Bull Run: Wall Street, the Democrats, and the New Politics of Personal Finance.
Public Affairs. 236 pages. $25.00
Summarizing his accomplishments at the Democratic convention in August, President Clinton mentioned that during his administration, the number of families with investments in the stock market had increased by 40 percent. Roughly 80 million households now own stock, either directly or through their pension plans. In the opening pages of Bull Run, journalist Daniel Gross puts that number in context: "Today, more people own stocks than surf the Internet, watch the hit TV show ER, or vote — and by large margins."
The increase in the number of investors, a trend Gross describes as "the democratization of money," is clearly an important story. Yet Gross is correct to note that the political effects of that trend have "gone practically unnoticed." To the extent those effects have been analyzed at all, they have been analyzed by conservatives. Lawrence Kudlow, the supply-side economist, talks about a "new investor class" leading American politics in a free-market direction. In the "Rise of Worker Capitalism," a paper for the libertarian Cato Institute, Richard Nadler examined survey data suggesting that the new investors were becoming receptive to the Republican Party and to traditionally conservative policies such as reductions in the capital-gains tax.
Bull Run offers something new: a Democratic take on the politics of the new investor class. Gross’s thesis is that "[i]n many ways, the democratization of money has led to the Democratization of money." Under President Clinton, the Democrats have become friendlier to Wall Street, and vice versa. So Wall Street has unprecedented influence over a Democratic administration’s economic policies, and the Democrats get larger donations from Wall Street than ever before. In addition, liberal groups — Gross discusses labor unions, academics, and government workers — have increased their involvement in the markets, and are using their power as shareholders to promote progressive causes.
The Republican reaction to Clinton’s success, Gross argues, has been to go downmarket. Increasingly, the Republicans represent less affluent, socially conservative voters, often Southern and rural. They are becoming indifferent or even hostile to Wall Street. By turning away from free trade and opposing administration efforts to stabilize foreign currencies, Republicans "took actions that were directly inimical to the interests of investors large and small." Gross concludes with a policy agenda that Democrats could use to build on the advantage they have thereby gained (though he allows that Republicans could take his advice too).
Gross is at his best when chronicling the shift among Democrats. As he points out, Bill Clinton campaigned against Wall Street in 1992, saying that "never again should Washington reward those who speculate in paper, instead of those who put people first." But in the first six months of his administration, such former Wall Streeters as Robert Rubin and Roger Altman fought a successful battle to get Clinton to drop the class-warfare rhetoric and to adopt an economic strategy designed to placate the bond market. There’s been no looking back.
"It’s more hip to be a Democrat if you’re loaded than it was in the 1980s," writes Gross. "And it’s more hip to be loaded if you’re a Democrat." It’s a sharp observation, borne out by Gross’s stories about parties in the Hamptons and fundraisers on Wall Street. But doubts start creeping in about his thesis. Hasn’t Wall Street leaned Democratic for decades? Gross doesn’t deny it; he implicitly confirms it by writing that "the tilt toward the Democrats has become more pronounced in the 1990s."
Further doubts arise when Gross writes that by signing a capital-gains tax cut in 1997, Clinton was "essentially giving up the one wedge issue that had consistently worked in favor of the Democrats in the 1980s and 1990s." The issue had not, in fact, won Democrats many votes, as Tom Foley once complained when he was speaker of a Democratic House. And opposition to capital-gains tax cuts was certainly not a "wedge issue" for Democrats, since to meet the definition of that term it would have had to divide discrete groups of Republican voters or at least Republican politicians. Gross deepens the muddle by writing, toward the end of the book, that "Democrats should stand firm in opposing broad-based cuts in payroll or capital-gains taxes." (He appears to be referring to income taxes.)
There is also an unexamined contradiction in Gross’s thesis. He points out that people at the bottom of the economic ladder are accumulating more financial assets: That’s the small-d democratization of money. But he also says that those people are becoming more Republican. If that’s the case, how do the small-d and big-D democratization of money go together?
That Gross glosses over the potential conflict between the two becomes clear in his chapter on public pension plans. He looks at defined-benefit pension plans, which reward retirees based on their age and length of service. He writes, "These massive pools of capital are endowed with attributes that have made them prime drivers behind the democratization of money: political accountability, liberal constituents, and a mandate to seek out investments with social value." But trying to promote social goals through pension-fund investments is controversial; critics, at their toughest, argue that the attempt is a violation of fiduciary responsibilities to beneficiaries, who deserve fund managers who will seek to maximize returns. Gross says nothing about this controversy.
