As the United States presidential race’s Democratic primary ramps up for the Iowa Caucuses, much of the campaign talk has been about how much money the candidates have spent. Some are asking whether billionaires such as Tom Steyer and Michael Bloomberg should be able to use their wealth to buy their way into the race. On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales break down the economics of money in politics.
Kate: We’re in the throes of the Democratic primary, and everyone’s talking about how much money is in politics.
Speaker 2: 2019 was a year of dramatic changes and new trends in campaign finance.
Kate: What’s interesting is that I don’t actually see that many political ads. Or, at least I used to not see that many political ads. And so, this idea that there’s all this money in politics didn’t really resonate with me until around November, when Bloomberg jumped into the race, and all of a sudden, the ads for shoes and hair stuff and makeup that I used to see all got replaced by ads for Mike Bloomberg. And I was like, “Oh, OK, now I understand what a billionaire can really do if he wants to make a dent.”
Speaker 3: In the race for the White House, it’s the billionaire candidates who are overwhelmingly spending the most on political ads. Tom Steyer and Michael Bloomberg are leading the way—
Luigi: Generally, I don’t watch ads for shoes. And, as I said, I don’t get even the ones for Bloomberg. I feel I may live in a bubble, because I don’t watch TV. I only use Twitter. And Twitter has banned political ads. In fact, you know that when we were trying to promote our podcast on Twitter, it was blocked for a day or two because it was considered a political ad. So, they’re very strict.
Kate: Yeah. We explicitly try not to be overly political. Which is a little bit ironic.
Luigi: Yeah. But that suggests that Twitter has a very, very tight system, and it seems to be screening out every political ad. And, as a result, I’m isolated from the Bloomberg campaign.
Kate: That’s actually sort of a nice existence. I’m kind of jealous.
Luigi: But you don’t know what the latest kinds of shoes are. So, you’re missing out, I would imagine.
Kate: Yeah. That’s true.
Luigi: The entry of Bloomberg in the political campaign is really changing the game, at least from a financial point of view. It’s putting so much money into the game, we’re starting to wonder, can you buy your way into the presidency?
Kate: From Georgetown University, this is Kate Waldock.
Luigi: And from the University of Chicago, this is Luigi Zingales.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And, most importantly, what isn’t.
Actually, we’re talking about politics today, we’re talking about how capitalism can impact politics. And we’re talking about the big, big question of money in politics. So, the cost of a presidential race is overall north of $2 billion. If you add the cost of all the congressional and Senate races, they are another $4 billion. So, the total cost of an election in a year like 2016 is north of $6 billion. That seems like an enormous amount of money, doesn’t it?
Kate: Yeah, that’s a lot of billions.
Luigi: However, I think it’s useful to put it in context, because it’s true that this is a lot of money. But last year, AT&T spent $5.4 billion on ads.
Luigi: So, do you think it is more important what cell phone you use or what president you’re going to elect?
Kate: Probably both. But maybe the president.
Luigi: I like your preferences. They’re really well aligned.
Kate: As a relatively young person, when I think about money in politics, the first thing that comes to mind is Citizens United. Citizens United, as you’ve probably heard, was a Supreme Court case that came down in 2010. And it extended the right of free speech under the First Amendment to corporations.
Now, I just assumed that the problem with Citizens United is that it made corporations people under the law. That’s not exactly what happened. Before Citizens, there was the McCain-Feingold Act, which made it illegal for corporations to make independent expenditures for electioneering communications.
And that’s basically spending money on ads on TV or on the radio. What Citizens United did was that it struck down this limitation on corporate spending on electioneering communications. Now, is that really the same thing as making corporations people? I argue that this idea is not really consistent with a real problem of citizens. So, imagine two scenarios, one in which Johnson & Johnson wants to donate a million dollars to, I don’t know, some political candidate. Luigi, give me a candidate.
Luigi: Donald Trump.
Kate: OK. So, let’s say Johnson & Johnson wants to donate a million dollars to Trump. And let’s say, alternatively, that Johnson & Johnson wants to directly pay for ads that tell people to vote for Trump. In the first case, there are other laws from the Federal Election Commission that say that corporations can’t contribute directly to candidates. And Citizens didn’t change that.
And, in the second case, Johnson & Johnson airing ads directly for Trump, corporations are extremely wary about attaching their names to specific candidates or specific political ideologies, because there are always consumers that have differing views on the political spectrum. And so, they don’t necessarily want to alienate those consumers. And so, when it comes to directly airing ads, I don’t think that Citizens had a huge impact on the way that corporations spend money.
