Friday, January 22, 2010

Supreme Court opens the money gates

Christian Science Monitor article "Supreme Court opens the money gates" (January 21st, 2010) argues that the fact that members of Congress limited campaign financing by corporations proves that even they believe that corporate donations to politicians are morally troublesome.
But even members of Congress, whose energy is increasingly diverted to fundraising, have long recognized the potentially corrupting effect that big money can have on them. More than 100 years ago they banned corporations from donating directly to federal candidates.
Government has power to create monopolies, adjust prices, and tax, and wields considerable other anticompetitive powers. It is in the interests of corporations to bribe politicians to benefit them at the cost of consumers. Framed another way, politicians have a franchise with which they accrue the monopoly rents they create for firms through bribes. If a law creates $10 million for a corporation in excess rent, then a politician should be able to gain up to $10 million in bribes, as firms compete for the rent.

Let us imagine that this legislation prevents future competition and allows firms to gain full monopoly rents in the future, rather than politicians. In such a case, long-lived corporations would be willing to pay the full net present value of monopoly profits today. In other words, we might imagine that short-lived politicians one hundred years ago sold their franchise at the expense, not of consumers, who lose the same amount either way, but of future politicians.  The transaction  is displayed graphically below (click to enlarge).

Just because politicians banned their future selves from doing something does not mean that they thought it immoral--it can simply be them selling their franchise for donations today.


  1. The suppression of corporate and individual campaign contributions by politicians has another important effect. Incumbents already have name recognition that newcomers have to purchase with time and money. Incumbents are already connected to donors and doubtless have a lesser cost of capital in raising money compared to newcomers. The raising of barriers to campaign contribution has a differential effect benefitting incumbents. Consider the extreme case where no campaign contributions were allowed and there was no government financing - in that case no challenger could possibly get the name recognition and raise the money required to forward their message. Moving from that zero state of campaign contributions the same pattern pertains with more limited amounts of all owed contributions. Eventually with high enough limits the differential advantage of incumbency may make some asymptotic approach towards zero. We should allow unlimited contributions in all cases to facilitate truly competitive elections. On another level, the Supreme Court was absolutely correct in removing the limits on corporate free speech. The Congress does not have the right to abridge the freedom of speech. Period. End of story. Speech should be free. Let all ideas be forwarded and let the voters choose among them.

  2. It's not clear to corrections that your limiting argument holds along the full support of donation caps. We can easily imagine a scenario in which incumbents do well with no donations or all donations, but do poorly with capped donations.

    Indeed, Steven Levitt, in "Using Repeat Challengers to Estimate the Effect of Campaign Spending on Election Outcomes in the U.S. House" (Journal of Political Economy, 1994) found that campaign spending limits appear to be socially desirable, though public financing did not. Generally, incumbents are able to spend their time accumulating a vastly larger "war chest" than challengers.