A recent analysis of stock trading by U.S. Congress members has uncovered a surprising trend: politicians are no better at investing than the average retail trader, often underperforming the market. This finding raises critical questions about the rationale behind allowing lawmakers to shape winner-picking industrial policies.
Research Insights into Congressional Trading
A new research paper by economists Haotian Chen of UCLA and Bruce Sacerdote of Dartmouth examines data from the STOCK Act, which requires disclosure of stock trades exceeding $1,000 by House and Senate members and their families. Between 2012 and 2023, there were 71,333 such trades. The study's title, "Capital in the Capitol: Congressional trades resemble uninformed retail trading," succinctly captures its conclusion.
Most trades, about 75 percent, involve amounts under $15,000, suggesting minimal risk to careers. However, one percent exceed $250,000. Notable traders include California Democrat Ro Khanna, with 12,020 trades, and Texas Republican Michael McCaul, with 4,482 trades, 28 percent of which were over $50,000. These outliers were excluded from the analysis to prevent skewing results, focusing instead on 331 other traders.
Political Motivations and Market Performance
The paper begins by questioning why politicians invest heavily in elections for a job paying $174,000 annually. Beyond salary, power serves as a key motivator, offering non-pecuniary benefits that are not taxable. While some argue political power can be leveraged for financial gain, the data suggests otherwise in stock trading.
Historically, Republicans traded more than Democrats, but since 2017, both parties have been nearly equal. Exchange-traded funds mimicking congressional portfolios exist, such as "Subversive Unusual Whales," which track holdings by Democrats and Republicans. Democrats often invest in big-tech stocks they publicly criticize, while Republicans favor companies like Comfort Systems USA, involved in construction systems.
Implications for Policy and Public Trust
The underperformance of congressional stock trades challenges the perception that lawmakers use inside information for profit. This raises doubts about their ability to effectively manage industrial policies that pick economic winners. If politicians cannot outperform the market in personal investments, their capacity to steer national economic strategies may be similarly limited.
This analysis underscores the importance of transparency and accountability in political finance. As debates over economic policies continue, these findings invite scrutiny of how legislative decisions align with market realities and public interest.
