How to Prepare for Climate Change’s Most Immediate Impacts

If you weren’t already convinced by the epic snowstorm, fatal heat dome, horrific flooding, apocalyptic fires, and terrifying IPCC report of 2021, let’s make one thing clear: Climate change is here, now, today. Even if we all became carbon zero overnight—an impossibility—the climate would still keep changing.

And while it’s important to keep fighting, lobbying, and making lifestyle changes to reduce the impacts of climate change, it’s also important to admit that our planet has irrevocably changed and each of us needs to learn how to adapt.

The biggest challenge of learning to live in a new climate is that there’s so much uncertainty about what’s going to happen, to whom, and when. “Climate change will cause mass migrations and economic disruptions,” says John Ramey, the founder of The Prepared, a website focused on prepping.

“What will happen when millions of homes are lost, people move, food and water is scarce, and whole economic sectors fail?” Nobody knows the answer to that question, much less whether it’s guaranteed that will all happen, but here’s a hint: Even a fraction of that is gonna be bad, and you’re gonna be glad that you read and took the advice in this article.

And if you’ve been eyeing cans of Spam at the grocery store, take heart that you’re not alone. According to a FEMA study, there’s been a recent growth in prepping—from 3.8 percent of American households in 2017 to 5.2 percent in 2019. Ramey predicts that after the double whammy of a pandemic and nonstop climate disasters, that number could now be as high as 10 percent.

“The climate crisis is one of the single largest reasons behind the huge growth in the modern prepping community,” Ramey says, “especially among people under the age of 35 or so, since they’re broadly well educated, believe the science, and have the fear or impression that the world will burn within their lifetime.”

When we hear the word prepping, most of us think immediately of a man with a long beard who lives in a hut in the woods, collects guns and “tactical” gear, and eats beans everyday for lunch. Or a Silicon Valley billionaire with a concrete fortress built to withstand nuclear war (with a bowling alley, because, you know, the apocalypse gets boring real fast).

“The media likes to highlight extreme characters and stories, such as a nutter wrapping his entire suburban house in foil or moving into the woods to teach combat shooting to their toddlers,” says Ramey. “Those people are no more representative of preppers than the Kardashians are of Californians.” At its core, prepping simply means taking actions to prepare yourself for a worst-case scenario. Chances are, you already do some form of prepping, whether that’s buying life insurance or installing a smoke alarm in your home.

While there may not be an exact blueprint for what climate change is going to do to each of our lives, experts have some solid guesses that, combined with some good old common sense, can help each of us prepare for our new normal. “I can’t tell you when you’re going to get hit by a climate disaster,” says David Pogue, tech journalist and author of How to Prepare for Climate Change. “But I can tell you that sooner or later, it’ll come.”

Climate-Induced Natural Disasters

The evidence is clear: Climate change is making natural disasters more frequent, more severe, and more expensive. “We’re getting freak heat waves and freak snowstorms, devastating droughts and historic downpours, flooding and water shortages,” explains Pogue. “Everything is changing simultaneously: oceans, atmosphere, plants, animals, permafrost, weather, seasons, insects, people.”

Because your risk of natural disaster is completely dependent on where you live, what’s most important is that you understand what disasters you, personally, may face (and don’t just rely on what disasters you’ve faced in the past—that’s not an accurate assessment anymore). You can do this by researching your city or county’s emergency preparedness tips and making sure you understand the basics of surviving an earthquake, tornado, hurricane, flood, or wildfire.

Pogue says that, no matter where you live, you should make sure your homeowner or renter insurance covers the disasters you’re at risk for. He also points out that you don’t need to live on a coast to be at risk for flooding, and homeowners insurance doesn’t cover flooding.

After your insurance is squared away, he suggests prepping for two weeks of having no water, food, or power, packing a “go bag” to sustain you for a couple of days outside of your home, and making a plan with your family about where to meet if cell towers aren’t working. His last piece of advice is the simplest: download the Red Cross Emergency app.

It’s free and will give you early warning about disasters. “The most tragic way to die in a fire, flood, or hurricane is in your home because you never got the word to evacuate.”

