William Lazonick Profits Without Prosperity Summary

Economic prosperity has had the tendency in the past few years to not be as high as the success of a multitude of corporations. In the article, “Profits Without Prosperity” by William Lazonick, the writer analyzes why this is the case in today’s world. Right off the get go, the author informs the readers that if the United States intends to accumulate growth that will allow for income equitably and also provide stable employment, then the government has no choice but to bring not only stock buybacks, but also executive pay under control. He strongly believes that the future of the nation’s economy is dependent on achieving this goal. The author then goes on to explain how this goal can be accomplished.
First off, he examines the relationship between value creation and value extraction. Throughout the 70’s, resource allocation was accomplished through a retain-and-reinvest approach. However, towards the end of the 70’s, a downsize-and-distribute approach was implemented. This caused costs to reduce, while cash was then distributed to shareholders. This shows that by using

value extraction instead of value creation, only certain people are favored; thus, increasing income inequality and employment instability. The author makes sure to point out that trillions of dollars in the United States over the past three decades have been used to buy back shares, resulting in stock-price manipulation.
Continuing on, Lazonick depicts the three main reasons executives give for open-market purchases.

The first being that signifying confidence in the company’s future can be accomplished through buybacks. However, the writer reveals that when this occurs the value of stock only decreases. The next reason given is that when employees exercise stock options, the dilution of earnings per share has to be offset by buybacks. Yet, the author depicts here that the company must wait on their incentives to work instead of using this method. The last reason provided is that the company needs to return its unneeded cash to shareholders, because the company is now matured, and does not foresee any future profitable investment opportunities. The author immediately disregards this reason by explaining this has not been the case since qualified dividends and tax-rates on long term capital gains became the

same.
Lazonick goes on to illustrate how executives are serving their own interest versus the greater good for society. He explains how stock-based incentives are techniques used to motivate senior executives to do buybacks. In order for this vicious cycle to be put to a stop, open-market buybacks must be put to an end. To begin, Lazonick suggests a review of the past three years. This study will overlook the damage open-market repurchases had on industrial corporations, capital formation, and the United States economy. One method the author offers up to help relieve this issue is to ensure taxpayers and workers have seats on boards. This will allow the regular every-day citizens to have say in what goes on in the corporate world. Overall, Lazonick spends his time arguing why buybacks negatively impact our economy, and what can be done in attempts to prevent this problem from continuing to occur.