New U.S. Investor Class Bodes Profound Political Change

Just as the stock market crash of 1929 changed the face of politics for the next six decades, the stock market boom of the 1990s may change the face of politics well into the next millennium.

The crash of ’29 was the catalyst for the modern welfare state. The current market boom could produce its opposite. As more Americans gain a stake in stocks, their views undoubtedly will change on such matters as business regulation, taxes, antitrust policy, trade, even foreign affairs.

The crash set off a chain reaction that led to Social Security, a more pervasive regulatory apparatus and, eventually, food stamps, welfare, Medicaid and Medicare. The boom could result in the reduction or dismantling of many of these same programs and a move back toward smaller government.

Tuesday in Kansas City, Mo., President Clinton led a discussion on the future of Social Security, and while the issue appears to be the program’s solvency, far more is up for grabs. If Social Security is reformed along the lines that even Democrats such as Sen. Daniel Patrick Moynihan (D-N.Y.) have proposed, then virtually all Americans will become stockholders. That would accelerate political changes already underway.

In 1997 about 43% of adult Americans owned stocks, according to a survey by Peter D. Hart Associates for Nasdaq. That figure has risen sharply--from 10% in 1965 to 21% in 1990. And new data from the Federal Reserve Board shows that stock investments now comprise 28% of household wealth in America--up from just 12% in 1990.

Meanwhile, real estate, which represented 33% of the wealth of the average American family in 1990, has fallen to 27%. Real estate has long been the asset favored by politicians, who showered it with tax breaks and subsidies.

But suddenly stocks are now more important to Americans’ financial well-being than anything else they own. That could produce a sea change in politics.

“You have the emergence of a broad-based investor class,” says Lawrence Kudlow, chief economist for American Skandia.

But only recently have politicians begun to recognize its power. Investor clout, for example, probably encouraged President Clinton to approve last year’s cut in the capital gains rate from 28% to 20% and the new, liberalized Roth IRAs, which allow tax-free withdrawals on retirement. And the satisfaction of investors at a rising stock market has helped keep Clinton’s job ratings high in the face of scandal.

In the future, the investor class could flex its muscles by becoming an advocacy group for corporations--for example, by opposing higher costs to deter global warming. The political shift could be profound, but it is just beginning. At its source are four developments:

* The shift away from traditional, defined-benefit pension plans toward defined-contribution 401(k) plans, run by individuals themselves. In 1995, according to the Employment Benefit Research Institute, 45% of Americans had a 401(k), or its nonprofit or public-sector equivalent.

* Growing fears that Social Security is in deep trouble. Research by Roper Starch Worldwide found that in 1997 only 46% of Americans said they “count on” Social Security as a source of income in retirement--down from 88% in 1974. Meanwhile, 42% count on self-directed retirement accounts, up from 6% in 1980.

* The rise of mutual funds, which have made stock market investing easier, safer and more democratic. A 1997 Investment Company Institute survey found that 37 million U.S. households--roughly three in eight families--own mutual funds. More than 70% of them had incomes under $75,000.

* The boom in the stock market itself. An investment of $10,000 in the 30 stocks of the Dow Jones industrial average in 1988 is worth $58,000 today, and there is good reason to believe the market will continue on a strong upward path into the next century. As the rise continues, more workers will want to own a piece of America’s businesses, which is bad news for traditional pro-Democratic interest groups such as labor.

All these factors have not merely increased and broadened financial wealth, they have also led to what Hart, in his study for Nasdaq, calls “a new ethic of self-reliance.” This is the idea that individuals can have a more satisfying life by providing for their own families, rather than depending on government. It does not obviate the need for a safety net for the truly needy, but it casts doubt on collective programs such as Social Security.

Certainly, a market collapse would be a setback. But in the new environment, politicians--even governors of the Federal Reserve Board--would be reluctant to take the kind of steps that could contribute to such a collapse.

Politicians of both parties will ignore this new investor class at their deep peril. The question is not whether it will become the most powerful interest group in America, but when.

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* DEBATE BEGINS: President Clinton kicked off a national debate on Social Security’s future. A1