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Big tech companies cause income inequality -- but not in the ways you think

By David Holmes , written on February 20, 2015

From The News Desk

We know the narrative by heart.

Big Bay Area tech companies use their unprecedentedly large pools of capital, enormous revenues, and exponentially valued shares to go on hiring sprees, attracting hordes of upper-middle class technology workers to a region. Thanks to commuter buses that ferry urban residents to the suburban enclaves these firms call home, the invasion of workers spreads beyond quiet industrial towns like Mountain View and Menlo Park up to the heart of San Francisco, making housing -- which is already limited by outdated zoning and construction regulations -- too expensive for workers with more modest wages. That makes San Francisco a city for the affluent or the homeless, with little room in-between. No wonder San Francisco is now on par with Rwanda when it comes to income inequality.

But while there's evidence that some large tech companies have exacerbated income inequality in both the Bay Area and across America at large, the reasons why may be far more complex than this irresistible narrative suggests.

According to former Harvard economist William Lazonick, the ways in which corporations worsen America's wealth gap come down to a simple question: When a company posts massive revenues, where does that money go?

To Americans raised on the promise of capitalism, the attractive answer is that the money is used to hire more workers and provide existing workers with higher wages and better benefits. The rest is reinvested into research and production so the company can create better, cheaper products or services to the benefit of the American consumer. This is the argument pro-business advocates have made for years in lobbying for breaks that soften effective corporate tax rates, which in the US are at their lowest level in 40 years.

But many publicly-traded corporations, including a number of tech firms based in California, do not follow the script of this tidy capitalist fantasy. According to research conducted by Lazonick, these companies invest huge portions of their annual revenues into buying back stock to line the pockets of shareholders, not to mention keep the bulk of global profits safely offshore and out of the reach of US tax collectors. And because stock performance is often used as a key factor in determining executive compensation, buyback schemes may also boost a CEO's take-home pay. Not that CEOs are exactly struggling: The ratio between a CEO's compensation and that of a company's average worker has skyrocketed since the 1960s, from 20:1 to 273:1.

Lazonick argues that the above programs drive income inequality in America by creating a system where corporate profits -- which in America are higher than ever before -- do little to enrich all but the most well-compensated stakeholders of an organization. This is true of individual organizations but also true on a macro level. According to the New York Times, citing research by the US Commerce Department, "Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years."

So what role do Silicon Valley tech firms play in this troubling trend? Surely these more enlightened organizations would never ever screw over workers, and instead act as better corporate citizens than the older guard, right?

Not necessarily. A new investigation by Pulitzer Prize winning journalist Gary Cohn looks to identify which California tech firms invest the largest percentages of their revenue in self-serving stock buyback schemes. And while San Francisco activists have focused the lion's share of their rage against Google over buses, there are some less visible Silicon Valley heavyweights that arguably do far more damage in terms of income inequality.

Of the top ten repurchasers of stock between 2003 and 2012, five of them are technology companies, all of whom distributed more cash to shareholders than they earned in net income. Microsoft came in at number two, distributing $185 billion, or 125 percent of net income. At $130 billion, or 111 percent of its net income, IBM was number 3.

As for tech firms headquartered in Silicon Valley, San Jose's Cisco Systems distributed $77 billion (121 percent of net income), Palo Alto's Hewlett-Packard distributed $73 billion (a whopping 177 percent of net income), and Santa Clara's Intel distributed $87 billion (109 percent of net income). Cohn also notes that Oracle, while it did not crack the top ten, gave 72 percent of its net income to stock repurchases and dividends.

As an aside, Exxon Mobil, always careful to preserve its formidable "evil corporation" reputation, was the number one stock repurchaser in the US.

As for the company that is perhaps most frequently attacked as a scapegoat for Silicon Valley's economic issues, Google almost never participates in these stock buyback programs, much to the chagrin of some shareholders. This pledge -- to aggressively reinvest profits in the growth of the company and moonshot projects, as opposed to providing shareholders with short-term windfalls -- is one component of its "Don't Be Evil" vow to which Google has kept true.

Facebook has also taken heat from some investors after its CFO announced that spending on future growth would increase by 50 to 70 percent in 2015. Many of these shareholders would rather see some of that excess cash returned to them, either through dividends or buybacks.

And then there's Apple, which offers an interesting case study. Unlike Google and Facebook, they've recently participated in massive stock buyback schemes, albeit not without great prodding by activist investor Carl Icahn. As long as we're on the subject of income inequality, it's worth mentioning that CEO Tim Cook has been paid as much as 6,258 times as much as an average Apple employee. But when a company is as successful as Apple and frankly has more cash than it knows what to do with, it's difficult to criticize it for paying executives or shareholders "too much." After all, how much is "too much" to a company with $178 billion in cash on hand?

That's just it: There's nothing inherently wrong with large CEO salaries and massive dividend packages to shareholders. But what about when a company like Cisco lays off 6,000 employees the same year it returns $13.3 billion to shareholders? To say nothing of the $12.9 million it received from the state of North Carolina to hire employees there? Or what about Hewlett-Packard, which laid off 50,000 employees in 2014 despite distributing 177 percent of its net income over 10 years to shareholders and investing only 3 percent of its revenue into research and development over the past 4 years?

Excessive stock buyback and dividend programs are only one factor contributing to income inequality in America. Furthermore, some argue that by distributing cash to shareholders these investors, who have already proven themselves to be risk-friendly, will reinvest this money in new companies and technologies.

Nevertheless, I can't think of a clearer example of "the rich get richer, the poor get poorer" than when companies send billions to shareholders and strike massive CEO compensation deals, while at the same time cut jobs and kneecap future growth. And if you're going to bemoan income inequality in the Bay Area, in California, and in America, you're betting off talking about these hidden wealth transfers than throwing rocks at Google buses.