George W. Bush has seized an early lead in the polls and he's dominated the national debate by urging tax cuts and a reform of Social Security. Despite Social Security's reputation as the "third rail" of American politics, Bush's proposal to allow Americans to invest some of their contributions in private accounts is a political winner. So why isn't Gore's anti-capitalist rhetoric playing with the electorate? Unfortunately for Gore but fortunately for Americans, we're all capitalists now!
Astute observers like Larry Kudlow have long been forecasting the emergence of a new "investor class." Skeptical of Social Security's promises and increasingly invested in stocks, these Main Street capitalists demand market-friendly policies from Washington. Thinking like the shareholders and business owners that they are, members of the investor class want low taxes on capital, low taxes on individual and corporate income, light regulation of business and limits on litigation.
I believe it's unclear how much the investor class has influenced elections to date, but this year could be the coming-out party for Baby Buffetts. And if George W. Bush is elected and actually manages to reform Social Security, the investor class will become the most powerful force in American politics.
The trends are clear. Earlier this year, the Federal Reserve released the results from its 1998 Survey of Consumer Finances (SCF), a triennial study of Americans and their money. According to the Fed, "The financial situation of families changed notably between 1995 and 1998. While income continued a moderate upward trend, net worth grew strongly, and the increase in net worth was broadly shared by different demographic groups. A continued rise in the holding of stock equity combined with a booming stock market accounts for a substantial part of the rise in net worth."
Just how much do stock investments contribute to the growing net worth of American families? The SCF reports: "Families may hold stock in publicly traded companies in many different ways through direct ownership of shares or through mutual funds, retirement accounts, or other managed assets When all these forms of stock ownership are combined, the data show considerable growth in stock ownership in every survey since 1989. In 1998, 48.8 percent of families owned stock equity through some means. Since 1989, the ownership rate has grown 17.2 percentage points, with nearly half of the gain since 1995."
So, as of 1998, almost half of American households were invested in stocks an all-time high. And stocks represented a clear majority of American assets. Reports the SCF: "The proportion of financial assets attributable to all forms of stock ownership also moved up, from 40.0 percent in 1995 to 53.9 percent in 1998. The rise reflects both an increase in the market valuation of stocks and the increased tendency of families to hold stock."
This fall, the investor class may constitute a majority of American voters. Memo to Al Gore: stop moving left to counter Ralph Nader. Memo to George Bush: hang tough when the media attacks your reform plans for Social Security.
While this fall could demonstrate the emerging power of the investor class in national politics, it's what happens after the November elections that could be truly revolutionary. A Social Security reform that gives people the option to create their own investment accounts would turbo-charge the movement toward middle-class capitalism. According to Prudential Securities analyst Chuck Gabriel, implementation of the Bush plan would lead to an almost immediate explosion of the investor class—with 80% of American households owning stocks.
Just guess how Americans will vote when 80% of U.S. households own stock in corporations. Maybe that's what the President was talking about when he said the era of big government is over.