Voodoo economics: a look abroad for a supply-side solution to America's campaign-finance riddle.

• Author: Sanderson, Matthew T.

ABSTRACT

The title of this Note--"voodoo economics"--is, at its core, an analogy: U.S. campaign-finance regulation operates like a price ceiling in the political money marketplace. Political campaigns are financed through money-for-access transactions and campaign-finance regulation caps the level of exchange. Like any other price ceiling, regulation is both effective and flawed. It suppresses the "price" of political money but inherently falls victim to some market players' avoidance activities. This price-ceiling analogy, among other things, makes apparent that many proposals forwarded by pro-regulation and deregulation advocates cannot solve the United States' century-old campaign-finance riddle. Instead, attention should turn to shaping market forces through expanding the political money supply. Political donation incentive programs in Germany and Canada provide attractive supply-side models for reform in the United States.

TABLE OF CONTENTS I. INTRODUCTION II. CAMPAIGN FINANCE THROUGH AN ECONOMIC LENS A. Economic Theory and Financial Support for Campaigns 1. Supply, Demand, and Market Equilibrium in Campaign-Finance Markets 2. Is Campaign-Finance Regulation a Restriction on Supply or a Price Ceiling? a. Past View: Campaign-Finance Regulation as a Supply-Side Restriction b. Proposed View: Campaign-Finance Regulation as a Price Ceiling i. Rent-Control Price Ceiling (1) Circumvention (2) Substitution ii. Campaign-Finance Price Ceiling (1) Circumvention in the Political Context (2) Substitution in the Political Context c. Viewing Campaign-Finance Regulation as a Price Ceiling Rather than a Supply-Side Restriction i. Describing Limits' and Disclosure Requirements' Market Roles (1) Placing Disclosure Requirements in the Market (2) Allowing for Limits' and Disclosure Requirements' Dual-Sided Form ii. Reflecting the Regulatory Scheme's Purpose iii. Capturing the Effects of Regulation on the Campaign-Finance Markets (1) Depicting Campaign-Finance Regulation's Prospects for Success (2) Explaining Avoidance Activities B. Historical Examples of Price Ceilings in Campaign-Finance Regulation 1. The Federal Election Campaign Act a. Pre-FECA Regulation and Circumvention i. The Pre-FECA Regulatory Regime ii. Circumvention b. Reinvigorating and Creating Price Ceilings with FECA c. Post-FECA Circumvention and Substitution i. Circumvention ii. Substitution 2. The Bipartisan Campaign Reform Act a. Reinforcing the Donation and Outlay Price Ceilings with BCRA b. Circumvention and Substitution after BCRA i. Circumvention ii. Substitution III. THEORETICAL SOLUTIONS: VIGOROUS ENFORCEMENT AND SUPPLY-SIDE EXPANSION A. Laws with a Negative" Character B. Theoretical Solutions 1. Reducing Demand 2. Expand Supply IV. BUILDING ON THEORY: CONTRIBUTION INCENTIVE PROGRAMS IN FOREIGN NATIONS A. Germany's Tax Deduction 1. Tax Deduction Structure 2. Evaluating Germany's Tax Deduction B. Canada's Tax Credit 1. Tax Credit Structure 2. Evaluating Canada's Tax Credit a. Expanding Supply b. Strengths and Weaknesses of the Canadian Tax Credit V. SOLUTION: EXPANDING THE SUPPLY OF POLITICAL MONEY THROUGH A CANDIDATE-DONATION TAX CREDIT PROGRAM VI. CONCLUSION I. INTRODUCTION

Few Americans give money to candidates, parties, and political action committees (PACs). (1) Many worry that this small class of campaign contributors distorts public policy by exercising undue influence over government officials' actions. (2) Surging campaign costs guarantee that their influence will only increase. (3) Regulation and deregulation advocates pitch their respective approaches as the solution to this perceived campaign-finance problem. (4)

One thing upon which advocates and opponents of campaign-finance regulation can agree is that political campaign contributors have found creative ways to resist efforts at reform. (5) The battle to regulate political contributions in the United States that began with the 1907 Tillman Act still rages today. (6) Over the last century, Congress has repeatedly enacted limits, prohibitions, and public disclosure requirements to stem the flow of money and access between federal candidates and powerful interests such as corporations, (7) labor unions, (8) and wealthy individuals. (9) The U.S. Supreme Court upheld Congress's latest such attempt, the Bipartisan Campaign Reform Act, (10) but ominously predicted that "[m]oney, like water, will always find an outlet." (11) The Supreme Court summarized a major argument against campaign-finance regulation that brings into question the rationale behind past and future reform. If money is "hydraulic" (12) in the sense that regulation merely causes it to seep into unregulated areas further from the public's reach, then campaign-finance laws may harm more than help the quest for greater democratization of the U.S. political process. (13)