Supply Chain Breakdown and Food Shortages

Whether or not you agree with experts who say that climate change could bring about a Roman Empire–esque societal collapse, it’s clear that shortages and supply chain disruptions are on the increasingly warm horizon. As Covid-19 showed us, those disruptions can impact anything from medical supplies to car parts to finding a winter coat. But the most concerning shortages that we face are access to food and water.

A 2019 UN report warns of a looming food crisis, and drought already threatens 40 percent of the world’s population, according to the WHO, and over 80 million people in the United States, according to the US government’s Drought Information system. A new paper published in Advances in Nutrition suggests that climate change will cause rising food prices, greater food insecurity, and may lead to micronutrient deficiencies in more people.

While there may be little you can do to impact the global food chain, you can start in your own backyard by planting a fruit tree or starting a garden, learning how to grow climate-appropriate vegetables, and making sure your pantry is fully stocked with two weeks of water and food, along with any necessary medical supplies. It’s also important to assume you won’t have warning before a food and water shortage, according to Ramey, so don’t put off stocking up until it’s too late.

Becoming Resilient Together

Resilience may be an overused term when we talk about climate change, but for most of us, it’s grossly lacking in how prepared we are to care for ourselves, our loved ones, and our property if emergency workers aren’t able to assist us. Barely half of Americans can perform CPR, only 17 percent know how to build a fire, and just 14 percent feel confident in their ability to identify edible plants and berries.

Basic skills—like learning how to operate a two-way radio, knowing the smartest escape route out of your city or neighborhood, or being able to change a bike tire—may sound simple, but can be the difference between life and death in a disaster.

Perhaps the most effective way to take care of yourself is to get close to others. According to FEMA, 46 percent of people expect to rely a great deal on people in their neighborhood for assistance within the first 72 hours after a disaster. “Prepping is not a lone wolf activity,” says Ramey. It’s important that your immediate neighbors know your name and who is in your family—including pets—so they can inform first responders in the case of an earthquake or a fire.

In the event of supply chain disruptions, your neighbors may be your only access to vital supplies like batteries or extra diapers. Building connections in your local community is also a great way to build an informal service network, because who knows when you may need help with an injury or a home repair. As Ramey puts it: “Community wins in 99 percent of situations.”

By: Emma Pattee

Emma Pattee is a writer from Portland covering topics related to feminism, climate change, and mortality. Her work has appeared in The New York Times, The Cut, The Washington Post, WIRED, Marie Claire, and more. 

Source: How to Prepare for Climate Change’s Most Immediate Impacts | WIRED

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Amid Chaos, IRS Attempts A Return To Normal

E-filing of individual tax returns for the 2022 filing season opens on January 24. The start of e-filing and the April tax filing deadline return to an almost normal schedule while ongoing issues make filing season realities hard to predict.

In 2021 individual e-filing didn’t open until February 12. In 2020 it opened on January 27. This year’s opening appears to be moving the needle back toward the more normal mid-January opening. The April 18th filing deadline is also a return to normal after the July 17, 2020 and May 17, 2021 extended deadlines. Friday, April 15, 2022 is the Emancipation Day holiday in Washington, D.C. which is why the deadline has been moved forward to Monday April 18. It almost seems normal. Almost.

While the start and finish lines to filing season 2022 have a whiff of normalcy about them, everything in between stinks. It stinks of expectations bordering on the delusional and it stinks of IRS rot. When it comes to considering “known unknowns” such as the effects of reconciling economic impact payments (stimulus money) and advance payments of the Child Tax Credit (CTC), the IRS doesn’t seem delusional.

The Commissioner is taking every chance he is offered to urge taxpayers and tax practitioners to file accurately and electronically. The IRS is using every channel it has to remind taxpayers to watch for Letters 6419 and 6475 (which provide the amounts of the advance CTC payments and EIPs, respectively). It’s the Commissioner’s apparent failure to consider the “unknown unknowns” that reeks of delusion.

While the IRS Commissioner (in a recent statement) and the National Taxpayer Advocate (in her most recent report) have been open about anticipating another difficult filing season, they have not seemed to consider the potential for natural disasters to create yet another patchwork of filing deadlines. In 2021 the May 17th deadline wasn’t the deadline for Texas, Oklahoma, and Louisiana due to winter storms.

