Sanders’ New Bill Rests on Economic Misunderstandings

November 19, 2018

Just three months after targeting Amazon with the Stop BEZOS Act, Sen. Bernie Sanders (I-VT) has turned his attention to another large employer. The “Stop Walmart Act” would penalize large corporations for buying back their stock unless all employees are paid $15 an hour and receive seven days of sick leave. It would also cap CEO compensation at 150 times of the pay of the median employee.

Companies that buy back stock without meeting the legislation’s requirements would be subject to a fee equal to the amount spent on the buybacks. While businesses would still be able to buy back stock, then, they would pay a higher price for doing so.

However, the Stop Walmart Act is based on a misunderstanding of business decisions and the factors behind wage growth. Criticizing stock buybacks for failing to help low-income workers has been common since the enactment of the Tax Cuts and Jobs Act, but it misunderstands the economic role of buybacks. As my colleague Erica York has written,

Stock buybacks do not come at the expense of capital investment or other economic activities, instead, they are a tool for companies to return excess cash to shareholders after the company has met its other obligations. Stock buybacks do not deprive firms of cash that they would otherwise use for investment and paying workers.

Penalizing companies for buying back stock would not incentivize companies to raise wages, because buybacks do not conflict with wage growth. Rather, buybacks complement wage growth by allowing investors to transfer their money into new and innovative projects, boosting worker productivity. Greater productivity, in turn, results in higher wages.

By fining companies for buying back stock without raising their minimum wage, the legislation would raise the cost of buybacks, discouraging investment and slowing productivity growth and economic output. A drag on investment and productivity would be a drag on wages, preventing workers from enjoying higher standards of living over time.

It’s also important to note that this legislation would affect far more companies than Walmart. The legislation defines a large company as one employing more than 500 people. Twenty-three thousand private-sector firms would fall under this threshold size, and these companies employ 47 percent of all private-sector workers. The Stop Walmart Act’s negative impact on investment and wages would thus be much wider than the name suggests.

Penalizing successful companies won’t benefit the economy or low-income workers. By preventing companies from making the investments that boost productivity and wages over time, the Stop Walmart Act is more likely to hurt the very people it’s intended to help.

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