THE last time a corporate-finance concept went mainstream was during the financial crisis, when banks’ capital became a subject you could raise in yoga studios or biker bars without being hushed or hospitalised. Now there is a new candidate: share buy-backs, which reached $189bn in the three months to March for firms in the S&P 500 index, a record high. They may rise even further when a wave of cash comes home in response to America’s new tax rules, which encourage firms to repatriate the $1trn of funds they have parked in foreign subsidiaries. Apple plans to spend $100bn on buy-backs, for example.

As the sums rise, so does the controversy. In a buy-back a firm acquires its own stock to return cash to its shareholders. To critics they are a financial voodoo that exacerbates inequality and depresses investment. Elizabeth Warren, a left-leaning senator, wants them partially banned. But among investors such hostility is seen as a “derangement syndrome”, to quote Cliff Asness, the boss of AQR, an investment firm. The financiers are right. Buy-backs are a sensible tool. They largely reflect economic imbalances, such as bloated profit margins, rather than cause them.

First permitted by American regulators in 1982, buy-backs are now widely used. Some 97% of firms in the S&P 500 indulged over the past decade, slightly more than paid dividends. Even holdouts, such as Berkshire Hathaway, have no objection in principle. Of the $8trn returned to shareholders in this period, just over half was via share repurchases. A fifth of buy-back activity was by ten big spenders, including Apple, Microsoft and Exxon.

The recent surge is clear to see but also skewed. Buy-backs rose by 41% in the last quarter compared with the prior year. The share of gross cashflow paid out as buy-backs rose to 48%, versus a ten-year average of 30% (excluding financial firms). However, an elite of 20-odd firms with piles of cash stashed abroad accounted for a third of this rise. If you also exclude a monster buy-back by Amgen, a drugs company, the share of cashflow spent on repurchases by the remainder has risen more modestly.

The debate over buy-backs is bedevilled by six muddles. The first is an inchoate sense that firms buying themselves is unnatural. In fact buy-backs are like dividends: cash moves from the firm to its owners. Their advantage is flexibility. Unlike with dividends, shareholders can elect whether to participate, and firms can turn the tap on and off without disappointing investors.

The second confusion is that buy-backs create shareholder wealth. That is like saying that withdrawing dollars from an ATM makes you richer. Buy-backs can transfer wealth between shareholders—if you sell at a price that later turns out to be low, the remaining owners benefit. They can also send signals about how managers intend to allocate capital. But they do not significantly change the underlying worth of America Inc or its shareholders.

The third mix-up is that firms’ main motivation is to manipulate either their stock prices or their earnings-per-share (EPS), which can be cosmetically boosted as the number of shares falls. The charge is hard to sustain, in aggregate, because buy-backs are small relative to the stockmarket, worth 2% of its value and 1% of shares traded for S&P 500 firms each year. Rules prevent firms from dominating trading in any given day. True, if executive-pay schemes are poorly designed around EPS, they can artificially encourage buy-backs. But of the 20 largest repurchasers today, three-quarters do not have EPS as a main element of their pay plans.

A fourth muddle is the idea that the world would be a better place if the same firms doing huge buy-backs reinvested the money instead. The trouble is that buy-backs are dominated by firms that specialise in intellectual property, which would be unable to reinvest all their profits. For example, had Apple reinvested the sums it has repurchased in the past decade, its physical plant would be six times larger than it is. A healthy economy is one in which abnormally high profits are recycled by the financial system, not one in which fat incumbents get ever more sprawling.

The fifth confusion is that buy-backs lead to low investment. A study by Federal Reserve economists in 2017 found little evidence of this. As firms’ cashflow has risen relative to GDP since the 1990s, a lower proportion has been spent on investment. But this reflects the denominator rising, not the numerator shrinking: investment relative to GDP is in line with 1990s levels. Surges in buy-backs and investment may sometimes even be complements, not substitutes. They can happen at the same time, such as in the second half of 2007. Today, buy-backs and investment are rising sharply again, in tandem. In the most recent quarter 64% of firms that boosted buy-backs also boosted investment—indeed they were slightly more likely to do so than other firms.

The sixth muddle is that buy-backs are a good measure of whether corporate-tax reform was in the public interest. They are not. Better alternatives are whether overall investment rises by more than the annual $100bn tax break (this looks possible in 2018), whether firms’ wage bills are rising (yes, but not much faster than before) and whether these effects will last (debatable).

Born to be wild

Most criticism of buy-backs is motivated by legitimate concerns about serious problems, including excessively high profits and squeezed wages, the concentrated ownership of firms and the reluctance of the financial industry to back more capital-hungry startups (Tesla and Uber are exceptions). All are important but none would be solved by obliging already profitable firms to hoard even more cash. Indeed, the most important signal sent by surging buy-backs is rather different. Leverage is creeping up, as 54% of firms spent and invested more than they earned in the last quarter. And when firms splurge on their own stock it is usually a sign of peak optimism: the last time they did was right before the 2008 crash. That’s worth mentioning the next time you chat during a downward dog or are quizzed by a Hell’s Angel.