Campaign Finance Reform
Clearly there is too much money being pumped into our political system and because of that, the public’s perception is that the entire electoral process and governmental system is corrupted . . . .If there is a consensus that there’s too much money in the system, let’s impose spending limitations.
—Senator Joseph Biden20
Campaign finance reform is usually touted as a means to address political corruption and influence peddling. Indeed, the Supreme Court is so sensitive to this issue that it looks kindly on reforms that claim to eliminate even the “appearance of corruption.”21 The justices themselves have also recognized the Achilles heel of campaign finance reform: it tends to protect incumbents. Even Justice Breyer, who has consistently voted to uphold campaign finance regulations, has noted the risk of allowing legislatures to pass campaign finance reform that allows “incumbents to insulate themselves from effective electoral challenge.”22
Incumbents usually have a financial advantage over their challengers in the form of campaign “war chests” built up during their terms. But they also have another crucial advantage that gains much less attention—they have an established reputation. Voters typically know an incumbent’s key positions even before he spends a dollar in a re-election campaign thanks to his past campaigning and media coverage of his previous terms in office. Even if the challenger is a famous athlete or movie star, his reputation won’t fully transfer to the political realm. Why? Because even if the person is well-known, he does not have an equally familiar history of making political decisions. Voters can predict how an incumbent will vote much better than they can divine the future votes of this type of challenger.23
This simple point is vital for understanding the problems created by campaign finance regulations.24 Suppose that during a campaign, these regulations limited the spending by an incumbent and his challenger to $100,000 dollars each. If this money allows both candidates to reach a similar number of voters through TV commercials, direct mailing, and the like, the incumbent is left with a huge advantage because many voters are already familiar with his reputation from his previous terms. Imagine a race where political spending by both sides was reduced to zero—voters would still recognize the incumbent, while the challenger’s positions would be largely unknown. The only factor that could eliminate this inequality is if the challenger already had a reputation as a result of holding some previous political office. Although challengers do frequently have prior political experience, the fact remains that challengers from all walks of life outside of politics are left at a huge reputational disadvantage when competing against seasoned politicians.25
Thus challengers benefit more than incumbents from each dollar of campaign financing because incumbents are already largely known.26 In other words, for each additional dollar spent, challengers can convey much more new information about themselves than incumbents can.
Campaign contributions from individuals and organizations were strictly limited in 1974 by amendments to the Federal Election Campaign Act, which was largely a response to the Watergate scandal. Analyzing election data since 1946, the rate of incumbents’ victories in federal races has risen since these regulations were passed; the re-election rate for House members has grown from 88 to 94 percent, while the rate for Senate members has increased from 76 to 81 percent.27 Granted, factors aside from campaign financing may have contributed to this result, but the reforms clearly have not succeeded in making House and Senate races more competitive.
Contribution limits have had a similar effect on the local level. Looking at all the state senate races from 1984 through the beginning of 2002, I found that donation limits increase the average margin of victory by anywhere from 4 to 23 percentage points. The regulations double the probability that only one candidate runs for office, and they increase the chances that incumbents win re-election. Campaign finance regulations also tend to reduce the number of candidates who run for office by an average of about 20 percent.28
Limiting the size of individual donations always works to the advantage of incumbents. When the size of individual donations are restricted, candidates are forced to rely on a larger number of small donors. This benefits incumbents who, having previously run for office, begin a campaign with a much longer list of past and potential donors.
Presidential history may have been a lot different if our current limits on individual campaign donations had existed in the 1960s and early 1970s. In March 1968, President Lyndon Johnson shocked the nation by announcing he would not seek re-election. His withdrawal is usually attributed to his poor performance in the Democratic primaries against Senator Eugene McCarthy, who campaigned against the Vietnam War. McCarthy’s candidacy heavily relied on just six big donors who bucked the party establishment and financed much of his campaign. Yet, McCarthy raised almost as much money—after adjusting for inflation—as George W. Bush did from 170,000 donors by the time of the first primaries of the 2000 campaign.29 Under today’s campaign finance regulations, McCarthy’s insurgent campaign would have been impossible, leaving an easy re-nomination for Johnson despite strong opposition within his party to the Vietnam War.30 Thus we see that campaign finance regulations help squelch dissenting voices within the parties and strengthen the position of the parties’ leaders.
Another drawback to limits on individual campaign contributions is that they force candidates to begin fundraising long before a race begins as candidates need more time to assemble a large number of small donors. This trend further decreases the competitiveness of these races, for if a front-running candidate falters, it is extremely difficult for other candidates to enter the race at the last moment.
Limitations on individual donations to candidates are harmful enough. But the McCain-Feingold bill of 2002 worsened the situation by abolishing so-called “soft money”—non-federal accounts through which individuals could make unlimited contributions to national political parties.
