The Becker-Posner Blog

Should Campaign Contributions Be Limited? Posner

Congress, most recently in the Bipartisan Campaign Finance Act (McCain-Feingold), enacted in 2002 in time for the 2004 presidential election, has tried to limit campaign contributions and, more broadly, to regulate campaign tactics. For example, a provision of the Act requires people or firms that spend more than a certain amount of money on campaign advertisements to reveal their identity to the Federal Election Commission, where the information is available to the public; and ads sponsored by the candidate himself or his campaign committee must so acknowledge, so that the reader or viewer doesn’t think that the ads are disinterested. The most important provisions of the Act, however, concern the size of permitted contributions. These provisions (1) raise the limit on individuals' campaign contributions ("hard money") from $1,000 to $2,000 per candidate and (2) forbid "soft money" contributions, that is, contributions not to a candidate or his party but instead to "independent" groups that buy ads during political campaigns but do not expressly endorse candidates. Most such ads actually are closely coordinated with the campaigns of particular candidates. The efficacy of the prohibition of soft-money contributions has, however, been greatly reduced because of "527" groups; section 527 of the Internal Revenue Code grants a tax exemption to groups that seek to influence federal elections, and it is as yet unresolved whether McCain-Feingold's prohibition of "soft money" contributions encompasses contributions to such groups. The higher hard-money limits, the increased use of the Internet to obtain small donations from a large number of people, and the 527 loophole have assured that elections will be just as expensive as they were before the McCain-Feingold Act went into effect, notwithstanding the purported abolition of soft-money contributions. However, the goal of the Act is not to limit total campaign expenditures, but rather to reduce the influence of the wealthiest donors (even before McCain-Feingold, corporations and labor unions were not permitted to make campaign contributions). A secondary goal is to make campaign advertisements less misleading by forcing disclosure of their sponsors, whether the candidate or someone else. So the main question that campaign-finance reform raises is whether it is desirable to limit the contributions of the wealthy. To put this another way, would allowing contributions without limit have good or bad consequences, on balance? Generally, we would think it inefficient to try to place limits on advertising. It is true that advertising has something of an arms' race character; to the extent that the advertising of competing products is mutually offsetting and so does not shift consumers from one product to another, it has no net social product. But to limit advertising would be to deny sellers full use of an important competitive tool. It would have a particularly deleterious effect on new entry into markets, since a new entrant may have to spend heavily on advertising to overcome settled consumer preferences for existing brands. The political market is similar. Candidates "sell" themselves as leaders or representatives, plus their programs and policies, to the electorate; campaign advertising helps the voters decide which candidate, which package, to buy. Limiting the amount of money that a candidate can spend on advertising his candidacy discourages new entry into the political market. Campaign finance laws like McCain-Feingold do not limit the candidate's expenditures directly, but do so indirectly by forcing him to raise money from many different individuals. Limiting campaign advertising, whether directly or indirectly, operates as a subsidy to newspapers and other news media, which report on political campaigns. The less political advertising there is, the more dependent the public is on the media. This may explain why the media strongly support campaign finance reform. Not that McCain-Ferguson is well designed to limit aggregate political advertising; but it could be a step toward such limitations. The fear that animates the imposition of limits on campaign contributions has three principal aspects. First, the incentive to engage in fraudulent and otherwise misleading advertising is greater in the political market because voters are less wary than consumers. The instrumental value of voting is nil (no nonlocal elections are decided by one vote), and its consumption value modest (as evidenced by low turnover), so the voting public has little incentive to invest heavily in learning the truth about candidates and policies. So maybe it would be a good thing if voters got more of their information from the media rather than from political advertising. But this argument for regulation overlooks the fact that voter interest and turnout are likely to be greater the more campaign advertising there is; to the extent that advertising by contenders is not offsetting, it increases demand for their product--that is, it increases the amount of voting. The second source of the fear of unlimited contributions is that they undermine democratic choice. A handful of very wealthy people could, if allowed to do so, provide a candidate of limited popular appeal with a campaign war chest of hundreds of millions of dollars, and by sheer volume of advertising could generate substantial electoral support for him. Wealthy people are allowed to spend as much of their own money on their campaigns as they want, which indeed has attracted some eccentric candidacies, and the prospects for "buying" elections would be enlarged if they could contribute unlimited amounts to others. But what this shows is the inefficiency of allowing the wealthy to spend money only on their own candidacies. It produces underspecialization. If the wealthy person is allowed to contribute to another candidate, his expenditure on campaigning will be on average more productive, because wealth and the ability to be an effective political candidate are not well correlated. Moreover, forcing a candidate to raise money from a multitude of people rather than from a rich people limits the field of selection of candidates by forcing candidates to spend a great deal of time in fund raising. Remember that campaign finance reform does not limit aggregate expenditures, but merely increases the cost of obtaining contributions by limiting the amount of the individual contribution. By making candidates work harder to raise the same amount of money, it actually increases the cost of fund raising, though an offset may be that slightly less is raised overall; in general, any increase in the cost of a commodity will result in less being demanded. Third, and greatest, is the concern that campaign contributions, when large in amount, are a form of thinly disguised bribery--corporations and wealthy individuals would not give substantial money to a political candidate without an expectation of a quid pro quo. Of course, some would give, out of conviction, but in smaller amounts than they would give if they had an expectation of a personal benefit. Bribery is illegal, but the kind of "soft" bribery that consists of campaign contributions that the recipient knows will diminish or disappear in the future if he constantly votes against measures important to his contributors undoubtedly exerts some influence on politicians. Yet even here there is some offsetting benefit. One weakness of democracy as a method of allocating resources is that votes are not weighted by intensity of preference, as they are in the market. Campaign contributions are a method of expressing intensity of preference and so help to direct the allocation of governmental resources to those who may benefit from them the most. The problem of course is that private and social benefits may not coincide, and the more concentrated the private benefits and the more diffuse the social benefits, the less likely is an allocation of resources guided by the weight of campaign contributions to produce the social optimum. My conclusion is that efforts to limit the size of campaign contributions are probably mistaken. I am more kindly disposed to requiring the revelation of the identity of the sponsors of political ads. It is true that one effect is to reduce the amount of political advertising, but to the extent that this comes about because disclosure of the backers of the candidate (or the candidate's connivance in an untruthful ad) makes the advertising less effective, rather than because the sponsor desires anonymity because his support of the particular candidate would be unpopular in his firm or his community, this is all to the good. And because voters have so little incentive to study political ads carefully, there is something to be said for inducing skepticism in voters by forcing the revelation of the names of the sponsors. For then it may be transparent to even the inattentive voters that the sponsors seek a private and inefficient transfer as a fruit of supporting a particular candidate with their campaign contributions.

