I like the suggestion of paying officials more. At Risk & Progress, I also discussed Singapore as a strong example of clean government. Paying staffers more reduces the incentive for graft.
I also like the idea of banning Congressmember trading and paying them in 10 year index fund options. I still wonder if it is really possible to fully ban Congressmember trading, however. Could they not feed their insider information to trusted friends and family instead?
"Ban stock trading for politicians but tie all of their salaries to an aggregate index of the US economy. All political salaries should be paid as 10-year locked shares of the total market index."
I endorse this policy, with one fear: to the extent that politicians understand (or not) how interest rates/inflation affect the stock market (generally), would this incentivize them to pursue (or pressure the Fed) to take actions that boost those indices?
What other asset could we mix into their salary to balance that?
I think the 10-year lock hedges against this somewhat since at most congresspeople cannot expect to be in office ten years in the future and short term pumps wouldn't help them.
Eli Dourado suggests TFP as the metric here which would be harder to game.
Trading on private information (differnt from insider trading) has a net market benefit, compensating the informat for disclosing to the market through their trades. It is unclear frankly how politicians would have access to "Insider" information. They are public servants and have public hearings. Bills are discussed publicly. Someone at FDA approving a drug have private information. Secret meetings with companies might be a source. All pretty traceable.
One approach would be to disclose all trades by politicans something like 10 mins after they are made. If they are trading illegally, or just on good information, they would get nailed quick. If they have a valuable insight, the market could leverage it quickly. Reducing market imperfection.
Dont forget private markets. Romney probably makes a lot of money in private markets through his relationships.
One sneaky way to give a elected offical a bribe is a good stock tip. My guess is Pelosi has access to people with good tips on things unrelated to current legislation, but those tips only come when she keeps doing the things the tipster wants.
2. How should we think about creating financial incentives to motivate Congress members to perform better?
Regarding the first issue, the stock performance graphs you’ve presented are informative, but they don't mean a thing. Whether or not Congress members are profiting from insider trading (spoiler: they are, and heavily, according to WSJ), they’re breaking the law and should be prosecuted like any other American under the STOCK Act of 2012, among other laws. Why these laws are enforced on the public but not on politicians is beyond me. That’s on the SEC and the FBI, both of which have been utterly useless at fighting this crime. Without whistleblowers and brave Americans keeping an eye out, frauds like Madoff, FTX, and Theranos might have never been uncovered.
As for the second issue, aligning Congress members with metrics that improve American lives is a great idea. However, I’m not convinced that stock options are the best mechanism. Most Americans don’t own stock, so who exactly are we aligning them with? And let’s not forget the key lesson from Investments 101: the quickest way to boost a stock is by cutting costs, which usually means jobs. We need to be careful not to incentivize Congress to destroy jobs or cause other unintended consequences.
Agree 100%. If we had done this in the late 1980s (when Social Security had its last major reform), today we could have much higher benefits and a long-term fiscal surplus.
The problem is that you would have to essentially pay for two different retirement systems for at least one generation.
Current FICA revenues go almost entirely to pay for current benefits, so there is not much money left over that can be invested in index funds. You would need a massive increase in taxes to pay for:
1 Current benefits
2 Current workers investing in index funds
It would probably take 20-25 years before the additional taxes could be eliminated. I think that we would end up with a better system, but the transition period would be very difficult and unpopular.
What's so bad about them getting to beat the market? Sure, I'd prefer just a high salary -- ideally larger than whatever they can get as a lobbyist -- as a means of compensation but it seems pretty decent. Especially given that voters show a repeated preferences for hidden costs (requiring corps/people do things that cost money rather than paying out of taxes).
It doesn't seem to impose much of a bias in their voting -- they can profit either way and often just from information -- and it spreads the cost across the economy pretty broadly likely as fair as taxes are.
I love this idea (ban individual stocks and tie Congressional compensation to long-term economic indices). Congress should have financial incentives to promote long-term economic growth. Your proposal does this in a simple and transparent way.
As an aside I think it is ridiculous how little attention politicians devote to promoting long-term economic growth compared to other issues. If we get that one issue right, then it opens up far more options on most other issues.
Might this also be applicable to CEOs and private-sector managers as well, but with their company stock holdings. I do not think that they should be able to buy/sell the holdings while employed by the company. The temptations to use insider knowledge are just too great.
Also CEOs currently have an incentive to focus on short-returns and then potentially bail from the firm when they know things are going to get bad. If their compensation was tied to company performance over the next 10 years, then they have a strong incentive to think long-term.
It also bugs me that they get lots of money when their company achieves average or below-average returns compared to the broader market or the economic sectors. The trend is for stocks to increase in value, so an exec can achieve below average performance and still make lots of money from the stock going up.
Does the data change if you add in the trading history of congressional spouses or is that already included? They are also required to report under the STOCK act. Paul Pelosi is quite prolific on that front.
Nice peice Maxwell.
I like the suggestion of paying officials more. At Risk & Progress, I also discussed Singapore as a strong example of clean government. Paying staffers more reduces the incentive for graft.
I also like the idea of banning Congressmember trading and paying them in 10 year index fund options. I still wonder if it is really possible to fully ban Congressmember trading, however. Could they not feed their insider information to trusted friends and family instead?
"Ban stock trading for politicians but tie all of their salaries to an aggregate index of the US economy. All political salaries should be paid as 10-year locked shares of the total market index."
