What Is Affirmative Action?

The term affirmative action refers to a policy aimed at increasing workplace and educational opportunities for people who are underrepresented in various areas of our society.

Affirmative action focuses on demographics with historically low representation in leadership, professional, and academic roles. It is often considered a means of countering discrimination against particular groups.

Affirmative action programs are commonly implemented by businesses and governments by taking individuals’ race, sex, religion, or national origin into account when hiring.

How Affirmative Action Works

The main purpose of affirmative action is to diversify various parts of society. It is a government-backed policy that was developed to provide inadequately represented groups of people with access to opportunities in academia, the private workforce, and government jobs.

These opportunities include admission to schools and jobs in professional positions, as well as access to housing and financing.

History and Implementation

The affirmative action policy rose to prominence in the United States in the 1960s as a way to promote equal opportunity for various segments of society. The policy was developed to enforce the Civil Rights Act of 1964, which sought to eliminate discrimination.

Early implementations of affirmative action largely focused on halting the continued social segregation of minorities and other disadvantaged individuals from institutions and opportunities.

Despite legislation that outlawed discrimination practices in the U.S., tangible change in the status quo was not immediate.

In more recent years, campaigns have expanded to make organizations and institutions even more inclusive by pushing for greater gender diversity. Newer policies are also aimed at providing more access to opportunities for covered veterans and people with disabilities.

Elements of Affirmative Action

Efforts to stimulate change can take the form of financial assistance such as grants, scholarships, and other support earmarked to help with access to higher education opportunities.

In addition, hiring practices may be structured to require the inclusion of diverse candidates for consideration for job openings. Government agencies may mandate that companies and institutions populate their ranks with a minimum percentage of qualified professionals from varying ethnicities, genders, and cultures.

Failure to meet such requirements could disqualify institutions from receiving government funding or being able to compete for public contracts.

Examples of Affirmative Action

Affirmative action has been put to work since the 1960s, despite lack of progress at times and rulings by legal authorities such as the Supreme Court that have hindered it. Here are some examples of the policy in action.

• In 1965, President Lyndon B. Johnson issued Executive Order 11246. It required that all government contractors and subcontractors expand job opportunities for minorities. It also established the Office of Federal Contract Compliance (OFCC) to enforce the order.
• In 1970, the Labor Department ordered and authorized flexible goals and timetables to address the underutilization of minorities by federal contractors. In 1971, women were included in the order.
• In 1973, President Richard M. Nixon signed the Rehabilitation Act of 1973. It required agencies to submit an affirmative action plan to the EEOC that detailed the hiring, placement, and advancement of individuals with disabilities.
• In 1983, President Ronald Reagan issued Executive Order 12432. It required every federal agency with substantial procurement or grant-making authority to develop a Minority Business Enterprise development plan.
• In 1990, President George H.W. Bush signed the Americans with Disabilities Act. A year later, he signed the Civil Rights Act of 1991.
• In 1998, the U. S. House of Representatives and the U. S. Senate stopped attempts to eliminate specific affirmative action programs. Both houses of Congress prohibited the abolishment of the Disadvantaged Business Enterprise program. In addition, the House refused to allow the elimination of affirmative action in admissions in higher education programs funded through the Higher Education Act.
• In 2022, the Wall Street Journal reported that dozens of major U.S. companies including Apple, Alphabet, American Airlines, and General Motors were urging the Supreme Court to uphold the continued use affirmative action policies in college admissions. They asserted that greater diversity on college campuses contributed to ongoing innovation in commerce and successful business endeavors.

Advantages and Disadvantages of Affirmative Action

The implementation and continued use of affirmative action policies have drawn strong support as well as staunch criticism.

Advantages

An obvious benefit of affirmative action is the opportunities they provide to people who otherwise might not have them. These opportunities include access to education for students who may be disadvantaged and career advancement for employees who may be blocked from rising up the corporate ladder.

Proponents of affirmative action say that the effort must continue because of the low percentages of diversity in positions of authority and in the media, as well as limited acknowledgment of the achievements of marginalized or unrepresented groups.

Disadvantages

Opponents of affirmative action frequently call these efforts a collective failure. They cite as evidence the tiny changes to the status quo after decades of effort. The cost of such programs, coupled with a belief that affirmative action forces the populace to make unwarranted accommodations, drives a significant part of the opposition.

Certain individuals believe that there is little to no bias in society. They argue that affirmative action results in reverse discrimination, which can often lead to qualified candidates being overlooked in academics and the workplace in favor of less qualified candidates who meet policy standards.

Affirmative Action Statistics

Affirmative action is a very controversial topic and often leads to heated debates between those who support it and people who feel it doesn’t benefit society. Is there a way to quantify how people feel and how it’s working?

According to a Gallup poll, more than half of Americans (61%) believe in affirmative action policies. This level of support has increased since the last poll, where only 47% to 50% of individuals thought affirmative action was necessary. This increase in support is especially important, given the active issues surrounding race and identity in the U.S. and elsewhere.

Many Americans feel positive about diversity. They are comfortable with the makeup of their communities, saying diversity positively impacts society as a whole.

There is some divide when it comes to identifying race and ethnicity for purposes of hiring. In fact, about 74% of individuals feel that a candidate’s racial or ethnic background shouldn’t be considered when hiring or promoting them. These activities should only be based on someone’s merit and qualifications.

What Is Austerity?

The term austerity refers to a set of economic policies that a government implements in order to control public sector debt. Governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility.

