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You and Me and Bill Gates Makes Three

Three of what? Why the “investor class” of course! This is the absurd concept, promulgated by Republican operatives and ideologues, that because you and me and zillions of other Americans have at least some money in the stock market, even if only indirectly in retirement plans, we’re all in the same class with Bill Gates and other people with the big bucks. And because of that we–our class!–want to cut regulation, taxes and social spending so that the health of America’s companies can be safeguarded and our stock portfolios can keep going up. Furthermore, since the investor class is growing–more and more people have at least some investments in stocks–the future of the GOP is bright, since Republicans are the party that supports such policies.

Put this way, it almost sounds too silly to be taken seriously–the quasi-Marxist (capitalists of the world, unite!) pipe dream of Republicans frustrated by the many ways demographic change is hurting the GOP. But, somewhat amazingly to DR, people do take it seriously. So, The Washington Post is to be commended for trying to take a closer look at the theory with some data in their Monday story, “Parties Put Stock in Investor Class”.

Too bad they couldn’t have done a better job. Let’s start with the issue of investor class growth. It is indeed true that the investor class, defined as anyone who holds any stock in any way, is increasing, as they say in the article. According to the Post’s data, 58 percent of adult Americans now hold some stock either directly or indirectly, up from 44 percent in 1997 and 32 percent in 1987. The Post’s current level might be a bit high, but their trend is consistent with other data on stock-holding among Americans.

The Post also points out that only 37 percent of stock-holding Americans hold individual stocks directly–again consistent with other available data. But the Post fails to point out what other data show clearly: the growth of stock-holding among Americans is mostly driven by increased indirect stock-holding–basically mutual funds held in retirement vehicles like 401(k)s and IRAs. For example, Survey of Consumer Finances data show overall stock-holding among American households increasing from 32 percent to 48 percent between 1989 and 1998. But in that period, direct stock-holding went up just 6 points, from 13 percent to 19 percent, while indirect stock-holding increased 18 points, from 25 percent to 43 percent.

That’s a particular problem in the context of the article because, as the article stresses, there is no convincing evidence that indirect stock-holding has any effect on one’s political views. In other words, by far the most popular form of stock ownership and the one that has mostly driven the rise in stock-holding among Americans currently has little political importance.

The Post article does say that direct investment in individual stocks, controlling for income level, is associated with pro-Republican views. This is interesting, but the article fails to explore this finding at all. To begin with, it doesn’t even tell the reader how many Americans (21 percent, which can be easily computed from the data in the article) actually have these direct investments.

Then, there is no indication this relationship was very carefully explored for robustness (certainly no regression analyses were reported). Under and over $50,000 in household income, in fact, appears to be as much as they did to compare direct stock-holders at the same income level. That raises the possibility that the direct stock-holders were concentrated in the higher income brackets of these very large divisions, thereby accounting for some of the observed pro-Republican effect. Also, it’s possible that what we are seeing here is a wealth effect–those who buy individual stocks at a given income level tend to be richer than others at that income level and some of their extra money is invested in individual stocks. But even if they didn’t invest in individual stocks, they’d still be wealthier, on average, and would therefore tend to be more politically conservative. Or it’s possible that those who invest in individual stocks are those who are attracted to the world of business and want to spend their time following business news and TV. So it could be their pro-Republican orientation that drives their investment in stocks, not the other way around.

It’s not clear which, if any, of these alternative interpretations is true. But it is clear that, between the finding of no effect for the fast-growing bulk of the investor class–those with only indirect investments–and the questionable nature of the finding on the slow-growing minority of the investor class–the individual stock-holders--the theory of the investor class as a huge demographic boon for the GOP seems, shall we say, underwhelming.

So underwhelming that let’s try a different way of looking at small investors–and, make no mistake, most investors do not have large holdings. Indeed, one-quarter of stock-holding households hold stock worth less than $5,000 and that the typical stock-owing household in the middle of the income distribution (between the 40th and 60th income percentile) owns only about $15,000 in stock

Let’s substitute for this ridiculous idea that all investors, no matter how rich or poor, are somehow part of the same class, the idea that there is a large group of middle income voters–call them the “401(k) class”--who own moderate amounts of stock, typically in mutual funds in retirement accounts, and are dependent on these accounts to fund their retirement. This is a large group also (perhaps 30 percent of households, though data limitations preclude an exact estimate), but permits us to cut out the poor, who tend to have very small holdings (remember, one quarter of stock-holding families have holdings under $5,000), the genuinely affluent, who tend to have fairly large and diverse stock holdings, as well as the flat-out rich, whose status in life is very far indeed from those in our 401(k) class.

This slimmed-down concept, besides having a more sensible size, has a singular virtue. It eliminates the conceit that someone holding $300 million in stock in 61 companies (as Treasury Secretary John Snow did before he was confirmed) and some FedEx worker holding $30,000 in stock funds in her 401(k) are somehow members of the same “class”. Instead, it allows us to focus on a group that might actually have some coherence of economic interests and for whom stock investments are means to very specific ends, like a secure retirement.

