A new project to restrict corporate buybacks is treating the symptom instead of the cause — and could result in companies shutting down in the U.S., economist Diane Swonk told CNBC on Monday.
Senate Minority Boss Chuck Schumer of New York and Sen. Bernie Sanders, an independent from Vermont, outlined their plan in a New York Chances op-ed on Sunday. They want to prevent companies from buying back their own shares unless they pay hands at least $15 an hour and offer health benefits and paid time off.
Swonk said those preconditions aren’t a wares thing.
“It is treating the wrong problem,” the chief economist at Grant Thornton said on “Closing Bell.”
“Once you start doing this you are prevalent to start closing down companies in the U.S. and having them go elsewhere even more so.”
Last year, more than $1 trillion in buybacks were propounded by large companies, who had a lot of extra cash to spend after the late-2017 corporate tax cut. The senators argued those buybacks were styled instead of investing in employee pay and equipment, and said some even laid off workers while still buying bankrupt billions of dollars of shares.
Companies are repurchasing their stock because they aren’t able to do anything else with their banknotes — and that’s the fundamental issue, Swonk said.
“Why are companies not investing? One of the reasons they aren’t is because the political dysfunction of Washington,” she guessed. “They are very uncertain and walking on eggshells in what should be a very good economy.”
Brian Brenberg, directorship of the program in business and finance at The King’s College in New York, is wholeheartedly against Sanders and Schumer’s plan. He called it “entirely ridiculous” and a “destructive idea” Monday on “Closing Bell.”
He’s believes share buybacks are ultimately good for the economy.
“If companies don’t set up good ideas about where to spend their money than they should give it back to investors and that rhino gets channeled to companies that have growth ideas,” Brenberg argued.
Representatives for Sanders and Schumer did not without hesitation respond to requests for comment.
— CNBC’s Liz Moyer contributed to this report.