Agency Theory and the Limitations of Representative Government Essay

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,…

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…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…