Analysis of other data indicates that the 401(k) class is much like the rest of the middle class--concerned about the schools, the health system and other problems and perfectly willing to support substantial government action if they are convinced it is necessary to solve these problems. And this willingness should logically extend to the very area--retirement funding--that is primarily responsible for the rise of the 401(k) class. A 401(k), after all, is a creation of public policy. The 401(k) class, not to mention the rest of the middle class (and the poor), would very much like ways to save more, and more efficiently and securely. As noted, the typical member of the 401(k) class has modest holdings and could use a much solider financial base for retirement.

Indeed, given the recent sordid history of Enron, the schemes of many other large corporations to underfund their pensions, and the failure of accountants to protect shareholders, the theory of the investor class can almost be inverted. As small investors become more politically conscious of their interests, it becomes clear that they depend on competent government regulation and oversight so that their pension savings are not fleeced, as well as social insurance to protect them from the vagaries of the marketplace in which they invest. Looked at in this way, the 401(k) class could form the new constituency for the mixed economy.

One thing government can do is mandate a universal pension system that would provide every worker with a fully portable retirement account. Under such a system, a version of which has been introduced by presidential contender and former House minority leader, Dick Gephardt, workers could direct cash from any IRA or 401(k) accounts into a comprehensive, fully portable retirement account. In addition, every American child would receive $500 to open an account.

Former White House economic adviser Gene Sperling has advocated a plan to fund these universal accounts further by providing up to $1,000 a year in matching contributions for savings deducted from paychecks–a one-to-one match for middle-income workers and a two-to-one match for lower-income workers. The funding for these matches could be generated simply by increasing the threshhold for the estate tax (to $5 million), rather than eliminating it entirely and in perpetuity as the Republicans wish to do.

These reforms build an investor class, but in a fashion with profoundly different implication for politics, ideology, and policy. Instead of promoting stock-ownership in a way that reinforces an individualist approach to government, as Social Security privatization would do, these reforms give the government a key role in guaranteeing that the promise of stock ownership is democratically extended to all and actually fulfils its purpose of providing economic security.

John Snow and the other very wealthy rich people lumped in the imaginary investor class might not be too excited about these proposals. But you can bet the 401(k) class, as well as lots of other moderate-to-low income voters, would be. Democratic presidential contenders, please note.


Excellent reporting.
Your careful analysis is really important because, as Thomas Frank demonstrates in "One Market Under God," market populism is one of the biggest cons going. The Washington Post article attests to the continued efforts to confuse the middle class about where its true interests lie...

Seems that this whole notion of an "investor class" is a house of cards built on the assumption that this group will behave irrationally by valuing policies to modestly boost their stockholdings over policies that provide services and protections they rely on.

I think there's some credibility that this group may favor a proposal if they are ONLY told it will help business (and hence, stock). But it seems that all it would take is a coherent argument pointing out what they are giving up to change their minds. Unfortunately, coherent arguments have been scarce in the Democratic Party the last few years...

I would love to agree with this analysis, but unfortunately it makes the common error of assuming that people will vote their best interests rather than their aspirations (however improbable those aspirations might be).

Specifically, in explaining the correlation between direct investment in individual stocks and pro-Republican views, DR doesn't consider the possibility that direct investors are pro-Republican because they believe (fatuously or otherwise) that stocks will make them rich. Low and moderate income people can have these beliefs just as much as the wealthy do. That fact that they are misguided doesn't make any difference for immediate electoral politics.

What follows, of course, is that Republicans are talking up the idea of an "investor class" precisely because they want Americans to believe that they are in that class and because, unfortunately, many Americans will fall for it. Until it's time to retire, a sadly small percentage of people will bother to actually do the math and find out how little their equity investments are worth.

This successful use of framing that is completely disconnected from reality is what makes the Republican party so maddeningly effective. Democrats can counter this, but only if they really understand that the argument isn't about the numbers it's about the aspirations.

Ruy, Great analysis. This topic is of particular interest to me, and I've been following it since seeing Norquist speak at a forum a year ago. I have a couple questions, though.

At what point do people's perceived interests kick in to determine their political choices? Might 401 (k) owners, the typically unsavvy investors, be fooled into believing their interests are being served by dividend tax cuts and like policies? Especially with all the 'money news' on TV? Isn't this more or less what the GOP is depending on? I'm basically having a problem relying on the results of the single Post survey, since it appears that years of GOP planning and research has orbited around this concept of the 'investor class.'

If the GOP has been blowing hot air, why have they been doing so? I'm having trouble seeing the benefit to this kind of misinformation.

In any case, the investor class, I agree, could be just as much of a liability to the GOP as a benefit. Beyond just the small investors' inclination towards decent regulation, I'm of the mind that the GOP's business-friendliness has persisted so long that it could lead to major crises in the market. For instance, lax oversight in the mutual funds industry is poised to explode in a flurry of investigations and potentially sell-offs. That won't be good for the GOP if they're relying on 401 (k) investors to vote for them.

The fact that as people become more (and presumably better) educated, they become more likely to vote Democratic, does indicate who the Republican core voter is: the ill-informed. :-/ Unfortunately there's no easy cure for this.