By JACK HOUGH
The Constitution puts> Congress in charge of America's money, empowering it to collect taxes, borrow money and pay debts. Fortunately, the job doesn't come with any stock-picking duties. The same body that failed to collect enough in taxes to pay for its spending in 45 of the past 50 years has also badly trailed the broad stock market with its members' personal investments in recent years, despite holding a key advantage over the public.
Stories abound of lawmakers and their staffs investing in shares of companies with which they have political attachments. In October, The Wall Street Journal reported that in 2008 and 2009 at least 72 congressional aides from both political parties traded in shares of companies that their bosses help oversee.
Insider trading laws that prevent most citizens from profiting from privileged information don't apply to Congress. Recent efforts to impose such a ban, like the Stop Trading On Congressional Knowledge (STOCK) Act, have attracted little support. However, lawmakers and top aides have been required for more than three decades to disclose to the public personal financial information including details about capital gains.
A new study of such records for the years 2004 through 2008 by a pair of academic researchers makes two remarkable findings. First, Congress members disproportionately invested in local companies and companies that contributed to their campaigns, and when they bought shares of home-district companies they beat the market by an average of 4.5% a year. Second, even with this advantage, returns for their entire portfolios stunk, with the average portfolio trailing the market by 2% to 3% a year.
In dollar terms, write study authors Andrew Eggers of Yale and Jens Hainmueller of M.I.T., a $100 investment made in a stock index fund in January 2004 was worth about $80 by December 2008. The average Congressional investor turned it into $70.
Curiously, an earlier study that looked at records from 1993 to 1998 found that stock-pickers in Congress trounced the broad market. Authors of the new study confirm the earlier finding using a broader data set, and speculate that Congress has lost part of its informational advantage, or that it has become reluctant to fully exploit it, or that it was simply unlucky during the more recent period.
One possibility the authors don't address is that investors in Congress, like many outside of it, pick the sort of stocks that do well in a rising market (S&P 500 returns averaged a compounded 22% from 1993 to 1998) but underperform during a downturn (like 2008's loss of 37%).
Whatever the cause, the new results suggest that although congressmen can still earn plenty as lobbyists and corporate board members after leaving office, their skills might be more closely suited to the job of portfolio manager at an actively traded mutual fund: Studies have shown for decades that four out of five of those underperform the market, too.