Free Money

Campaign finance "loopholes" are the best part of the system.

Once again we are preparing to choose federal, state, and local officials to preside over governments that redistribute about 38 percent of the GNP, enact and administer thousands of criminal laws, and assert an open-ended right to regulate every aspect of our lives. And once again the subjects of this power think they should be allowed to influence the outcome. People want to donate money to the candidates they favor, tell potential voters about candidates and issues, expand the channels of information beyond the conventional media, form organizations with others of like mind, establish Internet sites, and, in general, participate.

This desire to participate upsets most journalists, many politicians, and a large percentage of the nation's intellectual and financial elites. The Web site of Common Cause (www.commoncause.org/publications/ campaign_finance.htm), the organization that for 25 years has been the mainspring of the campaign for election finance reform, features alarmist headlines such as "Ka-Ching: National Parties Raise Record $160.5 Million in Soft Money Through First 15 Months of 2000 Election Cycle." The Committee for Economic Development (www.ced.org), a voice of the business establishment, is equally concerned, blaming the "vast sums of unregulated 'soft money'" for all the ills of the current electoral process and advocating fundamental reforms to "restore trust and balance."

During this year's Republican primaries, John McCain used the campaign finance issue to harvest great media acclaim and boost his candidacy. The topic played poorly with the nonestablishment parts of the Republican Party, both social and economic conservatives. They understood that McCain was telling the party to commit suicide, since his reforms would have disarmed Republican constituencies while leaving the power of labor unions, government employees, and celebrities untouched.

Still, the issue has enough media traction that George W. Bush has made reform noises. He proposes a ban on "soft money" contributions to parties by unions and corporations, along with stronger protections for union members who don't want their dues used for political purposes with which they disagree. These changes would affect Democrats as well as Republicans, so they will never pass. Al Gore, of course, favors reform, as long as he gets to define it. He would eliminate all "soft money" but allow everyone, including unions and corporations, to contribute to a nonpartisan fund that would be used to pay for the campaigns of congressional candidates who agree to spending limits.

As reflected in Gore's plan, critics of the current system tend to focus on the "loopholes" they believe undermine noble but inadequate attempts to control corruption. In particular, they decry "soft money" contributions to political parties, which are not subject to statutory limits, and spending by groups that care deeply about particular issues and want to communicate their concerns to candidates and the public. Yet almost everything the reformers say about "loopholes" is flat-out wrong. The practices branded as loopholes are not only legitimate, they are the best part of the system. Every lover of democracy and freedom should be working to expand them until they swallow the absurd rules that currently govern campaign finance. Given the inevitable failure of the Federal Election Commission's dithering efforts to regulate political speech on the Internet, that day may not be far off.

Evil Influence

In the campaign of 1789, George Washington spent £39 on "treats" for the voters. This was not much, but he was the only candidate and there weren't many voters. Washington may have been the last president not to be subjected to complaints about the evil power of money. By 1800, when Jefferson beat Adams, the financial power of banks played a role. By the post-Civil War era, both parties were shaking down public employees for contributions; in Pennsylvania during the 1870s, Republicans demanded 2 percent of their salaries. After civil service reform dried up this revenue source, the parties turned to the newest pot of wealth, big corporations.

The election of 1896 is generally cited as the great watershed in campaign finance. Mark Hanna, an Ohio industrialist, raised $7 million ($100 million in today's dollars) to help William McKinley beat William Jennings Bryan. The money came from corporations dedicated to the gold standard and protective tariffs, and Hanna asked them to contribute their "fair share," reflecting their stake in the general prosperity. His approach struck another modern note, says historian Thomas Fleming: "Hanna refused to promise any specific favor or service; rather, he sold the glittering concept of 'access' and a government that smiled on corporations."

Sympathy for Bryan is not entirely in order, because the populist's backers were wealthy individuals, notably financier Augustus Belmont of New York. But Hanna's tactics prompted a public outcry, and after McKinley's assassination in 1901 corporate America got Theodore Roosevelt, who was willing to ride the rising public concern about business money. A $50,000 check from New York Life to Roosevelt's 1904 campaign received unpleasant publicity, so, in another modern touch, he learned from his mistakes and proposed a ban on all political contributions and the funding of campaigns by the government.

