“He who loves money will not be satisfied with money; nor he who loves wealth, with gain: this also is vanity.”
The world has gone through periods of rapid change as well as long stretches of stasis. But throughout the vicissitudes of history, human nature has remained relatively constant. The array of human virtues and follies that ancient philosophers grappled with are the same as those we struggle with today. Barring some sort of dystopian revolution melding our natural DNA with artificial intelligence, human foibles are not likely to be eliminated in the future.
Capitalism is prone to occasional excess as well as regulatory capture, but free markets have undeniably created massive wealth far in excess of the results of authoritarian systems. Even the Communist Chinese had to adopt elements of capitalism to achieve their historic economic gains of recent decades. It is amusing to see anti-capitalist protestors on the streets wearing products of the capitalist system and using technology created by the capitalist system as they pine for the nirvana of socialism.
How can we account for polls suggesting that socialism is as popular as capitalism among young adults in the United States? Perhaps this is at least partly due to the perception that crony capitalism and capitalism are synonymous. The massive bailouts of the great financial crisis and a steady stream of stories of government corruption breeds cynicism among the electorate. Nothing creates more cynicism and anger than the thought of government officials rigging the system for personal enrichment.
Without a baseline level of trust, society will eventually collapse. It is in our interests to have policies that increase confidence in our economic system and our institutions of government.
The question of whether government officials should be allowed to own and trade securities in their personal accounts has been the subject of much debate in recent months. Most of the focus has been on trading among members of Congress and policy setting members of the Federal Reserve. However, the same issue is relevant for members of the executive branch and the judiciary as well as government officials at the state and local level.
Should government officials be able to own and trade securities at all?
For purposes of this discussion, I will focus on what our policy should be regarding members of Congress, but the same principles could be applied in other areas as well.
Let’s consider what the problem is that we are trying to solve with a proposed trading ban. The obvious problem is that we do not want members of Congress to trade securities if their official role has a major influence on the securities in question. For example, it would be highly corrupt for the Chairman of the House Committee on Transportation and Infrastructure to be involved in trading stocks of companies that could score major government infrastructure contracts.
It would be easy to say that members of a committee charged with setting transportation and infrastructure policy should not own or trade stocks of companies in that sector, but how do we define exactly which companies should be included in such a ban? And what should the policy be when it comes to conglomerates with a business involved in the sector? Should members be banned from owning and trading such conglomerates as well?
It is easy to see that there are major complexities involved in deciding what constitutes a conflict of interest just for a single member. When you consider that there are 535 members of Congress, each with their own committee assignments and areas of official and unofficial influence, the job of determining where conflicts exist would be immense. Add to this the fact that all members vote on all legislation, not just the legislation coming out of their committees. Given the size and scope of the Federal government, is there any reasonable way to determine and enforce bans of specific securities?
The obvious difficulties in setting policies specific to individual members has led to various proposals to ban stock trading in Congress. The proposals vary, with some allowing members to own passively managed index funds and others allowing ownership via so-called “blind trusts”. The proposed rules regarding trading by the spouses of members of Congress also vary.
It should be noted that current law already prohibits members of Congress from trading on non-public information and members are supposed to disclose trades involving stocks, bonds, and commodities within 45 days.
In my opinion, our goal should be to reduce conflicts of interest as much as possible among members of Congress but not to prohibit members from participating in our capitalist system entirely.
There are a number of reasons to take this position.
- Capitalism itself is not a dirty word and we should not send signals that it is. Crony capitalism, trading influence for profit, and abuse of office are dirty activities and that is what we should focus on. A total ban on stock ownership and trading sends the signal that owning securities itself is inherently corrupt.
- Banning trading and ownership of securities could discourage many successful people from serving in Congress. This is especially true for entrepreneurs and individuals who might have large stakes in businesses they have created or run prior to entering government service.
- There are many issues associated with bans on trading for spouses of members of Congress. It would be meaningless to ban members from trading but allow their spouses to trade. Do we want to ban members of Congress who have spouses in the securities industry?
- Having ownership in businesses represents skin in the game and we should want members of Congress to be exposed to the success or failure of our economy. Exposure to index funds might be a good way to establish overall skin in the game, but ownership of individual securities should not be ruled out either, provided that there is no corruption involved.
The problem remains one of enforcement. Members are already prohibited from trading on non-public information, so they risk the same consequences as others who trade on inside information. The real problem is owning or trading securities that the member impacts in his or her official role or in areas where the member exerts unofficial influence in various ways. How can this be policed?
With 535 members of Congress, there is no way to realistically police compliance and guarantee that there won’t be conflicts of interest. However, consider the following proposal which would improve disclosure and encourage more scrutiny:
- The portfolios of all members of Congress should be disclosed on a continuous basis. This should include all accounts controlled by spouses as well as trusts or other accounts controlled by the member. The portfolio should include specific numbers of shares owned, not just dollar amount ranges.
- All trades of stocks, bonds, commodities, and derivatives in any personal account, spousal account, trust, or other account controlled by a member of Congress or where the member has any sort of pecuniary interest should be disclosed on the same business day of the trade, not 45 days after the trade.
- Daily disclosure should be posted to a website organized in a manner similar to dataroma.com which is a site that reports on the portfolio and trades of hedge fund managers. The same style of reporting should exist for every member of Congress making it easy to see their portfolios and trades in near real-time.
- Every member of Congress should be required to post this information in a visible place accessed from the member’s home page on the internet.
- Automated data feeds of member portfolios and trades should be made available via RSS (or some other technology) that would allow the media, bloggers, and other politicians to have daily insight into what members of Congress are doing with their investments.
- Taking automation a step further, it might be possible for the brokerage accounts of members to be directly connected to a disclosure database in real-time. This would eliminate “clerical errors” and other frequently cited excuses for “mistakes” in timely reporting.
It would be unrealistic to have some government bureaucracy that would be in charge of monitoring all of the potential conflicts of interest for the 535 members of Congress. But it is not unrealistic to think that other politicians, the media, and voters would police this activity and bring to light suspicious situations.
Politics is a brutally competitive field, and such real-time data would be scrutinized heavily for openings to attack members of Congress for conflicts of interest. I am not naive enough to think that the mainstream media would be up to taking on this job, at least not for most members of Congress. But there is enough of an incentive for the data to be scrutinized by others.
Is it well known that gerrymandering has rendered many Congressional seats uncompetitive for general elections. However, even the most gerrymandered and “safe” Democratic or Republican seat can attract competition during the primaries. In fact, the primary elections for Congress can be more competitive than the general election for “safe” seats. Information on potential corruption will be heavily scrutinized by politicians engaged in primary challenges.
I will admit that my gut reaction to trading scandals is to wish that we could just rid ourselves of these potential issues by banning public servants from trading.
However, once the anger recedes, we are confronted by the eternal question: “And then what?” If we fail to think about the second and third order consequences of a “feel-good” policy, we could be creating more problems than we are solving in the long run.
Sunlight is often the best disinfectant when it comes to dealing with corruption.
At the very least, we should attempt to put in place a system of immediate disclosure with dramatically improved visibility to trading data before we impose bans that could have major impacts on who is willing and able to serve in Congress. A ban could always be imposed in a few years after a new system of disclosure is given a chance to work first.