The Personal Wealth Interests of Politicians and Government Intervention in the Economy

February 5, 2019

The Personal Wealth Interests of Politicians and Government Intervention in the Economy
Ahmed TahounLaurence van Lent
Review of Finance, Volume 23, Issue 1, 1 February 2019, Pages 37–74, https://doi.org/10.1093/rof/rfy015

With Mr. Trump’s ascendancy to the Presidency, the broader question of how the personal wealth interests of politicians influence their voting and lawmaking has gained significant urgency. It is this question that we address in our study, which investigates how the asset holdings of politicians in financial institutions affected their vote in Congress on the bailout of the financial sector during the Great Recession of 2008.

While academics widely agree that a politician’s vote depends on their ideological position and their electoral prospects, which in turn is linked to campaign spending and to ensuring that voter interests are well represented, we show that the effect of the vote on a given politician’s personal wealth plays an economically significant role too.

Using the politicians’ voting records on the bill that eventually became the Emergency Economic Stabilization Act and detailed data on the stock ownership of politicians in financial institutions, we document that politicians with exposure to the financial crisis are almost 60% more likely to vote in favor of the bailout plan than politicians whose wealth was relatively immune to the crisis. Figure 1 illustrates the effects. Together, members of the House invested up to 74.5 million dollars in the financial sector, with approximately 30% of the representatives owning shares in banks. Our detailed data on the asset holdings of politicians, allows us to isolate the effect of personal wealth from competing determinants of voting, which include ideology and electoral prospects as well as a vast range of other potentially confounding effects.

In our empirical approach, we attempt to underpin our claim that it is the asset holdings of politicians per se that affects their voting, rather than these asset holdings reflecting the beliefs of politicians in the importance of financial institutions. Such “finance friendly” politicians would then be more in favor of supporting a bailout. Perhaps the strongest evidence that our findings are not easily attributed to differences in beliefs, but rather relate to the personal wealth effects is provided by a test that uses the returns on defined contribution pension plans over 2008 earned by the spouse of the politician as a source of independent variation in personal wealth interest likely uncorrelated with other determinants of the politician’s voting behavior. Consistent with wealth interests per se and not beliefs affecting the vote on the bailout, we find a strong correlation between the return on the spousal pension plan and the vote on the EESA.

The recent Stop Trading on Congressional Knowledge Act aims to prevent politicians from taking advantage of non-public information gleaned from their activities as lawmakers. Our evidence suggests that politicians don’t have to trade on information to become better off; they also have the ability to pass bills that benefit themselves financially. Prominent politicians are aware of this possibility as evidenced by a statement issued by House Speaker Ms. Nancy Pelosi, who said “when there’s a thought of conflict of interest between a member’s financial holdings and the government bailouts then the member should divest”.