Monday, July 29, 2019

The Investor Class & the Working Class

The middle class is one of my favorite things to think and write about. I've tried reframing the classes into quintiles, I've written about the difference between having a middle class income and having middle class wealth; about how your location determines a lot about what kind of income you need to be considered middle class. This blog has posts about how class and inequality are inexorably linked, and how one of the traditional definitions of being middle class (doing better than your parents did) is completely unsustainable.

These days I'm not really sure I love the terminology.

What if we're using some antiquated ideas of lower, middle, and upper classes that don't mean much anymore?

I recently read about an old Republican party strategy from twenty years ago, in between the Bush presidencies, that centered on building up the "Investor Class". The GOP idea was that if the party could get more Americans to own stocks, then those voters would start leaning to the right politically. As voters owned more financial assets, they'd become less enamored with taxation on their new found wealth and with regulations on the businesses they invested in.

The theory goes that stockholders would support Republican policies and, over time, with enough voters becoming investors, the GOP would start to dominate politics as voters started voting with their wallets (or, at least, their portfolios).

The prediction ended up not coming to pass. While the percentage of Americans owning stock dramatically increased between the first and second Bush presidencies, Republican identification actually fell, as outlined in this Slate article from 2004:
"The growth in the investor population has been one of the great demographic stories of the past 15 years. In 1990, about 23 percent of Americans owned stocks and mutual funds in some form. By last year [2003], a whopping 91 million Americans in 53.3 million households—47.9 percent of the total—owned mutual funds, according to the Investment Company Institute.....The Pew Research Center for the People and Press, a seriously nonpartisan research outfit, has a good set of polls on party affiliation. After spiking in the early 1990s, the percentage of Americans calling themselves Republicans fell over the course of the decade even as the investor population essentially doubled. Moreover, Bush’s recent efforts to reward investors—like cutting taxes on marginal rates, capital gains, and dividends—haven’t produced significant realignment."
While the political outcomes Republicans hoped for did not come to pass, I think they were on to something with their framing of an investor class.

The term 'middle class' is defined in so many ways that almost everyone considers themselves middle class. In fact, when considering twelve different prominent definitions from economists, over 90% of the US population would qualify as middle class when all twelve are considered.

With definitions of the middle class so broad, we might benefit from a reframing.

One distinction we could make is simply asking whether you own financial assets or not. Are you part of the investor class that owns stock? Or are you part of the working class? Not to get all Marxian, but the class that owns very little besides their labor.

But how many families own stock anyway? According to a study from the St. Louis Fed, only about half of US households own any stock at all, meaning "[r]oughly half of all households don’t have a cent invested in stocks, whether through a 401(k) account or shares in General Electric. That leaves half the population with some exposure to financial market whims, but as Mr. Boshara [director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis] said, 'some exposure can be 100 bucks.'"

To put these figures in perspective, another breakdown from the St. Louis Fed shows that the amount of stock held by middle-aged families is barely over ten percent of their assets: a smaller portion than that of vehicles, and one dwarfed by their principal residence.


Click for bigness.

This New York Times article gives a visual breakdown of the stock holdings we're talking about, as well as their total share of household assets:


Click for bigness

Of those families who owned stock, fewer than 40% even had $5,000 or more and fewer than 25% had $25,000 or more invested. 

With numbers like that, it's no surprise the Republican plan for growing an Investor Class to start voting for conservatives never came to pass: these are insufficient amounts to change voters' minds. GOP hopes for the Investor Class seem to have been cannibalized by a more important, more foundational goal for the party: ensuring that wealth stays at the top, and out of the hands of women, people of color, and the poor. 

On that goal, they seem to have found more success. Again from the NY Times piece:"[a] whopping 84 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. And that includes everyone’s stakes in pension plans, 401(k)’s and individual retirement accounts, as well as trust funds, mutual funds and college savings programs like 529 plans."

Here is how stock ownership breaks down by quintile, showing just how much wealth is concentrated at the top:

Click for bigness. Source.

So while we can probably agree that the $5,000 in stocks that many families have is not enough to immediately turn them into Republican voters, I still think there's a lot of merit to the idea of an Investor Class. Owning any stock at all already puts you in a group that excludes nearly half of all US households.

Owning even $25,000 of stock in 2016 would have put you in a group that leaves out 75% of US households.

These are stark figures, and I imagine that those of us working towards FIRE are probably realizing that our level of stock ownership puts us in a truly rare group. Twenty five thousand dollars is a sum many of those seeking financial independence invest each and every year.

This is why I cringe so often at claims by people in the personal finance community who amass all this wealth and still consider themselves "middle class". It's a viewpoint divorced from the realities of what average families actually have as far as financial assets are concerned.

We can define our current class system along the divide of an investor class and a working class: those who are just scraping by on the income that they earn from working, and those of us who have managed to acquire real wealth with financial assets. The framing of an investor class at least is honest about how common or rare it is for people to actually own stocks at all.

Even a cursory look at the families who do manage to sock away a few thousand dollars of stock over the years, shows how incredibly rare it is see the six-and-seven figure portfolios that FIRE adherents are amassing.

The very idea of financial independence is based on moving from the working class to an investor class. We start out working for money, but eventually we get some assets that start working for us. The pile of assets eventually gets so big that the quaint idea of working for money becomes entirely optional: the investments are working so hard that we never have to work for money again. That's financial independence.

So if there is such a thing as an investor class, I think we FIRE folks are in it.


*Photo is from eleephotography at Flickr Creative Commons.