On Campaign Finance Reform-BECKER

I am dubious about the advantages of limiting campaign contributions. This is because I interpret democracy not simply as extending the right to vote, but also in good part as competition among interest groups for political support. Interest groups compete in many ways, such as influencing voters indirectly to favor particular points of view, and they also compete through campaign contributions. The McCann-Feingold Law of 2002 and previous campaign finance "reforms" attempt to restrict the competition of interest groups for political influence. I believe these restrictions are as undesirable as restricting who can run for office. Indeed, restrictions on campaign contributions do skew the political playing field toward rich individuals like Steve Forbes, Jon Corzine, Michael Bloomberg, John Kerry, and others who spend large amounts of their own monies. This is hardly a push toward greater "democracy". Despite the McCann-Feingold law, campaign expenditures in the 2004 presidential and congressional contests amounted to at least $4 billion, up from almost $3 billion in 2000, and a little over $2 billion in 1996. This is a lot of money in an absolute sense, but it is small relative to the over $2 trillion spent by the federal government, and also relative to the approximately $200 billion spent annually on advertising of products and services by private companies. As Posner points out, advertising, including campaign contributions, have something of an arms race character in the sense that spending by some groups partly offsets spending by other groups. Yet the amount "wasted" (if it is wasted-see my later discussion) in this way through political campaign spending is not huge. This conclusion on the relative unimportance of campaign contributions is supported by the many scholarly studies of the determinants of who wins elections. This literature generally finds a tiny effect of spending on the outcomes of election. For every Bloomberg or Corzine whose spending seems to have been decisive in their winning, there are many more Forbes', Kerry's, Michael Huffington's, and others who failed despite spending large amounts of their own money. Still, it is a weakness of the laws restricting campaign contributions that they skew viable political candidates toward rich persons who are willing to spend a lot of their own money. Political incumbents have many advantages over challengers because they get publicity while in office, and can use their position to steer legislation toward projects that help their constituents. Effective limits on campaign contributions make it harder for newcomers to challenge incumbents by raising funds to gain the recognition among voters that enable them to compete against incumbents. For a variety of reasons, the incumbency advantage has grown over the past several decades. The movement to restrict contributions is not the main force behind this growth, but it does work toward a greater incumbency advantage. Perhaps the most common reason for trying to restrict campaign contributions is the fear that otherwise rich and well organized interest groups, such as the oil industry or trial lawyers, will have an undue influence over legislation by helping candidates who they hope will push their interests. Some groups clearly have influenced legislation, in part through provision of financial and other support to particular candidates. But there are also many more "unfair" influences over election outcomes and public policies that have little to do with campaign contributions. A comparison of Europe and the US offers instructive evidence on this issue. For various reasons, Great Britain, German, Italy, and France spend a lot less on political campaigning than the US, yet it is far from clear that they get more desirable candidates or legislation. Entrenched economic groups like unions play a much more important role in countries with sharp limits on campaign spending. It is also much harder for political outsiders to enter the political arena to run for important offices. Part of the hostility to campaign contributions reflects a general hostility to advertising found among intellectuals in all spheres, including many economists. This hostility greatly underestimates the importance of advertising in providing information, in helping new products or candidates to compete against the establishment, and in entertaining and providing other satisfactions to those affected, be they consumers or voters. I believe that competition among advertisers of products and services usually leads to better, not worse, outcomes to consumers. The arguments behind this conclusion appear on the whole to hold with equal, if not greater, force in the political arena. If so, the many and continuing attempts in the US to restrict such contributions is largely misguided, and I suspect has worsened political outcomes, although probably not by a lot.

