It’s accepted wisdom among the mildly sentient that prices are the way that a market economy organizes itself. Without the price mechanism, producers are blinded on the matter of what and what not to create. Or they’re deterred from producing.
A high price born of demand outpacing supply for a certain product is logically a summons to production. At the same time, rising prices logically imply falling prices for other goods. This basic truth has been forgotten in modern times by a political and economic class that wears its cluelessness about what inflation is on its sleeve, but if surging demand relative to supply is driving up the cost of Honeycrisp apples, the price surge logically signals a decline in demand for and the price of Golden Delicious apples.
Still, the price signals revealed through consumers acting freely is a way for consumers to convey to producers what they want, and don’t want. Which explains why distorted prices care of politicians invariably lead to shortages, and subsequent lines. Think the old Soviet Union where there were lines for everything in the 1970s. Well, of course there were. Absent real prices, producers lacked the information (and the incentives, many would add) needed to meet the needs of consumers.
Conversely, the only consistent line in 1970s U.S. was for gasoline. No surprise there. Artificial price controls placed on the market good were a deterrent. Why bring to market what won’t fetch a market price? Scarcity was the logical result. Politicians mess with prices at their peril is the lesson, or it should be. Sadly, it’s not one they’ve internalized. Politicians aren't alone on the matter. Ravenously partisan pundits have joined the price-blunting echo chamber.
Evidence supporting the above claim is a proposal meant to limit stock trading by politicians. What happens in Washington plainly moves stock markets, and since it does it’s not unreasonable to conclude that politicians have an unfair, information edge that is rather remunerative.
About the edge, if we ignore that it’s harder to trade on privileged information that most think, let’s for the purposes of this piece assume that trading based on knowledge gained inside Washington is simple. Some would say the previous assumption is a statement of the obvious. And since it’s obvious, a ban on trading by politicians should be similarly be obvious. In truth, outsize returns by in-the-know politicians speak loudly to why it would be bad for the economy and the small investor if trading by political types were banned. Think about it.
Equity markets by their very name are price-signal pregnant just like the fruit section of a grocery store is. In equity markets, price movements signal where capital will be treated well, where it won’t, where there’s potentially value, and where future earnings are rather expensive to buy. Put another way, the where capital migrates to and where it migrates away from has profound economic implications.
Applying the above truth to politicians, if they have an information edge gained from seeing where legislation, regulation or both is moving, the rest of us not in politics need to know this ASAP. For one, it’s bad for the economy when precious capital is allocated based on dated information. If politicians know something, let’s make sure the large investors whose capital commitments power economic growth similarly know what politicians know.
For two, this inside knowledge expressed through trading is good for small investors. About them, it’s not asked enough how they benefit from markets defined by information barriers. Not well at all is the answer. Big market lurches are always and everywhere a consequence of surprise; of yes, new, unexpected information entering the marketplace. The small investor logically benefits from the clarity provided by the buying and selling of those in the know. Reduced to the basics with Congress in mind, if Nancy Pelosi sells shares based on insider knowledge of a coming capital gains tax increase, it’s better that we all know this ahead of time so that we can enter markets with vision that is as close to 20/20 as possible.
To all this, some readers will understandably and logically say it’s wrong. By that, they’ll say it’s wrong that what happens in Washington has such a substantive impact on capital flows; flows that in a perfect world would not in any way be driven by hapless and venal politicians. There’s no disagreement. Alas, the world is not perfect. The imperfect includes politicians using their office to profit. The latter is as old as politicians are. Meaning forever.
And since politicians seeking remuneration through the perks of office is a forever thing, let’s not pile on to what’s unfortunate with legislation meant to blur reality. If so, we all lose. If politicians know something that could move the markets, it does no one inside or outside politics any favors if this information doesn’t reach the marketplace right away.