Congress did not go that far, but it did ban corporate contributions to federal elections in 1907, require disclosure in 1910, impose expenditure limits in 1911, and require yet more disclosure in 1925. During the New Deal, Republican fears of the new army of bureaucrats brought about the Hatch Act of 1939, which limited government employees' political activity. As a balancer, caps were imposed on individual contributions to campaigns and on expenditures on presidential elections. The rising power of unions was attacked in 1943, when they, like corporations, were forbidden to contribute to federal campaigns.

It did not take long to find loopholes in these reforms. For example, the parties quickly decided that the 1939 limits on contributions and expenditures applied only to individual committees and that there was no limit on the number of committees a party could form. The 1940 election was characterized by multiple committees, no real limits on either contributions or expenditures for anyone who knew enough to write more than one check, and a new record for money spent on a presidential election: $21 million, or $257 million in 2000 dollars.

Costs kept rising—Johnson vs. Goldwater cost $60 million in 1964, Nixon vs. Humphrey $100 million in 1968 ($331 million and $492 million, respectively in current dollars)—and the issue finally erupted in the 1970s. In 1971 Congress passed a mild bill, directed mostly at disclosure. The election of 1972 set new records for spending ($400 million for all parties in all races, or $1.6 billion in current dollars) and was followed by the post-Watergate disclosures of sleazy tactics. With the public aroused, the result was the Federal Election Campaign Act of 1974.

It was promptly challenged by one of the oddest coalitions ever to enter a courtroom. The plaintiffs included conservative New York Sen. James Buckley (brother of William F.), liberal Sen. Eugene McCarthy, the American Civil Liberties Union, the Mississippi Republican Party, and the Libertarian Party. In Buckley v. Valeo, the U.S. Supreme Court rightly found that large chunks of the law violated the First Amendment right of free speech. Other provisions were upheld, though, based on distinctions not readily apparent to the naked eye.

Buckley was quickly followed by important decisions of the new Federal Election Commission (which had been established by the 1974 law) and then by more congressional action in response to both the Court and the FEC. When the dust settled, we had pretty much our current system, though there have been some tweaks since, largely in the form of FEC and judicial interpretations of the '74 law.

Speech Impediments

The fundamental problem with controlling campaign finance involves free speech. How can government constitutionally prohibit someone, whether an individual or a corporation, from running an ad that says "Candidate X is a schmuck" or "Candidate Y voted for higher defense budgets"? In fact, given First Amendment precedents, how can the government prevent a citizen from donating money for a candidate to spend on such messages? Free speech rights are not easily reconciled with the laws passed in the 1970s, and the courts have spent a quarter-century in the delicate political task of accommodating reformist alarms without doing excessive violence to the Constitution.

The task is complicated by the reality that campaign laws present a stark fox-guarding-the-henhouse scenario: Except for judicial enforcement of the Constitution, incumbents have carte blanche to write the rules under which people will try to unseat them. Any legislators who cannot protect themselves forever are too dumb to deserve to stay in office. In 1998, political action committees gave $220 million to congressional races; 78 percent went to incumbents, 10 percent to challengers, and 12 percent to candidates in open-seat races.

The courts are not big on contemporary political theory, and they rarely make use of public choice models that assume politicians, like actors in the private sector, relentlessly seek to increase their market share. The models of administrative law the courts do use are all based on treacly New Deal platitudes. Nonetheless, many judges, especially in the U.S. circuit courts, are aware of the campaign laws' potential as incumbent-protection devices, and this awareness infuses their decisions, however subtly. In Shrink Missouri Government v. Adams (1998), for example, the U.S. Court of Appeals for the 8th Circuit expressed skepticism about the testimony of various state legislators concerning the need to battle "corruption," noting that they had failed to cite any actual instances.