Louisiana’s deadline was re-adjusted after Hurricane Ida. In late April 2021 the May 17, 2021 deadline was extended for some Kentucky counties due to storm effects and the list of affected counties continued to be adjusted until June 28, 2021 (two days before the extended June 30 filing deadline). At the end of April 2021 Alabama taxpayers got an extension until August 2. In September New York and New Jersey got their deadline extended because of Hurricane Ida. That’s just a sample; the list goes on.

The other unknown unknown the Commissioner has failed to consider is the ongoing effects of the pandemic. His statement was issued January 10, 2022 amid the omicron variant surge. At this time it is unclear if that surge has peaked and it is even more unclear what effects the current surge will have on IRS staffing levels during filing season. Whatever the effects are, it is unlikely they will improve return processing or response times.

It’s early January 2022. It’s unlikely that the pace of natural disasters will abate and predicting pandemic surges has proved elusive, so why not plan for the worst and issue a pre-emptive extension of the filing deadline until July? Early filers will still file early. Procrastinators will still procrastinate. Extending the deadline until mid-year would simply mitigate some of the confusion resulting from yet another reactive patchwork of federal deadlines due to yet another bad weather year or more Covid-related staffing issues.

And then there’s the rot. Yes, the IRS has been underfunded for years. Yes, experienced people retired and because of funding cuts, they were never replaced. Yes Congress continues to ask the IRS to do more with less. But at some point the IRS needs to acknowledge certain systemic failures in its procedures and possibly its culture.

One such systemic failure was the continuation of automated notice processing despite the mail and phone backlog. Taxpayers and tax practitioners continue to receive second and third notices, each more aggressive than the last, about issues that were addressed by a mailed response to the first notice that has remained either unopened or unprocessed by the IRS. That’s a procedural failure.

The cultural failure is the idea that temporarily stopping automated notices or providing some sort of blanket penalty relief or temporarily giving more experienced customer service reps (or their supervisors) more autonomy to abate penalties until the IRS clears its mail backlog is some sort of abject moral failing that will result in massive taxpayer noncompliance. It’s the idea that cutting taxpayers some slack in the middle of yet another chaotic filing season will turn otherwise law abiding taxpayers into tax protesting scofflaws.

It’s the idea that their kindness will be considered weakness. Perhaps that is the case, but the fact of the matter is that our tax system is based on voluntary compliance and the complete inability to get assistance when trying to comply voluntarily with one’s tax obligations or exercise one’s rights under the tax laws could be as much (or more) of a disincentive to compliance as lack of enforcement. Unfortunately, heading into the third filing season under pandemic rules it seems we have yet to find rock bottom and a path out of this abyss.

Follow me on Twitter.

I own Tax Therapy, LLC, in Albuquerque, New Mexico. I am an Enrolled Agent and non-attorney practitioner admitted to the bar of the U.S. Tax Court. I work as a tax general practitioner preparing returns for individuals and (really) small businesses as well as representing individuals before the IRS and, occasionally, the U.S. Tax Court. My passion is translating “taxspeak” into English for taxpayers and tax practitioners. I write to dispel myths with facts and to explain “the fine print” behind seemingly simple tax concepts. I cover individual tax issues and IRS developments with a focus on items of interest to taxpayers and retail tax practitioners. Follow me on Twitter @taxtherapist505

Source: Amid Chaos, IRS Attempts A Return To Normal

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How Corporate Intelligence Teams Help Businesses Manage Risk

The word “intelligence” is loaded: While some confuse it with corporate espionage, today nearly every major company has an intelligence function or is building one. Prior to Covid-19, many corporate intelligence teams largely focused on security, but the pandemic has demonstrated the broader value of intelligence.

In a world of contradictory and misleading information, smart business leaders use intelligence to see around corners, mitigate risk, provide insight, and shape their decision-making. The authors offer an overview of corporate intelligence functions and provide advice on how to structure these internal teams.

In January 2020, a small team at the global financial services technology company Fiserv began closely watching early warning signs of a new disease outbreak in the regional capital of Wuhan, China. The team triangulated reliable media sources and applied their best analytical judgment based on comparable early indicators from historic outbreaks, such as SARS.

Prescient analysis revealed a potentially major disease was in the offing. The team recommended against executive travel even before the virus had been detected in the U.S., earlier than most companies or governments. Scenario assessments of the potential human and economic impact led the company to invest in protective equipment for personnel early on and mitigate risks by swiftly transitioning to remote work.

