Could banning stock buybacks help force investment into truly productive economic activities, like manufacturing?

Banning stock buybacks is one of the most debated “surgical” interventions proposed to fix the modern economy. To understand if it would work, we need to examine the reasons for the initial ban. Then, we should consider what occurred when that restriction was lifted.

Until 1982, stock buybacks were largely considered a form of market manipulation. The Reagan administration created a “safe harbor” under SEC Rule 10b-18. This change allowed companies to buy their own shares. They could do this without fear of legal reprisal. Before this, “success” meant building things; after this, “success” could be engineered through accounting.

The Argument for a Ban: Redirecting “Dead” Capital

Advocates of a ban, such as economist William Lazonick, argue that buybacks are the “engine of deindustrialisation.”

• Ending the “Cannibal” Cycle: Many companies now spend more on buybacks than on Research & Development (R&D). For example, over a decade, Intel spent tens of billions on buybacks while losing its manufacturing lead to overseas competitors. A ban would, in theory, leave that cash on the balance sheet. The board would then have to choose. They could let it sit idle. Alternatively, they could invest it in new plants, equipment, or worker training.
• Removing the Incentive to Gut: Currently, CEOs are incentivised to cut “costs” (workers, maintenance, safety). This is because the savings can be used to fund buybacks. Buybacks raise the stock price and trigger executive bonuses. Removing the buyback option removes the primary reward for “hollowing out” a company.

The Argument Against a Ban: The “Efficiency” Counter-Point

Critics of a ban argue that it wouldn’t necessarily lead to a manufacturing renaissance. Instead, it might lead to:

• Wasteful “Empire Building”: If a company is in a dying industry (e.g., a film-camera manufacturer in the digital age), forcing it to “reinvest” in its own business is a waste of capital. Buybacks allow that money to go back to investors, who can then invest it in the next big thing (like a green-energy startup).
• Dividend Shifts: If buybacks were banned, companies might simply switch to paying higher dividends. Dividends are more transparent. However, they still move cash out of the company. This cash goes into shareholders’ hands rather than into the factory floor.

The “Boeing” Case Study: A Warning

The recent history of Boeing is often used as the ultimate example of how buybacks can replace industrial success with “fake” success:

• 1990s-2010s: Boeing shifted its culture from “engineering-first” to “finance-first.”
• The Extraction: Between 2013 and 2019, Boeing spent roughly $43 billion on stock buybacks.
• The Consequence: Many critics argue this money was diverted away from the development of new aircraft designs. It was also diverted from rigorous safety testing. When the 737 MAX crisis hit, the company had hollowed out its technical core. The focus was on feeding its stock price, which led to a catastrophic loss of real-world value.

Would banning stock buybacks work?

A ban alone might not be enough to “force” manufacturing back. Capital is like water; it follows the path of least resistance. If you block buybacks but keep other loopholes open, the money might just flee to offshore accounts or private equity.

To truly revive industry, most economists suggest a “Policy Package”:

1. Ban or Tax Buybacks: Disincentivise “financial engineering.”
2. Close Interest Deductibility: Stop making it “free” for companies to take on debt just to pay shareholders.
3. Link Executive Pay to Production: CEO bonuses should be tied to long-term metrics like safety, product quality, or worker retention. They should not be tied to Earnings Per Share (EPS).

Summary of Impact

If we ban buybacks…	Likely Short-Term Result	Likely Long-Term Result
On CEOs	Lower “paper” wealth; shift in bonus structures.	Focus might return to operational efficiency.
On Investors	Lower immediate returns; shift toward dividends.	Must pick companies based on actual growth.
On Workers	More cash available for wages/training.	Potential for more stable, long-term employment.
On Industry	Capital stays within the firm.	Increased R&D, but requires industrial policy to guide it.