Wang: A Bull Market for Donkeys and Elephants?

Posted January 20, 2010 at 3:52pm

Most Beltway insiders are familiar with the saying, “In Washington, first you do good, and then you do well.— Recently, some Members of Congress have been questioned for not properly following that sequence with their investments. Specifically, several Members of both parties with stock in medical device firms were criticized for voting against a multibillion-dollar tax increase on medical devices to help fund the costs of health care proposals. Essentially, they were accused of not voting to do good, but to do well for themselves.

[IMGCAP(1)]The Washington Post ran a mildly alarmist front page article on these potential conflicts of interest, but it followed the typical story line by presenting only one side of the issue. Like bacteria or cholesterol, of which there are both good and bad varieties, many Members’ investments can actually be beneficial to the body politic. An “investment— can serve not only a remunerative purpose, but a societal one as well. To the extent lawmakers are investing in business and innovation, they are stepping outside the Washington bubble and into the shoes of millions of other Americans.

According to the Post article, more than half of Members of Congress own stock. This makes them only slightly less than representative of the general public. Shortly before the economy tanked, a Gallup poll found that 63 percent of Americans reported owning stock — whether individually or as part of an investment fund or account. Although we should be concerned about Members who are heavily invested in industries that will be affected by legislation, we should be concerned equally about Members who are entirely immune from the consequences of their votes.

Both chambers’ rules and ethics manuals prohibit Members from using their official position for personal gain, but they also explicitly recognize that Members may vote on matters affecting their financial interests. House Rule 3 prohibits Members from voting on matters in which they have “a direct personal or pecuniary interest.— Similarly, Senate Rule 37 provides that Members may not “introduce or aid the progress or passage of legislation, a principal purpose of which is to further only [their] pecuniary interest.— These prohibitions do not apply, however, if the legislation only happens to benefit a Member incidentally, and otherwise applies generally to a broad class of individuals or entities.

The ethics manuals cite numerous historical examples from actual votes that were determined to have been cast properly: Members who owned stock in breweries and distilleries voting on Prohibition; Members who owned stock in import businesses voting on tariffs affecting those businesses; a Member who owned tobacco farming interests voting on tobacco legislation. Far from being a new issue, these examples demonstrate that potential investment conflicts for Members have long existed and have been thoroughly considered before.

If any readers remain skeptical about the propriety of Members voting on matters that will affect their personal investments, consider the other side of the equation: As the Senate Ethics Manual points out, requiring a Member to completely divest from all private investments is “likely to insulate a legislator from the personal and economic interests that his or her constituency, or society in general, has in governmental decisions and policy.—

All this is not to say that conflicts involving Members’ personal investments — even for widely held stocks — are never a problem. The point is, if Congress were to attempt to police itself more in this area, it must recognize the two sides to this issue and carefully weigh them, so as not to insulate its Members from all other Americans who have investment interests. While I do not purport to know where to strike the proper balance, I would posit that this issue is emblematic of more general problems that are not specific to conflict of interest rules.

For example, the Post article cited a finding that Members’ stock portfolios consistently outperform those of average Americans. This suggests that Members are either savvier investors, have better access to investment advisers or are engaging in something akin to insider trading. That is, a Member may know certain details of legislation on the cusp of passage that will benefit a particular industry and may invest in that industry before the vote. However, this is more of a problem with inadequate transparency. If backroom deals were made more open, and details about legislation were made public well in advance of the vote, then that “insider— knowledge would no longer be secret and the public would have access to the same information.

More fundamentally, as libertarians would argue, the problem is that Congress is picking winners and losers. If the government would cease intervening in the free market, then Members would not be put in a position of voting on their own financial interests. The public could then go back to obsessing about the bulls and bears on Wall Street instead of the elephants and donkeys on the Hill.

Eric Wang, a political law attorney, has advised clients on all aspects of government ethics laws. He can be reached at ericwang@alumni.princeton.edu.