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Budgeting refers to decisions about how much funding to provide for the programs, staffs, and infrastructures of government, as well as about the processes used to arrive at funding levels. In examining processes, budgeting theories explain how individuals who hold budget-writing positions choose funding levels for programs. A second class of theories explain how and why political elites try to manipulate budgets to foster their goals. Rational theories of individuals responsible for choosing how much to fund budget lines offer bounded rationality explanations of these decisions.
Due to limits on human cognition, vast numbers of lines in the budget, and complex decision-making environments, budgeters’ forecasts about how well their choices will facilitate their goals are imperfect. Despite these limitations, budgeters use decision-making strategies that help them foster their goals. Such strategies are boundedly rational because, although the choices and behavior resulting from such strategies are not optimal, budgeters’ decisions still help them realize program goals. In this way, budgeters “satisfice”—they make decisions that are “good enough.”
The first generation of boundedly rational budgeting theories was developed in the 1960s by Aaron Wildavsky, whose contributions to understanding budgeting continue to exert a profound influence on budgeting scholarship. This perspective, developed with respect to the federal government in the United States, emphasizes that individuals responsible for contributing to the budget must take an incremental approach to arrive at funding levels. Budgeters begin by examining the “base” for each budget line, which refers to the amount that was spent on the line in the previous year’s budget. From this base, budgeters make small adjustments based on new information and limited by the availability of funds. For example, if program advocates can make an effective argument about why additional funds are needed, budgeters may increase funding levels slightly from the previous year. Nevertheless, even if budgets change from year to year, budgeters do not make drastic changes. Budgeters follow this approach out of necessity. Examining the budget holistically would involve the impossible task of investigating each budget line to ascertain the optimal volume of funds required to realize the goals embodied in the programs. Unfortunately, such an approach is not feasible given the vastness of the government and the resulting volume of decisions that must be made. By taking an incremental approach, however, budgeters arrive at funding levels for all budget lines, ensuring that programs continue serving their purposes even if neither the funding levels nor the achievement of program goals are optimal.
Additional research, however, observed that many budgeting decisions were not incremental, spurring refinement of Aaron Wildavksy’s approach. John Padgett’s serial judgment theory of budgeting stresses continuity with the incremental perspective in that budgeters’ decisions are understood from a boundedly rational perspective. Budgeters cope with the volume and complexity of the decisions they face by starting with the level of funding from the previous year and satisficing to arrive at funding levels for the current budget. However, the heuristic employed by budgeters is not incremental choice. Rather than consciously choosing a funding amount that differs slightly from that disbursed previously, budgeters consider, one after another, alternatives for funding levels until they arrive at one that is acceptable. In this way, budgeters satisfice in that they do not try to discover optimal funding levels for programs. Critically, though, budgetary outputs are predicted to differ from outputs predicted by incremental approaches. Because budgeters move from alternative to alternative until they reach an outcome that is good enough, it is possible for them to arrive at funding levels that are substantially different from the amounts funded in the previous year’s budget. Such dramatic changes can occur, for example, when budgeters’ understandings of what is necessary from a programmatic standpoint leads them to pick a funding level that happens to be a significant departure from the previous year’s base. Research focusing on the distribution of year-to-year changes in programs’ funding levels in the context of U.S. government budgets revealed that this perspective explained better the distribution of year-to-year changes than an incremental approach did. By specifying more precisely the decision-making heuristics employed by budgeters, the serial judgment perspective improved on the incremental model while remaining anchored firmly to a realistically bounded rational view of human decision making.
More recent research by Frank Baumgartner and Bryan Jones integrates research on agenda setting with a boundedly rational approach to budgeting. Because the set of issues that they can attend to is small, budgeters ignore most information from the political environment. They do so even in the face of political mobilizations by coalitions favoring substantial funding changes. Under these circumstances, year-to-year changes in budgets are characterized by incremental shifts in funding levels. However, when groups in favor of change are successful in securing space for their concerns on the government’s agenda, budgeters are forced to attend to the issues that these groups prioritize. In doing so, budgeters begin to consider alternative funding amounts for budget lines serially. Since past decisions related to the issues have resulted in incremental changes, political coalitions that have focused budgeters’ attention on a specific budget line are likely to desire significant change in that line. Therefore, the funding levels that allow budgeters to satisfice in such instances are likely to constitute sizable increases/decreases. After all, substantial changes are the only ones likely to satisfy the political forces behind the mobilization. In this way, the heuristics that budgeters employ differ depending on whether advocates for change can secure space for their priorities on the agenda. If not, budgeters ignore information from such groups, leading to incremental changes. However, when agenda space is secured, serial judgment heuristics are triggered. What is more, the nature of the mobilization implies that only substantial changes in funding levels allow budgeters to allay the concerns of the coalitions—and, by extension, allow budgeters to satisfice.