Why did Fiserv correctly anticipate looming risk while others languished behind the news cycle? Because it had a dedicated and trusted geo-political analysis team, which practices intelligence work, scanning the horizon and keeping senior leadership informed of growing risk and consequent business implications.

In a world of contradictory and misleading information, this kind of intelligence provides situational awareness of cyber threats, security risks, political instability, or other trouble brewing. Smart business leaders consciously use intelligence to shape their decisions.

The word “intelligence” is a loaded one. Some confuse it with corporate espionage, as described in Barry Meier’s Spooked, which portrays private-sector intelligence practitioners as dangerous renegades. Companies can cross the line. Among other egregious examples, an eBay team targeted and harassed bloggers and Credit Suisse used private investigators to surveil employees. These are the bad news exceptions.

Every day, private-sector intelligence professionals legally and ethically steer companies away from trouble and towards opportunity and decisiveness. Organizations, such as the Association of International Risk Intelligence Professionals, are establishing standards and codes of conduct, and academic institutions, such as Mercyhurst University, are producing a new generation of private-sector focused intelligence professionals.

Companies invest in security and intelligence because it helps the bottom line. According to Lewis Sage-Passant, a doctoral researcher at Loughborough University studying private sector intelligence, these functions are now “ubiquitous”: Virtually every major company either has a security intelligence capacity or is building one.

Seeing Around Corners

The best intelligence functions help leaders understand what is happening and what is likely to happen next. Erica Brescia, who until recently served as chief operating officer at GitHub, described the value of their intelligence team during the Covid-19 pandemic: “Our team helped us to identify threats and communicate effectively with multiple audiences throughout the company and across national and cultural boundaries to keep our employees safe and the business running.”

Likewise, Microsoft Global Intelligence Program Manager Liz Maloney told us: “Intelligence is the first step in understanding your risk…Our mission is to enable decision makers to mitigate risk and to respond to residual risk that we can’t avoid.”

A survey of 94 private-sector intelligence professionals revealed that their positions were often created in response to a “threat or crisis.” In the aftermath of terror attacks, cyber assaults, disinformation campaigns, and sudden political shifts, companies belatedly realized that a small investment in situational awareness is better than costly late reaction to unanticipated problems.

In a stark example, a fatal 2013 terror attack on a BP/Statoil/Sonatrach joint venture in In Amenas, Algeria, led both BP and Statoil to significantly enhance their intelligence capabilities to better identify hidden threats.

Mitigating Risk, Providing Insight

Intelligence can create a competitive advantage by enabling operations where others fear to tread. In high threat environments, strong intelligence enables companies to efficiently target security resources on the most relevant risks.

When entering new markets, intelligence teams help executives avoid becoming entangled with dodgy partners or overspending on security while closing the deal. “Information is king,” an aviation security intelligence professional told us. “You don’t need all the armed guards if you have good intelligence.”

The value of private-sector intelligence, according to Maloney, is “giving the business confidence and avoiding overreactions.” For example, after Microsoft executives saw alarming external reporting about security dangers in Puerto Rico in the aftermath of Hurricane Maria in 2017, Microsoft’s in-house intelligence team provided a nuanced assessment, specific to the company’s footprint, that gave the C-suite the confidence to continue operating safely.

Offering Much More than Security

Prior to Covid-19, many corporate intelligence teams largely focused on security, but the pandemic has shown the broader value of intelligence. Diana Dragon, head of global insights at Standard Industries, noted: “The same skills used to assess security risks can be used in identifying trends and opportunities.” According to the aviation security intelligence professional we spoke to, prior to Covid-19, his team was known as “the security guys.” Now they provide widespread strategic intelligence.

Intelligence analysis can simply relay facts to protect people and assets (baseline level of the pyramid below) but is most valuable when used for strategic, proactive decision-making support (top level). At Fiserv, the geopolitical analysis team, which sits outside of security, already had a broad remit and provided critical intelligence analysis early on that prepared the company for the impending Covid-19 pandemic.

Similarly, teams at Microsoft and GitHub tapped into the top-level potential, analyzing security or geopolitical trends to support strategic business decision making.