Before McCain-Feingold, party funding was particularly important for those challenging incumbents and for the least-known candidates. To illustrate this point, let’s look at both Republican and Democratic Senate and House campaigns from 1984 to 2000. During this time, the average Republican House incumbent received only about 2 percent of his money from the party, while the average challenger received almost 10 percent. For Democratic House candidates, the numbers were 2 and 7.2 percent, respectively. Indeed, during these nine campaign seasons, there was only one single case—Democratic Senate races in 2000—where incumbents received more money overall from their party than did challengers.
The conclusion from all this is straightforward—if we want to make campaigns more competitive by limiting donations and expenditures, we should place such limits disproportionately against incumbents. Of course, it would be extremely difficult to make campaigns “fair” through this method, since different incumbents have different levels of name recognition. Although incumbents are almost always more well-known than their challengers, their level of name recognition varies depending on the number of terms they have served, the amounts spent on past campaigns, and the amount of press attention they earn while in office.31
Contrary to all the evidence cited above, advocates of campaign finance reform claim that contribution limits actually make political races more competitive. This was argued by George Mason University Professor Thomas Stratmann in a legal brief submitted in support of McCain-Feingold for a court case challenging that law.32 Stratmann maintained that campaign finance restrictions make races more competitive because they make it more difficult for better candidates to differentiate themselves from inferior candidates through advertising. Aside from the methodological problems of this theory,33 it must be somewhat uncomfortable to argue that campaign finance regulations are beneficial because they make it more difficult for the best candidates to win elections.
Proponents of campaign finance regulations also claim that donation limits increase voter participation by removing the a
ppearance of corruption from elections. California State Senator Debra Bowen summed up the conventional wisdom on the issue during her 2006 race for California Secretary of State: “One of the reasons that people don’t vote is they think the big-moneyed interests run everything anyway, so what’s the point?”34
But empirical evidence shows that campaign finance restrictions actually lower voter turnout by reducing the number of competitive races.35 Limits on corporate donations to candidates diminish turnout by 4 percent, while limits on corporate PAC donations to candidates cut turnout by 6 percent. Limits on overall spending by the candidates have an even bigger effect, lowering turnout by 8 percent.36
Other analysts claim—somewhat quixotically—that campaign finance regulations are essentially harmless because donations don’t exert any meaningful impact on elections; they’re just wasted money. An extreme form of this argument appears in Freakonomics, in which the authors claim that “a winning candidate can cut his spending in half and lose only 1 percent of the vote. Meanwhile, a losing candidate who doubles his spending can expect to shift the vote in his favor by only that same 1 percent.”37
If this were true, it would mean that nearly every congressman and senator—that is, America’s most successful politicians—knows absolutely nothing about how to get elected. If fund-raising were really so futile that cutting expenditures in half would only cost candidates 1 percent of the vote, why do all these politicians spend so much time raising money? Why do they bother at all with their endless direct mail solicitations, fund-raising banquets, and the like? And how important is 1 percent of the vote to a politician? Consider this: in the 2006 Congressional elections, just eight seats out of 435 were decided by less than one percentage point, while only 35 races were decided by five percentage points or less.38
It seems that the next crop of presidential candidates will continue to belabor the notion that fund raising matters. The Daily News recently reported the leaked contents of a dossier outlining Rudy Giuliani’s strategy for his 2008 presidential run. According to The Daily News, “At the center of his [Giuliani’s] efforts: a massive fund-raising push to bring in at least $100 million this year, with a scramble for at least $25 million in the next three months alone.”39 Shortly after Barack Obama and Hillary Clinton announced their intentions to run for the Democratic nomination, the New York Times reported that both candidates aimed to raise $75 million just in 2007.40 Apparently, no one has told Guiliani, Obama, or Clinton that all this fund-raising is a waste of time. Haven’t they read Freakonomics?
Such counter-intuitive arguments notwithstanding, the vast majority of research confirms that contributions do affect political races. The studies also confirm that campaign contributions are much more important for lesser-known challengers than for incumbents.41
A final problem with restrictions on campaign financing is that their adoption inevitably creates momentum for ever more limitations on public participation in elections. Such restrictions are becoming increasingly ridiculous and oppressive. In the state of Washington, we get a glimpse of the kind of new regulations that McCain-Feingold inspires. There, a judge ruled that statements by two radio talk show hosts who supported an initiative to lower the gas tax had to be defined as political advertising and thus were subject to campaign spending restrictions. This would have limited the pair’s conversations on the topic to fifteen minutes per week for the three weeks before the vote. The talk radio hosts ignored the ruling which, as of this writing, is before the state Supreme Court.42
Why is Campaign Spending Increasing So Quickly?
Real per capita federal campaign expenditures for all candidates running for the House and Senate have risen 110 and 152 percent, respectively, from 1976 to 2006.43 Over the same period, real per capita income grew by only 46 percent. The dramatic growth in campaign spending is clear, but in the public debate over this problem, we rarely hear anyone consider the real reason for this explosion in spending—campaigns spend more and more because the government keeps getting bigger and bigger.
