Don’t throw them all out, take 2

Peter Schweizer’s Throw Them All Out was published last week to wide acclaim, left and right. 60 Minutes led off its show on Sunday with a segment based on the book, featuring Steve Kroft’s dramatic confrontation with Nancy Pelosi. Peter Boyer summarized the book’s findings in a Newsweek article that extolled Peter and the book, as did Marc Thiessen in a Washington Post column. In her American Thinker column today Clarice Feldman cites Peter’s findings: “The extent to which the political class has used insider information to enrich itself (over and above the gifts to its friends, contributors and family) is detailed in a recently released book.”

I tried to introduce a contrarian note regarding the book in “Don’t throw them all out” on Tuesday, the day the book was officially published. Holman Jenkins devoted his weekly Wednesday Wall Street Journal column to making a slightly more contrarian case than the one I made. Unfortunately, the column is hidden behind the Journal’s subscriber wall.

Jenkins’s column reflects the claims made in the 60 Minutes segment more than the book itself, which gilds its claims with a tone that causes me to ask whether the author is playing entirely fairly with the reader. For example, Peter treats legislation aimed at affecting VISA interchange fees paid by retailers as a something like a great good. If then Speaker of the House Nancy Pelosi kept the legislation bottled up because she was the lucky recipient of an allocation of VISA’s IPO, that would be bad, but the legislation was not good. Keeping the bills bottled might have been a rare lapse into good public policy, but Peter doesn’t raise the possibility because of the way he frames the issue.

Peter does not indicate in the book whether he contacted Pelosi and some others whom he indicts (such as John Kerry) for comment. When asked about the VISA IPO allocation by Steve Kroft for the 60 Minutessegment, Pelosi’s response was: “What’s your point?” Pelosi’s respose was unimpressive. As Boyer notes, however, Senator Kerry denies that he exploited inside information to make the stock trades that Peter decries:

“Senator Kerry does not buy, sell, or trade stocks,” says Jodi Seth, Kerry’s spokeswoman. She notes that Kerry’s holdings are in family trusts and managed by independent trustees with whom he does not communicate. Further, Seth says, Kerry is not a beneficiary of Teresa Heinz Kerry’s trusts, which were established before they were married. In any case, Seth adds, Kerry was running for president when the Medicare bill was passed, and he missed much of the debate.

These facts undercut Peter’s point substantially, and they should be in the book. Jenkins complains on Kerry’s behalf: “Don’t insult the man. Mr. Kerry doesn’t need to stoop to making money. He married it. His wife is worth an estimated $1 billion.” Here Jenkins overlooks Kerry’s pre-nup with Teresa.

In the book, Peter blurs the concept of “insider trading” to make the case that congressmen profit from the exploitation of “inside information.” He makes it sound as though congressmen are exempt from the insider trading law, or that they are taking advantage of a loophole they created for their own benefit. Nevertheless, the law applies to congressmen exactly as it does to others. It simply doesn’t affect them because they generally aren’t corporate insiders.

Peter cites one study published in the Journal of Financial and Quantitative Analysis finding that average Senator beats the market by 12 percent a year, while the average House member beat the market by 6 percent a year. Peter then cites a second study, covering 2004-2007, finding that “while many individual legislators do not beat the market, they do extremely well with stock in companies with which they are ‘politically connected‘” (my emphasis, the term is left undefined in the book). They beat the market by 5 percent a year. According to the study: “Members of Congress seem to benefit from knowledge of companies to which they are politically connected (and particularly those headquartered in their districts) and they appear to take advantage of this knowledge by investing disproportionately in those companies.” Let’s just say that the concept of “inside information” becomes extremely attenuated. Jenkins adds:

A few studies purport to show that Senate and House Members earn more than average on their stock investments, but the results are unconvincing. More persuasive is recent work suggesting that congressmen underperform the market for all reasons that most active traders do. They buy high, sell low, and waste money on trading commissions.

UPDATE: Please note that Peter Schweizer responds to this post in the comments below.