Luigi: Yes, you’re right. In fact, Walt Disney always said Mickey Mouse is not a Democrat, he is not a Republican, Mickey Mouse is just American. And so, they don’t want to be identified with one side or the other. They certainly want to be identified with, “We want to extend the trademark of Mickey Mouse as long as possible. And we’ll give money to any candidate who support this position.” But they don’t want to distinguish between Republican and Democrat.
Kate: So, the impact of Citizens United was not necessarily to suddenly flip the switch and allow corporations to be people. But it did have a profound effect on super PACs, not only super PACs, but these other groups that are maybe even more concerning, dark money groups. The reason that it made it harder for them to regulate is because Citizens fundamentally changed the definition of corruption.
So, this is an idea that’s been championed by the dean of Yale Law School, Heather Gerken. And she argues that the most important line of Citizens is actually that ingratiation and access are not corruption. Before Citizens, the Supreme Court, as well as other lower courts, had slowly been expanding the definition of corruption. And that came to an abrupt end with Citizens.
Luigi: And they can raise as much money as they want to put out as many ads as they want in favor of their candidates, as long as they don’t coordinate explicitly with a candidate. Now, many super PACs tend to be located on the floors above and below the headquarters of the very campaign they support. So, the idea that there is no coordination is really a figment of the imagination. And here the Federal Election Commission that is supposed to actually regulate and enforce these rules is completely asleep. I think that, if I may summarize a bit brutally what you’re saying, the bottom line is we’re still screwed, in a sense that anything is possible in fundraising—
Kate: No, we’re more screwed.
Luigi: —And the money’s flowing in large quantities. But I want to start with a provocative statement: I don’t think that there is necessarily too much money into politics. Democracy is expensive. Companies spend $5 billion to try to make you decide whether to use one cell phone versus the other. I’m not so sure whether spending $6 billion to choose who runs you is such a terrible way to spend money. Imagine the kind of mistakes you can make, and no reference to any all the current elected people, but imagine the kind of mistakes that people can make as a president, as a head of the House, as Speaker of the House, you can have a dramatic impact on the performance of the US economy.
Saying that we spend $6 billion every four years to make sure that things are run properly, it doesn’t strike me as a terrible number. What I’m more concerned about is that this doesn’t seem to be well spent, at least if you look a bit at the outcome. And, second, it seems also that it produces a lot of distortions in who runs for office and so on and so forth.
Kate: I think that that’s true. But there should also be a level playing field in terms of which side is spending more or less money than the other influencing elections. And also, which side is subject to more or less disclosure. If we made a law that said, “Democrats don’t have to disclose any of their political contributions, but Republicans do,” I think everyone would agree that that would be unfair and absurd. And yet we have loopholes in our political disclosure law that effectively allow that to be true. In our current environment, the biggest loophole has to do with these dark money pools.
If you register as a certain type of nonprofit, what’s called a social welfare organization or a trade association, and as long as you claim that your primary purpose isn’t solely electioneering communication, then you can essentially spend as much as you want. And they also don’t need to disclose who they’re raising money from or what exactly they’re spending it on. There are now these huge dark money pools. They are spending many, many millions, if not billions, on our elections, and they’re unduly influenced by conservatives. So, in effect, it is one party that’s exploiting rules more than another. And I think that that’s unfair.
Luigi: So, on disclosure, you cannot find somebody who agrees with you more than me. I’m always in favor of disclosure, that sunlight is the best disinfectant, as Louis Brandeis used to say. So, I am 100 percent with you on that.
Now, you seem to be a bit biased in this description, because recently we learned that, you know who uses a nonprofit institution to fund his campaign, nothing short of Bernie Sanders with Our Revolution—
Kate: Hold on.
Luigi: —a non-for-profit political organization that funds—
Kate: I don’t think that he . . . He does not support those contributions. I think that they exist outside of his control. And there’s nothing he can legally do to shut them down. But I don’t think that he has endorsed them.
Luigi: I’m sure that Hillary Clinton said the same about the PAC that she was not controlling, and I think that that’s part of the problem.
But let’s look a bit at the economic literature, because many years ago, a very eccentric economist called Gordon Tullock had this idea that actually there is too little money in politics. So, the idea is, consider a lottery, it must be that the prize of the lottery must be no bigger than the price of buying all the tickets. Why? Because if you buy all the tickets, you’re sure to win the lottery, right?