In Buckley, the Supreme Court struck down provisions of the 1974 law imposing limits on expenditures in House and Senate races. It also threw out, as an unconstitutional abridgement of free speech, limits on how much a wealthy person can spend on his own campaign. But limits on how much a person can give to someone else's campaign were upheld, and so were limits on how much an individual can give to all campaigns in a single year. Money, in the Court's view, somehow loses its character as speech when it leaves the donor's hands. Stewart Mott, the heir to a fortune in General Motors stock who largely funded Eugene McCarthy's 1968 insurgency, would no longer be able to do such a thing, though he could run himself and spend as much as he wanted. Hence the candidacy of Steve Forbes, who had to carry the economic reform banner himself because he was not allowed to finance a campaign by anyone else.

The contribution limits—$1,000 to individual campaigns and $5,000 to PACs per year, up to a total of $25,000 per year—have not been raised since 1974, even though inflation has reduced their real value by two-thirds. The next time some incumbent moans about how much time he spends raising money, think of how simple it would be to increase the limits, and suppress your sympathy. The limits may make an incumbent's life unpleasant, but they make a challenger's impossible, and that is why they remain.

Pre-1974 bans on campaign contributions by corporations and unions remained in place, except that the 1974 law allows these organizations to pay the costs of administering political action committees. PACs can collect contributions from individuals and dole them out to candidates, subject to the limit on the amount contributed to any single campaign.

The law also established the FEC to administer the system, write regulations, and implement myriad reporting requirements imposed on everyone who dabbles in elections. This has led to a numbing array of nit-picking rules. The FEC's Campaign Guide for Corporations and Labor Unions is 80 pages long, and the print is small. There are separate guides for party committees, for candidates, and for PACs. The FEC digest of court cases on the law decided between 1976 and September 1999 contains 328 entries. The list of FEC advisory opinions issued since 1977 totals more than 1,130. These concern issues such as whether companies may reimburse their employees for making campaign contributions (forbidden) and whether fathers may funnel dollars through their kids (also forbidden, but you can use your spouse, as long as both names are on the account and both sign the check).

Forbidden Words

The biggest regulatory challenges come from those areas that reformers call "loopholes" and others call the exercise of free speech rights. These fall into three categories: independent expenditures, soft money, and volunteer activity.

An independent expenditure is spending by someone outside a campaign that is not coordinated with the campaign. Advertising is the most obvious example, but the category also encompasses material such as voter guides. If these were classified as campaign contributions, it would be illegal for businesses, unions, and nonprofit corporations to make them at all. For individuals, their cost would count against contribution limits.

In 1974, Congress, acting just as a public choice theorist would predict, did indeed try to control independent expenditures. But the pesky Supreme Court would not agree. In Buckley, it read the statute narrowly so as to avoid constitutional problems (a tried and true legal technique), saying the prohibition of corporate expenditures "in connection with an election" extended only to contributions to candidates and "express advocacy," which meant ads using phrases like "Vote for Candidate X" or "Defeat Candidate Y."

"Issue ads" that present an argument and perhaps link it to a candidate but that stop short of express advocacy are not covered by the law. Similarly, other expenditures of all sorts are allowed as long as they are not coordinated with a particular campaign. A later case held that even express advocacy is protected if it is conducted by a nonprofit corporation and is not coordinated with a candidate's campaign. (A fortiori, this applies to individuals.) The FEC has moved to bring such spending into the system, though, counting donations to advocacy groups against limits on individual contributions to candidates and requiring extensive reporting.

After Buckley, groups with a stake in elections learned the arts of independent action and issue advocacy. Unions poured $40 million into the 1996 election, environmentalists use issue advocacy regularly, and various conservative groups depend on it. To reformers, this participation by groups that care about issues is a "loophole."

A brisk legal business advises people how to walk the line between issue advocacy, which escapes regulation, and express advocacy. To the FEC, an ad saying, "Higher defense spending is good; Congressman X is opposed to it," is express advocacy. But if it says, "Higher defense spending is good; write Congressman X and tell him to change his position," it is an issue ad. The FEC keeps pushing to expand the law's coverage, and the courts, for the most part, keep pushing back. (See "Feckless FEC," July 1997.)