Nor does the reader learn that the trend in state governments has been away from defined-benefit plans and toward defined-contribution plans. In the latter, individual workers make many investment decisions themselves, and their benefits depend on how much they invest and how well their investments do. Most recently, Florida passed a bill giving 600,000 state employees the opportunity to enroll in defined-contribution plans. This shift is, arguably, a democratizing reform; but it is unlikely to advance the institutional interests of the Democratic Party. Workers in defined-contribution plans will promote liberal investment projects only if they wish to do so; and their pension benefits will not depend much on negotiations between labor and management.
The democratization of the stock market has depended to a large extent on the rise of defined-contribution plans such as 401(k)s, which were granted tax advantages early in the Reagan administration. These plans were useful to employers: By matching their employees’ contributions, they could give out raises based on employees’ willingness to engage in characteristically bourgeois behavior. And because these plans tended to offer higher returns than defined-benefit plans, workers flocked to them as well. Bull Run does not, however, attempt to explain why the democratization of the stock market happened, or why it happened when it happened. (At one point, Gross confuses defined-benefit and defined-contribution plans.)
Instead, the book lavishes attention on figures such as Arthur Levitt, chairman of the Securities and Exchange Commission during the Clinton administration. No doubt Levitt deserves some of the accolades Gross showers upon him: Levitt’s efforts to abolish "pay to play" — the practice whereby bond underwriters would donate to the campaigns of the politicians who gave them business — were long overdue. And Levitt’s advice that prospectuses be written clearly, for the benefit of the new investors, was innocuous enough. But it’s silly to pretend that Levitt had much responsibility for the rise of the new investor class, or that the sec has in any important sense "presided over a vast expansion of the markets." Levitt has largely been a bystander.
The exaltation of Levitt is, perhaps, a result of the book’s marked partisanship. Gross is, at least in this book, full of scorn for Republicans. He sneers at Bob Dole for the Viagra ads, Dan Quayle for being rich, and Steve Forbes for being Steve Forbes. Trent Lott comes in for the worst abuse: He is described, outrageously, as "a sort of blow-dried reincarnation" of "Pitchfork" Ben Tillman. Gross also takes a cheap shot at Lawrence Kudlow, whose admitted problems with cocaine supposedly disqualify him from saying anything about the morality of tax cuts.
When arguing that the Republicans have turned against the markets, Gross stacks the deck. So it is held against Republicans that Lott’s brother-in-law Dickie Scruggs has been "growing rich terrorizing Fortune 500 tobacco companies with mass tort actions"; but it is not held against the Democrats that they have supported those lawsuits far more than the Republicans have, and it is not mentioned that Scruggs himself is a Democrat. The economic backwardness of Lott’s Mississippi is noted, but not that of Clinton’s Arkansas. Gross repeatedly asserts that Republicans "are increasingly skeptical of free trade" — but ignores the fact that congressional Republicans mostly supported free-trade initiatives such as the NAFTA and the trade deal with China while congressional Democrats mostly opposed them. If Patrick Buchanan is evidence of a protectionist tendency on the social Right, as he surely is, his departure from the Republican Party also suggests the weakness of that tendency.
In the end, Gross provides no persuasive reason for rejecting the conservative analysis of the politics of the new investor class, which is perhaps unsurprising since he does not mention that analysis. He asserts that Republicans have lost ground among the new investors, but cites no evidence for that conclusion. The little evidence we have suggests that it is untrue, and that the democratization of the stock market has been a great boon for Republicans. The new investors may be more Democratic than the old investors were — as well as poorer, darker, younger, and more female. But what is more important politically is the change at the margin: These investors are more Republican than demographically similar noninvestors, which suggests that they are more Republican than they would be if they were not investing.
This pattern would probably not be much affected if Democrats were to adopt the policies Gross recommends in his conclusion. He encourages Democrats to take consumer protection and "class warfare" (his own term) to the markets: beefing up the SEC, leading a crusade against excessive compensation for executives and what he calls the "options epidemic." It is not an impressive agenda. "Politicians," he writes, "should encourage people to read their prospectuses and proxy statements and to vote their shares." Yes, and they should encourage people to brush their teeth, too. But luckily people have sufficient incentives to do so that they do not need to hear it from their congressmen. Meanwhile, the theoretical distinction Gross posits between "arrogant capital" that needs to be curbed and "humble capital" that should be encouraged seems to boil down to Democratic money vs. Republican money.
The new investors would probably be more interested in free-market policies such as the establishment of an option to invest some of their Social Security funds. This is one way the rise of the new investor class is strengthening Republicans. To give Gross his due, it has also had effects on the Democrats. When George W. Bush proposed this reform to Social Security, for instance, Al Gore had to offer a pro-investment alternative. Savvy Democrats have to pay more attention to the markets now than they did in the past. Bull Run is valuable as an illustration of that trend, though not as an analysis of it.