By JR on Thursday, May 26, 2011
Ever wonder how people go to Congress and become millionaires? A new academic report clears it up for us.
A report from four scholars, Alan J Ziobrowski; James W Boyd, Ping Cheng; and Brigitte J. Ziobrowski, titled Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives, shows that between 1985 and 2001 members of Congress enjoyed a considerable advantage over members of the public in their investment returns.
The article was published by Berkeley Electronic Press and is a follow up to a similar study done on investments by US Senators.
“A previous study suggests that U.S. Senators trade common stock with a substantial informational advantage compared to ordinary investors and even corporate insiders,” says the introduction to the report. “We apply precisely the same methods to test for abnormal returns from the common stock investments of Members of the U.S. House of Representatives. We measure abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns). A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).”
Actually 12 times .55 percent comes out to 6.6 percent annually. That .6 percent return accounts for an additional $130,000 over a 17 year period.
So how lucrative can the 6.6 percent advantage be for Senators and Representatives? A portfolio of $100,000 getting average stock market returns of 11 percent over a 17 year period would have grown to $589,000. If you were a member of the United States House of Representatives, though, enjoying the advantage that inside government information can bring you, your portfolio would have reached $1,573,000, according to an investment calculation I did using the finding from the study.
Assuming only average market returns for the next 20 years, a Representative would grow their portfolio to close to $13 million. Under the same circumstances US Senator would have grown the portfolio to $18 million.
The conclusion of the study favors some sort of reporting mechanism similar to those imposed upon corporate insiders. “We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain. That having been said, abnormal returns earned by Members of the House are substantially smaller than those earned by Senators during approximately the same time period. These smaller returns are due presumably to less influence and power held by the individual Members.”
While the sky wouldn’t fall if reporting requirements were imposed on members of Congress, the report misses the most obvious point.
Why do we have a federal government that can so substantially ensure winners and losers in investments and our economy? Isn't a system like that prone to corruption? Don't we witness the effects of that corruption in legislation like Obamacare, or the cadillac benefits offered public employees?
The report points out the even corporate insiders don’t enjoy the return advantages that members of Congress enjoy. It’s one of the most damning indications yet that the scope of government has gotten wildly out of control. It’s also another example of laws that Congress passes for the rest of us but won’t consider following.