Congressional Insider Trading

A recent 60 Minutes segment and a new book claim that members of Congress from both parties have benefited financially from inside information obtained in the course of their legislative duties. Not surprisingly, the specific targets of these charges (Nancy Pelosi, John Boehner, and Spencer Bacchus) have denied doing anything illegal or unethical.

Of course, a major part of the story is that these legislators could not have done anything illegal, because there are no laws against insider trading by members of Congress. There are vague House ethics rules against profiting financially from their official positions, but the best I can tell the House ethics process has rarely if ever been used for allegations against congressional insider trading.

Obviously, I am in no position to evaluate the specific charges highlighted on 60 Minutes or the defenses offered by the individual legislators, but there is an excellent study by Jens Hainmeuller and Andy Eggers evaluating whether or not members of Congress earn excess returns on their stock portfolios. If insider trading were pervasive, one would expect congressional portfolios to outperform the broader market. But this is the exact opposite of what Hainmueller and Eggers find. In fact, legislators are generally bad investors. Their portfolios consistently underperform. My personal hunch is that members are often forced into weak investments for political reasons and that this works against maximizing the value of their portfolio. Hainmueller and Eggers find one important exception to congressional underperformance. Legislators do well with their investments in firms located in their districts. They find, counter to the presumed effects of insider trading, that these excess returns are not due to the timing of transactions, but to the superior selection of which local firms to invest.

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The Perry Brain Freeze

I am not a fan of Rick Perry, but it strikes me that there is something fundamentally unserious about the way Rick Perry’s mental lock during the last debate has been covered. All most all of the coverage has focused on whether his campaign can recover after forgetting that he has proposed abolishing the Department of Energy. It is as if debate performance were the sole qualification of the presidency. Does anyone really think that if he were elected he would not eliminate the department because he forgot to?

The main issue of course is whether eliminating the Department of Energy (as well as the Education and Commerce departments) is good policy or not. How much money would it save? How well would any of the critical functions be performed in other departments? Etc? But journalists seem to ne dispositionally and perhaps intellectually incapable of focusing on such things. It much easier and more fun to repeatedly show clips of a candidate saying “oops.”

Turnout and Polarization

The Monkey Cage has an interesting discussion about whether boosting turnout would reduce levels of polarization and partisanship among our elected officials. While none of my work directly addresses the question of the effect of general election turnout on polarization, several of its strands would place me clearly in John Side’s camp of skeptics.

  • Chapter 4 of Polarized America analyzes trends in turnout among different income groups during the period of expanding polarization (1972-2004). There were several important take aways. The first is that our evidence is consistent with earlier findings of McDonald and Popkin that there is no trend in turnout among the voting eligible population (VEP) (roughly citizens over 18 who are not disqualified due to felony convictions). The downward trend in participation by the voting age population (VAP) (all residents over 18) is caused by increased numbers of non-citizen residents and (to a lesser extent) disenfranchised felons. Moreover we find that the relative incomes of voters and non-voters are roughly constant over the time period. So it would seem that trends in turnout could hardly explain the increase in polarization. Indeed, reversing the trends in VEP would mean reversing disenfranchisement laws and allowing non-citizens to vote. It would be reasonable to expect that those reforms would shift the spectrum to the left but not de-polarize it.
  • My other relevant work concerns the effects of participation in primary elections. In this rejoinder to Richard Pildes, I report some estimates of the effect of primary election turnout on the extremity of a House member’s NOMINATE score. A key problem for such analysis is that turnout may itself be influenced by a candidate’s position. So I use the coincidence of competitive presidential, gubernatorial, and Senate primaries as exogenous variation in turnout. The resulting IV estimates show no relationship between turnout and the winner’s NOMINATE score. I concede, however, that the effect of the instruments (the competitive primaries for higher office) is small. The second piece of evidence is reported in my working paper with Eric McGhee, Seth Masket, Boris Shor, and Steve Rogers. Here we find little evidence that the institution form of primary election effects polarization of state legislators. This undercuts the common argument that open primaries reduce polarization by boosting participation.

