Monday, October 11, 2010

Campaign finance and fungibility

Yesterday, there was an interesting article in the New York Times about campaign finance, quoting President Obama on Republican political advertisements:

“You don’t know,” he said here. “It could be the oil industry, it could be the insurance industry, it could even be foreign-owned corporations. You don’t know because they don’t have to disclose. Now that’s not just a threat to Democrats, that’s a threat to our democracy.”

According to Democrats, this campaign finance issue is a matter of accounting:

The Democratic committee’s spokesman, Hari Sevugan, likewise offered no evidence and suggested it was up to the chamber to disprove the assertions. “Serious questions have been raised,” he said in an e-mail. “If they want to clear this up, they can open up their books.”

The chamber is hardly the only organization playing a role in the campaign that has international affiliations and gets money from foreign institutions. Among others are groups on the political left like the A.F.L.-C.I.O. and the Sierra Club. The law requires them to isolate foreign money from any domestic political activity.

I don't know what to think about the likelihood of foreign money being behind Republican (or Democrat) campaign advertisements, but there is an important economics lesson missing here. That is, it isn't clear that this law is going to be effective at all in keeping foreign influence out of American campaign advertisements, even if everyone abides by the letter of the law.

To see why, consider an example:

Suppose that the Sierra Club needs funds to place two advertisements: One raising awareness about endangered species and the other slandering a Republican candidate for Senate. If the Sierra Club can only pay for one ad, it prefers the endangered species one. Each ad costs $1000 to run.

Now, suppose that there are two donors. A foreign special interest that wants to influence American politics, and a domestic environmentalist that will donate to the Sierra Club regardless of how the funds will be used (because the environmentalist appreciates the Sierra Club's message). Both are willing to give the Sierra Club $1000, but the foreign special interest will only do so if it will lead to the damaging advertisement.

Without this law that keeps foreign and domestic funds separate, it is clear that both will donate and the foreign special interest will buy the damaging advertisement.

What happens with the law? Given the assumptions in the story, the same thing! Even while keeping the foreign funds out of the financing of political ads, the Sierra Club can redirect the foreign funds to pay to raise awareness, freeing up the domestic funds for political slander. It will look like domestic donors are sponsoring the damaging foreign advertisements, but effectively, the foreign funds allowed the Sierra Club to pay for the political ad.

This is the idea of fungibility, and this comes up whenever a significant part of someone's budget is unconditional (this also applies to companies and government entities). As long as there is a "general fund," one part of the budget is easily substitutable for another part of the budget. In this case, it isn't clear that regulating the spending (or designating earmarks) will accomplish anything aside from keeping the accountants at the Sierra Club busy with technical accounting exercises.

No comments:

Post a Comment

Please feel free to share your ideas about this post in the open forum. Be mindful that comments in this blog are moderated. Please keep your comments respectful and on point.