Let’s Make It Easier for Public Officials to Be Honest

Friends, I’m here to tell you about a simple product that could help to restore public confidence in government officials: the index mutual fund.

A surprising number of the people who run the country can’t seem to separate their private investments from their public responsibilities. They own shares in companies that they oversee; they make public policy decisions that increase the value of their private portfolios. They dance in the borderlands of illegality, and even when it’s impossible to prove they’ve broken the law, they are clearly trampling on the public trust.

Earlier this week, two members of the Federal Reserve’s policymaking committee announced their resignations following the disclosure that they traded last year in assets whose values were affected by the Fed’s response to the pandemic/recession.

That echoed earlier revelations that a number of senators executed well-timed stock market maneuvers in the pandemic’s early days, a period during which the Trump administration was issuing dire forecasts in private while smiling brightly in public.

Former Senator Kelly Loeffler of Georgia,for example, sold around $20 million in stock starting on the day she attended a private Covid briefing for senators in late January 2020. She also invested between $100,000 and $250,000 in Citrix, a company that offers teleworking software.

There are troubling examples in every branch of the government. To take just one of the most glaring instances from the Trump years, Wilbur Ross, the former commerce secretary, broke a promise to divest some of his stock holdings and then lied about it.

Neither the Fed officials nor the senators nor Mr. Ross have been charged with breaking the law, though that may say more about the state of the law than about their behavior. But a new investigation by The Wall Street Journal found that 131 federal judges did break the law between 2010 and 2018 by presiding over cases involving companies in which they or their families also happened to be shareholders. In a significant minority of those instances, the judges or their families bought and sold shares while the case was before the court.

The current system, by relying on the integrity of public officials, is undermining confidence in the integrity of those officials. Americans shouldn’t be asked to trust that public officials are only reaping profits from policy decisions by coincidence — a claim that beggars belief.

Fortunately, there’s a straightforward solution: Public officials should be restricted to passive investments like index mutual funds, which invest in broad categories of companies or assets. Anything else, like a family business, should have to go in a blind trust.

Improved disclosure requirements are helping to expose conflicts of interest, but that is only serving to highlight the inadequate, inconsistent and poorly enforced state of current law.

When caught, officials tend to insist that the conflicts are unwitting.

R. Brooke Jackson, a federal judge in Colorado who oversaw 36 cases involving companies in which he and his wife happened to hold shares, told The Journal he doesn’t pay attention to his investments. “I have preferred to stay unknowledgeable,” he said.

Ms. Loeffler, one of the wealthiest people ever to serve in the Senate, similarly insisted that the trades were made “without our input, direction or knowledge.”

Given that the alternative is confessing to malfeasance, the emphasis on ignorance is not surprising. It may even be true. But that’s not nearly good enough.

Robert Kaplan, president of the Federal Reserve Bank of Dallas, bought shares of Apple stock while the Fed was buying the company’s bonds as part of its wide-ranging campaign to prop up financial markets. Mr. Kaplan says he didn’t break any rules and that he’s resigning because the public uproar is a “distraction” from the Fed’s mission. But the point is that Fed officials shouldn’t be allowed to engage in this kind of distraction. If Mr. Kaplan didn’t break any laws, that’s only because the laws are far too accommodating.

Senator Sherrod Brown of Ohio, the Democrat who chairs the Senate Banking Committee, which oversees the Fed, said this week that he planned to introduce legislation barring senior Fed officials from owning shares of stock in individual companies.

That ban should apply to Mr. Brown and his colleagues, too. It should apply to judges. It should apply to the executive branch. There is no good reason to let public officials trade securities. Indeed, such a law might have financial benefits for honest public officials. Putting money into an index fund is generally a better investment than buying individual assets — unless, of course, one is trading on the basis of insider information.

One concern is that investment restrictions might discourage some rich people from seeking office. But take a moment to chew on that: Wouldn’t we all be better off if public service was limited to people who were willing to subordinate their private interests to the public good?

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