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

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.18 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.19 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.
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