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The “Investor Class” In The Ownership Society

By Gary D. Halbert
March 22, 2005


1.   What Is The So-Called New “Investor Class”?

2.   Political Implications In An Ownership Society

3.   An Interesting Article For The Republicans

4.   Investors & Owners Are Not The Same Thing

5.   Investor Class May Not Always Favor Republicans


As this is written, we are relocating our offices and staff to a brand new building just down the street from our old location.  Our new address is 11719 Bee Cave Road, Suite 200, Austin, TX 78738.  All of our phone numbers will remain the same.

Due to all the hustle and bustle in relocating, I am reprinting an interesting article for you to read this week.  As you know, President Bush is proposing “private savings accounts” (PSAs) as a part of his plan to save Social Security, and we have also heard a lot about private “health savings accounts” (HSAs) as a way of dealing with the looming Medicare crisis.

President Bush likes to refer to these proposed savings accounts as a part of an “ownership society” where people have more control over their health and retirement futures.  You may agree or disagree with these proposals.

There are, of course, political implications to these proposed savings accounts. President Bush’s advisors believe, rightly or wrongly, that as more Americans gain control of more of their health and retirement assets, people will tend to vote for more free-market initiatives that will favor the Republicans.  Many Democrats oppose these changes, rightly or wrongly, for the same reasons.

Whether these private savings accounts become a reality or not, the so-called “investor class” of Americans – those who are stock owners, either directly or indirectly through mutual funds and/or their retirement plans - is growing very rapidly.  In just the last 20 years, for example, we have seen stock ownership balloon from only one-fifth of households to over half of them.

The following article discusses some of the implications of the exploding investor class.  I trust you will find it interesting reading as I did.  However, this issue of the exploding investor class has many implications that the author did not address.  I will refer briefly to a couple of those issues following the article just below, and I will be writing more about them in the weeks to come.

The following article was written by Ramesh Ponnuru who is a senior editor at National Review.  I ran across it at


“The New Investor Class and Its Critics

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.”  END QUOTE

Implications Of The Growing Investor Class

National Review is a conservative publication, and Mr. Ponnuru is warning fellow conservatives not to be overconfident about recent voter trends in the growing investor class.  While his point is well taken, he rather assumes that private savings accounts and health savings accounts are all but a done deal at some point.

I would argue that widespread private savings accounts are far from a done deal!

The Democrats are uniformly opposed to the idea of private accounts.  A number of Republicans are also balking at the idea.  Recent surveys indicate that privatizing a large portion of Social Security is losing favor with the public.

Even so, let’s do some speculation assuming that private accounts become a reality in the near future.

Everybody’s An Investor

While I personally support the concept of true private accounts that can be invested in a limited number of professionally managed investment alternatives, I don’t know that such a program will create an even larger group of “automatic” Republicans.  Of course, the above article does admit that there are a number of factors that determine the ultimate politics of an individual (conservative or liberal), but it also seems to hint to a conclusion that if you wait long enough, the transition of workers to an investor class will be good for Republicans.

Well, maybe and maybe not.  While it’s true that free trade and pro-business positions are traditionally the stronghold of the Republican Party, that may not be true in the future.  After all, if and when private accounts are ever enacted, all workers will immediately become investors with the stroke of a pen.

Self-interest is the life-blood of politics, so if the vast majority of voters become part of the investor class, do you think that the Democrats will continue to take an obstructionist and contrary position?  Perhaps for a while, but I tend to think that the Democrats, out of pure self-interest, will start to align themselves with the pro-business crowd. 

It won’t matter that Democrats have taken different stances in the past because America is a nation with a short memory, and an even shorter attention span.  The sins of the past are soon forgotten in favor of the next sensational news story.  Historians warn us about it, and theologians preach against it, but politicians count on it. 

If a large part of the electorate were to suddenly be thrust into the investor class, Democrats will likely assess the situation, and possibly become more pro-business as a result.  Free trade may cease to become a line of demarcation and simply become an area of bipartisan agreement.  Pro-business political positions may become like baseball, mom and apple pie, who could be against them?

