Should Congress Be Subject to Insider Trading Rules?

On Monday, the Wall Street Journal ran a big feature on what it portrays as a serious problem: Congressional staffers are not subject to insider trading rules. So if they know nonpublic information about a bill in the works that would benefit or harm a particular firm or industry, they can invest freely and reap whatever profits follow. Is this okay?

The Journal doesn't think so. Its story focuses on an energy policy advisor to Harry Reid named Chris Miller who made a few thousand dollars betting on renewable energy in 2008. It followed up Monday's story on Tuesday with another article focusing on a bill introduced nearly five years ago to prevent precisely this problem. The current version of the "Stop Trading on Congressional Knowledge Act" is supported by just nine members of Congress, however.

Like Congress, Felix Salmon of Reuters isn't so concerned with this problem, however. He thinks that there's thin evidence that insider trading by staffers is a really occurring much. He writes:

The WSJ story is shot through with the implication that there's a big scandal here, but I don't see it. Instead, I see a lot of subtle rhetorical tricks, like the way in which the paper leads with a single profitable trade by a single staffer.

Salmon's point is well-taken. Despite WSJ's effort, it doesn't appear to have identified a mountain of evidence that Congressional staffers have been taking advantage of their insider knowledge. He said he would be fine with legislation to prevent it, but doesn't see a scandal here.

But so what? Whether there's a true scandal here or not doesn't change the fact rogue staffers could profit in this way, and they shouldn't be permitted to. For example, if dog fighting rings were exceedingly rare, that doesn't mean it would be okay if they were legal. You don't need a gigantic scandal involving a famed NFL quarterback to create a law against dog fighting.

Moreover, today, more than ever, Washington is heavily involved with the private sector. In the latest legislative session alone we've seen aggressive regulation of the health care industry, the credit card industry, and banks. We've seen firms like Fannie Mae and GM bailed out, which would almost certainly have failed otherwise. Let's say a staffer were to have learned of an amendment to the health care reform bill that would adversely affect pharmaceuticals. Should she be allowed to sell short shares in Pfizer before the public learns about this amendment? Of course not. So there should be a law against it.

Staffers profiting from their insider knowledge may not have been a common occurrence in the past, but it could be in the future. Now that the government is more intimately involved in business than it has been in decades, there's more opportunity than ever for staffers to use such information for profit. Moreover, the Internet has made stock trading simple for even the most amateur of stock traders. It's frankly pretty bizarre that there would be any resistance in Congress to such a prohibition. As a method to prevent such behavior, it seems like a no-brainer.