So, think about an election as a lottery, and think about the money as lottery tickets. The total price of all the lottery tickets is the cost of an election cycle. So, we just said that this is roughly on the order of $6 billion. Now, what is the prize? Imagine that you are Bloomberg, you spend $6 billion dollars, and not only do you get elected president, but you elect all your buddies in Congress and all your buddies in the Senate.
Luigi: So, you do, like, an enchilada, you control the entire federal government, let’s say for two years, because after two years you have to run a new congressional election. We know that the federal budget is roughly $4.4 trillion a year. But a lot of it is nondiscretionary. So, let’s say that you play around just with discretionary stuff, it’s still $1.3 trillion. Over two years, there is $2.6 trillion you can play around with, completely at your own discretion, because remember, you own the government. OK?
Luigi: So, you’re paying $6 billion to get ahold of $2.6 trillion. That’s a phenomenal investment. Now, you might say, “Oh, wait a minute. Even if you are a very kleptocratic precedent, you cannot steal $2.6 trillion.” But let’s say that you get 20 percent. You still get $520 billion over two years for an investment of $6 billion. This seems like a phenomenal investment. And the question is, why don’t more people invest in this activity?
Kate: I don’t think people have been able to see my eyes rolling throughout that little empirical, or I guess theoretical, exercise. But you can’t assume that the election cycle is a lottery, right? The election cycle might be random in the sense that we don’t really know who’s going to win, but it’s not a lottery in the sense that you can’t just, as a billionaire, spend the total amount of money that’s in the system and then be guaranteed to win. I think Bloomberg is a good example of that. He’s already spent how much?
Luigi: I think we’re going to test this, this particular election, to see whether that’s the case. But I agree with you. But let’s assume for a second that if you outspend everybody else by some margin, you win. OK? I think that that’s—
Kate: I just don’t think that’s an assumption that you can make. And, if anything, Donald Trump eventually did start spending money. But his meteoric rise within the Republican Party was not a result of him spending much money at all initially.
Luigi: That’s absolutely true. So, people don’t vote because they’ve been advertised to, they vote for him because they love him.
Kate: I hate to admit it, but yeah. I think that initially there was an element of truth to that. I think that the issue is that you can’t ever distill an election down to something like a simple lottery. The way that money is spent and the way that people are influenced by money is very complex. And you can easily overspend and turn people off.
Luigi: So, two things. Number one, I think that the power of the argument of Gordon Tullock is shown in the fact you are here now defending that actually money does not matter so much for politics. I thought that was your whole concern at the beginning of the podcast, and now you already turned around and said, “Actually, ideology matters. People are much more deep than that.” So, I think that Gordon Tullock has already won once. OK? Then the second—
Kate: No, no, no, no. Hold on. I think that you’re putting words in my mouth, because saying that whether you can reduce an election down to a simple lottery and arguing against that is not the same as saying that money doesn’t influence politics. I’m just saying that money influences politics in a complicated way. And so, therefore, it’s never going to be a straight arbitrage opportunity.
Luigi: That’s absolutely true. But in a sense, you are saying, and I agree with you, and I think it is actually good, that money’s not everything. We’re going to put this to a test with Bloomberg’s candidacy. But I think that we saw last electoral cycle, as you said, Jeb Bush started with much more money than Donald Trump, and he ended up nowhere. So, the great thing about elections is that money cannot buy them all. However, the point that Gordon Tullock was making, and which is still valid to some extent, is that we understand why there is so much pressure to escalate the stakes, because the stakes are so high.
If you can control—and here I talk only about money, I’ve not talked about things that are much more important than money, like your freedom, the right to abortion, the right to gay marriage, all this stuff has not even factored into the calculation. The stakes are incredibly high. And the incentives to put more money into this game are very large. And I think, actually, that’s the reason why I’m in favor of some form of limitation in campaign financing, because that can escalate to an arms race to no benefit.
Gordon Tullock himself showed that, while in principle, there should be no possibility that the cost of the lottery is less than the prize that you seek, it’s very possibly the other way around. These people outspend each other in order to win for the same reason why, in the United States, there is a salary cap in basketball, for example. There should be a limit to campaign financing, because why is there a salary cap in basketball? Because you don’t want one guy to hire all the best players and it’s no fun watching the games, right? Because if one team has all the best players and wins all the time, end of the story. So, you want the two—
Kate: And I would argue that it’s never fun, but that’s just me.
