Kill the Golden Goose

In an otherwise agreeable post on the problems with campaign finance reform, Matthew Yglesias (partially) misses the boat:

What I'd like to see are measures that would reduce the demand for campaign money by providing generous public financing and free airtime and such.

It is not at all clear that this would even accomplish the stated goal of reducing the demand for campaign money. If we look at political advertising in the same way economists often look at commercial advertising, we might treat this as a Prisoner's Dillemma.

There are essentially two reasons firms - or in this case, politicians - advertise. First, consumers might not know about the product and the advertising acts as a form of education. In the same way, potential voters might not be motivated enough to go to the polls without "get out the vote" type advertisements. Second, and more importantly in this case, people who already consume a different brand of the same product may switch brands because of advertising. Swing voters who would have otherwise voted for Gore will vote for Bush instead after viewing his snazzy TV commercials.

When advertising's main effect is brand switching, the dominant strategy for each individual politician is to advertise heavily in order to counteract the advertising of his or her opponent. But this spending is simply rent-seeking: a deadweight loss for both parties. Both politicians would be better off if neither spent money on advertising in an attempt to pull voters away from his or her opponent, as each advertising dollar spent by Bush is countered by an advertising dollar spent by Gore.

If this is the case, the way to reduce demand for campaign contributions is not "providing generous public financing and free airtime and such," because one politician's financing and airtime will simply cancel out the other's, and each will still have an incentive to spend even more. Instead, we should look at the source for this demand: why do politicians spend so much money in the first place?

As David Friedman and other economists have noted, what is surprising is not how much money politicians spend on political campaigns, but how little. Considering that government spending is well over $1 trillion, while total campaign spending is a little over $1 billion, this seems like a damn good deal. I would certainly spend $1 to gain control of $1000.

The solution, then, is clear. If you wish to reduce the amount of money candidates spend on political campaigns, you must first reduce the amount of money politicians get to play with once they win those campaigns.

Share this

to a certain extent I

to a certain extent I believe the Campaign Finance issue is really just a Voter Beware problem. The fact that folks are easily swayed by TV commercials is the reason why this country has the annoying electoral college to begin with.

In either case, I would like to see political commercials banned and the only thing shown are public debates and personal interviews. I'm sure Libertarians are twitching at the thought of restricting a free-market in the world of advertising but I think it can be justified somehow by the fact that the men and women are pursing public office and not selling a product or service for profit.

You write: "...the dominant

You write: "...the dominant strategy for each individual politician is to advertise heavily in order to counteract the advertising of his or her opponent. But this spending is simply rent-seeking: a deadweight loss for both parties."

Be careful what you label "rent seeking" and "deadweight loss". Remember all market transactions occur because they increase the wealth of participants. A politician values a television ad more than the money it takes to buy it, and the ad agency values the money more than the ad. That's a wealth-generating transaction. By calling it "rent seeking" you're introducing your own value judgments about what kinds of transations are appropriate or not. And by calling it a "deadweight loss", well, I don't think that's quite right. To whom is it a deadweight loss? The ad agency? The candidate? The candidates donors -- who often donate specifically so a candidate will run ads? I don't know. Maybe from some collectivist perspective where there is a "social pie" of wealth and we all agree how it should be used, it's deadweight loss, but not otherwise.

I'm convinced we already have a term in economics that describes most "rent seeking" behavior: profit maximization. What's called rent seeking is just a subset of this, and isn't fundamentally different. After all, lots of "rent seeking" takes place entirely in the private sector: firms paying lawyers to engage in sham litigation to harm competitors, for example. That transaction between the firm and lawyers is a voluntary one, and we should expect it increases total wealth, not decreases it. The only sense in which it's a deadweight loss is that some people morally disapprove of the activity. And while that's a letigimate topic of debate, it's very bad economics.

I think the last line is the

I think the last line is the most important. If all that mud slining campaing stuff offends you, reduce the need for it. Reduce the amout of power the politicians have, and there will be less of a need for these ads.

Spoonie, If you remember my

Spoonie,

If you remember my recent post on plastic advertising, that is an example of advertising not to sell a product (at least directly), but to change the negative image of plastics caused by environmentalist political campaigns. Should this form of advertising be banned as well?

What about organizations like the ACLU, the NRA, and PETA? They all spend money advertising on billboards, in magazines, and on television, and none of them are selling products; they are trying to influence the political process. The recent Nike case is a prime example of the difficulty in distinguishing between political speech and commercial speech. (Interestingly, commercial speech receives less protection than commercial speech in that context.)

