This chapter draws on recent work in transaction cost theory and historical institutionalism to provide a framework for analyzing the causes and consequences of trust fund financing. It first explains the relevance of political transaction costs for an understanding of trust funds in the US budget. Next, it outlines four reasons for the creation of trust funds. It then describes the main effects of the trust fund mechanism on the policymaking process, and how current officeholders can try to increase or decrease the credibility of existing trust fund commitments. Finally, the chapter discusses the case selection.

Political transaction costs, trust funds, and government budgeting

It is helpful to begin a study of trust funds with an examination of the larger budgetary system of which the trust fund instrument is a part. Public budgeting must be understood not merely as a technical exercise in resource allocation, but rather as the setting for some of the most crucial tasks of a democratic polity: mobilizing revenues, delivering benefits to constituencies, safeguarding the public fisc. These tasks inherently require politicians to enter into commitments both with one another and with voters and groups in the larger society. Budgeting can thus be seen as a form of contracting behavior, in which the government pledges – not always credibly – to do certain things rather than others in the future.