Agency Theory and the Limitations of Representative Government

The Political Nature of the Federal Budget Process
Introduction
The federal budget process is overseen by US Congressmen, who are fundamentally immersed in the political nature of government. As Elwood (2008) notes, members of Congress are influenced in three ways: 1) by money that is used to finance their political campaigns; 2) by obtaining the votes necessary for reelection; and 3) by obtaining expert advice on topics that are of personal importance to them. The federal budget process is particularly impactful on the first two and vice versa. For example, “the ability to funnel money into a congressional district or state provides an excellent opportunity for a legislator to remain in office” (Elwood, 2008, p. 3). This ability creates a conflict of interest among the politicians overseeing the budget process. On the one hand they are tasked with producing a budget resolution and allocating funds based on the duty to serve the collective good; on the other hand they have a vested self-interest in ensuring that funds are diverted in ways that will benefit them, their political career and their political cronies. This paper will discuss the political nature of the federal budget process.
Politics and Agency Theory
The political nature of the federal budget process is tied to the political nature of government in general. The budget itself is a representation of how government expenditure is allocated to various sectors, programs, agencies and departments. It reflects the extent to which society deems certain programs and departments as important. However, as Elwood (2008) points out, where money is a factor, corruption is sure to be found. The problem with the federal budget process is that it is overseen by individuals who suffer from the agent-principle paradox.
Agency theory posits that “an agency relationship arises whenever one or more individuals, called principals, hire one or more other individuals, called agents, to perform some service and then delegate decision-making authority to the agents” (ProActive Solutions, 2020). In terms of representative government, the representatives of the people are the members of Congress—they are the agents of the principles, i.e., the voters who put them in positions of power. The voters put the agents (the representatives) in office under the belief that the representatives will do what is in the best interest of stakeholders—the public. However, there are powerful lobbies in Washington, and they spend billions of dollars every year in order to gain influence among these same members of Congress. They promise donations to the campaigns of Congressmen, thus ensuring that the Congress member will have a long and profitable career in politics so long as they do the bidding of these lobbies. A conflict of interest thus arises: the lobbies represent only a small percentage of the public whereas many other voters voted under the impression that the agent would act on behalf of the principle.
One proposition put forward by Eisenhardt (1989) is that “when the principal has information to verify agent behavior, the agent is more likely to behave in the interests of the principal” (p. 60). Eisenhardt (1989) points out that the principal-agent relationship is built upon trust and that there is no way the relationship can work without implicit trust supporting it. However, there have to be precautions and risk reduction strategies in place so that one is not being naïve with respect to the fact that bias and self-interest can and do play a part in that relationship to some degree.
Still, without some system in place in the real world, there is no guarantee that self-interest and conflicts of interest do not arise. That is why in industries like real estate there are penalties that agents face if they are caught abusing the agent-principle relationship. In government, there is less of a system in place for voters to use to ensure that agents are acting in the best interests of the public. They essentially have only the means of the election booth and that opportunity comes once only every few years. In short, there is little accountability in the political nature of the federal budget process because the agency owed to voters is not well-regulated in government. Representatives have far more leeway to act on their behalf or on the behalf of special interest groups than in other organizations.
One reason for this is the case of Citizens United vs. the Federal Election Commission, which led to the creation of the super political action committee (PAC) that is now permitted to funnel unlimited amounts of money into the campaign of a candidate so long as the candidate is kept at one remove from the super PAC. In other words, lobbies and special interests can spend big money on candidates to ensure that the candidates act in the special interest of the lobbies rather than in the best interests of the public. This special interest goes on to be reflected in the creation of the federal budget, where billions are allocated to various sectors. The politicians thus become agents of new principles—the lobbies and special interest groups. The process is corrupted by the influence of certain groups who are capable of swaying the votes of legislators particularly when it comes to passing Acts like the CARES Act, which saw billions of dollars go to bailout companies. The federal budget process is really no different. For instance, 54% of the federal budget goes to funding the military. Without powerful lobby groups in the defense industry, this likely would not be the case. It is thus that Freeman asks the question, “For whose benefit and at whose expense should the firm be managed?” (Jennings, 2008).
