Profiteering by Politicians and the Blind Trust
October 18, 1994
This letter is about whether legislators should be allowed to make investments in private companies. I write mainly about personal stock market investments. However, the conclusions I will draw are also relevant to investments by political parties.
There is a myth that legislators have higher motives than other people. During an earlier period in Chinese history, when government officials were of a special class or had to pass stringent examinations, it may have been reasonable to expect higher standards of legislator behavior. In a democracy, however, legislators are elected from the rank and file of the people. Other things equal, voters prefer a candidate with integrity. But they are ordinarily much more interested in their personal benefits. Whether we like it or not, the first question asked by a typical voter is not "Are you honest and fair?". It is "What can you do for me?" Under the circumstances it would be unreasonable to expect candidates to adhere to a higher standard unless they were constrained by laws. Recognizing this, practically all democracies have laws against using ones power as a legislator for personal profit.
But anti-profiteering laws are costly to enforce. On the one hand, the government must hire unbiased investigators who possess detailed knowledge of business and accounting techniques. On the other hand, the investigators must be given the power to search through personal records, thereby possibly invading a person's privacy.
To reduce the costs of investigation, some countries have laws that require legislators to reveal their financial position and investments. It is possible to go further. Legislators can be required to transfer their investments into a blind trust to be administered by a bank or other credit institution with which they have no personal relationship. Sometimes candidates offer to voluntarily put their assets in a trust in order to demonstrate their integrity.
It is common knowledge in Taiwan that some legislators are willing to pay large amounts of money to be elected. At least part of the reason for this is the prospect for earning profits by helping to pass laws that raise the value of their investments. Political parties also support candidates that they believe will raise the value of the party's investments.
If the people of Taiwan want to stop these practices they should rally behind candidates who offer to put their investments in a blind trust and who are not linked to political parties that have investments. They should also try to initiate two kinds of referenda: one that requires legislators to use the blind trust and one that prohibits political parties from having investments.
Copyright © 1996 by James Patrick Gunning
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J. Patrick Gunning
Visiting Lecturer
Department of Economics
Bryant University
1150 Douglas Pike
Smithfield, RI 02917
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