It's never been a better time to own stocks in this country—in theory. With labor weak and management strong, corporations—and hence stockholders—have substantially increased their take of every dollar. Between the first quarter of 2001 and the fourth quarter of 2004, for example, corporate profits rose from 7.8 percent of the gross domestic product to 10.1 percent, according to the Center on Budget and Policy Priorities. In the third quarter of 2005, corporate profits amounted to about 10.3 percent of the GDP. Thanks to changes in the tax code enacted in 2003, stock dividends and capital gains are frequently taxed at lower rates than ordinary income. And all sorts of new vehicles—retirement plans, college savings programs—offer tax breaks for investing.
So, it ought to be glory days for President Bush, who has made the " Ownership Society" a theme of his presidency, and who views investing in securities as the solution to everything from Social Security's long-term insolvency to the health-care crisis. In his State of the Union speech, Bush touted Health Savings Accounts as a Band-Aid for the epidemic of underinsurance.Meanwhile, Bush administration officials and their affiliated propagandists continually rhapsodize on how cutting taxes on capital gains and dividends has encouraged people to invest like never before. "That America's ownership society is thriving can be seen in the burgeoning holdings of assets such as houses and securities," George Melloan wrote on the Wall Street Journal editorial page last week. "The president can claim, if he so wishes, that his first-term tax cuts fostered this expansion and broadening of national wealth."
As if. National wealth has hardly broadened in the Bush years. More significantly, the expansion of the ownership society has actually stalled during the Bush presidency. Except for the richest among us, Americans have not responded to Bush's exhortations and new tax incentives.
Stock ownership rose greatly in the 1980s and also in the 1990s, as the performance of markets stimulated the expansion of the investor class, which in turn spawned a massive industry devoted to encouraging individuals to invest—discount brokerages, mutual-funds marketing, CNBC. The Investment Company Institute's fact book notes that the percentage of households owning mutual funds rose from 5.7 percent in 1980 to 24.4 percent in 1988. Between 1992 and 2000, the accursed Clinton years—despite higher taxes on capital gains and dividends than exist now—the percentage of households owning mutual funds doubled, from 24.4 to 49 percent. But 2002, the year before the Bush tax cuts were enacted, represented the peak, and by 2004, the percentage of households owning mutual funds fell to 48 percent.
Other numbers tell the same story. Americans own less of the assets Bush wants them to. According to the Securities Industry Association's most recent Equity Ownership in America study (see Page 7) the percentage of Americans owning equities—either through mutual funds or as individual stocks—rose from 36.7 percent to 47.9 percent between 1992 and 1999, a 30 percent increase. But between 2002 and 2005, the percentage of households owning equities nudged upward from 49.5 percent to 50.3 percent, an increase of 1.6 percent. Next, look at the data on owners of individual stocks outside retirement plans, where the capital gains and dividends tax cuts makes the difference. (You don't pay taxes on the dividends and capital gains earned by stocks in your 401(k) plan.) The percentage of households holding stock outside employer-sponsored retirement plans fell from 21.4 percent in 1999 to 19.7 percent in 2002 and stood at 20.6 in 2005.
Why is Bush's strategy stalled? I'd propose a few reasons:
1) Long Muscle Memory. It's been five years since the market peaked. Though the S&P 500 has notched up three years in a row, Americans remain scarred by the bad end of the '90s boom. (The mere mention of the words Dow 36,000,a copy of which is available on Amazon.com for 11 cents,can cause a room to empty.)It took nearly two generations for investors to get over the debacle of 1929. Psychological recovery from the '90s bubble is going to take time.
2) Empty Pockets. It's hard to own things when your income falls every year. And as the Census Bureau notes (see the chart on Page 3) real median household income has slumped continually since 2000. Meanwhile, the cost of living is rising, thanks to returning inflation—especially in necessities like energy, housing, and health care.
3) Home Sweet Home. Stocks, the trendy investment of the 1990s, have been replaced by housing. Unlike stocks, homes can be purchased by strapped individuals with borrowed money. Nobody will lend you $500,000 to buy stocks with no money down. But assuming you have a pulse and are willing to pay some interest, there are probably 40 lenders waiting to write you a check for a mortgage on the same terms. But even here, the pace of growth in ownership has slowed from the pace of the 1990s. According to the Census (see Table 4), while the home-ownership rate rose from 64.4 percent in 1992 to 67.5 percent in 2000, it has bumped up only 1.5 percentage points in the last five years, to 69 percent in 2005.
Is it possible that we've reached the upper limits of the ownership society? That the percentage of the population that is financially and temperamentally suited to holding mutual funds and stocks is capped at about 50 percent of households? That's hard to believe, especially when low-cost, democratic outfits like Vanguard and TIAA-CREF allow people to start investing with tiny sums. No. It's not that we can't afford to own anymore. It's that we have been presented with two competing economic models by the president. The ownership society requires thrift and patience. The consumer society, by contrast, requires that we spend like drunken sailors to keep the GDP boosted. Bush says he wants us to be frugal owners, but he really needs us to be profligate consumers. And face it, the consumer society is more fun. Given the choice between buying a pair of shoes and a share of stock, what would you choose?
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