Earmarking Meaning Examples How Does It Work

Earmarking Meaning

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.read more, whereas 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.read more. For example, an individual might set aside money to buy a gift, while a politician may set aside funds to construct a power plant.

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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.”

Key Takeaways

Earmarking means setting aside some amount of money from the total funds and then using 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 people elected by the politicians in these regions is known as pork-barrel spending.

The terminology was later adopted by the U.S. government and different spheres of society. So, for example, a company can earmark some of its revenue to upgrade its sales department. At the same time, the government could use specific funds to create public schools in a particular region.

One obvious distinction is how these institutions use these funds. Also, the level of commitment and how freely they interact with the earmarked funds varies. Sometimes, both companies and governments can spend earmarked money on something. However, mostly, they cannot do it without special permission.

Another detail 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 of 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 is 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 do it. However, today they are less likely to mark animals by their ear, and farmers are using more sophisticated processes to do it, such as having different facilities to store animals 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 to 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 for development aid to build roads in the two major cities of a state, it is a case of earmarking. The funds can only 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 was led by Joe Biden.

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 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 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.read more for something, such as buying property.

Earmarking vs Pork Barrel

Earmarking may be an efficient tool to allocate funds. However, sometimes 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 occurs.

Generally, 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 comprehend that pork-barrel spending is often a derogatory 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 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.