Nov 15, 2011
There is suddenly a lot of attention being paid to investing behavior of members of Congress. As Jens and I work on finishing up our two papers on the topic, I am trying to keep up with the public discussion.
Larry Lessig alerted me to this Newsweek/Daily Beast article about a new book by Peter Schweizer called Throw Them All Out (subtitle: “how politicians and their friends get rich off insider stock tips, cronyism, and land deals that would send the rest of us to prison”). I had given a talk at Larry’s weekly seminar in the spring about our (Jens and mine) work on this issue, in which the general message was that members of Congress overall are not very good investors, and that existing investigations of “insider trading” in Congress (and ethics issues more generally) suffer from a general bias toward finding wrongdoing even when the evidence is more ambiguous. So, given that I was saying that things weren’t so bad and Peter Schweizer is now publishing this book saying that things are very bad, Larry asks me, “Is he wrong?”
I have not read the book (it just went on sale today I believe), but here are some thoughts on what I could learn about it from the article, and how it relates to our work on the investments of members of Congress:
a) Our work so far is about average behavior, and not isolated instances of wrongdoing. If there is wrongdoing, it probably is at the level of isolated instances — not everyone in Congress, not all the time. It is perfectly consistent for Congress as a whole to do poorly and for improper trading to be going on, and even for an individual to do poorly overall and to be doing some improper trading. Our work responds in part to an earlier study that showed extremely good average performance, which would really only be possible with widespread wrongdoing; showing poor average performance (as we do) does not prove the absence of wrongdoing.
b) Also, some of the behavior Schweizer is talking about is outside of what we analyze, e.g. options on index funds — our analysis is about equity holdings.
c) John Kerry may have had some conveniently timed trades, but our analysis suggests he would have done better overall had he invested in an index fund. That doesn’t mean he acted ethically, but it does take some of the edge off of this “politicians get rich while we suffer” narrative.
d) There is deep cherry-picking going on here. You could write a book of completely bone-headed investments that come from the same data. If well-timed trades prove corruption, what do poorly-timed trades prove?
e) The current discussion talks a lot about how Congress has exempted itself from insider trading laws, but I think (not being a securities law expert) that is kind of bogus. They are just as exempt from insider trading laws as I am. It’s simply that the SEC regulations on insider trading apply to information held by corporate insiders, but don’t address other types of information that might be gathered by politicians, academics, journalists, bankers, bloggers, hedge fund managers, and others who are in a position to learn about market developments. It seems like an exaggeration to say (as Schweizer does here) that members of Congress “have legislated themselves as untouchable as a political class.” Also, there are ethical restrictions in both houses of Congress against profiting from your political position. Perhaps these should be enforced more strictly, but this places members of Congress roughly in the same category as journalists, who learn a lot of stuff about the market but are prohibited by self-regulation from profiting from it — except that members of Congress are required to disclose their investments while journalists are not.
Overall, I think the whole story lends itself to the kind of argument Larry makes in his book Republic, Lost — it’s hard to tell whether corruption is going on, but why bother allowing it to seem as if it is? If I were in Congress, I would not be trading stocks: I would own broad index funds of U.S. equities and bonds, and/or have my money in a qualified blind trust. I would also probably vote to require other members of Congress to do the same. I would do these things because I would not trust the public to really figure out whether corruption is occurring or not, and because I don’t think losing the flexibility to play around in the stock market is much of a cost to pay at all. (In fact, overall it would have helped members of Congress, according to our study!) I wish we could count on the public to accurately identify instances of corruption, but I think the rewards to “finding” wrongdoing (and reporting on it) are large enough, and the rewards to arguing otherwise small enough, that the public will generally conclude the worst whether or not there is legitimate cause for concern.