Managing Intelligence Better

Intelligence roles are often buried deep in an organization, scattered across corporate functions, or obscured under opaque job titles. Surveys reveal intelligence roles popping up in 20 different business units.

This approach often makes intelligence employees invisible to senior leaders who would benefit from their skills, experience, and networks. “Not having direct contact with decision makers significantly degrades the quality of the service,” says Ryan Long, co-founder and co-host of the Business of Intelligence podcast, “and will likely cause the practitioner to miss mark altogether.”

There is no one-size-fits-all answer for structuring intelligence teams, but specific characteristics lead to success. First, direct connectivity to decision makers is critical. As explained by Brescia in her time at GitHub, “the intel team has direct contact with decision-makers across the company.” From the outset, she met with her head of intelligence, set expectations and priorities, and empowered the intelligence team to come to her if they identified risks that needed to be brought to leadership’s attention.

The intelligence team is also included in working groups on issues of concern to leadership from early on, giving them visibility on executive priorities. Intelligence teams provide the best value when they are clear on the decisions to be made, the questions to be answered, and the company’s strategic goals.

Second, corporate intelligence units must break down silos and engage stakeholders across all business units. “It’s critical,” says Long, “that the intelligence practitioner engage with the customer to understand their needs, receive frequent feedback, and develop rapport.” Teams closely tied to strategy give better support. Better questions lead to better responses.

And finally, an intelligence professional must lead the effort. Whether from government or the private sector, they must be versed in analytic tradecraft, understand collection methodology for the private sector, be able to evaluate vendors’ quality and ethics, and have the skills and experience to understand what the business needs.

Some companies are leading the way and have built intelligence capacities that harness the potential of intelligence to both mitigate risk and facilitate business opportunities. Fiserv’s geopolitical analysis team reports alongside security to the head of global services.

At Standard Industries, the intelligence function moved out of security in 2021 and now the head of global insights sits on the executive leadership team. This new structure arose due to intelligence’s demonstrated ability to provide strategic guidance and support to senior executives on opportunities and trends, as well as risks, across the gamut of corporate activities.

If your company does not have an intelligence function, your competitors likely do. And even if you do, you may not be using it to optimum effect. Are you engaged with the team? Does the team understand your strategy, timelines, and gaps in information? Are you using intelligence beyond security issues to inform wider business challenges?

Executives must empower their intelligence teams, sharing goals and objectives. Likewise, intelligence teams must understand the business, tailoring their products to maximize opportunity and minimize risk. When the right insight arrives at the right time to shape an important decision, a firm gains enormous advantage. It is well worth the modest investment of time and resources to make that happen.

Source: How Corporate Intelligence Teams Help Businesses Manage Risk

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Merry Christmas, Wall Street! But There’s No New Year’s Day Holiday For The Stock Market This Year—Here’s Why

1Blame it on an obscure rule. For the first time in a decade, there will be no stock market closure in observance of New Year’s Day. U.S. markets will be closed on Christmas eve on Friday because the holiday falls on a Saturday but equity markets will be open on Dec. 31, or New Year’s Eve, and operators of the New York Stock Exchange aren’t designating Jan. 3, the first Monday in 2022 as New Year’s Eve observed.

The last time this sort of calendar event transpired was New Year’s Eve Dec. 31, 2010. How rare is this calendar event. Assuming that it was applied since 1928, it would have occurred 13 times from 1928.

Dow Jones Market Data

The lack of a New Year’s Day respite for stock trades is the result of NYSE Rule 7.2, which stipulates that the exchange will be closed either Friday or the following Monday if the holiday falls on a weekend, unless “unusual business conditions exist, such as the ending of a monthly or yearly accounting period.”

In this case, the last day of December is a trifecta of accounting dates, including month-end, quarter and year-end dates and comes after markets have experienced a bout of volatility in recent days.

On Monday, the Dow Jones Industrial Average DJIA, +0.64% sank 433 points, while the S&P 500 SPX, +0.82% and the Nasdaq Composite COMP, +0.85% indexes both registered sharp declines and their third straight drop on the back of omicron-fueled uneasiness and concerns about global economic expansion in the coming year.