The Federal Budget Process
The process begins about a year and a half before the budget is due, and the first step in the process is the submission of proposals by the various departments and agencies. The submissions are sent to the White House because it is the President who drafts the budget request, which is sent to Congress for approval. Thus, the legislative has oversight of the Executive when it comes to the federal budget. But the influence of lobbyists and special interests groups is immense all the same. It begins with the departments and agencies, all of which tend to be looking to secure the maximum amount of feds possible. However, politics enters into the fray as soon as proposals are sent to the White House because the President will often run on a platform that addresses the federal deficit, spending, and cut backs. President Trump for example ran on a platform in which there were threats of cutting aid to Planned Parenthood. This was part of his appeal to conservative voters. Though the President can propose these types of cuts in his request to Congress, Congress does not have to approve it. If the Congress is stacked with members of the opposing political party, it could mean that the President will have to compromise on some of his promises to the public if he wants to get any budget passed.
The conflict between Right and Left, Republicans and Democrats is thus just as important as the influence of lobbying groups and special interests because both parties know that they have constituents who will turn against them if they only show themselves as serving the interests of powerful lobbies. Most legislators will at least attempt to tow party lines insofar as is possible. However, even when a budget might seem in the best interest of the public, contention will arise between two parties, especially if one controls Congress and the other controls the White House. This is one of the biggest ways politics impacts the federal budget process.
Understanding the problem of the political nature of the process is important because there is a great deal of focus on shareholders and stakeholders. Shareholders can refer to the stock holders of the public companies like Boeing or Lockheed Martin that win large defense contracts. Politicians will consider shareholders of these companies when making their decisions and they are often shareholders themselves—thus conflict of interest arises again (Elwood, 2008).
Politicians know at the same time that they owe a duty to stakeholders, the public. But the issue that feminist critics point out here is that simply viewing their responsibility from either perspective is not good enough. They must assess their role from an ethics of care perspective—not a political one.
The idea that government and the federal budget process ought to be managed for someone’s or some group’s benefit but at the expense of someone else or some other group is somewhat cynical—yet modern politics has allowed this cynical view to become ingrained in the cultural discourse. Is there a reason the process cannot be managed so that it is a win-win for all? From the feminist perspective it can be argued that there is, for “a central feature of feminist ethical theories is the emphasis on relationships rather than the individual, independent, atomised self that is so prominent in masculinist moral reasoning” (Machold, Ahmed & Farquhar, 2007, p. 670). Establishing a care ethic is the first step in applying this perspective.
The management of the process and how the proper boundaries of decision making in more relational terms are assessed can lead to a fuller perspective and understanding of the values inherent in the system if they are approached without bias. The problem with the Milton Friedman and Freeman perspectives is that they are limited by assumptions made from the two thinkers. Friedman’s assumption is that putting shareholder interest first and foremost will enable politicians to make the best decisions. Freeman’s assumption is that politicians who put stakeholder interest first will be better situated to see the big picture and make the best decisions in terms of how money is allocated and managed from year to year. Each has a built in assumption that is only partially legitimate because neither is looking at the whole picture or assessing their built in assumptions. The benefit of what Machold et al. (2007) show in their study is that they do assess these assumptions and do indicate that there is a more appropriate, holistic and fuller view that one can take. They refer to this view as being rooted in a “care ethic,” which is applied by evaluating relationships from the standpoint of caring (Machold et al., 2007, p. 671). The essential benefit of a feminist approach to managing the process is that it shows how important it is to develop “moral reasoning around notions of connectedness and caring for people” (Machold et al., 2007, p. 669). Ethics of care can be used to provide a better understanding of the relationship between the representative, the represented, stakeholders, shareholders, the public, the President, the lobbies and so on. Instead of seeing the process in terms of winners and losers, it should be seen in terms of relationships. Those seeking maximum funds know that they do not exist in a vacuum, and the ethics of justice focus on autonomy. The ethics of care focus on relationships, which is an approach more fitting for a holistic understanding of how the federal budget process should be managed.
Machold et al. (2007) make the point that a care ethic does not have to be applied at the expense of justice considerations. Rather, representatives should “embed the values of care in internal and external systems and procedures” so that they can bring care from the private sphere to the public sphere and make it whole (Machold et al., 2007, p. 674). The reason for this is that people truly do live in a tightly related world, where technology has integrated communities all over the planet, where business and state are merged into one entity, and where the public is more in-tuned to what goes on at the highest levels of power. The interconnected and cooperative fact of our social nature has to be acknowledged by managers of federal budget process if they wish to thrive. This social nature is what supports the process because production is inherently a social process and depends upon the efficient use of funds. Adam Smith’s Wealth of Nations was predicated on the assumption that people would not lose sight of that inherently social nature—but with the rise of technology and industrialization and even the division of labor that Smith recommended the social nature of man and the social nature of production has been lost sight of. Production is a social act and social cooperation should be something that is promoted. When two parties fight over funding because of a political dispute that has nothing to do with relationships and everything to do with party politics, it hurts the process.
