Almost no one is willing to speak up in defence of lawmakers trading stocks based on knowledge of non-public information about public policy.
It seems to bring together two things most people loathe: insider economic privilege and political self-dealing. It’s hard to think of something that is a greater candidate for public outrage than insider trading by politicians.
So it might be worth taking a moment to wonder if it really is a good idea to enforce insider trading rules against members of Congress. Because I think there might be some unintended consequences here that could be potentially hazardous to our constitutional order.
In the first place, it’s unlikely that any organisation that must labour too much under the oversight of Congress can be counted on to enforce insider trading rules against powerful members of Congress. Since Congress controls the budget of the Securities and Exchange Commission, we won’t get much out of them.
To overcome the reluctance of agencies like the SEC to crack down on Congress, there has to be a counter-balance to the oversight and budgetary authority. One candidate is executive authority.
Executive branch appointees can sometimes be counted on—at least more than the leadership of independent commissions—to enforce laws against legislators, at least when the executive finds such enforcement in its interest. But giving the president the right to pry into the investment decisions of members of Congress is an invitation to undermine the independence of the legislative branch. It would be all too easy for a President to use this authority to harass and distract his Congressional rivals for power.
This concern might be overcome if the price of Congressional insider trading were thought to be too great. But there is no evidence of any great public expense caused by Congressional insider trading.
Perhaps if it were shown that beneficial legislative compromises were being destroyed by embedded financial interests, the cost might be great enough to warrant enforcement. If, say, a Congressman’s opposition to a Single Payer plan in healthcare was made more adamant because, through investments, he would profit from a defeat of the plan. But things seem to operate in the opposite direction: politicians tend to invest in favour of policies they support, rather than support policies they invest in.
As I pointed out earlier, it may be that the absence of an adequate official enforcement mechanism for a ban on Congressional insider trading could be compensated for by media investigations. Perhaps a ban would motivate journalists to pay more attention to this matter, and discovering violations of the ban would motivate voters to throw the rascals out of office.
But I’m not sure the legality here matters all that much. Journalists can still make headlines if they can show evidence of Congressional insider trading. And the public, while outraged when actually confronted with it, doesn’t seem to take these accusations very seriously.
What’s more, the question of media bias would become important. It seems highly likely that journalists would be more eager to investigate insider trading of politicians who the journalists regard as foolish, wrong or dangerous. This could result in highly selective “enforcement.”
In short, there’s no good reason for allowing Congressional insider trading—but there’s not much to be gained by banning it. We’re probably stuck with this as a fact about the world. So we might as well smile at this charming bit of mostly harmless corruption.
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