May 17Liked by Philo

Thanks for the very detailed overview.

One area of this discussion that I haven't really grasped is stock buybacks in the context of bailouts. I saw a lot of criticism in 2020 and 2021 that airlines invested more in stock buybacks in the 2010s than the cost of federal bailouts in 2020, and arguments that they wouldn't have needed a bailout if they didn't put so much towards buybacks.

I don't know if the stock buybacks are even relevant to this controversy, though. Like you've pointed out numerous times in your writing, the story would be the same if they issued dividends or reinvested a similar amount. The only option that would prevent them from "needing" a bailout (if this was even a necessity) is holding massive cash reserves for a rainy day.

I'm really interested to read your opinions on this, but as I mentioned, my suspicion is this controversy has nothing to do with stock buybacks and everything to do with bailouts.

Perhaps bailouts are a good thing, perhaps they shouldn't happen, perhaps companies should hold large cash reserves, or perhaps the private sector should need to rely on insurance to address rare turbulence. Lots of options -- including ones that I'm not even aware of -- but not much clarity in my mind.

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Yes, you're right. No one can accuse airline shareholders of profiteering: airlines are the canonical example of an industry that never produces a return to shareholders and even after the government support they got, airline shareholders still took a huge hit from Covid.

Of course we could have a specific explicit federal unemployment insurance program for airline employees, where airlines pay an extra tax on employee salaries in return for insurance coverage in case of a pandemic (just as state unemployment insurance is based on experience rating). We could require airlines to hold extra capital like we require banks to. (But in a lot of cases they had enough financial capacity to raise cash anyway.) We could have an FDIC-like insurance program for airlines too. All of that would probably be excessively complicated for such a rare event.

It's fine to effectively raise taxes on certain industries if that's what we decide we want to do, and that's what all of these different plans would amount to (including restricting capital returns to shareholders). But we should be aware of the consequences rather than treating them as a free lunch, as often happens.

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Apr 21Liked by Philo

Nice piece. Two observations. First, buybacks are tax advantaged vs dividends, would have been interesting to see your take/incorporating that into the overall analysis. Second, Japanese companies have been notorious for retaining capital and it may explain their terrible returns on capital…(continuing to try and grow despite saturation in that specific end market and not freeing up capital in aggregate to go to its most productive end cases).

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Taxes are complicated, and I think a bit overrated as an factor into the buyback vs. dividend analysis. Yes, buybacks are tax advantaged vs. dividends, but that only applies to US-based taxable shareholders, which apparently only own a quarter of US equities these days (but does notably include company executives themselves). The majority of stock is owned via non-taxable retirement accounts, non-taxable institutions, or foreign entities. If tax treatment ever became a big deal, we would see companies just go entirely into buybacks or dividends rather than splitting the difference as most do today.

There are a couple of interesting recent articles on the topic here:



Re Japan, I agree. For all the pop criticisms of "shareholder capitalism", people kind of miss that when we operated under the alternative system, where managers were basically unaccountable, they would hoard cash and squander money on vanity projects, which has terrible downstream effects -- no one wants to invest, companies are unproductive, and so on. So you see in Japan they are going the other way, pushing companies to buy back their own stock. If you haven't seen what happens in other countries or what happened historically, it's easy to come up with these naive sort of narratives about how buybacks are harmful, but there is a reason a country like Japan is pushing for more buybacks.

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