By Tuesday afternoon, however, markets had made up for those losses and then some and the 10-year Treasury note yield TMUBMUSD10Y, 1.458%, was hanging near 1.50% after putting in a 3 p.m. Eastern Time finish at 1.418%, according to Dow Jones Market Data.

It is worth noting though that, the U.S. Securities Industry and Financial Markets Association, a trade group, recommends a 2 p.m. ET close for trading in Treasurys on Dec. 31. The holiday schedule for markets isn’t likely to alter the mood on Wall Street, however.

“I don’t see it mattering in a meaningful way,” Baird market strategist Michael Antonelli, told MarketWatch. “The final few sessions of the year have traditionally been very quiet, and the fact that we don’t have a specific holiday for New Year’s likely won’t change that at all,” he said.genesis3-2-1-1-1-1-1-2-1-1-1-1-1-1-2-1-1-1-1-1-2-1-1-1-1-1-1-1-2-1-1-1-1-1-1-1-1-1-1-1-1-1

For Christmas, the bond market will close early on Dec. 23 and remain closed on Friday, Dec. 24, Christmas Eve. Meanwhile, the New York Stock Exchange and Nasdaq will observe regular hours on Thursday Dec 23, closing at 4 p.m. Eastern Time and remain closed on Christmas Eve, Dec 24.

Our call of the day says investors have much to get excited about in 2022. Put growth stocks at the top of that list.

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By: Mark DeCambre

Mark DeCambre is MarketWatch’s markets editor. He is based in New York. Follow him on Twitter @mdecambre.

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Why Stock Buybacks Are Dangerous for the Economy

Even as the United States continues to experience its longest economic expansion since World War II, concern is growing that soaring corporate debt will make the economy susceptible to a contraction that could get out of control.

Even as the United States continues to experience its longest economic expansion since World War II, concern is growing that soaring corporate debt will make the economy susceptible to a contraction that could get out of control. The root cause of this concern is the trillions of dollars that major U.S. corporations have spent on open-market repurchases — aka “stock buybacks” — since the financial crisis a decade ago.

In 2018 alone, with corporate profits bolstered by the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index did a combined $806 billion in buybacks, about $200 billion more than the previous record set in 2007. The $370 billion in repurchases which these companies did in the first half of 2019 is on pace for total annual buybacks that are second only to 2018. When companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.

Making matters worse, the proportion of buybacks funded by corporate bonds reached as high as 30% in both 2016 and 2017, according to JPMorgan Chase. The International Monetary Fund’s Global Financial Stability Report, issued in October, highlights “debt-funded payouts” as a form of financial risk-taking by U.S. companies that “can considerably weaken a firm’s credit quality.”

It can make sense for a company to leverage retained earnings with debt to finance investment in productive capabilities that may eventually yield product revenues and corporate profits. Taking on debt to finance buybacks, however, is bad management, given that no revenue-generating investments are made that can allow the company to pay off the debt.

In addition to plant and equipment, a company needs to invest in expanding the knowledge and skills of its employees, and it needs to reward them for their contributions to the company’s productivity. These investments in the company’s knowledge base fuel innovations in products and processes that enable it to gain and sustain an advantage over other firms in its industry.

The investment in the knowledge base that makes a company competitive goes far beyond R&D expenditures. In fact, in 2018, only 43% of companies in the S&P 500 Index recorded any R&D expenses, with just 38 companies accounting for 75% of the R&D spending of all 500 companies. Whether or not a firm spends on R&D, all companies have to invest broadly and deeply in the productive capabilities of their employees in order to remain competitive in global markets.

Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity.

Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%.

Why have U.S. companies done these massive buybacks? With the majority of their compensation coming from stock options and stock awards, senior corporate executives have used open-market repurchases to manipulate their companies’ stock prices to their own benefit and that of others who are in the business of timing the buying and selling of publicly listed shares.

Buybacks enrich these opportunistic share sellers — investment bankers and hedge-fund managers as well as senior corporate executives — at the expense of employees, as well as continuing shareholders.

In contrast to buybacks, dividends provide a yield to all shareholders for, as the name says, holding shares. Excessive dividend payouts, however, can undercut investment in productive capabilities in the same way that buybacks can.

Those intent on holding a company’s shares should therefore want it to restrict dividend payments to amounts that do not impair reinvestment in the capabilities necessary to sustain the corporation as a going concern. With the company plowing back profits into well-managed productive investments, its shareholders should be able to reap capital gains if and when they decide to sell their shares.

