Stock ownership and congressional elections: the political economy of the mutual fund revolution

Economic Inquiry, July, 2008 by John V. Duca, Jason L. Saving

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.