Capitol Gains

MANIFESTO

Bill Frist is not the first politician to become ensnared in a shady stock deal, nor will he be the last. But he is probably not the only politician who should be under investigation for acting on insider information. Last week's The New Yorker magazine had a very interesting story by James Surowiecki about the seemingly superhuman ability of politicians to ride Wall Street to huge profits.

Last year, Alan Ziobrowski, a professor at Georgia State, headed the first-ever systematic study of politicians as investors. Ziobrowski and his colleagues looked at six thousand stock transactions made by senators between 1993 and 1998. Over that time, senators beat the market, on average, by twelve per cent annually. Since a mutual-fund manager who beats the market by two or three per cent a year is considered a genius, the politicians’ ability to foresee the future seems practically divine. They did an especially good job of picking up stocks at just the right time; their buys were typically flat before they bought them, but beat the market by thirty per cent, on average, in the year after. By those standards, Frist actually looks like a bit of a piker.

The report is then forced to conclude some of these investments were made “based on information that is unavailable to the public” or as its known to the rest of us: Insider Trading. This isn't really a partisan issue. I have no doubt that just as many Democrats are guilty of acting on insider information as Republicans.

There are relatively simple ways to reduce some of this activity—for instance, requiring that insiders disclose in advance when they plan to trade and how much they plan to buy or sell. But ultimately we don’t seem all that interested in doing much about it, unless someone sails too close to the wind too publicly—or you’re Martha Stewart. Perhaps we want to keep the insider’s advantage intact because we all want to be inside. The choice is between a system in which people get rewarded for the work they do and a system in which people get rewarded for who they know or for what they’re lucky enough to stumble into. And in Washington today that’s no choice at all.

It is just another example of how politicians are often in the business of governing for no reason other than themselves.