Keep the Facts Straight: Congressional Portfolios do *not* Outperform the Market

Insider trading in Congress is back in the news, this time because Congress is trying to set up more stringent regulations against it. The reason:

Almost all of the 173 House members cosponsoring the legislation signed on following a 60 Minutes broadcast last month reporting that congressional lawmakers can enrich themselves through investments without fear of prosecution.

The emphasis here, however, ought to be on the can. Because in the aggregate, US legislators do not seem to be doing a better job enriching themselves through their investment portfolios than the general public, a fact that seems to be getting lost (or not appearing at all!) in the discussion of this issue. Jens Hainmueller, a draft of whose work we previously featured on The Monkey Cage, emailed me regarding a revised version of his paper with Andy Eggers:

We actually just revised this paper in order to more clearly point out the serious shortcomings of existing studies on congressional investing and also put the results in the context of the current debate. The link to the new version is here.

The paper is now titled Capitol Losses: The Mediocre Performance of Congressional Stock
Portfolios, 2004-2008
. Here’s the abstract:

Given the well-documented effects of public policy on financial markets, one would expect political insiders to be capable of enriching themselves through savvy investing. Consistent with this, two prior studies of stock trades in Congress conclude that members of both the House and Senate easily out-perform the market, fueling the perception that corrupt “insider trading” is widespread in Congress. In this paper, we point out serious shortcomings in existing studies on congressional investing and carry out our own analysis using financial disclosure data from the 2004-2008 period. We find no evidence of either informed trading or above-market portfolio returns for Congress as a whole or any subset of members. In fact, the average investor in Congress underperformed the market by 2-3% annually during this period, suggesting that a substantial majority of members would have financially benefited from replacing their stock holdings with passive index funds. Our research suggests that widespread political “insider trading” in Congress is more myth than reality.

It’s really troubling how many major media outlets are uncritically broadcasting these poorly supported allegations of insider trading. Even the New York Times is now joining in, writing:

“That report complemented research by Peter Schweizer of the Hoover Institution tracking the stock profits and legislative activities of lawmakers who wind up millionaires. Earlier university studies had found stock-trading legislators smartly outperforming the market by 6 percent to 12 percent in the 1980s and 1990s.”

Our paper shows that this previous research is highly problematic (Schweier just provides cherry-picked anecdotes and a close reading of the published tables in the two previous studies suggests very little systematic evidence of informed trading, as the majority of specifications in these papers are actually insignificant). Moreover, our new tests, which for the first time consider the actual stock portfolios instead of just synthetic portfolios built from trades, shows no evidence of members outperforming the market. Even the individuals singled out by Schweizer have below market returns (see figure 3).