If that happens, the Republicans would no longer hold a monopoly on pro-business issues, and voters will have to make up their minds based on other issues.  Just in case you don’t believe this could ever happen, just look up Senator Hillary Clinton’s recent comments about abortion.  On an issue where there couldn’t be more difference between the two parties, she has created a new position that doesn’t sound like the Republicans or the Democrats, but rather sounds like many people in American who are conflicted on the issue of abortion.

Hillary surprised many by saying that, while abortion should remain legal, it should be avoided whenever possible.  She even went so far as to recommend that we teach abstinence to young people.  If that’s not straddling the fence, I don’t know what is!  If this can happen on the emotionally charged issue of abortion, it can surely happen on pro-business issues.  

Investors Versus Owners

Of course, the discussion above assumes that those who become investors actually start to think like owners, which I do not think is necessarily accurate.  It may be true in relation to those entering into the market only after careful study and research, which is relatively rare.  However, it is not likely to be true when the public is thrust into being an investor for the first time because of a Social Security private account.

There is a real difference between an owner and someone who is merely an investor.  Owners are concerned about the economic and political climate that will help their businesses grow and prosper.  Investors, on the other hand, are only interested in the price of their stocks going up, whatever may be the cause.  Our modern securities markets have blurred the link between ownership of a stock and ownership of a company.  As a result, many people view ownership of the stock as the end result, not the underlying company.

For example, just think back to what you thought the last time you received a proxy statement in the mail.  Did you view this as a way to participate in the management of the company, or did you merely throw it away?  Most people just throw them away.

I can tell you from my position as owner of a financial services firm that many people who consider themselves to be investors do not want to handle the paperwork and research it takes to be a good owner.  We often get calls from our clients asking how to “turn off” mailings from stock, bond, and mutual fund positions they own. 

It is simply a fact that in many cases, when investors buy a stock, they consider themselves as owners of the stock, not necessarily of the underlying company it represents.  Think about the chatter around the break room.  When someone tells you they own Intel, Dell, or IBM, they’re most likely talking about the stock, not the company. 

In fact, it can be “fashionable” to own certain stocks with little or no regard to the health, assets or profitability of the underlying company.  Stock buying frenzies are nothing new.  When that happens, the stock starts to become a commodity in and of itself, rather than a representation of an ownership share in something larger.

There is no question that this is one of the factors that led to the tech bubble of the late 1990s.  All tech stocks had to go up, and did go up for a while, just because they were tech stocks.  Never mind that many of the tech companies and dot.coms had no tangible assets, no business plans, no experienced management, and had never produced a profit (some had produced little, if any, revenue, much less profit).  “Investors” divorced the thought of corporate profit from ownership of the stock.

All of the foregoing leads to one basic conclusion; giving all workers a private account will make them investors, but it will not necessarily give them the attributes of owners.  And it is these ownership attributes that the Republicans long for.


As I stated at the beginning, Mr. Ponnuru’s article makes some very good points.  Recent voter trends and the rapid growth of the investor class have favored the Republicans in recent years.  But as I have hopefully pointed out, there is no guarantee that these same trends won’t swing back to the Democrats, especially if we hit some rough economic times.

This article provides a springboard from which I will discuss other issues concerning the growing investor class in future E-Letters.  However, in this first installment, I think it’s important to realize that the political agendas and affiliations of the general public are far more complex and involved than just who is best for business.

As a result, I think it is dangerous for the Republican leadership to make assumptions regarding an ownership society or investor class being the key to a long-term political dynasty.

Lastly, if you follow my idea that not everyone who becomes an investor necessarily has the mindset of an owner, then it’s important to think about exactly what these “new” investors have witnessed in the investment markets. 

Many in the current investor class joined during the late 1990s, only to see their investments plummet in the bear market of 2000-2002.  Couple this simple observation with the fact that most people simply don’t understand economics, and you will find that a large number of people equate happy days in the markets with Bill Clinton, a Democrat, and bear markets with George W. Bush, a Republican.  (I’m not saying either caused the economic conditions that occurred during their tenure, just that they happened to be the person in charge at the time.)

To the extent that those workers who would be brought into the investment class remember things the same way, the Republicans may find that these new investors might prefer a Democrat in office rather than a Republican, exactly the opposite of what the Republican leadership wants. 

Very best regards,

Gary D. Halbert


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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