This Note examines political money's hydraulic qualities and evaluates campaign-finance regulation's utility--rather than its constitutionality--in light of those hydraulic qualities. Part II of this Note explores political money's hydraulic traits and reviews the history of American campaign-finance regulation through the lens of economics. Part III describes theoretical approaches to improving American campaign-finance regulation's efficacy. Part IV looks at German and Canadian political donation incentive programs as attractive real-world models for reform in the United States. Finally, Part V distills features from German and Canadian donation-incentive programs that can help the United States expand the political donor base and dilute the current contributing class's influence.

2. CAMPAIGN FINANCE THROUGH AN ECONOMIC LENS

   This Part explains how basic economic principles apply to financial support for federal candidates' political efforts. Specifically, it describes campaign finance as a market transaction, contrasts this Note's "market" view of campaign-finance regulation with past theories, and justifies this Note's perspective. It also reviews the modern history of campaign-finance legislation from this Note's economic standpoint.

   1. Economic Theory and Financial Support for Campaigns

      1. Supply, Demand, and Market Equilibrium in Campaign-Finance Markets

         Campaigns are financed through market transactions. (14) The currency traded is access. Access is the opportunity to influence a decision-maker, or prospective decision-maker--a federal candidate. (15) Real life accounts suggest that individuals and entities contribute to gain access to federal candidates. (16) Access appears to motivate those who contribute to unopposed candidates, (17) to opposing candidates, (18) or to election winners with campaign debt because other donative interests are greatly diminished in these contexts. (19) It is also true that individuals and entities financially support candidates for reasons other than obtaining access, including ideological preference, prestige, and personal relationship. (20) But this Note assumes no other motives than access for analysis purposes because such motives are irrelevant to evaluating and improving the campaign-finance regime. In other words, this Note takes up Oliver Wendell Holmes's suggestion to look at the law only from the perspective of a "bad man." (21) Access-seekers are Holmes's "bad men" not because they are "bad," but because their contributions are more likely to pervert governmental decision-making than those given purely to support broad ideals or show friendship. (22) A campaign-finance regulation scheme should focus on access seekers and deter negative effects caused by their contributions. (23) To effectively evaluate and design an effective regulatory scheme, it is necessary to assume that campaign-finance market participants use only access as currency.

         Political money--money used for election-related purposes--is the commodity traded for access. (24) (The political money markets' orientation is thus opposite from most markets--political money is the commodity and price is calculated in terms of access, not currency units.) It may be a "gift, subscription, loan.... advance, or deposit of money or anything of value made by any person for the purpose of influencing any election for Federal office." (25) For this Note's purposes, political money is either a "donation" or an "outlay." It is a donation if a federal candidate exercises meaningful control over its use. Donations include, among other things, value transfers that are "contributions" (26) or "coordinated party expenditures" (27) under federal law. Political money is an outlay if a federal candidate does not exercise meaningful control over its use. Outlays include, among other things, value transfers that are uncoordinated "expenditures," (28) "independent expenditures," (29) or "electioneering communications" (30) under federal law.

         Donations and outlays are traded in separate markets. Like all markets, the donation and outlay markets are subject to the economic laws of supply and demand. (31) The markets' supply curves represent the quantity of donations or outlays that PACs, businesses, labor unions, individuals, governments, (32) and other entities are willing to supply at a given price in terms of access. (33) The markets' demand curves represent the quantity of donations or outlays that a federal candidate (34) will demand at a given price in terms of access. (35)

         A supply-side participant in the donation and outlay markets will try to command a price for its political money that will maximize the access it receives. (36) Conversely, a candidate will endeavor to receive the greatest amount of donations or outlays for each unit of access traded to a political-money supplier. (37) The size of a candidate's access cache is determined by, among other things, the extent of the candidate's decision-making power. (38) The more power a candidate holds, the more access units she can trade in the market. As in other markets, supply and demand compel prices to...