The left’s loathing against stock buybacks never really made much sense but now it will apparently be codified into the tax code through the Inflation Reduction Act.
The IRA is primarily a climate change spending bill. It aims to increase investment in clean energy and cars by providing hundreds of billions of dollars of tax credits and other subsidies. The bill also extends the existing Obamacare subsidies through 2025. In order to win over Senator Joe Manchin (D-WV) and fend off accusations that the massive increase in spending would be inflationary, the Democrats included enough taxes that the bill will—on paper, at least—reduce the budget deficit.
One of those taxes is a one percent duty levied on stock buybacks. Attaching a penalty to stock buybacks is a strange choice of Democrats. When a company buys back its stock, it reduces its cash position and decreases the number of shares outstanding. It is essentially a way for a company to return profits to shareholders. The alternative is for the company to hoard its cash or spend on the priorities of management. Neither of those seems like a particularly good fit with Democratic political priorities.
Take the energy industry. U.S. energy companies have been large buyers of their own stock. One reason for this is that investors felt burned by the last boom and bust cycle in which billions of dollars of capital were wasted on questionable investment in stepped-up production. So for several years, oil companies have been proving to investors that they now take a disciplined approach, growing production slowly, investing very little, and returning lots of cash to shareholders. Liam Denning at Bloomberg Opinion estimates that buybacks for six large U.S. energy companies—Chevron Corp., ConocoPhillips, Exxon, Marathon, Occidental Petroleum Corp., and Valero Energy Corp.—might total $55 billion this year alone. Do the Democrats wish this money was being invested in fossil fuel extraction instead of buying shares?
Inflation is Spreading and Strengthening
The government will release the July Consumer Price Index on Wednesday and the July Producer Price Index on Thursday. It’s very likely that the CPI’s headline figures will decline due to a steep and sustained decline in gas prices. Core prices, which economists say are a better guide to underlying inflation and predictive of future inflation, are likely to accelerate. Last month, core prices rose 5.9 percent. Economists are forecasting 6.1 percent. It’s also likely that inflation is continuing to spread from goods to services, with increasing price pressure in transportation, shelter, and recreation.
One question will be what happened to food prices. Some analysts think food price inflation is likely to be easing, in part because prices were already very high last year. We’re less confident. The fall in gas prices may be translating into more spending on groceries, which would push up prices. The huge job gains in July will—sooner or later—translate into more demand for food, which will mean higher inflation.
Immaculate Disinflation in Household Expectations
The Federal Reserve Bank of New York said on Monday that the public’s inflation expectations have cooled both at the one-year ahead and three-years ahead level. The one year expectation came down to 6.2 percent from 6.8 percent in June. The three-year expectation fell to 3.2 percent from 3.6 percent. The N.Y. Fed said the declines were broad-based across income groups, but largest among Americans with annual household incomes under $50k and respondents with no more than a high school education.
This should be reassuring to the Fed. It means that the public is being persuaded by Fed officials insisting that they have the tool necessary to bring down inflation and the willpower to succeed. Since the Fed is convinced that inflation expectations have a large impact on inflation outcomes, this shift could make the Fed’s job easier.
There is a fly in the ointment. Only forty percent of the public believes that unemployment will be higher a year from now than it is today. This seems extremely unrealistic. The Fed has its sights aimed directly at the labor market. It believes that in order to cool off inflation, it needs to cool off demand for workers. While the hope is that much of this could be done by eliminating some of the vacant jobs currently going unfilled, it will very likely require raising the unemployment rate above the current 3.5 percent. What the N.Y. Fed survey tells us is that the public does not yet understand this and a significant portion expects inflation will decline without any jobs lost.