Many Americans are troubled by the country’s ongoing fiscal crisis, which is driven by endless annual budget deficits. These deficits are building up a mountain of gross national debt so large that it will eventually dwarf the country’s GDP. Some place blame for this predicament on a suite of large entitlement programs that are inherently unsustainable. Others blame expensive wars abroad, paid for on the installment plan. And still others blame democracy itself, as a shortsighted public punishes representatives who try to bring tax and spending policies into balance. But they all miss the forest for the trees.

The underlying cause of the U.S. fiscal crisis lies deeper -- in political dysfunction that began when Congress moved to control campaign expenditures through the Federal Election Campaign Act (FECA) of 1971. Much of the law was initially declared unconstitutional for violating the First Amendment, but Congress revised it in 1974, and the revised law governed elections for the following three and a half decades. No longer were candidates free to raise unlimited donations, nor were citizens’ groups free to express their political opinions. In short, organized political discussion and activity were left largely in the hands of the news media and the two leading political parties.

It is no accident that these changes in the rules of American politics coincided with increasing partisan alignment among members of Congress, nor that they coincided with the massive growth of entitlement commitments and fiscal deficits. The changes in campaign finance rules turned American politics into a classic case of monopolistic competition, in which the Democrats and Republicans’ partisan duopoly was protected by government regulation that diminished innovative policy ideas, bipartisanship, and fiscal responsibility. Only the removal of official support for this duopoly can avert continuing U.S. decline. Luckily, such a course correction is already under way, thanks to the Supreme Court’s landmark 2010 decision in Citizens United.

MONOPOLISTIC DEMOCRACY

At first glance, the gap between U.S. tax revenues and federal spending over time is a multitrillion-dollar math problem. But beneath the math problem lies a political problem. As the Bloomberg View columnist Clive Crook wrote in 2011, “The polarization of American politics is the proximate cause [of the ongoing budget deficit]. . . . Lately the ideological center in Congress has thinned, and the distance between the parties has widened. Compromise has come to be seen as surrender -- and the U.S. government has all but come to a halt.”

Americans dream of political leaders who make decisions beyond the narrow boundaries of their group, tribe, or party -- what James Madison called “factions.” The U.S. Constitution does not mention political parties, precisely because it was largely designed to prevent partisanship from overwhelming the country. Yet the existence of parties does not have to lead to poisonous political polarization, and in fact, U.S. parties have not historically been ideologically rigid. Even in recent decades, for example, Democrats and Republicans have often been mixed together on both sides of votes on various issues, including defense, taxation, and trade. Democrats have tended to favor higher government expenditures and taxes, while Republicans generally have preferred free trade, but these have not been absolute positions, and individual legislators have often crossed party lines. In the 1950s and 1960s, only a few legislators identified themselves with the extreme right or the extreme left, and the parties in those years were understood as loose coalitions of a diversity of interests. Indeed, General Dwight Eisenhower was offered the presidential nomination by both the Democrats and the Republicans, a notion almost inconceivable today. Eisenhower’s nonideological attitude was reflective of the times, expressed when he said, “I despise people who go to the gutter on either the right or the left and hurl rocks at those in the center.”

Since 1974, however, overlap in the center of federal politics has melted away. The trends are documented in Thomas Mann and Norman Ornstein’s recent book It’s Even Worse Than It Looks. Using a metric that determines the relative partisan voting patterns of legislators -- the dw-nominate data series, developed initially by the political scientists Keith Poole and Howard Rosenthal -- Mann and Ornstein show that party extremism has increased dramatically since the mid-1970s. The evolution of partisan voting behavior between the 92nd Congress, in 1971–72, and the 112th Congress, in 2011–12, is striking. The ideological distribution of voting patterns within each party resembles a bell curve, with the Democratic bell toward the left side of the spectrum and the Republican curve toward the right side. During the 92nd Congress, the bell curves overlapped by roughly 25 percent -- that is, there were a significant number of Democrats who were more conservative than some Republicans and many Republicans who were more liberal than some Democrats. During the 102nd Congress, the tails of the curves overlapped by roughly ten percent. And by the 112th Congress, the overlap was gone; the parties were now separated by an ideological gulf.

Mann and Ornstein attribute this increased polarization to a change in behavior by the Republicans, arguing that during this period, the party became “ideologically extreme.” Other political scientists have challenged their interpretation as a “misapplication” of the underlying data, which show that Democratic legislators have become equally extreme. In fact, the larger trend is the rise of independent voters, who are shifting out of both ideologically rigid parties in equal numbers.

The Madisonian design of American democracy channeled the energy of factions into nonideological, winner-take-all voting districts based on geography -- states for senators and congressional districts for representatives. Once the design was put into practice, however, something curious happened: parties formed informally, beginning with the Federalists and the Anti-Federalists. Despite the emergence of a third party every half century or so, there has been a stable equilibrium of two political parties in Congress since 1789.

