Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't (9 page)

Even politicians who raked in hundreds of thousands of extra dollars during their second-to-last term did not significantly change their voting patterns. Politicians consistently vote the same way over their entire careers, regardless of the onset or the end of donations from any particular interest group.
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This is not to say that cases of influence-peddling and outright bribery never occur. In 1978, for example, the FBI launched ABSCAM, a corruption sting that resulted in the conviction of one senator and six congressmen for accepting bribes from fictitious Middle Eastern businessmen. More recently, we have seen an unusual number of bribery cases: California congressman Randy “Duke” Cunningham was caught taking bribes from defense contractors; Louisiana congressman William Jefferson was investigated for allegedly accepting $400,000 in bribes in return for helping a telecom company secure business in Nigeria and Ghana (the FBI found $90,000 in cash in Jefferson’s freezer); and most famously, lobbyist Jack Abramoff was convicted on corruption-related charges that implicated several congressmen and staffers
including Ohio representative Bob Ney, who was forced to resign from office and later convicted of related charges.
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Everyone loves a good corruption story. The corrupt politician is an iconic image in American popular culture, and the torrent of headlines generated by stories like the Abramoff scandal reinforces this impression. But how pervasive is this problem? Do most congressmen engage in corrupt activities?

There is an interesting way to test this question. Until 1994, congressmen who had begun their first terms prior to January 8, 1980, could spend unused campaign funds as they pleased, with no restrictions. But congressmen elected after that date could only spend such funds to cover further campaign-related expenses or to pay for moving expenses back to their home district after retirement. So until 1994, a contribution to one of the earlier congressmen during his last term could easily represent a direct cash payment for services rendered; the congressman came through with the votes, and so a donor rewards him with a contribution that he can legally spend on personal luxuries. Yet, interest groups rarely donated money to these retiring congressmen during their last terms, and those donations that were made were almost entirely given before the politician announced his intention to retire.
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This indicates the donations were intended for use in political campaigns, not as personal bribes.

The public perception of widespread corruption in our political system undermines confidence in the government, breeds cynicism toward our democracy, and results in demands for ever-greater regulations on campaign financing that actually restrict public participation in politics, as will be discussed below. Likewise, the belief that politicians sell their votes to the highest-bidding donors supports the notion that politicians don’t really value policy outcomes, and that they only pretend that they do in hopes of raking in more contributions. The evidence, however, indicates that these views are misguided. Politicians do care strongly about policy outcomes.
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They tend to vote
consistently throughout their careers, regardless of donation patterns. And donors give to politicians who have developed a reputation, through their voting record, of supporting the donors’ values. In short, the system generally works, in that the public gets the kind of government that it votes for.

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 Biden
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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.”
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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.”
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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.
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This simple point is vital for understanding the problems created by campaign finance regulations.
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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.
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Thus challengers benefit more than incumbents from each dollar of campaign financing because incumbents are already largely known.
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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.
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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.
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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.
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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.
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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.
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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.
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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,
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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 appearance 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?”
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But empirical evidence shows that campaign finance restrictions actually lower voter turnout by reducing the number of competitive races.
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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.
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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.”
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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.
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