Domestic Affairs, Esha Dhar
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The Economic and Ethical Implications of Insider Trading in the Government

Image source: Leslie Garvey / POGO

Dozens of government officials have violated laws on stock trades, raising the question of corruption and lack of transparency in the government.

By Esha Dhar

Recently, a number of investigations have brought light to potential insider trading taking place amongst government officials. Last month, House Speaker Nancy Pelosi announced that there will be a floor vote on legislation that would ban officials in all three branches of the government and their families from dealing in securities while the lawmakers in question are in office. This is not the first time this issue has been introduced in Congress, as lawmakers and Americans have been calling for regulations on trading for years. 

According to the Wall Street Journal, more than 2,600 officials at various federal agencies have disclosed stock investments in companies that were lobbying their agencies for favorable policies, amounting to more than one in five senior federal employees across fifty federal agencies. The latest investigation has found that one in three officials at the Environmental Protection Agency owned shares in companies that were lobbying their agency. Overall, EPA employees have had a total of two million in oil and gas investments from the last five years. The investigation also found that within the Department of Defense, officials were buying shares of aerospace and defense companies. With recent studies on technology companies, more than a total of 1,800 federal officials from different agencies have reported owning or trading at least one of four major tech stocks: Meta, Alphabet Inc.’s Google, Apple and Amazon. This pattern spans across a number of agencies in the federal government; one in five senior employees from 50 federal agencies owned stakes in companies that lobby their agency. Even in the judicial branch, over 130 federal judges have disclosed owning stocks in companies that were appearing in their courtrooms.

There are supposed to be consequences in place for federal officials participating in this kind of behavior since there is legislation in the US in place that does not allow politicians to work with companies that can affect their personal finances or investments in order to avoid conflict of interest. To prevent conflicts of interest, federal officials or politicians engaging in insider trading or similar activities are subjected to around five years in prison or a $500,000 fine. However, these measures are rarely put into practice. Congress attempted to increase the transparency of the securities transactions for government officials in 2012 when they passed the Stop Trading on Congressional Knowledge Act, also known as the STOCK Act, based on existing legislation passed in 1978 that increased the reporting requirements for officials. In this act, officials had to report securities transactions valued above $1,000 within 30 days of receiving notice of the transaction and within 45 days of the transaction date They also had to put their filings on the internet and make reports monthly. Many of the findings found that it was common for officials to trade their stocks in companies right before regulations were put in place for the companies in question. Government officials disclosed their investments under the implication that if they complied, they wouldn’t get in trouble. 

While this act did expose insider trading taking place in the government, very few charges were actually brought against officials due to the structural inefficiencies embedded within the bureaucracy. Many ethics officials were not made aware of the ongoing government projects and which companies they are working with. As a result, the ethics officials had to rely on comparing yearly changes to filings to search for conflicts of interest. With access to limited information, ethics officials were not able to accurately assess the extent of insider trading under the surface. Furthermore, it becomes increasingly difficult to charge or issue subpoenas against members of Congress, as they’re protected from being questioned about their ongoing legislative work. The act remains an insufficient remedy for treating the prevalent insider trading issue, as it fails to ensure its actual application.    

The economic and ethical implications of insider trading run deeper. Insider trading stems from certain interest groups taking advantage of the special, often inaccessible, information they possess that may not be available to the general public. Since government officials have information about different companies and upcoming regulations on them that everyday Americans don’t have access to, they have the upper hand in information asymmetry. High liquidity is essential for financial markets’ existence and performance, as large trades must be made at low transaction costs. Insider trading impacts the liquidity of the market, making transaction costs higher and reducing small investors’ returns. Insider trading also makes it more expensive for companies to issue stocks and bonds since it has a large effect on the supply and demand of various securities. Overall, insider trading discourages small investors from participating in the financial markets and allows the elite to maintain the unequal power imbalance they have over ordinary citizens. 

Clearly, allowing government officials to trade stocks is highly unethical. So the question arises, why are government officials not banned from trading stocks? One answer to this question is that government officials don’t want to discourage others from entering the federal government. Members of Congress have argued that if they are not allowed to trade stocks like civilians, they will be disconnected from the economic interests of their constituents, precisely going counter to the function of Congress in representing their constituents. When asked about the potential to ban members of Congress and their family members from owning individual stocks Pelosi said that the free market economy protects their participation in financial markets. Furthermore, lawmakers feel that they have a right to control their savings accounts, such as retirement accounts, through all types of investing, like individual stock trading. They feel that this should be allowed to trade in order to promote monetary fairness. From their perspective, they find that it would be unethical for them to be able to participate in the free market because of their jobs.  

From an ethical standpoint, politicians exercise great power and influence over their citizens’ lives. If politicians are violating the rules that they are putting in place, this diminishes the integrity of the government. Americans trust that the politicians that they elect are acting in the best interest of the American people and not themselves. How can officials who we elect to enforce laws be trusted if they are not following the laws themselves?

1 Comment

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