In the 1950s, the French social scientist Maurice Duverger showed that a winner-take-all structure leads to a mathematically stable equilibrium of two parties. Such a situation is akin to what economists refer to as a “natural monopoly,” and the United States’ two-party equilibrium has traditionally been stable in the short term but subject to sudden shifts. When a major new issue confronts the country that the two existing parties cannot resolve, a third party emerges to either supplant or revolutionize one of them.

Natural monopolies can be beneficial to consumers. Artificial monopolies granted and enforced by the government, however, can harm consumers and stifle innovation. What has happened in the United States in recent decades is the transformation of a natural political monopoly into an artificial one. Starting with FECA in 1974, the two main parties were essentially given government protection from smaller competitors. This problem is what economists call “regulatory capture,” when rules are put in place by regulators that are ostensibly designed to protect consumers but actually just restrain potentially competitive entrepreneurs, benefiting the very industry they were meant to be regulating. It is natural for two parties to dominate American politics, but it is unnatural for the same two parties -- Democratic and Republican -- to strangle competing factions and entrepreneurial candidates. The result has been political stagnation.

THE BIRTH OF HYPERPARTISANSHIP

The passage of FECA coincided with hyperpartisan divergence in the U.S. Congress. This outcome should not be surprising, because the objective of the FECA reforms was to give parties greater control over campaign cash. The concern of many observers in the 1970s, curiously, was that the Democratic and Republican Parties were too weak. The journalist David Broder, for example, expressing the conventional wisdom of the day, lamented the impotence of politics in an influential 1972 Atlantic article. He thought more partisanship -- strengthening the role and ideological clarity of the two major political parties -- would diminish the chaotic discourse of unregulated factions. “Most important of all the structural reforms,” he wrote, “we need to follow through on the recent congressional effort to discipline the use of money in politics, by setting realistic limits on campaign spending, limiting and publicizing individual and organizational gifts and channeling much more of the money (including, in my view, all general election spending) through the respective party committees rather than through individual candidates’ treasuries.” Broder supposed that creativity and energy rested with big organizations, not entrepreneurial individuals. (This attitude was consistent with the narrative of commercial innovation at the time, which had not yet been upended by the entrepreneurial nature of the information technology revolution.)

In the wake of the Watergate scandal, Congress amended FECA by sharply limiting the contributions individuals could make to a political campaign. Before 1976, an individual could contribute any amount of money -- $11,000 or $11 million -- to his or her favorite member of Congress. After 1976, an individual was allowed to give no more than $1,000 directly to a congressional campaign but $10,000 to a national party (and more in “soft money,” that is, funds for “party building” activities) -- giving the parties greater power than individual politicians and reducing ideological diversity along the way. Incumbent politicians were protected at the expense of challengers, who remain hamstrung by the limits to this day.

The law was immediately challenged, and the most extreme parts were pared back by the Supreme Court in the 1976 case Buckley v. Valeo. The justices declared that any restrictions on individual independent expenditures -- political campaign communications separate from those made by candidates or their parties -- were a violation of free speech, but they let stand the new monopoly powers of the two parties over campaign dollars. Next came the rise of political action committees (PACs), representing businesses, unions, and activists, but they were restricted to a $5,000 maximum donation to any one candidate, and those donations skewed heavily toward incumbents and party organizations. Direct fundraising by candidates was sharply constrained, while money donated to national party offices exploded.

WHAT CITIZENS UNITED HATH WROUGHT

In broad terms, this imbalanced playing field prevailed until the monumental Supreme Court case in 2010 known as Citizens United v. Federal Election Commission. A nonprofit corporation, Citizens United, had produced a documentary film but was barred from showing the film on cable television, even on pay-per-view, during the Democratic primaries in 2007 and 2008, and it sued for its right to do so. In its ultimate decision, the Supreme Court struck down restrictions on all independent expenditures for political speech. A new kind of political organization, the super PAC, was born (technically, reborn, after a 37-year hiatus). Super PACs are nonprofit associations of like-minded citizens that can make unlimited independent expenditures for or against any candidate. The majority opinion, penned by Justice Anthony Kennedy, said, “If the First Amendment has any force, it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”

Critics of the ruling, including party leaders, have misrepresented what the Supreme Court did. During his 2011 State of the Union address, for example, President Barack Obama falsely claimed that the ruling would “open the floodgates” for unlimited campaign spending, even by foreign corporations. From the time of the decision in late 2010 until the November 2012 presidential election, there were over 1,100 stories in The New York Times alone that mentioned the case, almost all mischaracterizing the impact and the meaning of “corporate,” which is the legal term used to describe organizations, as opposed to individuals, and not just businesses (and the term used in the ruling). Critics claimed that contribution limits and disclosure requirements on candidates’ campaigns had been rescinded (they had not been) and that foreign corporations were now free to contribute in U.S. elections (they are not).

