By: Brian Canfield
Nov. 22, 2020
As the COVID-19 pandemic started to sweep through the United States in March 2020, news outlets began to report that multiple United States senators may have used insider information about the incoming coronavirus to increase their personal wealth. While the Stock Act bans congressional insider trading, many responded to the March 2020 report with calls to ban members of Congress from trading individual stocks altogether, a position advocated for by senators such as Elizabeth Warren, Jeff Merkley, and Sherrod Brown in 2018. While banning members of Congress from owning individual stocks is an important step in fighting government corruption, it does not go far enough in reshaping lawmakers’ incentive structures. Instead, members of Congress should be banned from trading any securities besides securities issued by the Treasury Department.
A ban on members of Congress purchasing individual stocks would be an improvement over the current policy on Congressional trading. This ban would have the benefit of making it virtually impossible for members of Congress to trade individual securities based on inside information, which is particularly hard to prove for members of Congress. Additionally, such a ban would weaken the incentive for lawmakers to consider their personal wealth when voting on bills that would affect individual companies whose stock they may hold. Yet this type of ban would only address a small portion of the incentive problems with regard to members of Congress and their personal wealth.
Many of the proposals to ban legislators from buying individual stock still allow the lawmakers to own broad market indices like mutual funds or ETFs. These mutual funds and ETFs often track the performances of indices like the S&P 500, which contain many of the largest companies listed on U.S stock exchanges. Therein lies the problem. Many laws do not affect just a select company or industry, but rather impact the entire economy. For example, card check—a policy supported by many on the left and in the labor movement—would very likely increase union membership in the country. Since unions generally increase wages for their members, labor costs would increase, thus potentially decreasing the profitability and stock price of companies with a unionized workforce. A lawmaker who is allowed to own mutual funds and is interested in increasing his or her personal wealth would face some incentive to vote against a card check bill. Similarly, a bill modifying the corporate tax rate would affect all businesses that pay taxes, so a mutual-fund-holding lawmaker would be personally affected by the change in tax rate. On the other hand, members of Congress owning solely Treasury securities would be incentivized to prevent the U.S. from defaulting on its debt. Such an incentive should be seen as a positive.
This is not to suggest that legislators vote exclusively according to what will benefit their net worth, especially with politically charged issues such as card check or corporate tax rates. Members of Congress face several different incentives, some righteous and some not quite so righteous, and all of these incentives factor into a legislator’s decision making. However, the ability for lawmakers to hold mutual funds and ETFs presents perverse incentives that should be eliminated in order to promote decision-making that is more in line with the democratic values that our government should strive for.
Critics of this plan may argue that by limiting members of Congress to investing in low-yield securities such as Treasury securities, congressional income will decrease, thus leading to an increase in corruption. Indeed, while there is no consensus on the link between government pay and corruption, some studies have shown such a link to exist. Logically, it makes sense as well: All things equal, a person struggling financially is more likely to seek alternate sources of income relative to somebody doing better financially. This problem can be easily solved, however, by increasing the salary of Congress. An increase in salary will not have a substantial effect on the government’s budget, as congressmembers’ pay makes up a minuscule percentage of the country’s budget.1Members of Congress earn $174,000 per year, with very small increases for leadership. With 535 members of Congress, this comes out to about $93,090,000. This comes out to about .002% of congress’ $4.4 trillion budget in 2019, a small price to pay for improved decision making from our legislators. While the amount of the increase can be quibbled with, I would suggest doubling congressional salary to $340,000.2As discussed, current congressional salary is a drop in the bucket of federal spending. Doubling congressional salaries would amount to just two drops in the bucket.
Critics of a plan to ban all trading of non-governmental securities including market indices also argue that a ban of this capacity would discourage qualified individuals from running for office.
This criticism falls short for a couple of reasons. For example, this proposal includes an increase in salary for members of Congress, in part to alleviate such a concern. For any person considering running for Congress, this proposed salary/investment scheme would be a better deal financially, except for those in the top 5.5 percentile of wealth.3This analysis uses the following assumptions, which generally lead to the amount of wealth in which one is indifferent to an increase in salary vs. the ability to invest in securities to be lower: All wealth is in the stock market, return on a 10-year Treasury security (T-note) is a modest 2%, and the average annual return on the stock market is 9.2%. The difference between return on the stock market and return on 10-year T-notes (9.2-2) is 7.2%. Investing $2,416,666 dollars at 7.2% is equal to a return of a $174,000, which is the amount of my proposed salary increase. $2,416,666 of wealth would put a household in the 94.5th percentile in wealth. It would be awfully cynical to characterize a scheme that leaves 94.5 percent of Americans better off as a scheme that disincentivizes qualified individuals from running for office.
In addition to the 94.5 percent that would be better off under this scheme, there is proof to suggest that at least some of the remaining 5.5 percent would still be willing to run for office. For example, elected officials turn down substantial salary increases every time they run for reelection, as former congressmembers are very attractive to certain industries like lobbying and could earn significantly higher salaries in those fields. This suggests that at least some people put a substantial amount of value on the power that comes with lawmaking.
A policy banning legislators from owning individual stocks would be a positive step in fighting government corruption. Insider trading would be much more difficult for members of Congress, and it would eliminate some conflicts of interest for the legislators. Such a policy however does not go far enough in addressing the perverse incentives members of Congress may face by owning non-government securities.
Brian Canfield, J.D. Class of 2022, N.Y.U. School of Law
Suggested Citation: Brian Canfield, Banning Congressmembers from Buying Individual Stocks Does Not Go Far Enough, N.Y.U. J. Legis. & Pub. Pol’y Quorum (2020)
- 2As discussed, current congressional salary is a drop in the bucket of federal spending. Doubling congressional salaries would amount to just two drops in the bucket.
- 3This analysis uses the following assumptions, which generally lead to the amount of wealth in which one is indifferent to an increase in salary vs. the ability to invest in securities to be lower: All wealth is in the stock market, return on a 10-year Treasury security (T-note) is a modest 2%, and the average annual return on the stock market is 9.2%. The difference between return on the stock market and return on 10-year T-notes (9.2-2) is 7.2%. Investing $2,416,666 dollars at 7.2% is equal to a return of a $174,000, which is the amount of my proposed salary increase. $2,416,666 of wealth would put a household in the 94.5th percentile in wealth.