Luigi: It depends on which game you watch. But you want more balance, as you want more balance in the political system. So, I’m very much in favor of some limitations in campaign expenditures. But that’s something that I don’t think that even my grandchildren will see in America, because with the current constitutional point of view, I don’t think that I don’t have any hope of that.
Kate: Well, there are limits on how much hard money you can contribute to campaigns, right? If I want to directly give money to Joe Biden or Donald Trump even, or if a corporation wants to give money directly to Joe Biden or Donald Trump, there are severe limits on how much they can do that. And that’s because of campaign finance reform. However, those hard limits have spawned this entire complicated, convoluted system of all these different conduits that are constantly evolving, right? It used to be 527s and then they turned into super PACs, and now they’ve turned into dark pools, and 501(c)4s. And I just can’t keep track.
I don’t think anyone can keep track of what the conduits are. And what this has done is that now we have limits on direct spending by campaigns, but there are no limits on indirect spending outside of the campaign on political ads. And we haven’t been able to successfully rein them in. And so, this creates a weird dual system in which the actual candidate, him- or herself, can’t have too much influence on what these indirect forms of spending do. You argue that they do, and I agree with you to some extent, but at least the law says that the campaigns are not supposed to be coordinating with these independent organizations. But then all the power is taken away from the candidates and put into hands of billionaire donors, who have political views and who are operating on behalf of candidates, but really in their own way. And so, yes, we should have campaign-finance reform, but we shouldn’t necessarily have campaign-finance reform that applies only to the candidates, but not to anyone else who wants to spend on campaigns.
Luigi: I agree. But I think you said limits to direct spending, I think it is a limit to direct contributions. Because in the United States there are limits to contributions, but there are not limits to spending. And this is an important distinction.
Luigi: Because if you are Bloomberg, you don’t get any contribution. And, as a result, you have no limit in spending. And I think that what we should . . . The problem of campaign expenditures is twofold. One is the corruption that can come from receiving the donation. But the other is the unequal balance that you start with. So, if you are Bloomberg, Bloomberg might be a great president, but he starts at an enormous advantage vis-a-vis all the other candidates because he has so much money. And we don’t necessarily want a country where the president is elected based on how much money he has to spend and not on the quality he has to run the country. And so, I’m also in favor of limits on expenditures so that people actually are on equal footing, or more equal footing. I don’t think that you want complete equality everywhere, but I think that the imbalance we have today is worrisome to me.
Kate: I think that that’s a great proposal. And to the extent that you can, I think that those expenditure limits should apply not only to the direct candidates, but also any “independent” organizations that are spending on their behalf.
Luigi: Yeah. Especially close to the election, where it says, “If you want to campaign for legalizing marijuana outside of the election period, that’s perfectly fine.” But if you are campaigning for a candidate or for a person near the election, it has the potential risk of being very distortive. One other thing I learned is not only the amount of money that is spent, but also the amount of money that could be spent. So, we focus all the time on presidential elections because they attract the attention of everybody. But I think that actually the presidential elections are fairly fair, in the sense that they get so much visibility that it is much more difficult to pull tricks.
But if I am a congressman or congresswoman in the middle of the country, I don’t get to raise an enormous amount of money, but I live in fear that all of a sudden some super PAC will a drop a million dollars to my opponent in the last two weeks of the election and take away my seat in the last two weeks. And because there are not very many people that can drop that kind of money in the last two weeks, I have to be very careful of antagonizing some vested interest, because those vested interests are the ones that can actually get me out of my job at the last minute. And the perverse beauty of this system is that there is no trace left. Nobody spends any money. It’s just a threat of spending that kind of money that fast that makes me behave differently as a congressman.
Kate: Yeah. I think you’re right about the threat point. An interesting loophole that super PACs exploit that has to do with timing relative to the elections is that super PACs are supposed to disclose more as the election ramps up. But if you only spend money within the few days before the election, then you don’t have to disclose who your sponsors are until after the election. There’s this proximity loophole. And so, super PACs can and do exploit that, so that they don’t actually have to reveal who’s giving them the money.
Luigi: So, our producer told us that his wife is very concerned about money in politics. However, she decided not to donate to her favorite candidate, because she thinks that at the end of the day nothing will change, that her $100 will not make a difference. Our producer was very upset, because he thinks that this is an irrational way to behave. And we’re trying to convince him that his wife actually is very rational in the sense of being individually rational. She does what is optimal from her point of view, which is, whether I donate $100 or do not donate $100, nothing will change. But I will end up adding $100 more to actually make a nice birthday present for our producer.