Child Care and Work Leave--Posner's Response to Comments

One commenter suggests that low fertility is due to the reluctance of a couple to give up the second income (normally the wife's) if the couple has a child and as a result one of the parents (normally the mother) leaves the labor force. This has always been true; but in the old days, women's job opportunities were limited, so that the income they had to give up when they dropped out of the labor force in order to have children was usually quite small. This is another way of saying that the opportunity costs (alternative income forgone) of having a child have risen for women, so, naturally, the "output" of children has fallen. Now, this would not necessarily happen if, at the same time that children were becoming more costly, they were becoming more valuable to their parents; that is, if the demand curve for children as well as the supply curve were shifting upward. But, especially with the prohibition of child labor, this has not happened. Rather, as Becker has emphasized, there has been a shift in demand from quantity to quality of children. This makes sense if the cost of the extra quality in better schooling, etc., is less than would be the cost of an extra quantity of children--in other words, if the total costs (including opportunity costs) of one high-quality child are now lower than the total costs of two or more lower-quality children. It may also be the case that, if one thinks of children as being from the parents' perspective a consumption good (like a pet), what has happened is that the market for goods and services is producing better substitutes, at a lower quality-adjusted cost, than in the past, so that the cost of giving up these alternatives in order to invest in children has risen. A Canadian commenter states that the quality of public day care is, in Canada, higher than that of private day care. If so, however, one wonders what demand there is for private day care--is it that access to public day care is limited and that public day care is of higher quality than private because of high taxation?

Response on Child Care and Leaves-BECKER

I am happy to see a variety of interesting comments. I can only give a few quick responses. Sweden was mentioned by many of the comments, and it is a very interesting case. Sweden has much more employment than other OECD countries relative to its high tax rates, in good part because it highly subsidizes paid leaves. I do not know if professional women take more or less leaves than other women, but women do take large scale advantage of the generous paid leave provisions, partly because ithey are paid out of social security funds rather than by their employers. I would predict that women who earn a lot relative to their mates, like some professional women, take less of the allowed leaves while their mates take more, but I do not know if that is true. The US has much more extensive opportunities for part time work than most other nations, especially France, Italy, and Germany. Sweden has a fairly large amount of part time work, but it mainly involves working for the government, whereas most part time work in the US is in the private sector. To a considerable extent, government part time work in Sweden involves some mothers caring for other mothers' children in government run child care centers. This seems like a very inefficient system, as convincingly argued by Rosen in the article I cited in my original entry. I certainly believe that government subsides for childcare and paid leaves do raise fertility, even though they are paid for by taxes. The reason is that these policies lower the cost of children, and also that families getting these subsidies have an increase in their income that is contingent on raising their fertility, while taxpayers have a reduction in income that is largely independent of their fertility. Economic analysis is convincing on this point. Much of the reduction in fertility has been caused by a substitution of the so-called (I called it this!) quality of children for quantity. If parental care had a large effect on the quality outcomes of their children, then there could be a case for encouraging care by parents. Paid leaves work in this direction, but government childcare facilities work in the opposite direction. And an alternative to paid leaves is a special tax on working women who have small children, or on families that divorce. These taxes would not be popular, and I do not support them. Still, they show that present policies of countries like Sweden have contradictory effects on the degree of parental care, and that there are many ways to induce more mothers or fathers to spend time caring for young children.