The economics of campaign finance

So you're an applied social science student and are interested in advocating for issues you believe in, but you want a high paying job?  Here's a career path for you:  Political consulting.

One of the stories that comes out towards the end or shortly after every campaign season is always about the amount of spending done leading up to the election.  (See a really good summary graphic from the NY Times here, or a more detailed set of facts from a watchdog group on campaign spending here)

This was the first true post-Citizen's United election season and the result is an estimated $6 Billion spent on elections in the U.S. this year.  Where does that money go? (and how can you pocket a chunk of that sweet, sweet cash for yourself? you might be asking)

There are some interesting economic and game theoretic issues at play here.  One of them is what we call a "Principal/Agent Problem."  This occurs in any situation where you have an expert you hire to do something on your behalf, particularly when they know more about what needs to be done than you do (other examples are doctors, lawyers, car mechanics, and yes, college professors).  In this situation, the political consultant is the "Agent" and the candidate is the "Principal."  The problem arises when the interests of the two are not perfectly aligned.  What you may not know about political consulting is that very often the consultants / campaign managers (particularly the "media consultants") are not paid a flat fee for their services - instead they are paid a commission on all the ad buys they make on behalf of the campaign.  So, if you're hired by the Romney or Obama campaign and you go out and buy 5 minutes of ad time during prime time hours on CBS, the campaign pays several million dollars for that ad time.  And you, the campaign media consultant who is in charge of running those ads, get to keep 10-15% of those millions of dollars as a commission.  As you can imagine, this leads to a bit of a conflict of interest - you, as the consultant are going to try to argue that you should spend as much as possible on ads - partly because you think it's a good idea and you want to help the candidate win, and partly because you want to get more commission money. 

What does all this mean?  Of that $6 Billion dollars, 10-15% went in commission money to the political consultants and consulting firms  (for the mathematically challenged, that's $600-900 Million).  Now, consultants hired directly by the campaigns have to disclose these payments to the federal election commission.   Here's a list of the top consultant fees for these consulting strategists from the FEC as of June this summer (before the election spending even really kicked in for its final push):

However, the Super-PACs don't have to disclose any of this, so there is a CRAZY amount of cash flowing from the PACs (see this NY Times summary graphic of which PAC's spent what this year) and as a result of Citizen's United there is a new gold rush of consulting jobs as each new Super-PAC needs to hire its own people to handle the ads.  (An interesting article from this summer on this topic here)
 
So, the Principal/Agent issue suggests consultants will likely push for higher-than-necessary spending.  There's another game-theoretic economic issue that also pushes in this direction.  A Prisoner's Dilemma problem.  Suppose for the sake of argument that issues don't matter and the winner of the election will be the one who spends the most money.  (I know this is an over-generalization and all the money in the world won't save you if you make some crazy comment about "legitimate rape" or word gets out about your secret habit of being a serial killer [that's in there just for you Nicole Ries!], but just for the sake of argument follow along with me on this thought experiment).  If there are two (or more) candidates in the election and the one who spends the most wins, what's the equilibrium strategy for a candidate's optimal amount of spending?  Every.Dime.They.Have. 

If you spend $1, then my best strategy is to spend $2 if I want to win.  And if I spend $2, you have to spend $3.  And this race never stops until one of us runs out of money.  And so we'll even keep trying to raise money until the last second before the polls close.  If you were going to end up spending more than me at the end of the campaign, then the final outcome is exactly the same as it would have been if we'd just agreed to stop after the first dollar.   Every cent we spent after that was a total waste.  Yet, strategically we had no choice but to keep spending because if one person stopped before they were totally cashed out, the other could outspend them and win. This is why as a nation, we would do well to have major campaign finance reform, saving candidates from themselves, and not wasting money on redundant ads, flyers, mailings, phone calls, etc.  But the combined two headed monster of principal/agent issues and a strategic equilibrium death spiral of spending makes this difficult to agree to if you think there's some probability that you will win the spending game at the end of the day. 

Depressing, I know.  On the plus-side, not all the spending is wasteful, and there is some benefit to helping people become more informed about the issues and candidates so that they are able to better match their vote to the candidate that best matches their views.  (Shameless plug:  For a discussion of matching models, see my earlier post on this year's Nobel Prize winners who studied that very thing!)  Or at least there would be if any of the ads told the truth.  (Second shameless plug: for more on signalling, truth telling, matching, strategy, and general awesomeness, sign up for Game Theory Econ 360 next fall)

Moral of the story - work hard in your research methods classes so you understand how to do interviews, surveys, focus groups, and especially quantitative data analysis and interpretation, and you could be the next James Carville or Bruno Gianelli!