In one of the weirder aspects of this odd field, the definition of express advocacy differs in the East and the West. The U.S. Court of Appeals for the 9th Circuit, which covers California and eight other states, supports a squishy FEC test that says it all depends on what you intended to do. Other circuits say that only the precise words mentioned in Buckley and their synonyms are covered.

Lifeblood of the Party

The second big alleged loophole is called "soft money." State and national political parties are allowed to collect funds for general "party building" activities without having these count against the donors' annual contribution limits. Perhaps more important, these contributions can come from unions and corporations, entities that cannot give directly to campaigns at all. The parties must report the money to the FEC, and they must not coordinate their spending with campaigns.

The current deluge of soft money stems from a 1978 FEC advisory opinion that expanded the extent to which the parties could use such funds for purposes such as registration and get-out-the-vote drives. Predictably, these activities are now given an expansive reading, encompassing major electioneering. In 1992, the major parties collected $86 million in soft money, but its utility was still thought to be limited because everyone assumed that if they tried to push much beyond registration and get-out-the-vote drives, they would cross the line into illegal coordination. The FEC took the view that party committees were too close to the candidates to be independent and thus could never meet the requirement that expenditures on advertising or materials not be coordinated with a campaign.

Two things happened in 1996 to change this. The Supreme Court decided that a Republican state committee in Colorado that ran ads against a Democratic senatorial candidate was in fact independent of the Republican candidate. More important, President Clinton boasted of raising millions of dollars for early issue ads and personally vetting the campaign. The Republicans countered with their own spending spree, though they were slow off the mark, and soft money given to the parties reached $260 million that year.

Despite his boasts, the enforcers did nothing about Clinton, which had to mean they did not regard his actions as "coordination" that destroyed the "independence" of the expenditures. But if these actions were not "coordination," then nothing is, which means that the noncoordination requirement is dead. The FEC is now conducting a rulemaking proceeding to define coordination.

By 2000, Hillary Rodham Clinton's Senate campaign was telling people to make a big contribution and let the campaign staff break it down into hard money for the campaign, hard money for her related campaign committee, and soft money to be used by other committees for "party building." The president was equally overt, crisscrossing the nation to raise money from corporations and wealthy individuals, and the Republicans responded in kind, pulling out their own gate attractions, such as they are, and tapping into business executives and conservative entrepreneurs.

Celebrity Skin

The third gap in the law, though no reformer would dream of calling this a loophole, is voluntary activity by individuals, which is not covered by contribution limits. This exemption is an important reason for the rising political power of celebrities. The most conspicuous recent example of celebrity volunteering was Robin Williams' performance at the Democratic National Committee's record-breaking "barbecue bash" in late May, which raised $26.5 million. On a more modest but still impressive scale, an entertainer can contribute her time for a fundraiser; draw, say, 10,000 people at $100 a pop; and net a cool $1 million for the campaign. The presumptively corrupting industrialist can contribute a mere $5,000. Politicians spend a lot of time in Hollywood these days.

Another important effect of allowing unlimited voluntary activity is to give power to unions and to big government, categories that are increasingly overlapping. About 1.7 million civilians work for the federal government, and almost 13 million more earn a living producing goods and services for the feds, not counting state and local workers paid with federal dollars. State and local governments employ 17 million people. Add it up, and 22 percent of the civilian labor force of 138 million people works for governments. Public sector employees are much more likely to be unionized than are private sector employees: Unions cover 60 percent of the direct federal work force and 38 percent of state and local employees, compared to less than 10 percent of the private sector work force. All told, about 40 percent of the nation's 16.2 million union members are public employees.

Wall Street Journal columnist Paul Gigot notes that "government has become the ultimate special-interest lobby, always arguing for more government and always in apocalyptic terms." The numbers bear him out. In the 1997-98 election cycle, the American Federation of State, County, and Municipal Employees (AFSCME) was number three on the list of PAC contributions, with $2.4 million, all to the Democrats. (Numbers one and two were the realtors and the trial lawyers.) Media references to the role of "unions" in campaigns are largely references to public employees, and under the current laws their power is considerable. Unions can establish PACs to give hard money, and they can use dues for soft money and issue advocacy. In theory, a worker has a right to object and get back the portion of his dues used for politics, but this right has been gutted by administrative and judicial actions.

