As Donald J. Trump heads to the White House amid a flurry of charges of conflicts of interest, research backed by the Institute for New Economic Thinking raises questions over whether members of Congress are themselves immune to this particular problem.
Ahmed Tahoun of the London Business School and Laurence van Lent of the Tilburg School of Economics and Management conducted a ground-breaking study examining whether prospects for personal gain affect how our representatives make decisions. In particular, they looked at how Congress behaved during the national emergency of 2008, when the subprime mortgage crisis blew up.
What they found should give every American pause. While they may not be making deals on golf courses in the Middle East, members of Congress have plenty to lose when the legislature’s decisions affect their personal wealth.
As the entire world financial system ground to a halt in the wake of the failure of Lehman Brothers and the emergency rescue of AIG, Treasury Secretary Paulson and Federal Reserve Chair Bernanke went to Congress to plead for a much larger bank bailout. Paulson’s first design offered only sketchy details of a plan for government purchases of banks’ toxic assets. That plan was rejected by Congress. As the world economy tanked, a revised plan passed, allowing government funds to recapitalize banks.
The bailout was massively unpopular and flew in the face of the Bush administration’s rhetoric about free markets. Polls showed that the majority of Americans clearly didn’t like bailing out Wall Street with $700 billion of taxpayer money — $2,000 for every man, woman and child in the country. That didn’t stop Congress from passing the Emergency Economic Stabilization Act of 2008 (EESA).
So why did lawmakers differ from their constituents? One reason, suggest the researchers, may be because many of them directly held assets in the financial institutions that required bailing out.
Before Tahoun and van Lent dived in, others investigating the motives of politicians’ votes tended to highlight the effects of the opinions of constituents and special interests groups. But this pair suspected that other motivations might play a role — like maximizing returns on investments. The eureka moment came when they discovered a treasure trove of personal finance disclosures that other researchers had largely overlooked, enabling them to glean details about the wealth of every House Representative and Senator, including information about stock ownership in corporations.
But how do we know that owning stock in bank and financial institutions was really a driving motivation in Congressional decision-making rather than other factors? What if lawmakers just believed strongly that what was good for banks was good for everybody? Or, what if they hoped to get a big bank donation for their next campaign?
Tahoun and van Lent considered those questions. They pored over biographical information about members to see, for example, if they ever worked in a bank or studied finance — things that might make them especially partial to that sector. They studied past investment behavior, and even looked at the pension plans of politicians’ spouses. In every test they ran, they found that the extent of a politician’s asset holdings meaningfully affected their vote on the EESA. When they compared the votes of those who held assets to those who didn’t, asset-holders were found to be about 60 percent more likely to give the bailout a thumbs up.
The researchers note while there are plenty of ongoing debates about the influence of powerful lobbying groups or of flush Super-PACs — which are clearly significant and controversial — far less attention is paid to how politicians can become richer or poorer by their activities in Congress.
Unfortunately, the researchers point out, Congressional ethics rules governing such matters are very loose, and at the time of the bailout, the rules implied that holding stocks did not create a conflict of interest. However, senior politicians knew that it didn’t look good: Nancy Pelosi, the Speaker of the House at the time, suggested that politicians divest their interest in companies that were benefitting from the bailout. She did so herself — after the bailout passed.
The researchers do point to one ray of light: at least there is data available for voters to examine. Their paper shows that in cases where constituency scrutiny is likely to be higher, asset holdings explain less of the politician’s voting behavior.
Tahoun and van Lent would like to see more work done on stock ownership among politicians because it’s not yet empirically clear whether it’s harmful in itself. Some argue that having skin in the game could be a good thing if it doesn’t cause politicians to make decisions that only benefit themselves rather people they are supposed to represent. The researchers note that disclosure doesn’t necessarily solve potential problems: Politicians might, for example, feel less guilty about acting in their own self-interest if the information about their stock portfolios is publicly available. It gives them a handy excuse to say, well, voters ought to have known.
In addition to more research and voter vigilance, the researchers would like to see truly blind trusts implemented to prevent even the appearance of a conflict of interest among politicians. They further note that having independent bodies to examine potential ethics violations and conflicts of interests, both within and outside of Congress, is key.