The United States has relaxed campaign finance laws over the past few decades. As a result, there exist concerns about politicians favoring special business interests over the welfare of other constituents, such as workers. In a new paper, Pat Akey, Tania Babina, Greg Buchak, and Ana-Maria Tenekedjieva examine how the 2010 U.S. Supreme Court decision in Citizens United v. Federal Election Commission affected earnings for firms and workers, as well as political turnover and polarization at the state level.

Over the last few decades, the deregulation of United States campaign finance laws has increased election spending dramatically. At the federal level alone, spending quadrupled between 2000 and 2012. 

This rapid rise in election spending has been widely discussed by politicians, academics, and journalists, yet little is known about its overall economic effects. In our new paper with Ana-Maria Tenekedjieva, we study how increased election spending affects the economic outcomes of firms and workers. While on the whole, firms would likely benefit from a greater ability to spend money in elections to help elect officials who will enact business-friendly policies, it is unclear if campaign finance deregulation would benefit or harm workers. 

On one hand, firms may leverage their increased political access to benefit themselves at the expense of other stakeholders, such as workers—a view supported by numerous anecdotes and several firm-level studies and theoretical models. For example, firms may push for weaker union bargaining rights or lower minimum wages. On the other hand, it is possible that increased corporate campaign spending leads to greater political competition and, ultimately, policies that are more growth-oriented and benefit both firms and their employees. After all, campaign finance is only one means by which a corporation  can exert political influence, and arguably one with lower barriers to entry compared to lobbying and political connections. With lower entry costs, firms that were previously politically unengaged may enter the market for political influence. As a result, political competition may increase and lead politicians to cater to a wider set of constituents and enact pro-growth policies. Put simply, increasing campaign spending can grow the metaphorical economic pie rather than simply divide it differently. Perhaps surprisingly, our analysis provides evidence consistent with this second view: increased campaign spending can increase political competition which benefits both firms and their employees.

How Citizens United Helped Both Firms and Workers Through Political Competition

How do we assess whether increased campaign spending grows the overall economic pie or if it only leads to increased corporate profits? Our strategy centers on measuring the effects of Citizens United v. FEC, a 2010 U.S. Supreme Court decision that represented one of the largest changes to election campaign finance rules in the last several decades. In a surprise 5-4 decision, the Court invalidated laws that placed restrictions on corporate spending in elections. In short, the ruling made it easier for corporations to give money to candidates running for political office. Citizens United is often discussed in the context of federal elections, but a lesser known fact is that it also applied to and affects state elections.

Interestingly, Citizens United only affected half of U.S. states, since the rest had no relevant restrictions on corporate giving before the decision. This important institutional difference allows us to compare the economic outcomes of firms and workers in states affected by Citizens United (i.e., states that experienced an increase in corporate access to state elections) and the states unaffected by the ruling.

Our results support the view that allowing more money in politics can benefit both firms and workers: We find that from 2005-2016, total state income (measured either as state-level GDP or adjusted gross income) increased by about 2% in states which removed their restrictions in the years following the decision. These gains accrue primarily to workers: labor income increased by up to 3% in states affected by the ruling. The positive effects reflect both more people being employed and the average salary increasing. We also find positive effects of similar magnitude for capital income, though the noise in the capital income measure we use makes the pattern less stark. Overall, these results suggest that increased corporate election spending increases aggregate economic output and employment and that employees—and likely firm owners and capital providers—share in the gains.

This result is surprising at first blush, but we can trace its context back to existing studies on the political effects of Citizens United. These studies show that the ruling resulted in campaign finance crowding out other methods of political activism, such as lobbying and revolving door connections—firms with a history of political activism, or “political incumbents,” lost value in the ruling aftermath. These findings imply that increased campaign finance lowers the cost of entry into the market for political influence, which can allow small and mid-sized firms to cultivate ties to politicians more easily. Consistent with these results, we find that income growth is concentrated among  younger firms, which are less likely to be politically connected. Additionally, among larger firms, we find that workers benefited the most in firms that were not previously politically connected, experiencing the largest income growth among employees at large firms. 

More generally, we saw that in affected states, political participation through donations increased relative to the states that did not experience a change in campaign finance regulation This increase in giving to political candidates among the affected states reflected a broad set of constituents, including small-money donors, rather than being concentrated in firms or industries that are historically politically active (e.g., real estate or finance). 

We find that the broader political participation of corporations affects who gets elected and bolsters the local business environment. First, political competition increases: we see political turnover intensify in states where Citizens United removed political giving restrictions. Contrary to common perception, these changes are not Republicans taking Democrats’ seats—there were major shifts both across- and within-parties. For states affected by the Citizens United ruling, states with an incumbent Democrat governor had an increased probability of a Republican taking over of 27 percentage points, while states with an incumbent Republican governor had an increased probability of a Democrat being elected of 23 percentage points.

Our paper also shows that legislatures in states affected by Citizens United become less polarized after the ruling. This finding implies that newly elected politicians vote in favor of more centrist policies that are likely to appeal to a broader segment of the voter base. This broad appeal comes in part from the ability of more firms to compete for political influence outside of the traditional channels, namely lobbying and the revolving door. Indeed, we find that once these newcomers are elected, they enact policies that encourage economic growth and a more firm-friendly regulatory environment: there are fewer state-level enforcement actions against violations of labor or consumer protection laws in treated states. More broadly, a composite measure of state-level regulatory burden decreases. In addition to workers monetarily gaining from this new regulatory environment, we find no evidence of workers becoming worse off in any non-monetary dimension , such as increased workplace accidents or reduced health care spending.

Campaign Finance Regulation Moving Forward

What are the important lessons from this analysis? The big question at the heart of our work is which stakeholders benefit from increased campaign finance: labor or capital. Our results highlight that the economic outcomes of political policies are not necessarily zero-sum. Indeed, increased campaign finance can bring a broader set of interests to the table through easier access to political influence, increasing political competition, and electing new politicians who enact broadly beneficial policies.  

However, there are several important caveats. The Citizens United ruling did not occur in a world with zero corporate influence—it merely lowered the cost of one particular form of corporate influence. Therefore, our analysis cannot answer if more money in politics is socially optimal. It is possible, and perhaps likely even, that the best policy is to have a reduced scope for political influence of all forms, including lobbying or hiring via the revolving door. However, in a world where some groups have access to politicians, it might be beneficial to increase the ability of all groups to have access to politicians.

Articles represent the opinions of their writers, not necessarily those of ProMarket, the University of Chicago, the Booth School of Business, or its faculty.