Proponents of greater control over campaign spending, such as Fred Wertheimer, founder of the nonprofit corporation Democracy 21, have warned that unregulated financing of candidates is dangerous. Without the campaign finance restrictions in FECA, they worry, rich people and companies will corrupt U.S. politics. But what is corruption? Law professors acknowledge that the claim of corruption in politics is a vague one -- there is nothing impure in a flat-tax candidate’s seeking or receiving support from flat-tax donors -- and that the Supreme Court’s earlier justification for infringing on free-speech rights based on preventing “the appearance of corruption” was a problematic standard. Moreover, although Wertheimer warned months before the 2012 election that “massive amounts of secret money, unlimited contributions and corporate funds are again flowing into federal elections,” this was a false alarm. The fact is that nonprofit organizations, rather than for-profit businesses, are the primary corporate organizations involved -- think the American Civil Liberties Union and the National Rifle Association, not GE and General Motors. As the Center for Responsive Politics concluded when reviewing the 2012 election, “Donations from large, publicly traded corporations have been relatively rare.”

Today, the maximum an individual can contribute directly to a candidate is capped at $2,600. (Congress still allows individuals to give a maximum of $32,400 to either national party.) Wertheimer is now warning that a Supreme Court case in 2013 might uncap donations to individual candidates, creating the potential for what he calls “legalized bribery.” But his logic is faulty. For the sake of argument, assume the critics are correct that money by its nature is politically corrupting. The question at hand, then, is whether politics is easier to corrupt when the money is controlled by two parties or when the money is diffuse. If regulatory capture has occurred, such that independent political voices can be legally muzzled, then the answer is self-evident. What Citizens United really did was create a level playing field between the two big factions (the Democratic and Republican Parties) and all the smaller factions in U.S. politics -- every other player that wants to participate in electioneering speech. Major individual donors, such as the conservative casino magnate Sheldon Adelson and the liberal financier George Soros, have not been given new license, because the right of individuals to make independent expenditures has always been protected. What is new now is that smaller donors can participate outside of the duopoly by contributing to party-like organizations with their independent expenditures. And they have.

Over $1 billion was spent on independent political expenditures -- not made by or coordinated with candidates or parties -- in the 2012 election cycle, more than the total of the previous 20 years combined. (In 2008, $147 million was spent, and in 2004, $66 million.) Before 1990, all independent expenditures amounted to less than one percent of what either of the two political parties spent. Don’t cry for the duopoly, however. The Democratic National Committee raised $1.068 billion and spent $1.067 billion in the most recent cycle, and the Republican National Committee raised $1.023 billion and spent $1.009 billion -- each party raising and spending more than it did in 2010 or 2008. Even so, Americans were hardly flooded by campaign ads. McDonald’s alone spent more on advertising in 2012 than both political parties spent on everything.

What Citizens United has done is shift the structure of the political market in favor of small donors and causes. One recent study, by the legal scholars Douglas Spencer and Abby Wood, found that after the ruling, independent expenditures increased in all states, but that the effect was twice as large in those states, such as Iowa, Michigan, and Ohio, that had previously banned corporate and union independent expenditures. Properly understood, the decision ended an almost four-decade period of repression of independent political voices. The history of campaign finance in this era will be remembered for making politics more, not less, polarized. FECA was a policy failure, and it is for the good of American democracy that the Supreme Court said as much.

Just as the campaign finance restrictions of the 1970s led to increased polarization, political stagnation, and fiscal irresponsibility, so the new rules will lead to the emergence of new political actors and coalitions that may refresh U.S. politics and address the country’s growing fiscal crisis. A third party that stands for something original, for example, might well gain ground and shake up the system with new fiscal alternatives, either displacing one of the existing parties or forcing its concerns onto their agendas.

The United States is highly unlikely to see the growth of a multiparty political system, but the power of factions relative to the existing partisan duopoly will shift back to its traditional balance. Expect to see more unique characters in office willing to buck party discipline. Expect to see more issue-centric coalitions that defy recent partisan ideological straitjackets: Democratic represenatives favoring gun rights, say, or Republican governors favoring environmental regulation. Activist groups of all kinds will grow stronger at the expense of weakened partisan PACs -- the National Rifle Association and the Club for Growth, to be sure, but also Planned Parenthood, the AFL-CIO, the Sierra Club, and the Concord Coalition.

A new era of political competition, one less beholden to party bosses and more responsive to the diverse needs and interests of the American public at large, will create an unexpected opportunity to break the current fiscal stalemate bedeviling the U.S. economy. The country’s turn toward fiscal imbalance began in the 1970s, when the cost of entitlement programs began to mount. The current two parties have been unable to deal with the resulting mounting debt and economic torpor. Enhanced political competition will help voters generate solutions that advance both prosperity and equity -- and, ultimately, allow the country to take back its future.