From the Editor: A Call for Courage

by Adi Ignatius,

Editor in Chief Harvard Business Review

It’s been five years since the official end of the Great Recession, yet the U.S. economy continues to lag. True, corporate profits are healthy, and the stock market has soared—but most Americans aren’t sharing in the recovery. In “Profits Without Prosperity,” William Lazonick pinpoints one critical culprit: the growing trend of allocating corporate profits to stock buybacks.

Lazonick, a professor of economics at the University of Massachusetts Lowell, has done a study of S&P 500 companies that were publicly listed from 2003 to 2012. It shows that during that time they used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock. An additional 37% went toward dividends. This, he says, left little for investment in their productive capabilities, let alone higher pay for their employees. What’s needed, Lazonick says, is “courage in Washington”—to rein in stock buybacks and executive pay, and to encourage productive capital formation…

Cross-posted on August 14, 2014 with permission from Harvard Business Review. Click here to read the full text.