Congress' Culture of Wealth: How Insider Information Enriches Members of the House

We know that members of Congress often stroll right out of their jobs and into lucrative lobbying positions, consulting gigs, or book deals. We know that they enjoy all sorts of perks of their offices, from golf trips with lobbyists to corporate-sponsored air travel.  

We even might have guessed that they've done some insider trading. After all, these are the people who make decisions about how the economy is going to go. About which mega-defense corporation will get the next juicy contract.  

A new study in the journal Business and Politics reports that members of the House saw their investments outperform those of the average investor by 55 basis points per month, or 6 percent annually. A previous study had found Senate investments performed even better, outperforming even House members by 30 points per month.  

Democrats managed to do even better than Republicans, perhaps proving once again that unlimited faith in markets doesn't always lead to great decisions. The Democratic subsample beat the market by a full 9 percent annually, while Republicans did so only by 2 percent.  

What might be more surprising is that this is all perfectly legal. The Washington Times notes:  

Strict laws ban corporate executives from trading on their insider knowledge, but no restrictions exist for members of Congress. Lawmakers are permitted to keep their holdings and trade shares on the market, as well as vote on legislation that could affect their portfolio values.

The rationale is that requiring lawmakers to divest their economic holdings would "insulate a legislator from the personal and economic interests that his/her constituency, or society in general, has in governmental decisions and policy," according to the House ethics manual.

So even while a new insider trading trial starts for Winifred Jiau, an investment consultant charged with passing on secret information to her hedge fund clients, members of Congress can go right on profiting off their decisions.

Perhaps the most interesting part of the study—after all, who's really shocked that members of Congress use their knowledge and status for personal gain?--is that the members who did the best in the stock market were actually the ones with the least seniority.

The authors of the report, Alan J. Ziobrowski of Georgia State University, James W. Boyd of Lindenwood University, Ping Cheng of Florida Atlantic University and Brigitte J. Ziobrowski of Augusta State University, suggested that perhaps lower-ranking members of the House had more incentive to invest aggressively because they had less access to campaign funds.

Or, perhaps, to lobbyists.

What's the solution to all this? At least one bill, the Times notes, was introduced back in 2006 to “Stop Trading on Congressional Knowledge.” The STOCK Act, wittily named and introduced by Reps. Louise Slaughter of New York and Timothy J. Walz of Minnesota, both Democrats, was reintroduced in March, but has yet to make it to the House floor.

The authors of the study recommended requirements on members of Congress similar to those on business executives, so that voters could evaluate whether their reps were up to no good. But who has time for that?

The cause for concern, perhaps, shouldn't be that members of Congress are making a little profit on the side of their day jobs. Instead, it should worry us, as the lobbyist revolving door and growing corporate influence do, because those legislators might be making decisions based on what would be good for their personal portfolios or their corporate buddies, rather than the people in their districts.

The study, which covered the years 1985 to 2001, found that only around 16 percent of House members played the stock market, while 27 percent of Senators did.