Why Lawmakers Should Invest In Businesses They Oversee

Capitol Hill lawmakers invest heavily in the sectors they regulate and oversee, according to a study by the Washington Post.

Committee chairs and ranking members in both the House and the Senate have millions invested in businesses that fall under the oversight of the panels these powerful lawmakers run, the study explains. And, apparently, all of this passes muster with the internal rules of Capitol Hill.

Is this corruption? Or is it a good idea to have lawmakers exposed to the upside and the downside of the sectors they regulate? The answer depends on whether the lawmakers invest in individual companies or are required to invest in broader indexes that cover the relevant sectors.

Let’s first of all do away with the phony debate about what is and is not allowed by the rules of the House and the Senate. Those rules are made by House members and senators—who obviously have a strong incentive to go easy on themselves. After years of criticism on the issue of lawmakers and staffers investing in advance of legislation—the political equivalent of insider trading—nothing has been done to stem the practice.

Of course, the kind of investments made by the most powerful people on Capitol Hill don't violate the rules created by those same people. The question is whether we need new rules.

While some anti-corporate types might instinctively recoil at the idea of the most powerful lawmakers investing in the sectors they oversee, it’s not necessarily a corrupt practice. In fact, it could act as a check on over-regulation or over-taxation by aligning the interests of lawmakers with the broader public’s interest in economic prosperity.

It’s something like requiring a CEO to hold his company’s stock to align his interest with shareholders. As my colleague Michelle Caruso-Cabrera observed this morning, it might not be a bad idea to require such investments.

The fact that the Senate’s Banking, Housing, and Urban Affairs Committee had on average twice the value of holdings in finance, insurance and real estate as the rest of the Senate could provide a strong motivation for lawmakers to seek a balance between allowing Wall Street recklessness to imperil the economy and allowing overly aggressive regulation to stymie financial growth and innovation.

There can be, however, a dangerous outgrowth of this alignment between corporate and lawmaker interests. Lawmakers who invest in individual companies rather than broad sector indexes will be motivated to favor the prosperity of those particular companies—possibly granting them legal advantages over their competitors.

For instance, a lawmaker with a stake in JPMorgan Chase might favor regulations—such as fixing rates banks are allowed to charge retailers for consumer use of debit cards—that disproportionately hurt smaller banks.

This dynamic of lawmakers favoring well-connected competitors over companies that are out-of-favor on Capitol Hill is the rule rather than the exception. Corporate profits can come from victory on Capitol Hill—through anti-competitive laws, direct subsidies, barriers to new entrants—as much as victory in the market. And shareholders—including lawmaker shareholders—are objectively indifferent when it comes to the source of their dividends.

It is typically smaller companies on the losing end of this dynamic, since they have less money to lobby. When it comes to lawmaker investment practices, it’s easy to see how lawmakers would wind up favoring large, publicly held companies against small, privately held partnerships.

At the very least, lawmakers should be required to hold only index funds that track the sector they regulate rather than individual stocks in companies that might seek competitive advantage through regulatory favoritism. This wouldn’t avoid all potential favoritism—privately held start-ups might still find themselves disadvantaged when competing against large, established companies—but it would begin to ameliorate the problem of favoritism.

What’s more, it might even diminish some of the corruption caused by lobbying. Lawmakers who know that a certain law might help one company at the expense of the rest of the business sector would be more likely to resist the lure of lobbyist dollars if their personal fortunes would suffer. For example, last year’s tobacco regulation bill was supported by the largest cigarette maker—Altria (formerly known as Phillip Morris, the makers of Marlboro)—and opposed by the rest of tobacco companies. It passed, and has effectively locked in Altria as the biggest tobacco seller. Things might have gone differently if lawmakers held an index of the tobacco companies.

At the very least, the market distortions of politics might be somewhat reduced if we required lawmakers to hold sector indexes.

Of course, the index requirement will not be a panacea. Lawmakers on the agricultural committees would still favor agribusiness subsidies, and lawmakers on the financial committees would still favor bailouts like TARP. But indexing lawmaker investments wouldn’t make these problems any worse.

And anyone who thinks a Capitol Hill reform is likely to solve all the special interest driven problems with our system has more ambition and hope than experience and wisdom.