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Article Excerpt
I. INTRODUCTION
In recent years, political analysts have conjectured that voting has been affected by the rise of an investor class in the United States, where the stock ownership rate has doubled from under 25% in the late 1970s to over 50% by 2001. (1) This shift in portfolio behavior has accompanied an upward shift in the two-party share of the House popular vote for candidates from the more capital-friendly Republican Party (Figure 1).
While the notion that property interests affect voting is an old and intuitive one, empirical tests of the effect of stock ownership on voting have been hampered by the lack of continuous time series data on stock ownership. Fortunately, continuous data on equity mutual fund costs are available from Duca (2006) that are highly and negatively correlated with discontinuous stock ownership rates as shown by Duca (2001, 2005). In line with research on factors affecting stock ownership by Aiyagari and Gertler (1991) and Heaton and Lucas (2000), we argue that mutual fund costs are a good proxy for stock ownership rates and use them in short- and long-run models of the two-party share of the popular vote for Congressional Republican candidates that use data spanning 1954-2004.
We analyze the link with congressional voting because the shorter cycle of races allows for more degrees of freedom than presidential races, and we focus on House rather than Senate elections, the latter of which cover only one-third of that body and are not geographically balanced. Also, relative to presidential elections and Senate elections, the larger number of House races in national vote totals and the lower profile of individual representatives limit the impact of personality on elections, perhaps allowing for a cleaner test of the role of property interests. We focus on the national share of the popular vote rather than on the number of House seats because the latter is influenced by the design of House districts, which is subject to political gerrymandering.
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We test whether the rise in the Republican share of the House popular vote from around 44% to 50% since the late 1980s is linked to wider stock ownership. Our findings accord with the view that the mutual fund revolution has contributed to a shift in voting. In particular, our results suggest the Republican share of the House popular vote will likely fluctuate around 50% until other factors trigger a political realignment.
Our study is organized as follows. Section II reviews the history of the debate over linking voting rights with property ownership in the United States and the literature on how stock ownership rates could affect voting. Section III empirically tests whether there is a long-run relationship between the House popular vote and stock ownership. Section IV addresses whether property interests, as reflected in this long-run relationship, help explain short-run changes in voting in the presence of more conventional short-run variables (e.g., midterm elections). To assess whether these findings are robust, Section V similarly analyzes the House vote in the South, where there has been a long-run shift toward the Republican Party. Section VI analyzes the popular vote shares in Senate elections. Although the latter is noisier than the House series and is not from a geographically balanced electorate unlike House races, applying the methodology to the Senate provides a robustness check on the House results. Section VII summarizes our findings and discusses their implications for future research.
II. VOTING AND PROPERTY OWNERSHIP IN U.S. HISTORY
The idea that asset ownership could affect voting is an old one in the United States and was much discussed at the 1787 constitutional convention. George Mason proposed that owning land be required for Senators because the chamber was intended "to secure the rights of property," which presumably could not be guaranteed if Senators did not own property (Madison 1987, 200). Pennsylvania delegate Gouverneur Morris argued that wealthy states ought to receive more House seats than poorer ones because citizens of wealthy states would be more likely to protect the assets of the propertied (Madison 1987, 244). This led South Carolina delegates John Rutledge and Pierce Butler to propose that House seats be apportioned by wealth and population. However, disputes over how to measure wealth (by federal taxes or land values), dedication to private property (ownership of land vs. general assets), and applying economic values to slaves convinced most delegates that apportioning the House by wealth was impractical.
The most important debate (from our perspective) was over suffrage. Gouverneur Morris proposed limiting the right to vote in federal elections to landowners (Madison 1987, 401). John Dickinson of Delaware supported this as "a necessary defense against the dangerous influence of those multitudes without property and without principle" (Madison 1987, 402). Madison (1987, 403) noted that landowners are the "safest depositories of Republican liberty," because only they can safeguard "the rights of property and the public liberty" but nevertheless argued against Morris, believing that limiting voting rights would lay the groundwork for dictatorship.
While many of the American republic's founders feared the prospect of rule by the general populace, Karl Marx welcomed it. Recognizing that workers with no hope of advancement and no prospect of wealth ownership had literally "nothing to lose but their chains," Marx (1977) theorized in his classic work, Capital, that the masses would inevitably confiscate the assets of the rich and establish an egalitarian society. What Marx never anticipated was that common individuals would gain the ability to become owners. The last decade of the 20th century featured the largest rise in stock ownership the United States has seen, and greater stock ownership has shaped many middle-class Americans into what many observers, such as Kudlow (1997), have called an "investor class." Kennickell, Starr-McCluer, and Surette (2000) found that Americans' net worth grew strongly during the 1990s with "a continued rise in the holding of stock equity ... account[ing] for a substantial part of the rise in net worth." This rise was "broadly shared by different demographic groups," with the biggest percentage point increases in ownership occurring in the middle quintiles of the income distribution.