Unions are also the infantry of elections. They get out the vote, go door-to-door, and stuff envelopes. In this year's New Hampshire primary, more than 2,000 federal employees worked for Al Gore. In New York, union members distributed 1 million Gore fliers at 10,000 workplaces just before the March primary.

Current discussions of "reform" focus primarily on soft money, but many reformers also want to control issue advocacy, since they regard it as unseemly for those with an interest in the outcome of elections to interfere. No one talks of tightening the rules governing voluntary activity.

Access Fees

A fair amount of support for control of soft money comes from businesses. Business gets a load of grief from the media for financing politicians, but from the perspective of the givers the system looks like extortion rather than bribery. They fear that failing to pony up means that telephone calls will be unanswered, submissions unread, and representatives left standing out in the hallway while deals are cut in the conference room. So, they think, why not go with the flow, join the public indignation, and encourage Congress to outlaw soft money?

Incumbents could easily be persuaded because soft money tends to go to the parties themselves, where the leadership can use it as a tool of party discipline. The parties could also use soft money to fund challenges to incumbents of the other party, or even to fund primary challenges to some of their own members. Democratic and Republican incumbents alike can agree on the urgent need to avoid such an outrage. Since a nonincumbent finds it impossible to raise significant hard money, soft money is the only real threat to permanent tenure.

Business people think they would still get to talk to their representatives without soft money, only they would no longer be required to pay for the privilege. They also would avoid endless time spent at fundraisers eating insipid food and listening to even more insipid speeches. But it's a mystery why executives think they would prosper if campaigns were dominated by union (i.e., public employee) volunteers and the Washington media, and if no incumbent ever needed to worry about losing an election, not even the little bit they must worry now. (In 1998, 395 of 401 House members seeking re-election succeeded, a rate of nearly 99 percent.) If soft money contributions were banned, the realities would come home to them after a cycle or two, and the logic of the situation would dictate that the former soft money contributors would start funding more issue advocacy, conducted outside the political party structure.

The federal government is now involved in every area of national life, and people with high stakes in government actions need to communicate about those actions. Those stakes need not be economic: Studies indicate that most campaign contributions are motivated by ideology, not financial interest, and those who think the government should go in a certain direction will wish to make their views known. Why would anyone think that candidates should have a monopoly on communications about themselves and their opponents, to the exclusion of interested outsiders? Only an incumbent could love this idea.

One can be sure that a ban on soft money would soon be followed by an escalation in reformist fire at the terrible "loophole" of issue advocacy, whereby those who care about political issues spend money on them. What many "reformers" really fear is not the power of money but the power of ideas, especially ideas skeptical of government. The true agenda is to suppress these; the corrupting influence of money is simply a convenient rationale.

Web of Regulations

Exhibit A for this conclusion is the reformers' attitude toward the Internet, which is becoming the newest "loophole." Instead of rejoicing that the new medium reduces the costs of communication and thus creates great opportunities to cut the tie between money and political speech, the FEC has tried to use the fact that it costs some money as a jurisdictional hook to limit it.

Four years ago, CompuServe wanted to create an "Election Connection '96" that would have offered free Web sites to all candidates. No, the FEC said; that would be an illegal corporate contribution.

In 1998 a Connecticut man named Leo Smith put up a Web site advocating the election of one candidate and the defeat of another in a congressional race. He argued this was not an expenditure because his marginal cost was zero. No, said the FEC; because the Web site was of value to the candidate, it counted as an expenditure and was subject to regulation.

A year later, the FEC was presented with a Web site called DNET (Democracy Net) designed by the League of Women Voters and another nonprofit entity to provide comprehensive information on elections. It decided this was not an expenditure and was therefore OK. But the commission did not simply repudiate its CompuServe opinion. Instead, it noted that it had considered a number of factors, and that "although all of these factors are relevant, different facts with respect to a particular factor may or may not lead to a conclusion that a website's activities are permissible." In other words, the FEC reserves the right to do whatever it pleases, without explanation.

