Earmarking refers to a fund allocation practice in which an entity, a government, or an individual sets aside a determined amount of funds to use them for a specific goal. It can be done either via collective or individual decisions.
While businesses and governments earmark funds as part of their budgeting processesBudgeting ProcessesBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time., individuals use it as mental accountingMental AccountingMental accounting theory, introduced in the year 1999 by Richard Thaler is a concept in behavioral economics that states that the importance of money and its impact that each individual attaches to the available funds is based upon subjective criteria and can result in irrational spending.. For example, an individual might set aside money to buy a gift for others, while a politician may set aside funds to construct a power plant.
- Earmarking definition means separating some amount of money from the total of funds and then use it for a stated purpose later.
- The term originated from the livestock industry but was incorporated by the U.S. government in congressional appropriations.
- Individuals and corporations can also earmark funds for personal savings and finance purposes.
- Wasteful earmarking of funds focused on helping small regions, or a group of peoples done by the politicians elected by voters in these regions is known as pork-barrel spending.
How Does Earmarking Work?
The concept of earmarking is simple to explain as it means setting some money aside. But its uses in different contexts vary enough to give it some complexity. The concept was first used in the livestock industry. The cattle that would be set apart for specific purposes was marked on the ear, which created the term “earmark”.
The terminology was later adopted by the U.S. government and different spheres of society. A company can earmark some of its revenue to upgrade its sales department, for example. And a government could use a specific fund to create public schools in a particular region.
One obvious distinction is how these institutions can use these funds. Also, the level of commitment and how freely they can interact with the earmarked funds varies. Sometimes, both companies and governments can decide to spend earmarked money on something. But most of the time, they cannot do it without special permissions.
Another detail to know about earmarking is that the definition is far from a consensus. In its report in 2006, the Congressional Research Service noted that the U.S. government lacked a single description for what the term meant.
The researchers took data from several documents between 1994 and 2005. They noted that sometimes it is defined as funds for specific programs, while in others, it was for specific projects, locations, or institutions. So, the lack of coherence was visible.
Examples of Earmarking
Let us check some of the most popular examples
#1 – Agriculture & Livestock Industry
As stated before, the concept of earmarking comes from the livestock industry. Even today, some livestock and agriculture companies still do it. However, today they are less likely to mark animals by their ear, using more sophisticated processes to do it, such as having different facilities to store animals that will be used for a specific purpose.
#2 – Bankruptcy
In bankruptcy law, the concept of earmarking is evoked when a third party lends money to the debtor to allow it to pay off its debt. That money is automatically earmarked. So, the entity that filed for bankruptcy cannot simply decide that it will spend the funds in another way. It needs to use them for that purpose only.
#3 – Politics
When a politician decides to set aside 10% of the budget of particular development aid to build roads in the two major cities of a state, it is the case of earmarking. It means that the funds can only be used to hire contractors and purchase materials to build the road. For instance, the announcement of over 4,000 earmarks worth $13 billion in congressional appropriation bills for the fiscal year 2022 by the U.S. government led by Joe Biden.
#4 – Social Science
The concept has its uses in social sciences too. In this context, the work of American sociologist Viviana A. Zelizer, The Social Meaning of Money, gives an example of how individuals use this concept.
According to Zelizer, people do not treat all of their money the same way and earmark some for social purposes. For example, money earmarked to pay their bills or buy a gift for a loved one will be more important than the money they will use for more frivolous uses.
#5 – Banking
In the case of banking, we can see an example when someone pre-determines an amount of money that should be set aside in their account to pay for something. For instance, someone might ask the bank to separate money for use as collateralCollateralCollateralization is derived from the term "collateral," which refers to a security deposit made by a borrower against a loan as a guarantee to recover the loan amount if s/he fails to pay. for something, such as buying property.
Earmarking vs Pork Barrel
Earmarking may be an efficient tool to allocate funds. However, sometimes the politicians are not focused on helping everybody. Instead, they target only certain portions of society that voted for them or sponsored their campaigns. In these cases, pork-barrel spending happens.
As a general rule, one can divide ethical earmarking from unethical pork-barrel spending. While the first will benefit a large portion of the population, the latter will benefit only a handful of individuals or entities with political ties.
For instance, if a politician earmarks money to build a road that most people in town use, they will be doing it right. However, if they use the money to construct a road that leads to a specific corporation that was a major campaign donor, they would almost certainly be accused of pork-barrel spending.
It is imperative to understand that pork-barrel spending is often a derogative term used for earmarking that is not well done. Therefore, someone can call a specific law an example of clean earmarking, while others, often in the opposition, may call it pork-barrel spending.
Most of the controversy surrounding pork barrels comes from the fact that it is a part of corruption. Some groups, such as the Citizens Against Government Waste (CAGW), are among the leading opponents of pork-barreling in the U.S. Congress.
This has been a guide to Earmarking and its meaning. Here we discuss how it works with the examples and its differences from Pork Barrel. You can learn more from the following articles –