Is this really the road you want to go down? Do you really want to grant the government the power to create content-based restrictions on acceptable speech?

Andrew,

It is a dead-weight loss because both participants would be better off if neither spent money trying to out-do the other. Think about it in the context of your recent blog post on window blinds: both you and your neighbor could progessively get up 1 hour earlier each day in order to out-do each other, but at a certain point, both of your schedules are screwed up. You would both be better off if neither of you bothered to try to out-do the other, as each one of you is canceling out the efforts of the other.

This has nothing to do with making value judgements other than assuming that each politicians' dollar is valuable to them. They spend it because they are stuck in a game of chicken, but both would be wealthier if they agreed not to compete in this way.

After all, lots of "rent seeking" takes place entirely in the private sector: firms paying lawyers to engage in sham litigation to harm competitors, for example. That transaction between the firm and lawyers is a voluntary one, and we should expect it increases total wealth, not decreases it. The only sense in which it's a deadweight loss is that some people morally disapprove of the activity.

I don't morally disapprove of political advertising; in fact, I find it very entertaining. And I don't see any reason why I should assume that these kinds of interactions increase total wealth just because they are voluntary. I may voluntarily higher a lawyer to defend me against a frivolous lawsuit, but I never asked my competitor to sue me.

Or, consider this hypothetical case. Firm A sues firm B, not because A has a legitimate complaint against B, but because A knows that the lawsuit will hurt the reputation of B and because A can afford an expensive trial while B cannot. A is essentially trying to run B out of business through the legal process rather than through the market process. If B goes out of business, A may be better off, but B is not, and neither are the consumers, who now face higher prices as a result of less competition.

This example containts no initiation of force (as long as we assume that frivolous lawsuits do not count as force), yet it is clear to most observers that this makes society worse off.

You write that both my

You write that both my neighbor and I would be better off if we both stoped competing with our blinds. In some sense that's true. But that doesn't mean it's a deadweight loss.

Deadweight loss works like this: You begin with an "ideal" market outcome (one that maximized consumer and producer surplus). Then you allow some distortion to take place. Then you measure the drop in total surplus caused by the distortion. In the blinds situation, what is the "ideal" market outcome you'd begin with, where there isn't the stratigic interaction I describe? I can't even conceive of it. There would have to be zero transaction costs and no bounds on rationality and maybe more. That's an ideal that doesn't exist. Our strategic blinds game is a fundamental part of the world. By saying our energy expended to win is a deadweight loss is comparing an impossible ideal with the actual situation. Which I don't think makes sense, and is something Ronald Coase used to call "blackboard economics."

Besides, a crucial feature of deadweight losses are that they aren't transfers, but are losses that go to no one. Campaign spending clearly makes ad agencies and media outlets better off, so that definition doesn't fit.

Also you write: "[Candidates] spend [money on ads] because they are stuck in a game of chicken, but both would be wealthier if they agreed not to compete in this way."

But are Nike and Reebok locked into a "game of chicken" and would be better off if they didn't advertise?

My basic objection here is that when you call campaign advertising a deadweight loss, you're saying it represents a deviation from some market ideal. But that market ideal, whatever it might be, is not an option. Besides, the advertising expenses are transfers, not total losses. It's kind of a technical point, but it seems important to me.

(This is a great blog, by the way. Thanks!)

I agree that deadweight loss

I agree that deadweight loss may not be the best term to use in this situation. However, wouldn't you agree that neither candidate gains anything by spending money on political advertisements insofar as those advertisements are intended to induce voters to "switch brands"? Each candidate's advertising dollars are simply canceled by his or her opponent's dollars.

And while it is true that ad agencies and media outlets are better off, is this any different than the broken window fallacy? Window repair companies are better off, but the store owner is worse off now that he has to spend money on fixing a broken window rather than buying a new suit, or some other such good.

But are Nike and Reebok locked into a "game of chicken" and would be better off if they didn't advertise?

In a certain sense, yes, they would both be better off if they didn't advertise as much. We must be careful to separate the first kind of advertising - that which increases consumer preferences for the product overall - from the second kind of advertising - that which simply induces consumers to switch brands. Nike and Reebok would both be better off if they could avoid trying to cancel each other's spending.

So again, I think you may be right about my improper usage of the term deadweight loss, but I think the rent-seeking argument is still valid.

I'm glad you enjoy the blog; I enjoy yours as well, especially your most recent post.