However, does that mean social control is needed? Social control can rob one of his free will and that undermines the very idea of cooperation and collaboration. The challenge for society is that free will should be respected—not obliterated—and the risk of course is that people will choose not to collaborate. That is the problem of the political nature of the federal budget process. Instead of collaborating to build a better relationship, the sides of the two parties will raise objections in order to score political points or to make it appear that they are fighting for what the party believes in, even though in the end it is largely all theater. Would public socialism prove beneficial if considered in this light? As Dewey points out, it is not a question of control but rather a question of realizing that men are men only in so far as they are related to one another: if they are without a sense of their integrative place in the whole, then they are missing an important element of humanity. Production and distribution should be considered from this aspect, keeping in mind the good that is achieved from both. If the good is pursued, the profits will follow and the profits will be there for all in different ways. In the end, the care ethic and the feminist approach is really all about putting people first.
The situation in the federal government is such that there is no application of such a care ethic and for that reason it allows for politics to trump all else. Once the President submits his plan to Congress, both branches then set about assessing the President’s request and creating a budget resolution that determines the overall amount that will be spent. A conference committee is formed to enable the Senate and the House to iron out the differences in their resolutions so that one final resolution can be created that both chambers will agree upon.
The process becomes even more complex and bureaucratic with the division of subcommittees that are set to look at discretionary spending among the various agencies and departments. These subcommittees draft the appropriations bills that will determine the funding for each agency and department. These subcommittees are very important in the process and the people who sit on them will be targeted by lobbies. Once the committees have their resolutions, the final resolution is drawn up and sent to the President to sign, which he typically does. But even here the President can refuse to sign the resolution and thus create a stoppage in government. This happens from time to time, and government shut downs are really only partial: parks and government sites tend to close down and some government employees are furloughed but there has never been a complete collapse primarily because these shutdowns are political theater as well and are meant to appeal to the voter base to show that their representatives are fighting for the values and principles of their party.
The reality is that they are putting pressure on different players for other objectives. The opposing party in Congress may refuse to vote on a budget in order to put pressure on the President to support a different bill that is unrelated to the budget but that they cannot get any support for otherwise. It is like a game of political blackmail in this regard and there is nothing for it but a total revamping of the culture of the federal government with a care ethic being instilled.
But is such even possible? The debt ceiling is used as a political cudgel when it is convenient for both sides of the political aisle. The Left or the Right will force a shutdown over protestations of raising the debt ceiling—and then when they obtain the concession they were seeking they will sign off on raising the debt ceiling as though it were never really an issue for them in the first place. This is exactly the sort of political gaming of the system that goes on.
The government itself is thus held hostage to players in a process who should have the best interests of the public in mind and yet who are more inclined to play political games for points that can be used later or redeemed at a future time. They are supported by lobbyists and special interests who want to see maximum funds appropriated for their industries. They are supported by other legislators who want to make sure that they have everyone on the same page for the important votes that matter down the road. The federal budget process is more than just about the budget—it is about the entire system of government that has been erected over the past 200 years since the Founding Fathers began a new system meant to be small.
Conclusion
The political nature of the federal budget process is such that it prevents a proper care ethic from being applied and the full best interests of the public from being obtained. Instead, political machinations take place to the extent that government itself will shutdown in a kind of perverse self-defeating purpose that is pursued when one side of the political aisle perceives an advantage in doing so. The recent shutdown under the Trump Administration shows why and how such games are played and what comes of them in the end. It is all politicking that displays the conflict of interest at the heart of the matter: the agent-principle relationship is limited in terms of what can be achieved before self-interest becomes a factor that must be considered. Because shareholders and stakeholders can be elements in that self-interest it is more appropriate that a care ethic be applied in the system so as to prevent the kind of political shenanigans that go on year after year.
References
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of management review, 14(1), 57-74.
Elwood, T. W. (2008). Politics of the US Federal Budget Process. International quarterly of community health education, 28(1), 3-12.
Jennings, M. (2008). Business Ethics: Case Studies and Selected Readings. Cengage.
Machold, S., Ahmed, P.K., & Farquhar, S.S. (2007). Corporate Governance and Ethics: A Feminist Perspective. Journal of Business Ethics (2008) 81:665-678.
ProActive Solutions. (2020). Agency theory. Retrieved from http://knowledgegrab.com/learners-zone/study-support/performance-management-review/framework-introduction-to-hrm/agency-theory/