The rise in campaign spending has sparked demands for reforms ranging from stricter limits on campaign expenditures to public financing of election campaigns. And concern over “excessive” campaign spending is not limited to the federal government. Since the passage of McCain-Feingold, many states have adopted campaign finance regulations limiting donations to state political parties and restricting contributions to candidates from parties, individuals, corporations, or unions.
All these proposals to reduce campaign spending invariably ignore the root cause of the problem. The reason why campaign financing keeps growing is because the government is constantly expanding its grip on the economy; the more that is at stake, the more people will spend to get their candidates elected.44 One-hundred years ago, when federal government spending accounted for just 2 to 3 percent of GDP, government expenditures did not affect the average citizen so directly. Today, with federal government spending at about 20 percent of GDP,45 much more is at stake when we select who will control the purse strings.
Nearly 90 percent of the growth in federal campaign spending from the 1970s to the 1990s can be explained just by the growth in federal government expenditures. Likewise, on the state level, states that saw the fastest growth in per capita government spending also witnessed the most rapid growth in per capita campaign spending. Indeed, the rise in state government expenditures explains as much as 80 percent of state legislative and gubernatorial campaign expenditures.46
Instead of addressing the growth of government, groups concerned by the rise in campaign financing inevitably advocate restrictions on campaign spending and contributions to candidates. But attempts to limit the amount of money in campaigns have failed quite extraordinarily, as we have seen. Campaign finance restrictions don’t really decrease the amount of money in campaigns; they just change the avenue the money takes from the donor’s wallet.
Due to campaign finance restrictions, many donors simply give their money to PACs instead of candidates. PACs are often portrayed by advocates of campaign finance reform as “special interest” groups that exert a malign influence on the political system. Proliferating quickly after the passage of the campaign finance reform regulations of the 1970s, they are sometimes perceived as vehicles used to avoid campaign finance restrictions. This is especially true in recent years, when a special type of political advocacy organization that is exempt from many campaign finance restrictions—so-called 527 groups—has multiplied quickly.
The proliferation of PACs was a natural reaction to campaign finance restrictions. People want to participate in the political process and to support the candidates they like. When new regulations restrict their ability to do this, they look for other ways. Generally, when given an option, donors prefer to give directly to candidates, not to intermediaries like PACs and 527 groups. Direct donations to candidates are more efficient, largely because McCain-Feingold greatly limits coordination between interest groups and the candidates they support. PACs and 527 groups thus sometimes create inconsistent messages for a candidate, or even worse, may push an agenda that differs from that of the candidate they support. But due to restrictions on direct donations to candidates, donors are left with little choice; they are forced to support PACs and 527 groups by default.
While utterly failing to counter the surge of money in politics, campaign finance restrictions have empowered PACs and 527 groups. This is evident in the campaign spending by billionaire George Soros, who spent close to $18 million advocating for campaign finance reform.47 However, the adoption of McCain-Feingold has not removed Soros’ own money from politics. Instead, he has given tens of millions of dollars to a variety of liberal PACs and 527 groups including Moveon.org and America Coming Together (ACT). These groups have largely taken over some campaign functions that the political parties used to control, such as advertising and get-out-the-vote drives.48 (ACT raised and spent a hefty $200 million during the 2004 campaign alone.)49
As Sor
os himself demonstrates, since McCain-Feingold, money continues to pour in to political campaigns, even from some of the biggest advocates of campaign finance reform. But instead of going directly to political parties and individual candidates, the money is now being funneled through the less efficient auspices of non-party organizations.50
The empowerment of PACs and 527 groups by campaign finance restrictions brings a detrimental consequence that is frequently overlooked—it increases the number and intensity of negative political advertisements. Political commentators and newspaper editorials frequently complain that the proliferation of negative campaign ads breeds cynicism and depresses voter turnout.51 Just before the 2006 November election, for example, CBS bemoaned that “This political season has already set records . . . in terms of the number of negative ads that we’re forced to watch.”52 Such commentary, however, tends to ignore the relationship between the rise in negative ads and campaign finance reform. Candidates have been forced by campaign finance limits—and particularly by McCain-Feingold—to cede much of the responsibility for producing political ads to independent PACs and 527s. These groups are more able to run negative ads than candidates can themselves because these groups are less concerned about a possible backlash—if a PAC-sponsored ad is particularly offensive, the candidate that it is supposed to help can always claim that he has no connection to the commercial or to the group that produced it. This is not so easy to argue if the objectionable ad is produced by the candidate’s own staff.
Annoyed that 527 groups still allow citizens a roundabout way to donate to their favored candidates, campaign finance reformers have introduced legislation to further restrict their activities, such as the 527 Reform Act of 2005. Even if approved, such “reforms” will not abolish money from politics; they’ll just once again change its route. The National Rifle Association (NRA) recently foreshadowed how interest groups might react to all these restrictions when it looked into purchasing a TV or radio station. The group, perhaps, could thereby avoid myriad campaign finance restrictions by claiming the status of a media organization.
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