I endorse this policy, with one fear: to the extent that politicians understand (or not) how interest rates/inflation affect the stock market (generally), would this incentivize them to pursue (or pressure the Fed) to take actions that boost those indices?
What other asset could we mix into their salary to balance that?
I think the 10-year lock hedges against this somewhat since at most congresspeople cannot expect to be in office ten years in the future and short term pumps wouldn't help them.
Eli Dourado suggests TFP as the metric here which would be harder to game.
https://www.cato.org/cato-online-forum/incentive-pay-congress
I imagine that fed independence is assumed.
Trading on private information (differnt from insider trading) has a net market benefit, compensating the informat for disclosing to the market through their trades. It is unclear frankly how politicians would have access to "Insider" information. They are public servants and have public hearings. Bills are discussed publicly. Someone at FDA approving a drug have private information. Secret meetings with companies might be a source. All pretty traceable.
One approach would be to disclose all trades by politicans something like 10 mins after they are made. If they are trading illegally, or just on good information, they would get nailed quick. If they have a valuable insight, the market could leverage it quickly. Reducing market imperfection.
Dont forget private markets. Romney probably makes a lot of money in private markets through his relationships.
One sneaky way to give a elected offical a bribe is a good stock tip. My guess is Pelosi has access to people with good tips on things unrelated to current legislation, but those tips only come when she keeps doing the things the tipster wants.
With regards to congressional insider trading, there are two separate issues that you're conflating here:
1. Congress members are breaking the law. Why are they treated differently from the rest of us? It’s not just Congress—Wall Street Journal’s investigation revealed that federal judges and officials across eight agencies (Treasury, EPA, Defense, IRS, SEC, Fed, HHS, and Interior) are also profiting illegally from insider trading: https://www.wsj.com/articles/federal-judges-brokers-traded-stocks-of-litigants-during-cases-walmart-pfizer-11634306192 and https://www.wsj.com/articles/government-officials-invest-in-companies-their-agencies-oversee-11665489653.
2. How should we think about creating financial incentives to motivate Congress members to perform better?
Regarding the first issue, the stock performance graphs you’ve presented are informative, but they don't mean a thing. Whether or not Congress members are profiting from insider trading (spoiler: they are, and heavily, according to WSJ), they’re breaking the law and should be prosecuted like any other American under the STOCK Act of 2012, among other laws. Why these laws are enforced on the public but not on politicians is beyond me. That’s on the SEC and the FBI, both of which have been utterly useless at fighting this crime. Without whistleblowers and brave Americans keeping an eye out, frauds like Madoff, FTX, and Theranos might have never been uncovered.
As for the second issue, aligning Congress members with metrics that improve American lives is a great idea. However, I’m not convinced that stock options are the best mechanism. Most Americans don’t own stock, so who exactly are we aligning them with? And let’s not forget the key lesson from Investments 101: the quickest way to boost a stock is by cutting costs, which usually means jobs. We need to be careful not to incentivize Congress to destroy jobs or cause other unintended consequences.
Great article. Wish we could peg social security to an index fund too!
Agree 100%. If we had done this in the late 1980s (when Social Security had its last major reform), today we could have much higher benefits and a long-term fiscal surplus.
It's not too late to fix things.
https://stovetop.substack.com/p/stovetop40
https://stovetop.substack.com/p/gut-social-security-fund-fertility
The problem is that you would have to essentially pay for two different retirement systems for at least one generation.
Current FICA revenues go almost entirely to pay for current benefits, so there is not much money left over that can be invested in index funds. You would need a massive increase in taxes to pay for:
1 Current benefits
2 Current workers investing in index funds
It would probably take 20-25 years before the additional taxes could be eliminated. I think that we would end up with a better system, but the transition period would be very difficult and unpopular.
What's so bad about them getting to beat the market? Sure, I'd prefer just a high salary -- ideally larger than whatever they can get as a lobbyist -- as a means of compensation but it seems pretty decent. Especially given that voters show a repeated preferences for hidden costs (requiring corps/people do things that cost money rather than paying out of taxes).
It doesn't seem to impose much of a bias in their voting -- they can profit either way and often just from information -- and it spreads the cost across the economy pretty broadly likely as fair as taxes are.
The connection between a congress member's actions and the overall GDP/stock market is far too weak to motivate specific behaviour
I love this idea (ban individual stocks and tie Congressional compensation to long-term economic indices). Congress should have financial incentives to promote long-term economic growth. Your proposal does this in a simple and transparent way.
As an aside I think it is ridiculous how little attention politicians devote to promoting long-term economic growth compared to other issues. If we get that one issue right, then it opens up far more options on most other issues.
https://frompovertytoprogress.substack.com/p/debate-challenge-economic-growth
Might this also be applicable to CEOs and private-sector managers as well, but with their company stock holdings. I do not think that they should be able to buy/sell the holdings while employed by the company. The temptations to use insider knowledge are just too great.
Also CEOs currently have an incentive to focus on short-returns and then potentially bail from the firm when they know things are going to get bad. If their compensation was tied to company performance over the next 10 years, then they have a strong incentive to think long-term.
It also bugs me that they get lots of money when their company achieves average or below-average returns compared to the broader market or the economic sectors. The trend is for stocks to increase in value, so an exec can achieve below average performance and still make lots of money from the stock going up.
Does the data change if you add in the trading history of congressional spouses or is that already included? They are also required to report under the STOCK act. Paul Pelosi is quite prolific on that front.
Pelosi has always been more of an ideologue which is why she could never be President. She won’t play ball.