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Study: Debt-limit votes colored by personal bottom lines

Voters trying to predict how candidates will vote on the economy may want to look beyond party ID or interest-group scorecards. The real tell may be their investment portfolios, according to a just-released analysis of one of the key votes of President Obama's first term.

Just based on the numbers, U.S. House members with large, diversified stock portfolio — and a lot to lose in the market — were more likely to vote for the August 2011 debt-ceiling increase than those with smaller holdings, according to the new survey of the vote.

The lawmakers' affiliation with the tea party, which opposed raising the debt ceiling, "played no role," although party and district did, according to the study by Christian R. Grose, associate professor of political science and public policy at the University of Southern California.

"The implication of these results is that fear of personal financial loss through a stock market crash was a factor for many members who voted to increase the debt limit," said Mr. Grose in his 37-page paper, "Risk and Roll Calls: How Legislators' Personal Finances Shape Congressional Decisions," which was posted Feb. 18 on the Social Science Research Network.

He said he chose the debt-limit vote because the final vote appeared so random: Far from toeing the party line, 174 Republicans and 95 Democrats voted to increase the debt ceiling, while 66 Republicans and 95 Democrats opposed it.

The House passed the debt-ceiling bill Aug. 1 by a vote of 269-161, but it was unclear in the days leading up the vote whether the Republican-controlled chamber would approve it.

The study examines the stock portfolios of 425 House members as disclosed in their mandatory financial disclosure forms. One key finding: House members are far more likely to own stock than average Americans: 92 percent of those in the 112th Congress owned some form of equities, as opposed to just 54 percent of all Americans in 2011.

The bottom line? Legislators with $30,000 in stock investments and $30,000 in retirement accounts were the least likely to vote to extend the debt limit, with a 59.8 percent chance of doing so.

Those falling in the middle, with $500,000 in stocks and $500,000 in retirement accounts, had a 66.4 percent chance of voting to raise the debt ceiling. Those most heavily invested in the market, those with $1.5 million in stocks and $1.5 million in retirement funds, were highly likely to extend the debt limit at 78.3 percent.

"Clearly, the value of investments and exposure to the market made legislators more likely to support the debt limit," Mr. Grose said. "It appears that financial self-interest and the hope of preserving one's equity holdings, along with party constituency and ideology, played a role in the debt limit vote."

Mr. Grose also takes into account whether a member of Congress is willing to take market risks based on the diversification in the member's portfolio. Those who own 10 of fewer stocks were considered "risk-accepting" while those with 10 stocks or more are seen as "risk-averse" because of the wider diversity of their investments.

"Somewhat surprisingly," the political scientist found, two-thirds of House members were risk-takers while just a third were risk-averse when it came to investing in the market. Then again, most Americans are also risk-takers, he said, pointing to a study showing that 80 percent of U.S. investors own 10 or fewer stocks.

Risk-averse legislators with more invested were more likely to vote for the debt-ceiling extension than risk-averse lawmakers with smaller investments. Among risk-accepting lawmakers, the predicted probability for voting for the debt-ceiling bill remained the same whether their investments were large or small.

An alternative argument is that legislators with hefty stock holdings are also more market-savvy and therefore more likely to support policies that contribute to the nation's financial stability. Mr. Grose acknowledges that the interpretation is possible, "the evidence regarding legislators' risk profiles suggests otherwise."

"The effect of significant market holdings on the roll-call vote was conditioned by the risk aversion of the members," said Mr. Grose. "Because risk aversion had a conditional impact along with stock investments, this is not simply a story of financial literacy. Members with the most to lose who also are averse to losing protected their own financial interests with their [vote]."

The investing practices of Capitol Hill lawmakers -- and the relation to their day jobs -- have come under scrutiny before.

A massive study by four university researchers released in 2011 studied 16,000 stock transactions made by approximately 300 House members from 1985 to 2001. The congressmen were able to generate what the researchers deemed "significant positive abnormal returns," beating the market by about 6 percent annually.

A similar study found that U.S. senators did even better -- beating the market by 10 percent a year on average.

In part in reaction to the investment numbers, Congress passed and President Obama signed the so-called Stock (Stop Trading on Congressional Knowledge) Act in April 2012, prohibiting the use of "nonpublic information" for private profit, including insider trading, by members of Congress and other government employees.

"The powerful shouldn't get to create one set of rules for themselves and another set of rules for everybody else," Mr. Obama said at the signing ceremony. "If we expect that to apply to our biggest corporations and our most successful citizens, it certainly should apply to our elected officials."

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