Government and the Ultimate Inside Stock Traders

The Wall Street Journal featured a major exposé of how many federal government employees are becoming wealthy by investing in stocks. Before reading any further, be warned. It’s not a small problem.

Here’s an excerpt from the WSJ’s report:

Thousands of officials across the government’s executive branch reported owning or trading stocks that stood to rise or fall with decisions their agencies made, a Wall Street Journal investigation has found.

More than 2,600 officials at agencies from the Commerce Department to the Treasury Department, during both Republican and Democratic administrations, disclosed stock investments in companies while those same companies were lobbying their agencies for favorable policies. That amounts to more than one in five senior federal employees across 50 federal agencies reviewed by the Journal.

Why is that a problem? The WSJ article quotes two ethics lawyers:

Federal agency officials, many of them unknown to the public, wield “immense power and influence over things that impact the day-to-day lives of everyday Americans, such as public health and food safety, diplomatic relations and regulating trade,” said Don Fox, an ethics lawyer and former general counsel at the U.S. agency that oversees conflict-of-interest rules.

He said many of the examples in the Journal analysis “clearly violate the spirit behind the law, which is to maintain the public’s confidence in the integrity of the government.”

Some federal officials use investment advisers who direct their stock trading, but such trades still can create conflicts under the law. “The buck stops with the official,” said Kathleen Clark, a law professor and former ethics lawyer for the Washington, D.C., government. “It’s the official who could benefit or be harmed…. That can occur regardless of who made the trade.”

Not only do many federal government employees have access to insider information that they could profit from through their investments, but they also have the power to influence how their investments might perform. The WSJ’s reporters have broken the news of a scandal involving federal government employees enriching themselves through their insider status. And they did it at the worst possible time. 

Making Bank During the Covid-19 Pandemic

Profiteering is a term Americans usually hear only during times of war. It is usually applied to companies selling war goods at high prices to the U.S. government. But that term comes immediately to mind because of how certain federal government employees seized the opportunity to personally profit from the coronavirus pandemic. The WSJ reports on the latest episode of bureaucrats behaving badly:

In January 2020, the U.S. public was largely unaware of the threat posed by the virus spreading in China, but health officials were on high alert and girding for a crisis.

A deputy to top health official Anthony Fauci reported 10 sales of mutual funds and stocks totaling between $157,000 and $480,000 that month. Collectively, officials at another health agency, Health and Human Services, reported 60% more sales of stocks and funds in January than the average over the previous 12 months, driven by a handful of particularly active traders.

But it goes well beyond that:

Federal officials owned millions of dollars of stock in industries most affected by the pandemic and the government’s response. About 240 officials at health agencies and at the Pentagon, a key player in the vaccine rollout, reported owning a total of between $9 million and $28 million in stocks of drug, manufacturing and biotechnology companies that won federal contracts related to Covid-19 in 2020 and 2021, the Journal’s analysis found.

For the federal government’s bureaucrats, it seems the power to spend taxpayer dollars is also the power to control and improve their financial future. The status quo is crying out for reform.

What Reform Is Needed?

Working for the federal government is an exceptionally well-compensated privilege. That compensation cannot include any gains they might realize from the insider knowledge federal government employees acquire through their positions. That is because allowing such an unearned path to wealth means these same employees can and will enrich themselves by abusing the powers granted to them.

The best path to reform lies in aligning the personal financial interests of all federal government employees, whether elected, appointed, enlisted, drafted, or hired by the government’s executive, legislative, or judicial branches, with those of ordinary Americans.

One way to achieve that result is to restrict their investing options to broad-based investment funds. Funds like those already offered to federal government employees via the Thrift Savings Plan (TSP), which offers investment options similar to those ordinary Americans can access through 401(k) or 403(b) retirement plans. That way, if federal government employees wanted to use their power to enrich themselves through investing, ordinary Americans would also benefit.

Alternatively, all federal government employees could be restricted to just one investment option: U.S. Treasuries. After all, their jobs and benefits are funded by the excessive spending that requires the U.S. government to borrow so much. Shouldn’t they all be first in line to loan Uncle Sam the money needed to sustain it?