TCS Daily

The New Investor Class and Its Critics

By Ramesh Ponnuru - March 17, 2005 12:00 AM

Most Republican strategists -- and certainly the ones at the White House and the Republican National Committee -- believe that the growth of the investor class is pulling American politics toward the free-market right and will continue to do so. A desire to accelerate that process is one of the reasons President Bush wants to create an "ownership society" in which people save and invest to meet their families' health and retirement needs.

But there is resistance to the investor-class idea among conservative intellectuals. Some detect in it a crude economic determinism reminiscent of Marxism. Some consider it a distraction from appealing to the working-class social conservatives whom they consider the Republican party's real growth constituency. But the criticisms of the theory either misunderstand it or confuse its strengths for weaknesses.

The theory holds that people who become stockowners -- either directly or indirectly through 401(k)s and mutual funds -- grow more likely to have, and to vote on, free-market political views. Behind the theory stand some plausible arguments, suggestive historical coincidences, and survey data.

From almost the very start of the nation's history there have been people who claimed that tension between workers and capitalists would diminish if workers became capitalists themselves. And it stands to reason that when people have the kind of direct, bottom-line stake in the health of the economy that a broad portfolio provides, they will be more likely to favor policies that promote economic health than people whose stake is less direct.

Over the last two decades, the number of stockowners in America has increased by about two million a year. Stockowners went from representing one fifth of American households to over half of them. Over the same period, the Republican share of the vote in congressional, gubernatorial, and state legislative races has grown. The Democratic edge in party registration and voter self-identification, meanwhile, has shrunk. Also over this period, pro-capital policies such as tax cuts on capital gains and dividends became much easier to enact.

Or take Social Security. As liberals have recently pointed out, conservatives have been wanting personal accounts for a long time now. But the accounts are getting a serious hearing in Washington only now. That's not because conservatives have gotten a lot better at making their case. It's because more and more voters have grown comfortable investing their own money and want to do more of it.

Then there's the empirical support for the investor-class thesis. Stock ownership appears to increase employee satisfaction and performance, and to reduce layoffs and job turnover. It tends to induce people to find new sources of information (such as CNBC). And yes, it tends to change their politics, too.

A January 1999 Rasmussen Research poll found that in almost every demographic category, people who owned stocks were more likely than non-investors to support a capital-gains tax cut and to identify with the Republican party. Men who didn't invest, and made between $20,000 and $40,000 a year, favored the Democratic party by 12 percentage points. Male investors with the same income favored Republicans by 3. Six percent of black non-investors supported Republicans, versus 21 percent of black investors. Republicans lost non-investing government employees by 21 points; they lost investors in the public sector by only 4.

Later polling by John Zogby showed that investors grew more conservative politically the larger their portfolios were, the more time they spent in the markets, the more they were willing to describe themselves as members of an "investor class," and the more active their ownership was.

Note that the theory does not hold that everyone who becomes an investor will become a Republican -- the kind of caricature that comes up surprisingly often in critiques of it. In that Rasmussen poll, a very large majority of black investors were Democrats. They just favored them less than non-investors did. Investment is an influence on behavior, but does not determine it.

Other criticisms are similarly misguided.

-- Critics sometimes point out that today's investors are more Democratic than yesterday's. But that is exactly what an investor-class theorist would expect. Investors were historically Republican -- and rich, and white, and men. As capital has democratized, investors are less likely to be any of these things. Many Democrats came into the markets. Only some of them switched parties. But enough of them did to make it true that the growth of the investor class helped Republicans.

The same error has marred analyses of the last two presidential elections. Polls suggest that Bush beat Kerry by the same 6-7 point margin among investors that he beat Gore by. But so what if Bush's edge among investors isn't growing? Those 6-7 points mattered more in 2004 than in 2000 because the total number of voter-investors grew -- by 7.4 million people, according to the American Shareholders Association. No other group in this country is that large, is growing that fast, and is maintaining that kind of Republican lead.

-- New York attorney general Eliot Spitzer argues that the new investors will favor Democrats, not Republicans, since they will want regulations to protect themselves. Spitzer's theory cannot be simply dismissed. But at this point, there is less evidence for it than for the conservative investor-class theory. It's not clear that investors support Spitzer's crusades more than non-investors do. When Congress passed far-ranging corporate regulations in 2002, to "restore investor confidence" after scandals, the Dow Jones fell another 1,400 points. If investors were clamoring for more federal interference, they had a funny way of showing it. In the elections that year -- which came during the worst bear market of any election in years, and right after the scandals -- investors voted for pro-personal-account Republicans.

Spitzer's excuse is that Democrats, including John Kerry, have not adopted his regulation-is-good-for-investors message. But Republicans fail to maximize their appeal to investors as well. They don't run ads explaining how they would advance investors' interests. The pro-Republican effects of the new investors have been robust enough that these tactical failures haven't much mattered.

-- Finally, some critics argue that an appeal to the investor class is not a sufficient basis for building a Republican majority. These critics are of course correct. Republicans will still have to find politically viable positions on foreign policy, controversial moral issues, and the like. Who ever said otherwise? But the range of issues where appealing to investors makes sense is not narrow. Most people who invest do so to finance their families' retirement, housing, health care, and educational expenses. Over the last century, using government to cater to these cradle-to-grave needs has been the basis for liberalism's strength. It is instructive to note that President Clinton came back from the political dead, and defeated the Gingrichites, by exploiting just this range of issues.

If a reform of Social Security based on private investment passes -- as the theory suggests it will at some point -- almost everyone will be an investor. I suspect we will then see an increasingly free-market politics. But not an eternal Republican majority: Presumably the Democrats would at some point adapt by becoming more pro-market themselves. (In some respects, they already have.)

In the near term, it is a mistake for conservatives to see a pro-investor politics as an alternative to reaching out to blacks, Hispanics, or working-class whites. It is one way of reaching them. Investors vastly outnumber union members. Conservatives ought to abandon a model of the politics of labor that is ideologically leftist and demographically obsolete.

Mr. Ponnuru is a senior editor at National Review.



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