There has been much discussion among politicians and in the news regarding stock buybacks. I've been inspired to write this post because of an AOC tweet and I have downtime.

Let me be unambiguously clear: Alexandria Ocasio-Cortez is unfairly attacked by those on the right because she is an outspoken millennial Latina woman. She is rarely criticized for her ideas on economic policy, but rather because she demands the administration not put children in concentration camps among other common decency proposals. Attacks on her have been incredibly malicious.

My criticism is purely economic in nature. As a millennial, I am happy to see my generation represented in Congress and my social beliefs as well. Now we only need AOC to be a stealth neoliberal.

Very simple RI: Medication is highly priced due to monopoly pricing by pharma companies. Intellectual property is used to justify incredibly costly R&D for medicine, so that in expectation firms turn a profit. Given marginal cost pricing of drugs is probably near 0 (marginal cost of producing a pill is trivial I suspect), firms would not invest if there was no IP to give them monopoly pricing.

That's it. That's why it's so high. The government can do things to mitigate monopoly rents, such as negotiating prices on behalf of consumers, purchasing IP from pharma companies and releasing it to the public to produce, etc.

Share buybacks are not the cause but there are good questions regarding buybacks (and dividends) and investment.

The law of finance says that the price of a security is equal to its expected discounted cashflows (P = E[MX]). What are cash flows? We usually say "dividends" but it also includes buybacks or whatever residuals you get when a company goes bankrupt. A firm that promises to take money from equity shareholders and never pay them back would have a stock price approximately equal to zero.

Firms invest such that the MB of a project = the MC of a project. Firms invest optimally to maximize the market value of their firm (the - admittedly controcersial- q-theory). Residual cash is returned to shareholders. Shareholders either demand this via voting or managers do this because they feel they're expected to be diligent stewards of shareholder capital.

If firms invest cash where MC > MB, then they're wasting shareholder money. That money could be better used in other projects at other firms and using cash for negative NPV projects is wasteful behavior.

This is not how many politicians, ranging from Sanders and AOC to Marco Rubio, think of buybacks. They see buybacks as shareholder greed, where shareholders just want money and dont care about the long term. They see buybacks as a way to boost the price of stocks, benefiting shareholders at the expense of companies.

First: a short history. Jason Zweig published a simply fascinating short article in the WSJ about the history of buybacks. In short, American politicians and the public used to be extremely skeptical of companies' ability to be good stewards of external capital. Share buybacks were mandated in the late 1700s on top of mandatory dividends. Politicians were worried (in contrast to today) that companies would simply squander money. This idea persisted into the 19th century. Keeping excess cash out of the hands of companies was the goal.

Only in the mid 20th century did this flip. In the 50s and 60s, business professors and politicians started to see buybacks as bad for companies and only for the profit of shareholders. Today, politicians see buybacks as not in the public interest.

So who's right? As Aswath Damodaran notes, buybacks tend to come from mature, large companies consistent with the idea that firms with few investment opportunities buyback shares. Buybacks should not impact market valuation, making concerns about short-term increases in share price illusory.

Onto AOC's point about buybacks benefitting management, is that bad? Well buybacks raising stock prices provides an incentive to not have CEOs squander money (remember: this is the historical skeptical American view of the firm). CEOs get more compensation when they return excess cash to shareholders, thus helping resolve the agency problem between managers and shareholders.

So, banning or curtailing stock buybacks would make it harder for capital to be allocated efficiently in the market and would provide opportunities for CEOs to squander capital. Concerns regarding lining shareholder pockets at the public's expense is a historical anomaly and largely misplaced.

Ask yourself: should Jeff Bezos really squander pension money by investing in pet projects or should the retired firefighters and teachers get their hard earned pension money returned to them so they can invest in more productive projects?