But perhaps the most relevant piece of information about Bill Galston’s original contention that mandatory voting would reduce polarization is a new paper by Anthony Fowler at Harvard. In a careful study, he looks at the effects of the adoption of compulsory voting in Australia. He estimates that the causal effect of compulsory voting was a significant boost the left-wing Labour Party. So the effect of compulsory voting appears to have shifted Australian politics to the left rather than shore up the center.

New Working Paper

Keith Poole, Howard Rosenthal and I have spent the last couple of years working on a manuscript on the political economy of the financial crisis. That joint work has inspired my to write this paper modeling the effects of policy complexity on regulatory policymaking. Although the argument is formalized, it is a simple one. Policy will tend to be biased towards the interests of the regulated industry in areas where policymaking is complex. I hope the paper contributes some useful insights to financial market regulation.

Testimony before NJ State Redistricting Commission

Below are my prepared remarks delivered before the NJ Congressional Redistricting Commission in their public hearing on October 11.

Contemporary politics in the United States is historically distinctive in at least two respects. The first is the ever increasing polarization of political elites. As my collaborators and I have documented, partisan differences in congressional voting behavior have grown dramatically to levels not seen since the early 20th century. The second distinction is the historically low levels of competition in congressional elections. This is especially true of the House of Representatives where 99 percent of incumbents standing for reelection were successful in the 2002 and 2004 elections. In the swing to the Democrats in 2006, no individual Democrats were defeated and even 89 percent of standing Republicans were reelected. This pattern was essentially reversed in 2010.

Given the conjunction of these two patterns, it seems natural to draw a link; namely, the increased polarization of Congress is a direct result of the increasing ease of reelection. Presumably in an era of declining competition politicians no longer feel the need to reach out to moderate and independent voters. Instead politicians are free to pander to their base. Politicians who do not pander may face primary challenges by ideologically purer candidates.

Is there a link between increased polarization and declining competition? Scholars have yet to establish a compelling causal relationship. Some scholars (as well as pundits) claim that the link between polarization and declining competition is rooted in the increasingly sophisticated techniques deployed during the congressional redistricting that follows each decennial census. Pundits proclaim that we are in “the age of gerrymandering.” Many observers argue that redistricting increasingly produces districts that are homogeneous with respect to partisanship and voter ideology. Consequently only conservative Republicans can win in conservative Republican districts just as liberal Democrats dominate liberal Democratic districts. Because redistricting no longer produces moderate, bipartisan, or heterogeneous districts, moderates cannot win election to the House.

This narrative is attractive not only because of analytical elegance, but because it suggests a single, perhaps even feasible, solution to what ails the American polity — take the politics out of redistricting. Draw districts heterogeneous, competitive, and politically moderate. Appealing to independents would become the key to winning election, and polarization would become a thing of the past.

Unfortunately, although elegant in description and prescription, the story may not be true. There is little empirical support for the claim that districting has had a substantial impact on polarization.

That the U.S. Senate has experienced an increase in polarization at the same time as the U.S. House suggests that gerrymandering plays at best a modest role. In addition to this historical claim, my research (published in the American Journal of Political Science) has three findings that also undermine any such link.

First, a very large fraction of the polarization in the U.S. House is the result of what we call within-district divergence between the voting records of Democrats and Republicans. In other words, for a given type of district (in terms of partisanship, demographics, ect, a Republican representative compiles an increasingly more conservative record than a Democrat does. This effect has been the overwhelming source of the increase in polarization since the 1970s, Gerrymandering cannot account for this form of polarization.

Some of the increase in polarization is due to an increase in the congruence between a district’s characteristics and the party of its representative. Republicans are more likely to represent conservative districts and Democrats are more likely to represent liberal ones . Such an effect is consistent with the gerrymandering hypothesis but it is also consistent with a general geographic polarization of voters along ideological and partisan lines. Moreover, we find that the timing of this sorting effect is inconsistent with the gerrymandering story. It occurs in the 1980s and early 1990s, relatively early in the upswing of polarization. This is well before the most recent decline in electoral competition in the House.