Policies favoring capital formation and accumulation have gained popularity. "Thinking like the shareholders and business owners that they are," writes Glassman (2000), "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." And polls suggest that stock ownership induces middle-income Americans to support procapital policies like lower capital gains and estate taxes as Nadler (1999) and Gigot (1999) note.
In a basic two-party median voter framework such as Downs (1957), a change in the electorate would not affect the fortunes of either political party because the parties would adjust their platforms to match median voter preferences. Gross (2000) argued that the Democratic Party has adjusted by increasingly accommodating the views of "New Democrats," who combine social liberalism with moderate-to-conservative economic views. But for many reasons, including primary elections and ideological conviction, a complete convergence of party platforms to the views of the median voter may not occur as discussed in Mueller (2003). Simply put, neither a party nor its supporters are willing to entirely shed the principles that motivate them to seek power, whether those principles protect the poor or reward the rich--even at some added risk of losing elections. Thus, the traditional gap between the two major parties on wealth issues could plausibly persist, implying that owning stocks raises the likelihood of voting for the Republican Party that has traditionally pursued capital-friendly policies as Faucheux (1999) maintained.
III. STOCK OWNERSHIP AND HOUSE ELECTIONS IN THE LONG RUN
Although continuous stock ownership rates are unavailable, continuous data on equity mutual fund costs from Duca (2006) are a good proxy for stock ownership, having a strong, negative correlation (-0.96) with stock ownership rates (Figure 2), where equity fund costs (MFCOST, Appendix A) equal the annual expense ratio plus the annualized, average cost of front-end and back-end commission fees (loads) for mutual fund investments over 5 yr following Duca (2005, 2006). (2,3) We assess the time series relationship between stock ownership rates and voting behavior by using equity mutual fund costs as a proxy for unavailable continuous stock ownership rates. This section first discusses the link between the share of households owning stock and the mutual fund costs and then focuses on testing the long-run relationship between equity fund costs and voting.
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A. Why Equity Mutual Fund Costs Are a Good Proxy for Stock Ownership Rates
There are good arguments for using equity mutual fund costs to proxy for stock ownership rates because higher equity participation has been associated with declines in the cost of investing in equity mutual funds, consistent with recent research on stock investing by Guiso, Haliassios, and Jappelli (2003), Heaton and Lucas (2000), and Siegel (1999) and on mutual fund costs by Duca (2000, 2001, 2005, 2006). In particular, Heaton and Lucas (2000) analyzed why stock ownership was lower than implied by conventional theory given a high equity premium. In their optimization model and that of Vissing-Jorgensen (2002), transaction costs and nondiversifiable labor market risk deter middle-income families from owning stocks despite a high equity premium. As a result, transaction costs can have larger portfolio effects than in conventional models, and higher mutual fund fees before the early 1980s may explain the lower stock ownership rates of that era. In this calibration model, lower transaction costs can induce higher equity participation, especially among low- to middle-income families, consistent with Dixit (1989), and a greater rise in stock ownership rates in the 1990s among these families than among high-income families, as noted by Duca (2006) and Kennickell, Starr-McCluer, and Surette (2000).
Owing to limited wealth, many families are more apt to acquire a diversified stock portfolio by buying mutual funds rather than directly buying stocks. For such families, the relevant transaction costs for investing in stocks are mutual fund fees, and if these lees fall, stock ownership rates should rise. Figure 2 shows that the rise in ownership mostly owes to greater indirect ownership, which is even more negatively correlated with annual equity fund costs (correlation of -0.98) than is overall ownership (correlation of -0.96) over commonly available years (1969-2004). Furthermore, other data show that the rise of indirect ownership primarily occurred through increased mutual fund ownership. The much higher fees of the 1970s and early 1980s may thus account for the low, pre-1990 stock ownership rates that were analyzed by Aiyagari and Gertler (1991) and others.
Using three decades of data, Duca (2005) found that lower mutual fund costs and greater confidence boosted the percent of stocks owned by families via mutual funds. He argued that lower fund fees could induce greater reliance on mutual funds by spurring some shareholders to shift assets from stock shares to mutual funds and by inducing some households to become shareholders. In addition, Duca (2005) found evidence linking mutual fund costs with technology. In particular, he showed that the measure of mutual fund costs used here is cointegrated with and negatively related to productivity in commercial banking, the only financial sector for which a long time series of productivity estimates exists. Together, recent calibration models and evidence on household portfolio behavior suggest that falling mutual fund costs have boosted equity ownership rates.
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The positive correlation between stock ownership rates and the Republican share of the House vote and the negative one between stock ownership and equity fund costs imply a negative relationship...
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