November 15, 2005
Beware the Wrath of the Investor Class
By Lawrence Kudlow
A brand new, hot-off-the-press survey shows that the American investor class continues to grow by leaps and bounds. In the last three years, the number of families owning stocks has risen to 56.9 million from 54.1 million, meaning that nearly 60 percent of U.S. households are invested in equities today. That number is even more striking when you look back twenty years, when only a fifth of households were card-carrying members of the investor class. The Investment Company Institute, one of the sponsors of the survey (which was based on five thousand interviews), proclaims that the U.S. has "become a society of equity investors." The Securities Industry Association, another survey sponsor, believes that these trends will only intensify with the aging of the post-war baby-boom generation.
With the House and Senate now weighing crucial votes on whether to make permanent the 15 percent tax rates on investor dividends and capital gains, you'd think our elected officials would be considering the needs of America's stock-owning families. But the Harry Reid and Nancy Pelosi Democrats continue to oppose these tax cuts as nothing more than sops to the rich. Are they saying that three-fifths of American families are rich? Zogby polling shows that nearly all Americans -- 93 percent -- earning $75,000 a year or more own stocks. They can't all be rich. And how about those earning up to $75,000 a year? In this group, more than half, or 56 percent, own shares. Of those earning below $50,000 a year -- a group that in the aggregate pays very little in taxes overall -- 30 percent own stocks.
The "tax cuts for the rich" argument just gets weaker and weaker as the investment class gets larger and larger.
The Republican Congress, meanwhile, can't seem to get the job done either. Instead of winning one for the investor class, a vital part of their base, GOP politicians in Washington are attacking oil companies (whose shares are widely owned), reneging (perhaps) on the tax-cut extenders, and coming up blank on offering a strong budget-cutting plan. This is not yet a Republican crack-up, but it's perilously close to becoming one.
The good news for the GOP is that Democrats continue to disrespect the investor class. But the bad news is that by failing to enact higher after-tax rewards for investors and job-creating capital formation in the overall economy, Republicans may be alienating their most natural supporters. In recent elections, nearly two out of every three voters were stock owners. Where will they turn if the Republicans they put into office no longer represent them?
In a recent speech to the Washington Economics Club, President Bush again expressed his strong support for investor-class tax cuts, and also for the necessity of additional spending cuts. But is one speech sufficient to make the case, and to really put the heat on Congress? I don't think so. Good political marketing requires message repetition. Bush must make the investor-class case again and again, day after day, as Congress considers key votes on budget and tax policy. He must give voice to the investor class, becoming their representative in Washington; their advocate general. He must make it clear to the tone-deaf Republican majorities in both houses of Congress that they risk an electoral overthrow a year from now if they don't heed the call of America's stock-owning families.
It really has come to this breaking point. IRA and 401(k) owners are getting fed up with GOP recalcitrance. Nearly two-thirds of respondents to a recent CNBC poll actually believe that a Democratic majority in the House would be bullish for stocks. In other words, gridlock might be better than Republican government.
Polls like this, and perhaps the Democratic gains in the election earlier this month, are bad straws in the wind for the Bush vision of ownership, individual choice, and growth economics. Investors are risk takers and they know how to trade. If they see a stock in decline they will sell it. And they just may short the GOP unless they see a major turnaround in that company's management and performance.
Lawrence Kudlow is a former Reagan economic advisor, a syndicated columnist, and the co-host of CNBC's Kudlow & Company. Visit his blog, Kudlow's Money Politics.