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

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.29 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.30 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.31
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.32 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,33 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?”34
But empirical evidence shows that campaign finance restrictions actually lower voter turnout by reducing the number of competitive races.35 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.36
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.”37
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.38
It seems that the next crop of presidential candidates will continue to belabor the notion that fund raising matters. The Daily News recently reported the leaked contents of a dossier outlining Rudy Giuliani’s strategy for his 2008 presidential run. According to The Daily News, “At the center of his [Giuliani’s] efforts: a massive fund-raising push to bring in at least $100 million this year, with a scramble for at least $25 million in the next three months alone.”39 Shortly after Barack Obama and Hillary