Sanders and Schumer's buyback plan is treating the wrong problem, says economist

  • A new proposal to restrict corporate buybacks is treating the symptom instead of the cause, says economist Diane Swonk.
  • The issue is really about why companies aren't investing, she says.
  • Swonk believes the plan could result in companies shutting down in the U.S.

A new proposal 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 Leader Chuck Schumer of New York and Sen. Bernie Sanders, an independent from Vermont, outlined their plan in a New York Times op-ed on Sunday. They want to prevent companies from buying back their own shares unless they pay workers at least $15 an hour and offer health benefits and paid time off.

Swonk said those preconditions aren't a good thing.

"It is treating the wrong problem," the chief economist at Grant Thornton said on "Closing Bell."

"Once you start doing this you are going to start closing down companies in the U.S. and having them go elsewhere even more so."

Senate Minority Leader Chuck Schumer (D-NY) (R) and Sen. Bernie Sanders (D-VT).
Yuri Gripas | Reuters
Senate Minority Leader Chuck Schumer (D-NY) (R) and Sen. Bernie Sanders (D-VT).

Last year, more than $1 trillion in buybacks were announced 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 made instead of investing in employee pay and equipment, and said some even laid off workers while still buying back billions of dollars of shares.

Companies are repurchasing their stock because they aren't able to do anything else with their money — 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 said. "They are very uncertain and walking on eggshells in what should be a very good economy."

Brian Brenberg, chair 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 "completely ridiculous" and a "destructive idea" Monday on "Closing Bell."

He's believes share buybacks are ultimately good for the economy.

"If companies don't have good ideas about where to spend their money than they should give it back to investors and that money gets channeled to companies that have growth ideas," Brenberg argued.

Representatives for Sanders and Schumer did not immediately respond to requests for comment.

— CNBC's Liz Moyer contributed to this report.