How Not to Reform Campaign Finance

Sunday, January 30, 2000

Members of Congress are quick to demand more vigorous law enforcement against anticompetitive and deceptive practices, real or imagined. Yet these same people are responsible for a political market whose anticompetitive and deceptive features make those in commercial markets pale in comparison. They should not be allowed to have it both ways—insisting on competition for others while rigging the political market to their own advantage.

The excesses that have given rise to the current public controversy over campaign practices are merely symptoms of the anticompetitive and deceptive features of the political marketplace. More than two decades of research have established that a major effect of the campaign finance reforms of 1974 was to help incumbents ward off challengers. The literature is replete with studies showing that campaign expenditures by challengers are far more effective in producing votes than spending by incumbents. The reason is that through use of the perquisites of office—the franking privilege, free media coverage, constituent service, personal contacts in the district or state, and similar efforts—the incumbent has gone much further toward exhausting his or her ability to influence voters. Thus, any measure that makes it more difficult for candidates to raise money or spend their own actually hurts challengers more than incumbents.

Contrary to popular belief, laws that make it more difficult for political candidates to raise money or spend their own money hurt challengers more than incumbents.

Just as interfirm rivalry and searching by consumers tend to break down or circumvent competitive restraints in commercial markets, candidates and other participants find ways over and around financial restraints in political markets. The illegal use and misreporting of campaign contributions is one way, but the major devices are bundling contributions through political action committees (PACs) and the use of so-called soft money contributions (funds designated for "party-building" efforts). These phenomena have existed for some time, but they are more prevalent now for two reasons. First, the lid on individual contributions in a federal race ($1,000 in each contest) has not changed in over two decades. (It requires $3,256 today to purchase what $1,000 purchased then.) Second, as incumbents have found more ways to insulate themselves from competition, it takes more money to mount a credible challenge.

How do incumbents limit competition? They provide themselves with privileges such as free mail, telephone, and web pages. They sneak district- or state-specific "pork" projects into appropriations measures and claim credit with constituents. They pass ambiguous laws and promote complicated regulations in order to increase the demand for constituent service—which only they can provide, usually through taxpayer-funded caseworkers at various home offices in their districts or states. They intimidate major contributors to support them rather than their opponents, reminding them that, even if they lose, they will be around long enough to help them or hurt them. And even in years when they have no effective opposition, they amass enormous war chests from vested interests to intimidate would-be challengers at some later date. Members of the same party collude by agreeing not to support any challenger in a primary. Members who do not have hotly contested races work for other incumbents—raising money for them and making personal appearances—expecting the same help in return if ever needed. They also make sure a full menu of pork is available to those incumbents who are in tight races.

Since it would help incumbents, why doesn’t Congress enact McCain-Feingold/Shays-Meehan by acclamation? Because it would help Democrats more than Republicans, and the Republicans are holding out for a better deal.

The competitiveness of political markets is further restrained by the incentives and opportunities candidates have to deceive voters. Deception seldom works in commercial markets because, if duped, a consumer can switch providers immediately. But if an incumbent candidate is later caught lying, constituents have to wait until the next election, when the incumbent’s insincerity may well have been forgotten. And because of various interpretations of the First Amendment, the applicability of libel and slander laws in politics is very limited. In short, the major actors in the political market—the ones who set the rules—engage in behavior that would lead to fines and/or imprisonment in commercial markets.

What is needed is a direct attack on the numerous anticompetitive features of political markets, not a misguided attack on the symptoms. The vehicle for reform most often touted by would-be reformers, the McCain-Feingold/Shays-Meehan campaign fi-nance reform bill, does the latter. It would actually make political markets less competitive. By banning soft money, by treating any ad that uses a candidate’s name or likeness as a political expenditure (and therefore subject to more stringent regulation), and by strengthening reporting requirements, giving the Federal Election Commission more enforcement tools, and increasing penalties, the bill would further strengthen incumbents over challengers. By barring party expenditures on behalf of candidates who do not limit expenditures from their own pockets to $50,000, the bill would cut down on what recently has been one of the few avenues for successful challenges—the self-financed candidate.

Given the anticompetitive thrust of McCain-Feingold/Shays-Meehan, one may wonder Congress doesn’t adopt it by acclamation. The rub is that it would help Democrats more than Republicans, and the Republicans are holding out for a better deal. McCain and Feingold did agree to a provision that would require unions to inform their members that they may apply for a refund of dues devoted to political activities. But Republicans want more on this front—they want unions to obtain written approval from individual members before any dues are spent on political advocacy. Moreover, the Republicans would like to see better policing of voter registration (under the theory that Democrats cast more illegal ballots than Republicans) and higher ceilings on individual and PAC contributions (under the theory that although these measures might hurt some Republican incumbents, they would advantage Republicans over Democrats even more).

The notion that congressional action or inaction on campaign finance reform is likely to be driven by incumbents’ perceptions of how the reforms are likely to help or hurt them fend off challengers is not new. Analysis of the series of votes leading up to the 1974 reforms indicates that the votes of individual members of Congress were driven by cold calculations regarding which version would help them most in their efforts to be reelected.

There is a direct connection between our corrupt campaign process and the poor performance of our body politic.

It is puzzling that although the public instinctively knows that poor performance in commercial markets may well be due to some sort of "unfair" or anticompetitive behavior, it fails to appreciate the relationship between the lack of competitive vigor in political markets and the generally poor performance of the body politic. Perhaps that is why there is so little public demand for reforms that would truly level the playing field and why the public is so easily hoodwinked into thinking that something like McCain-Feingold/Shays-Meehan would constitute an improvement.