Stock buybacks done as open-market repurchases emerged as a major use of corporate funds in the mid-1980s after the Securities and Exchange Commission adopted Rule 10b-18, which gives corporate executives a safe harbor against stock-price manipulation charges that otherwise might have applied. As a mode of distributing corporate cash to shareholders, buybacks surpassed dividends in 1997, helping to elevate stock prices in the internet boom.genesis3-2-1-1-1-1-1-2-1-1-1-1-1-1-2-1-1-1-1-1-2-1-1-1-1-1-1-1-2-1-1-1-1-1-1-1-1-1-1

Since then, buybacks, which are much more volatile than dividends, have dominated distributions to shareholders when the stock market is booming, as companies have repurchased stock at high prices in a competition to boost their share prices even more. As shown in the exhibit “Buying When Prices Are High,” major companies have continued to do buybacks in boom periods when stock prices have been high, rendering these businesses more financially fragile in subsequent downturns when abundant profits disappear.

JPMorgan Chase has constructed a time series for 1997 through 2018 that estimates the percentage of buybacks by S&P 500 companies that have been debt-financed, increasing the financial fragility of companies. In general, the percentage of buybacks that have been funded by borrowed money has been far higher in stock-market booms than in busts, as companies have competed with one another to boost their stock prices.

In 2018, however, as stock buybacks by companies in the S&P 500 Index spiked to more than $800 billion for the year, the proportion that were financed by debt plunged to about 14% in the last quarter. Why was there a sharp decline in 2018, when the dollar volume of buybacks far surpassed the previous peak years of 2007, 2014, and 2015?

The answer is clear: Corporate tax breaks contained in the Tax Cuts and Jobs Act of 2017 provided the corporate cash for the vastly increased level of buybacks in 2018. First, there was a permanent cut from 35% to 21% in the tax rate on corporate profits earned in the United States.

Second, going forward, the 2017 law permanently freed foreign profits of U.S.-based corporations from U.S. taxation (Under the Act, the U.S. Treasury has been reclaiming some tax revenue lost because of a tax concession dating back to 1960 that had enabled U.S.-based corporations to defer payment of U.S. taxes on their foreign profits until repatriating them).

In 2018 compared with 2017, corporate tax revenues declined to $205 billion from $297 billion, hypothetically increasing the financial capacity of U.S.-based corporations to do as much as $92 billion more in buybacks in 2018 without taking on debt. Given that from 2017 to 2018 stock buybacks by S&P 500 companies increased by $287 billion (from $519 billion to $806 billion), the reality is that, through the corporate tax cuts, the federal government essentially funded $92 billion in buybacks by issuing debt and printing money to replace the lost corporate tax revenues.quintex-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-2-1-1-1-1-2-2-1-1-1-1-1-1-1-1-768x114-1-1-2-1-1-4-1-2-2-1-2-1-1-1-1-1-1-1-1

Since the total federal government deficit increased by $114 billion (from $665 billion in 2017 to $779 billion in 2018), we can (again hypothetically) think of $92 billion of this additional government debt as taxpaying households’ gift to business corporations to enable them to do even more buybacks debt-free, shifting the debt burden of stock buybacks from corporations to taxpayers.

If, as a “transfer payment,” we add $92 billion to the $150 billion in debt that, according to the JPMorgan data, S&P 500 companies used to fund buybacks in 2018, the percentage of their 2018 buybacks that were debt-financed rises to 30%, greater than the proportion of 29% for 2017. But because of corporate tax cuts, in 2018 taxpaying households were burdened with about 38% of the combined government and business debt that enabled corporations to do buybacks.

Whether it is corporate debt or government debt that funds additional buybacks, it is the underlying problem of the corporate obsession with stock-price performance that makes U.S. households more vulnerable to the boom-and-bust economy. Debt-financed buybacks reinforce financial fragility. But it is stock buybacks, however funded, that undermine the quest for equitable and stable economic growth. Buybacks done as open-market repurchases should be banned.

By: William Lazonick,Mustafa Erdem Sakinç,Matt Hopkins

Source: Why Stock Buybacks Are Dangerous for the Economy

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