· Next, we simulate the expected polarization following various districting procedures. The difference between the actual polarization and these simulated procedures allows us to estimate the effects of gerrymandering on polarization. Our upper bound estimate is very small and realistically can account, at most, for 10-15% of the increase in polarization since the 1970s.

True, electoral sorting has increased over time, as shown in table 2. But the secular increase in sorting does not appear to be linked to census triggered redistricting that would reflect gerrymanders. A good deal of the increase reflects the gradual disappearance of the one-party South and increased geographical sorting on political and social attitudes. Moreover, the secular increase in polarization is not primarily a phenomenon of how voters are sorted into districts. It is mainly the consequence of the different ways Democrats and Republicans would represent the same districts.

Our simulations further demonstrate that the levels of polarization we observe are quite consistent with congressional districts representative of the states for which they are drawn. Thus, the scope of districting reform to eliminate polarization is extremely limited. Even if we eliminated districting all together and elected candidates statewide, we could only roll polarization back to the level of the mid-1990s.

Indeed, if anything, we underestimate the ability of redistricting to reduce polarization. Redistricting with an eye to increasing electoral competition will create a large number of districts that are heterogeneous with respect to income, race, ideology, and other characteristics. Recent research indicates that legislators from these heterogeneous districts are likely to deviate, in a polarized fashion, from the “average” preferences of the constituents.

So I conclude with two pieces of general advice for the commission.

  • It’s important not to overemphasize the creating electorally-competitive districts for the sake of reducing legislative partisanship and polarization. Doing so is unlikely to have the desired effects, and artificially heterogeneous districts may be counterproductive.

  • The normatively derisible approach to districting in my view is to have the distributions of districts look like then distribution of voters. So the number of conservative districts should reflect the percentage of conservative voters, the number of moderate districts should approximate the distribution of moderate voters, and the number of liberal districts should reflect the number of liberal voters. Legislatures should be representative of the voters.
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The Price of Principle

In this era of polarized politics, the ideologically-driven behavior of our political leaders is often lamented. But in the end, both progressives and conservatives normally make short-term compromises with their principles in order to achieve some of their long-term goals. Senator Feingold’s unwillingness to do the same has resulted in the equivalent of yet another bank bailout.

On HuffPo with Keith Poole, Tom Romer, and Howard Rosenthal.

My Prediction for the Nobel Prize in Economics

Although I’m not an economist, I work in the part of Political Science just across the border and have many good friends in the economics profession. So just as they are, I am swept up in the excitement of the pending announcement of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (otherwise known as the Nobel Prize in Economics). There are a lot of great candidates this year including Jean Tirole, William Nordhaus, Paul Milgrom, Tom Sargent, and a whole host of my Princeton colleagues. But recently a dark horse candidate has emerged who now seems likely to win in a walk. So I’m conceding the inevitable. The 2009 Nobel Prize in Economics will go to Barak Obama.

Consider the following:

  • Whereas Tirole, Nordhaus, Milgrom, and others have made important and fundamental scholarly contributions to economic theory and policy analysis, only Obama has the audacity to hope for better economic policy in the future. Can he design a health care system that covers everyone and saves money? Yes, he can! Can he reengineer the financial system to eliminate systemic risk, protect consumers while maintaining the benefits of modern finance? Yes, he can! Can he reduce greenhouse emissions without reducing jobs and economic growth? Yes, he can! What actual economist would dare say those things? For his vision alone, he deserves the prize.
  • Obama has never been associated rational expectations theory or the efficient markets hypothesis. In fact, he’s turned his administration into one big Behavioral Economics Seminar.
  • I’ve heard rumors that Obama still plans to broker a peace treaty between Paul Krugman and Bob Lucas. Unfortunately, the track 2 negotiations seem to have broken down.
  • The Scandinavians could really stick it to George Bush by giving Obama two Nobel Prizes.
  • He taught at the University of Chicago.

How could he lose?