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‚Äôt 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.