacks increased significantly.

Remember, they changed rule 10b-18 with NO PUBLIC COMMENT.

By 1997, when issuing stock options was a very big motivator for Silicon Valley companies, the use of stock buybacks had surpassed dividends as a way to distribute corporate wealth to the shareholders.

In 1981-'83 when the rule was first going into effect, corporations spent 4.3% of profits on buybacks and about 40% on dividends.

In 2014-'16 it was 59% of profits and still about 40% on dividends.

Clearly, the spigot feeding money back to employees and corporate investments had shrunk a lot. Why weren't companies interested in doing more investment and expansion? When the rules are changed, Wall St. used corporate raiders to claim companies were undervalued and should be bought. They would keep the stock price at a peak, so stock buybacks fed as much money as possible to the insiders. Many companies were laying-off workers by the thousands in the 1980s. I remember every Christmas Eve there would be news stories that horrified.

First companies laid-off workers, then with Reagan's help they moved to southern states to hire non-union workers, then they went further and moved to Mexico, and finally to all parts of the world where labor was cheaper. The American mid-west was devastated. their unionized industrial jobs were gone. The Republicans blamed NAFTA on Bill Clinton, though Republicans had written the original trade deals which became NAFTA.

Considering that about 40% of profits are disbursed as dividends and 59% as stock buybacks, there is pitiful little remaining to be reinvested into the companies. Yet, some companies have a lot of profits in the bank or held off-shore (for tax purposes). Even without so many American workers they have made a lot of profit with cheap off-shore labor. This is a major difference with American corporations which DIDN'T go off-shore. And the tax benefits to corporations with off-shore profits is clearly unfair to corporations not using off-shore labor. The incentive for corporations to hire off-shore is still there, still tying down the American economy. Yet, the American economy has grown in recent years and we have a record low unemployment rate. These are strange times.

Corporations have lots of money, labor is working, many corporations don't bother paying down debt, corporate tax rates are at near-record lows, yet the U.S. worker can't see a better future and the U.S. government has a huge debt -- TRILLIONs. Strange times indeed.


What to do?


There are many ideas. One is to take another look at SEC rule 10b-10. Another is to re-enable unions with something like card-check secrecy to let workers join unions without company pressures. But, there are some other ideas too.

First, I do not favor eliminating stock buybacks. It's a key way for companies to distribute their wealth to their stockholders and to manage their outstanding stock. But, as the recipients of the corporate money may be taxed at a much lower rate than the standard individual tax rate, it may be wise to reconsider the difference between the two.

Second, we might consider limiting the ability of corporations to do stock buybacks when they have debt of some level. Companies have real reasons to carry some debt, but it's possible we could improve corporate health by requiring them to pay down debt to some generally approved level before doing any stock buybacks.

Since stock buybacks and dividends both distribute corporate wealth, they are the spigot which directs wealth away from reinvestment in real projects or employees. So, limiting buybacks or dividends to some percentage of a company's profits and requiring real economic activity, may also be viable. Even if a corporation is doing business overseas, it makes sense for them to use capital for commerce and not to fill bank accounts. The American people didn't create corporations to sit on money.

This immediately raises the question of why there is so much wealth corporations want to distribute? Are there no good projects? What level of profit do they require to put their money to work? Perhaps better international trade deals will enable them to do more work abroad where they feel the return on investment will be sufficient.


But, what of the U.S. worker?

The first obvious thing is to fix the Affordable Care Act (ACA) (which Republicans have tried to destroy) or shift to the Medicare for All approach. This will help more people avoid bankruptcies and it will improve the health of workers. That improves corporations.

Another health-related idea is to make the use of marijuana legal for an alternative to opioids and for other medical purposes. This will reduce healthcare costs and help workers be more able to work in today's economy.

I think we need to help unions, raise the minimum wage and index it to inflation, and improve the participation rate for workers in their company's 401K plans (many can't seem to afford to on low wage jobs, even when the company offers good plans). We can also tax away more of the corporate excess wealth to make it clear to CEOs that they had better use it or lose it. A corporate tax rate more like 21% would help. This will help pay down government debt and push the economy along.


Specific legislation:

At present, Sen. Tammy Baldwin has a bill to fix the SEC rule 10b-18. I don't know the details, but that should be discussed seriously.

The recent tax reform of the Trump administration was not "revenue neutral" and if left as is, will cause a massive increase in our government debt. That has to be fixed very soon.

Individual tax rates are relatively low and I would rather see a significant tax rate with a rather larger individual deduction. I think the recent reform wasn't wrong in structure, just magnitude. Democrats suggested the larger individual deduction, but Republicans said "No". We need to fix those numbers and begin regaining proper balance in our annual budgets & revenues and find a long-term path forward which will get us out of this hole.


Conclusion:

These ideas are the result of only a little research. Congress has access to far better data and experts for advice.


The public attitude toward the problems is that government doesn't work, the egg-heads are idiots, and "this problem will get solved right after Wall St. is burned to the ground and the 1% is hunted like game" (so says "gene"). Another comment was "fewer outstanding shares at higher prices, concentrated in fewer hands, does not translate into real economic growth" (so says Bud). I'll go with Bud's advice, though gene's may appeal to some people too.