So, she is super rational from the individual point of view. Of course, collectively, that’s the wrong decision. But that’s part of the problem with campaign financing. If I am a very wealthy donor, I know that my million dollars will have an impact, and I’m willing to make that donation. Even if we keep things in proportion and you donate the same fraction of your wealth that that wealthy donor donates, you are not willing to do it, because of what we economists called the free-rider problem and now we’re going to call Matt’s wife’s problem.
Kate: Exactly. And an interesting part of this election is seeing how all of these frictions, these economic frictions, play out. I think that Bernie Sanders has done a really good job of doing away with that free-rider problem for his campaign. Because, first of all, he has made it very clear that he doesn’t want to accept donations from billionaires, and so that makes the individual donors feel like they do have more individual influence, even if it’s with a relatively small gift, because they’re not up against a billionaire who has a gift that’s 1,000, 2,000 times bigger.
But on top of that, I think what Bernie has done successfully is that he’s made donations to his campaign less about the dollar influence on his electability and more about this signal of what it means just to have a large number of donors. I think that in November he announced that he had something like four million individual donors, and we know now from the early January stats that he has raised a huge sum of money. And so, he’s made the donations less about the dollar value and more about the signaling effect. And I think that that has ironically been incredibly successful in terms of raising a large dollar value.
Luigi: Yeah. I think it’s extremely good marketing techniques. We should tell AT&T to hire Bernie Sanders as a marketing guy. One of the consequences that people often don’t see, but I think is very important, of this huge influx of money into politics, particularly in the form of large donations, is the radicalization of the political scenario. If I want to raise money in small quantities from a large set of people, I need to, number one, stay very far away from the contributions of the large companies, and two, really cater to the extreme left or, on the other side, to the extreme right of the political spectrum, where people are more excited and more willing to contribute in small quantities.
The moment I decide to be more moderate, then I have a choice. I can tilt a bit more to the business side and get the donations of Facebook, or Google, and Goldman Sachs. Or I can be a little bit more anti-big-business, and then—unless I’m super radical, and then I play the Bernie Sanders game—I don’t get any money. So that creates, in my view, a hole in the political spectrum, where either you are a centrist, and you are completely in the pocket of business, or you are a super radical like Bernie Sanders, and you are not in the pocket of business, but you’re not necessarily very moderate in your proposals.
Kate: To be fair, I think that some of the other Democratic candidates, even though they have accepted money from billionaires just based on their policies, I don’t think that they’re all in the pocket of big business.
Luigi: Actually, Warren is struggling in this, because that’s my view of why Warren is radicalizing. Because once she cannot get that money, then she had better be like Sanders to the extreme. It’s very hard to be more moderate. Part of some of her proposals that made her lose votes, et cetera, is exactly for that game.
Kate: That’s a very interesting political theory.
Luigi: Yeah. It’s not a problem, in my view, just in the United States of America, it’s also a problem in all Latin America. If you are a centrist, you are basically pro-USA, and you get the support of all the big businesses who are pro-USA. You cannot be just slightly critical of USA and not be a radical, because you don’t get the money that comes with the critics, or with lack of critics. And you’re going to get the support of the extreme radicals. So, at the moment you are not completely pro-big-business, the next day you are Chávez. There’s very little in between.
Kate: I agree with your political theory. I would just make one modification, which is that it’s not necessarily the threat of big business and corporations themselves. I do think that they spend a lot of money on politics. But I think they do it in a more balanced way than most people think. I think it’s actually the billionaires who, for the most part, not all of them, but for the most part, are pro-big-business. And they’re the ones who the political candidates really have to worry about.
Luigi: Yeah. But generally, billionaires tend to have big businesses. Not all big businesses are billionaires, but certainly, in order to be a billionaire, you have to have a big business.
Kate: Exactly. I agree.
Luigi: So, Kate, what do you think, is this capital-is or capitalisn’t?
Kate: Campaign-finance reform, if it worked, would be a capital-is. I think that the way the things have played out have shown that it is a serious capitalisn’t, that has had not only effects that we didn’t expect, but effects that run contrary to the spirit of campaign-finance reform. Which is essentially empowering billionaires, the already very wealthy, and making it harder to observe all of this activity. What about you, Luigi?
Luigi: Actually, Bo Rothstein, a Swedish political scientist, said that in a market economy, you have to have everything for sale except the government itself. And I think that that’s a very deep insight that we want to maintain. We want to have everything for sale except all the offices of the government. And I fear that in the United States, those are for sale, too.