12 comments:

  1. "GOP hopes for the Investor Class seem to have been cannibalized by a more important, more foundational goal for the party: ensuring that wealth stays at the top, and out of the hands of women, people of color, and the poor."

    I think the premise of less taxes on investments isn't some kind of discrimination like the statement above claims.I think it's much more basic and logical. If I already paid income tax on this money I use to invest, and now that investment makes money and you want to tax that as well ? If you tax those earnings too, we need to make sure we don't overtax it or people may just decide not to save less or worse not at all. Investments are already swimming upstream against inflation, tax them too much and I know personally I would invest less and maybe just payoff my mortgage instead. I just read something where someone made that decision :)

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    1. Hi Chris,

      Thanks for commenting and, yes, I suppose I did just make a decision to pay off my mortgage (though ironically that move caused us to pay MORE in taxes, as we had a lot of capital gains). So I'm not sure our very lax taxation on investments had much impact on that decision.

      "If I already paid income tax on this money I use to invest, and now that investment makes money and you want to tax that as well ?"

      I believe this is one of the key tenets of the Investor Class strategy from the Bush era GOP approach: that they would encourage investment (& thus a growing investor class) by creating accounts & policy by where investment wasn't taxed, but income was.

      And wealth inequality dramatically increased after these Bush era policies went into place.

      While I agree there is some upper limit on taxation where it discourages investment, by comparison, our tax rates (capital gains, dividends, even our income taxes) are far lower than that of other first world countries AND lower than our own historical rates (ironically, times where our own GDP grew at far higher rates than the 2% or 3% or so we're seeing today).

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    2. "If I already paid income tax on this money I use to invest, and now that investment makes money and you want to tax that as well ?"
      - Every transaction is taxed, whether is it invested (capital gains), used for purchase (sales tax), invested into direct business (earnings are taxed), invested in time (W2 earnings are taxed). Taxation occurs when realized, which happens during a transaction b/c there is a set value. Why should earnings on stocks be any different than any other transaction?

      Remember money is merely a value placed on an exchange of energy/time, not something that is magically created for the first time when it enters your wallet and thus should never be subject to taxation again.

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    3. That's a good reminder of the rationale behind our tax system which, let's be honest, DRASTICALLY favors money made from investments rather than from labor.

      It's one of the lasting impacts of the Investor Class strategy from the Bush presidencies: policies that lowered the tax rates on investment are still here.

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  2. I keep hearing wealth inequality growing being alarming or surprising. To me it's the magic of time value / compounding of money. The people investing early/often (many of the readers of your blog) are going to keep widening the gap between themselves and others that are not diligent earners and savers. I don't think it will shrink in my lifetime. It's going to take the giving pledge on a very large scale to turn this tide in my mind. And giving is a very personal decision.

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    1. I agree that wealth inequality is simply part of the FIRE movement, which is, as you noted, contributing to the problem. I've written about that here:

      https://www.donebyforty.com/2018/09/my-fire-journey-inequality.html

      What I disagree with is that the way to address the problem is by giving. I think that's a bit facile. Tax rates are far, far higher than rates of giving for the wealthy.

      While the rich like to wax on about the importance of charity as a driver for social change, it's a red herring when one looks at the numbers. Taxation is and always will be a far more effective way to address structural inequality.

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  3. I have to keep reminding myself that I'm no longer middle class. I live like I am, but that merely gives me the money to invest in retirement. Making me part of the investor class, which I think is a good demarcation in the class system.

    No, the reality is that I am upper middle class. It's a baffling idea, and I see why so many people are in denial about it. But the fact is that it *is* denial. With very few exceptions, FIRE folks are not middle class.

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    1. Hey there, Abby.

      Yeah, I feel the same way. It's a weird feeling, no longer being part of the class you grew up with and identify with.

      But there's no damn way I can consider myself middle class any longer. Not by income. Not by wealth. Not by the ridiculous privilege I have to consider retiring when I might. It's all rich people shit: we're rich.

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  4. Great point about being in the investor class. I guess you're right about the middle class. We live like a middle class family, but we're wealthy investors.
    The way we live should count somehow. It's all about appearance...

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    1. I hear what you're saying, Joe. There's definitely something that should count about the way people live.

      But I also see a lot of very wealthy people living frugally: while they may 'seem' just like anyone else, they're really 'the millionnaire next door'. And there are plenty of people living beyond their means: their cars or houses might imply they're wealthy, even if they have negative net worths.

      In other words, I'm not sure that outward appearances of wealth are really the best determinants of class. I think net worth tells a truer story. Maybe income, too.

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  5. You've got me thinking hard today, DBF! This post brings up some fascinating points. God bless the STL Fed, huh? I think as a couple people commented, what's just as fascinating particularly for FIRE folks, is the middle class lifestyle. We're almost all in the top quintile, but many of us live like we're in the 2nd or 3rd to make FIRE work.

    And while this may be key to one's identity, I think it is definitely for us to acknowledge the reality - we're rich. Our family may be set to live on $35K/year, but if shit hit the fan, no one in the FIRE community would end up homeless or go hungry. We don't face the harsh realities of living paycheck to paycheck without 6 or 7 figures in the bank.

    Keep em' coming, sir. Cheers.

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    1. Hey there, friend.

      Yeah, there are a lot of different ways we can think of class. In some ways it's about your income and your assets: that determines what class you're in.

      But a lot of times it's very hard to know what someone makes or has just by looking at them (which, I think, is part of the allure of FIRE: it's a bunch of rich people fooling everyone else into thinking they're not wealthy, based on how little they spend/own). For those FIRE people, they seem middle class to everyone else, and they often think they're middle class, too...does that mean they are?

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