TCS Daily


Let It Grow

By Jerry Bowyer - August 8, 2002 12:00 AM

One of the most interesting ideas to appear in recent years is that of the New Investor Majority (NIM). The analysts who have promoted this idea base it on the observation that over the past several decades the proportion of American households that own stocks, bonds or other securities has been steadily increasing and that sometime in the recent past that proportion passed the 50 percent mark. In and of itself, this is hardly a stunning revelation, but when combined with sociological data that indicates that households that own investments have markedly different political behavior, it suggests something radically important -- a fundamental political realignment.

The New Investor Majority is basically a conservative Republican idea, championed by Larry Kudlow, a former Reagan Administration economist and current CNBC talk show host. It has also been picked up by Grover Norquist, a Republican party activist and the founder of Americans for Tax Reform. They are definitely on to something: ordinary Americans now have a piece of Wall Street, and people who own something act differently than people who don't. What has been most surprising, however, about the New Investor Majority is not their existence but rather their independence. Please don't misunderstand; they tend to vote for Republicans. But I would focus most on the words "tend to" in the previous sentence and not the word "Republicans".

Just as it has become a political cliché that the Democrats take the black vote for granted, I believe it will become clear shortly that the Republicans take the New Investor Majority for granted as well. And as the following graph indicates, the New Investor Majority doesn't like being taken for granted. First let me explain the source of the numbers: every year Americans for Tax Reform calculates what they call the Cost of Government Day. This is the day on which you stop working to pay for the cost of government, as measured by direct government spending in combination with the regulatory costs which government imposes. If the direct cost of government spending plus the indirect cost of government regulation adds up to exactly 50 percent of our entire economic output, then Cost of Government Day, in that particular year, will fall on June 30th. If the cost of government is less than half of our output it will fall on a day before June 30th.

In the graph below we have taken the inverse of the Cost of Government Day; in effect we're graphing the number of days that you work for yourself. This is superimposed on a graph of changes in the Dow Jones Industrial Average. The results are rather startling: starting in 1993, the first year of President Clinton's administration, one can identify three distinct phases. The first, the early years of the Clinton Administration, is marked by a noticeable decline in the proportion of days that Americans work for themselves, and it is also marked by uncertainty in the stock market. The second phase, which begins with the election of the Republican majority in the United States Congress and ends the year before the election of 2000, is marked primarily by a decrease in the cost of government, and punctuated by one of the great bull market's in American history. The third phase begins shortly before the election season and continues through the election, and through President Bush's term until today. It is characterized by government consuming increasing shares of our work output and by a bear market to which you need no introduction.

The point here is clear, the market cares more about economic policy than it does about partisan labels. President Clinton did increase marginal tax rates in 1993, but he did it in a way that was back loaded; it applied to people in the highest brackets and therefore applied to very few people, that is until the late 1990s when strong economic growth in the bull market expanded the number of people in the highest brackets and therefore widened the scope of the tax increase. So the middle of the Clinton years was characterized by a modest marginal tax increase, but by a large reduction in taxes on international trade - NAFTA. Further, non-inflationary monetary policy lowered the effective rate of capital gains tax, and in 1997 the statutory rate was reduced as well. Welfare reform, spending control, and classical economics in the form of free trade led by a Democratic president using a triangulation strategy against his own party, led to the great bull market of the 1990s. There were exceptions, the breakup of Microsoft being the most notable.

During the Bush years the Cost of Government Day has been appearing later each year than the year before. Steel tariff protectionism, farm subsidies, and a very real possibility of retaliatory tariffs from the European Union have combined with the probability of massive defense spending, to push the line representing the days that we work for ourselves ever downward and the change in the Dow Jones Industrial Average along with it. The president's recent decision to mollify the anti-business mood of the U.S. Congress was the final straw.

Republicans have been here before, in 1998, when the bull market was interrupted by the Clinton impeachment proceedings. Democrats were able to persuade the country in general, and the New Investor Majority in particular, that they should choose between moralism and prosperity. Hundreds of opinion polls later, we learned that prosperity won, the people, and the markets sided with Clinton. The Democrats had shown themselves able, in this particular case, to peel off a key component of the Republican base.

If George W. Bush does not manage to stop Congress with its pitchforks and torches at the castle gate, and redirect them towards economic growth, the midterm elections may show that the Democrats were able to do it again.

In the 1980s, NIM's adolescent years, she was going steady with Ronald Reagan. In the 1990s , her wandering eye was caught by Bill Clinton. She came back to the GOP for the prom in November of 2000, but NIM is feeling a little neglected and George Bush should send her a bouquet (a cap gains tax cut would smell pretty good) -- he should send it right now.

A version of this article appeared in the New York Sun.

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