Political Nature of the Federal Budget Process Explained

Introduction

The federal budget process is overseen by members of Congress, 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 used to finance their political campaigns; (2) by obtaining the votes necessary for reelection; and (3) by obtaining expert advice on topics of personal importance to them. The federal budget process is particularly impactful on the first two factors, 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 themselves, their political careers, and their political allies. This paper discusses 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 important. However, as Elwood (2008) points out, where money is a factor, corruption is sure to follow. The core problem with the federal budget process is that it is overseen by individuals who suffer from the principal-agent 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 representative government, members of Congress are the agents of the principals—the voters who put them in positions of power. Voters place agents in office under the belief that those representatives will act in the best interest of the public. However, powerful lobbies in Washington spend billions of dollars every year to gain influence over these same members of Congress. They promise campaign donations, thereby ensuring that a Congress member will enjoy a long and profitable career in politics as long as they serve the interests of those lobbies. A conflict of interest thus arises: the lobbies represent only a small percentage of the public, while many voters cast their ballots under the impression that their representative would act on behalf of the broader constituency.

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) further points out that the principal-agent relationship is built upon trust and cannot function without it. Nevertheless, precautions and risk-reduction strategies must be in place to account for the reality that bias and self-interest can and do play a part in that relationship to some degree.

Without such a system in place, there is no guarantee that self-interest and conflicts of interest will not arise. This is why industries like real estate impose penalties on agents who abuse the principal-agent relationship. In government, far fewer mechanisms exist for voters to ensure that their agents are acting in the public's best interests. Voters essentially have only the ballot box, and that opportunity arises only once every few years. In short, there is little accountability within the political management of the federal budget process because the agency owed to voters is not well regulated. Representatives have far more leeway to act on their own behalf—or on behalf of special interest groups—than agents in most other organizations.

One landmark development contributing to this dynamic is Citizens United v. Federal Election Commission, which led to the creation of the super political action committee (super PAC). Super PACs are now permitted to funnel unlimited amounts of money into a candidate's campaign, provided the candidate is kept at one remove from the super PAC. As a result, lobbies and special interests can spend enormous sums on candidates to ensure those candidates act in the interests of the lobbies rather than the public. This influence is ultimately reflected in the creation of the federal budget, where billions are allocated to various sectors. Politicians thus become agents of new principals—the lobbies and special interest groups. The process is further corrupted when powerful groups sway legislators' votes on major bills such as the CARES Act, which directed billions of dollars toward corporate bailouts. The federal budget process is no different. For instance, 54% of the federal budget goes to funding the military—an outcome that, without powerful lobby groups in the defense industry, would likely not be the case. It is in this context that Freeman's question resonates: "For whose benefit and at whose expense should the firm be managed?" (Jennings, 2008).

The Federal Budget Process

The process begins approximately a year and a half before the budget is due. The first step involves submissions of proposals by the various departments and agencies, which are sent to the White House. It is the President who drafts the budget request and submits it to Congress for approval, giving the legislative branch oversight of the executive where the federal budget is concerned. The influence of lobbyists and special interest groups, however, is felt throughout. Departments and agencies typically seek to secure the maximum amount of funding possible. Politics enters the process as soon as proposals reach the White House, because presidents often campaign on platforms that address the federal deficit, spending levels, and proposed cutbacks. President Trump, for example, campaigned on threatening to cut aid to Planned Parenthood—part of his appeal to conservative voters. Although a president can propose such cuts in the budget request, Congress is not obligated to approve them. When Congress is controlled by the opposing party, the President may be forced to compromise on campaign promises in order to get any budget passed at all.

The conflict between the political Right and Left is therefore just as consequential as the influence of lobbying groups, because both parties know they have constituents who will turn against them if they are seen as serving only the interests of powerful lobbies. Most legislators will at least attempt to hold to party lines where possible. Even so, contention regularly arises between the two parties—especially when one controls Congress and the other controls the White House—and this is one of the most significant ways politics shapes the federal budget process.

Once both chambers have assessed the President's request, they create a budget resolution determining the overall level of spending. A conference committee is then formed to reconcile differences between the Senate and House resolutions so that a single final resolution can be agreed upon by both chambers. The process grows even more complex with the division of subcommittees tasked with examining discretionary spending across various agencies and departments. These subcommittees draft the appropriations bills that determine funding for each agency, and the people who sit on them are routinely targeted by lobbyists.

Once the committees have finalized their resolutions, the consolidated resolution is sent to the President to sign. At this stage the President can refuse to sign, triggering a government shutdown. Such shutdowns are largely partial in practice—national parks and government sites close, and some federal employees are furloughed—but a complete collapse of government operations has never occurred. These shutdowns function primarily as political theater, intended to signal to a party's voter base that their representatives are fighting for core values. In reality, shutdowns are used as leverage: one party in Congress may refuse to vote on a budget in order to pressure the President into supporting an entirely unrelated bill. The debt ceiling is similarly wielded as a political cudgel. A party will force a shutdown over protests about raising the debt ceiling, then quietly sign off on an increase once it has extracted the concession it was seeking. The federal budget process thus becomes about far more than budget figures alone—it reflects the entire system of governance that has developed over the past two centuries.

Conclusion

The political nature of the federal budget process is such that it prevents a proper care ethic from being applied and prevents the full best interests of the public from being served. Instead, political machinations dominate to the point that government itself will shut down in a kind of perverse, self-defeating exercise whenever one side of the political aisle perceives an advantage in doing so. Recent government shutdowns illustrate why and how such games are played and what comes of them. It is ultimately all political theater that reveals the conflict of interest at the heart of the matter: the principal-agent relationship breaks down before self-interest can be adequately checked. Because both shareholders and stakeholders can be elements in that self-interest, it is all the more appropriate that a care ethic be embedded in the system so as to curb the political maneuvering that recurs 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, 81, 665–678.

ProActive Solutions. (2020). Agency theory. Retrieved from