Shifting gears, a separate tradition on government budgets asks whether political elites manipulate budgets to serve their goals. One line of such research asks whether ruling political parties stimulate the economy prior to elections in order to maintain their control of government and its decisions. This political budget cycle thesis was spurred by research conducted in the 1970s examining indicators of economic health in light of election cycles in the United States and in other major industrial democracies during the post-World War II era, observing that unemployment dipped and economic growth increased in years during which elections occurred. Naturally, the argument behind the thesis is that the ruling party prefers to remain in control of government. Therefore, it pursues policies that stimulate the economy to achieve economic growth prior to the election. Voters, the ruling party hopes, observe this performance and reward it by returning it to power.
Subsequent research on this hypothesis has produced mixed findings regarding the ability of ruling parties to pursue this strategy successfully. In recent research, James Alt and David Lassen suggest why: The ability of ruling parties to exploit their position is conditional on several factors. The first involves how transparent the government’s fiscal policy decisions are to the public. Transparency allows the media and political opposition, and by extension the public, to observe the government’s intentions, making it more difficult for the ruling party to try to create economic growth without being accused of doing so for its own benefit. The second factor is the level of polarization between parties. As policy conflict increases between the ruling party and its rival(s), the costs to the party of losing control of government to the opposition increases. These costs increase with policy conflict because the policies that the opposition (as the future ruling party) will adopt will be more offensive to the (present) ruling party for higher levels of policy disagreement between parties. In summary, while it may be feasible for the ruling party in government to rig the economy in order to maximize its chances of continuing in power, the circumstances under which this strategy is feasible may be limited.
Another line of research focusing on elite influence over budgets examines the participation of bureaucrats in shaping the budgets of their agencies. One theory advanced in the early 1970s held that bureaucrats were “budget maximizers” in that they wished to expand the size of their agency’s budget as much as possible. What is more, bureaucrats are well positioned to do so because they possess more information about what is necessary to achieve the policy goals their agencies are responsible for meeting than elected officials who create budgets. This information asymmetry allows bureaucrats to receive substantial increases in their agencies’ budgets.
Subsequent research in the tradition of the budget-shaping perspective by Patrick Dunleavy and others, however, has led to a substantial refinement of this view. In addition to noting that budgets are not characterized by the growth predicted by the maximization perspective, these critics note that, because an agency’s budget is a collective good, bureaucrats face a collective action problem in advocating budget expansions. Moreover, because agencies’ budgets are disaggregated, bureaucrats possess no guarantee that increases to the budget will accrue to their corner of the agency, undercutting the incentive to lobby. Bureaucrats also face varied incentives to lobby for expansions based on the type of agency they work for and their position within their agency. In particular, the highest ranking officials most capable of lobbying possess the least incentive to do so because, from a pecuniary standpoint, their salaries do not increase with budget increases. Instead of budget maximizing, the budget-shaping view argues that agency executives prefer to use the budget to construct an agency such that its staff perform professional functions characterized by high levels of discretion that foster creative solutions to problems. Executives in public agencies are thought to prioritize such “shaping” because individuals drawn to career advancement in such agencies are likely to value such a professional orientation. Additionally, and at any rate, laws forestall the ability of bureaucrats to capture pecuniary rewards from public service beyond their salaries.
- Alt, J. E., & Lassen, D. D. (2006). Transparency, political polarization, and political budget cycles in OECD countries. American Journal of Political Science, 50, 530-550.
- Dunleavy, P. (1985). Bureaucrats, budgets, and the growth of the state: Reconstructing an instrumental model. British Journal of Political Science, 15, 299-328.
- Jones, B. D., & Baumgartner, F. R. (2005). The politics of attention: How government prioritizes problems. Chicago: University of Chicago Press.
- Padgett, J. F. (1980). Bounded rationality in budgetary research. American Political Science Review, 74, 354-372.
- Wildavsky, A. (1964). The politics of the budgetary process. Boston: Little, Brown.