The story does not end there, because the nonprofits then sold DNET for $30 million to a commercial operation, which is running it as grassroots.com, where it does many things that CompuServe and Leo Smith were forbidden to do. This has triggered a formal complaint to the FEC from the conservative National Legal and Policy Center, which wants to make sure the FEC does not give breaks to the politically correct that are not available to all.

In the meantime, the FEC, faced with a deluge of requests for clarification of its Internet policies, has punted. In December 1999 it issued a request for comment on all aspects of Internet use in campaigns. It received more than 1,200 responses (all of which can be read at www.fec.gov/internet.html) and is now digesting them. The word on the street is that the commission has no intention of doing anything before November, so everyone is left to speculate about what rules apply and what risks they face if they run afoul of what the FEC decides in the future. With any luck, the pressures of the Internet will trigger the demise of the whole system by making the FEC's efforts to micromanage political speech patently impossible.

Real Reform

"That's not a bug," the computer joke goes, "it's a feature." So it is with campaign finance regulation. The loopholes are the only good part of the system. Instead of fretting about how to close them, we should be figuring out how we ever went down such a ridiculous path in the first place, and about how to inoculate the body politic against future folly.

The core idea that too much is spent on elections is downright silly. In 1995-96, federal elections cost about $11 per potential voter. The federal government that year spent about $1.7 trillion, which is about $8,600 per voter; indirectly allocated huge additional chunks of resources; and affected people's well-being in all sorts of other, noneconomic ways. And we are supposed to be appalled that educating the citizenry about the people we put in charge of these activities costs $11 per voter? Clearly, the problem is the reverse: There is gross underinvestment in political information, a problem exacerbated by the reform laws.

Equally wrong-headed is the idea that most campaign contributions are motivated by a desire for favors. There is a real, though limited, problem with federal corporate welfare payments and associated unsavoriness, but on big issues contributions do not matter much. Business cannot buy votes on Social Security, or defense, or the minimum wage. Bradley A. Smith, a law professor at Capital University in Ohio and a shrewd scholar of the process, wrote in 1996: "Those who have studied voting patterns…are almost unanimous in finding that campaign contributions affect very few votes in the legislature. The primary factors in determining a legislator's votes are party affiliation, ideology, and constituent views and needs. That has been reflected in study after study over the past 20 years….Donors contribute to candidates believed to favor their positions, not the other way round." (Smith, whose skepticism about current regulations scares the so-called reformers, was confirmed as a member of the FEC in May.)

The final rationale trotted out by the reformers is the "appearance of corruption." Even if the system is not really corrupt, people think it's corrupt, so the government (i.e. incumbents) should regulate it to avoid this appearance. Unfortunately, the Supreme Court has been sympathetic to this nonsense, which is odd because in every other area of First Amendment jurisprudence such arguments get the summary rejection they deserve.

A real program of campaign finance reform would start from the premise that the First Amendment is not, as the reformers seem to believe, a loophole. The First Amendment, as applied to electoral campaigns, is an indispensable element of representative government. The only real reform needed is to expand the loopholes, not end them. Contribution limits should be removed, even for corporations and unions, and the only requirement should be full and immediate disclosure over the Internet.

There can be First Amendment objections to disclosure, since anonymity is sometimes important. But contribution sources are important pieces of information for voters to get, disclosure is necessary for public acceptance of radical change, and it is a reasonable price to get rid of the present system. Beyond the disclosure requirement, let it rip. The more money spent, the better. The more voices, the better. The more that citizens feel they can participate and be heard, the better. The less governments try to control advocacy, the better.

It won't be pretty. There will be lots of abuses, problems, and outrages. But, as Winston Churchill said of democracy itself, this approach to campaign finance has one irrefutable argument in its favor: All the other systems are worse.

Contributing Editor James V. DeLong ([e-mail]) is a senior fellow at the Competitive Enterprise Institute.