The New Republic

Implicit in the conservative case for Chris Cox, President Bush's
nominee to replace ousted Securities and Exchange Commission (SEC)
Chairman Bill Donaldson, is the idea that the interests of
investors and corporate executives almost always overlap. According
to this thinking, lower taxes and fewer regulations lead to higher
profits, which benefit shareholders and managers alike. Cox "is
perfectly qualified to restore sense to the SEC after [Donaldson's]
regulatory excesses," wrote the editors at National Review Online
(NRO), citing Cox's reputation as a deregulator.It's no doubt true that investors and managers have some interests
in common. But there's an important bait and switch going on here:
What applies generally doesn't apply in the realm of financial
information, the bailiwick of the SEC. In that case, corporate
managers are the producers; investors are the consumers. And, as
with most industries, the interests of producers and consumers
diverge here. Conservatives can't admit this, because doing so
would alienate a key constituency--investors. So, instead, they
fudge.

For example, NRO praises Cox for opposing proposals like one by
Senators John McCain and Carl Levin "to limit corporate deductions
on stock-option compensation." The implication is that Cox opposed
a costly tax increase--for which both shareholders and managers
should be grateful. But what the senators actually proposed was
eliminating a double standard: They wanted companies that treat
stock options as an expense on their tax returns, thereby earning
enormous deductions, to report them as an expense to investors as
well. The law currently allows managers to tell the IRS one thing
and shareholders another, creating a false impression of a
company's financial health.

Similarly, The Wall Street Journal editorial page recently rejoiced
that Cox would likely abandon Donaldson's efforts to help "special
interests ... elbow their way onto seats on corporate boards." This
sounds like something both managers and investors should cheer. In
fact, what Donaldson proposed was making it easier for shareholders
to nominate board members. In a recent column, George Will touted
legislation Cox sponsored making it much more difficult for
shareholders (er, special interests) to win lawsuits against
corporate executives who've defrauded them. Will says Cox's intent
was to discourage "frivolous and extortionate lawsuits," which
ultimately harm investors, not to carry water for executives. He
neglects to point out that an earlier version of Cox's bill went so
far as to make forgetfulness a legitimate defense against charges
of recklessness.

For years, of course, it really wasn't clear where the so-called
investor class began and the managerial class ended. Pretty much
the only people who owned large amounts of stock were corporate
managers themselves, other affluent professionals, and the
independently wealthy. In the case of executives, their interests
as managers overwhelmed their interests as consumers--why clamor
for tighter consumer protection when it's only going to constrain
the way you run your company? Meanwhile, the affluent didn't rely
on the government to look out for their interests as consumers of
financial information, because they could afford skilled
professionals to do it for them. And all of these people had an
economic interest in cutting taxes on business and capital and
eliminating regulations.

But, beginning in the early '80s, a change to the tax code
permitting workers to save tax-free for retirement--section
401(k)--coupled with what would be a nearly 20-year bull market
created a new investing demographic: the middle class. In 1983,
according to the Securities Industry Association (SIA), only about
20 percent of all households owned stock in some form. By 2002, the
percentage had soared to 50.

Politically, the question posed by this development was whether the
interests of middle-class investors as owners of corporations would
dominate their interests as consumers of financial information.
Conservatives assume they do. But the evidence points in the
opposite direction. For instance, one question on the Election Day
exit poll in 2000 asked respondents to state whether they favored a
larger role for government in solving the nation's problems or a
larger role for business and individuals. According to an analysis
by Ruy Teixeira of the Center for American Progress, middle-class
voters who owned stock were five percentage points more likely to
favor a larger role for government than middle-class voters who
don't.

It's pretty obvious where this preference comes from. Of households
that invest, 85 percent have less than $250,000 in the market,
according to the SIA. The "primary financial goal" of investing for
these households is to generate retirement income.

For these investors, reducing the capital gains tax by five or ten
percentage points, or generally lowering regulatory costs, would
increase the size of their retirement assets by a couple thousand
dollars. On the other hand, being defrauded by a company or
middleman could wipe out a substantial chunk of their savings.

This asymmetry helps explain, for example, why middle-class
investors supported Eliot Spitzer for targeting conflicts of
interest among stock analysts. Wealthy people can afford customized
stock research. But middle-class investors rely heavily on the
investment advice of retail outlets like Merrill Lynch, whose
analysts hyped dubious stocks. For middle-class investors, a poorly
regulated market creates potentially catastrophic risks.

The White House, however, seems deaf to these risks. And the
political fallout could be severe. That's because Republicans are,
in a sense, the party of Chris Cox writ large: They're heavily
funded by corporate executives, whose agenda they dutifully enact.
For years, the GOP struggled to square this agenda with the party's
need for middle-class votes. But the rise of the new investor class
presented a tantalizing opportunity: If the GOP could convince
middle- class stockholders that their economic interests mimicked
those of the managerial class it already served, then it could
cement its electoral majority without abandoning its pro-business
strategy.

One would have thought Republicans would make the handful of
concessions necessary to seize that opportunity. The nomination of
Chris Cox suggests they're doing nothing of the kind.

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