In short, austerity helps bring financial health back to governments. Default risk can spiral out of control quickly and, as an individual, company, or country slips further into debt, lenders will charge a higher rate of return for future loans, making it more difficult for the borrower to raise capital.

How Austerity Works

Governments experience financial instability when their debt outweighs the amount of revenue they receive, resulting in large budget deficits. Debt levels generally increase when government spending increases. As mentioned above, this means that there is a greater chance that federal governments can default on their debts. Creditors, in turn, demand higher interest to avoid the risk of default on these debts. In order to satisfy their creditors and control their debt levels, they may have to take certain measures.

Austerity only takes place when this gap—between government receipts and government expenditures—shrinks. This situation occurs when governments spend too much or when they take on too much debt. As such, a government may need to consider austerity measures when it owes more money to its creditors than it receives in revenues. Implementing these measures helps put confidence back into the economy while helping restore some semblance of balance to government budgets.

Austerity measures indicate that governments are willing to take steps to bring some degree of financial health back to their budgets. As a result, creditors may be willing to lower interest rates on debt when austerity measures are in place. But there may be certain conditions on these moves.

For instance, interest rates on Greek debt fell following its first bailout. However, the gains were limited to the government having decreased interest rate expenses. Although the private sector was unable to benefit, the major beneficiaries of lower rates are large corporations. Consumers benefited only marginally from lower rates, but the lack of sustainable economic growth kept borrowing at depressed levels despite the lower rates.

Special Considerations

A reduction in government spending doesn’t simply equate to austerity. In fact, governments may need to implement these measures during certain cycles of the economy.

For example, the global economic downturn that began in 2008 left many governments with reduced tax revenues and exposed what some believed were unsustainable spending levels. Several European countries, including the United Kingdom, Greece, and Spain, turned to austerity as a way to alleviate budget concerns.

Austerity became almost imperative during the global recession in Europe, where eurozone members didn’t have the ability to address mounting debts by printing their own currency. Thus, as their default risk increased, creditors put pressure on certain European countries to aggressively tackle spending.

Types of Austerity

Broadly speaking, there are three primary types of austerity measures:

• Generating revenue generation through higher taxes. This method often supports more government spending. The goal is to stimulate growth with spending and capturing benefits through taxation.
• The Angela Merkel model. Named after the German chancellor, this measure focuses on raising taxes while cutting nonessential government functions.
• Lower taxes and lower government spending. This is the preferred method of free-market advocates.

Taxes

There is some disagreement among economists about the effect of tax policy on the government budget. Former Ronald Reagan adviser Arthur Laffer famously argued that strategically cutting taxes would spur economic activity, paradoxically leading to more revenue.

Still, most economists and policy analysts agree that raising taxes will raise revenues. This was the tactic that many European countries took. For example, Greece increased value-added tax (VAT) rates to 23% in 2010. The government raised income tax rates on upper-income scales, along with adding new property taxes.

Reducing Government Spending

The opposite austerity measure is reducing government spending. Most consider this to be a more efficient means of reducing the deficit. New taxes mean new revenue for politicians, who are inclined to spend it on constituents.

Spending takes many forms, including grants, subsidies, wealth redistribution, entitlement programs, paying for government services, providing for the national defense, benefits to government employees, and foreign aid. Any reduction in spending is a de facto austerity measure.

At its simplest, an austerity program that is usually enacted by legislation may include one or more of the following measures:

• A cut or a freeze—without raises—of government salaries and benefits
• A freeze on government hiring and layoffs of government workers
• A reduction or elimination of government services, temporarily or permanently
• Government pension cuts and pension reform
• Interest on newly issued government securities may be cut, making these investments less attractive to investors, but reducing government interest obligations
• Cuts to previously planned government spending programs such as infrastructure construction and repair, health care, and veterans’ benefits
• An increase in taxes, including income, corporate, property, sales, and capital gains taxes
• A reduction or increase in the money supply and interest rates by the Federal Reserve as circumstances dictate to resolve the crisis.
• Rationing of critical commodities, travel restrictions, price freezes, and other economic controls, particularly in times of war

Criticism of Austerity

The effectiveness of austerity remains a matter of sharp debate. While supporters argue that massive deficits can suffocate the broader economy, thereby limiting tax revenue, opponents believe that government programs are the only way to make up for reduced personal consumption during a recession. Cutting government spending, many believe, leads to large-scale unemployment. Robust public sector spending, they suggest, reduces unemployment and therefore increases the number of income-tax payers. 

Economists such as John Maynard Keynes, a British thinker who fathered the school of Keynesian economics, believe that it is the role of governments to increase spending during a recession to replace falling private demand. The logic is that if demand is not propped up and stabilized by the government, unemployment will continue to rise and the economic recession will be prolonged.

But austerity runs contradictory to certain schools of economic thought that have been prominent since the Great Depression. In an economic downturn, falling private income reduces the amount of tax revenue that a government generates. Likewise, government coffers fill up with tax revenue during an economic boom. The irony is that public expenditures, such as unemployment benefits, are needed more during a recession than a boom.

Examples of Austerity

United States

Perhaps the most successful model of austerity, at least in response to a recession, occurred in the United States between 1920 and 1921. The unemployment rate in the U.S. economy jumped from 4% to almost 12%. Real gross national product (GNP) declined almost 20%—greater than any single year during the Great Depression or Great Recession.

President Warren G. Harding responded by cutting the federal budget by almost 50%. Tax rates were reduced for all income groups, and the debt dropped by more than 30%. In a speech in 1920, Harding declared that his administration “will attempt intelligent and courageous deflation, and strike at government borrowing…[and] will attack high cost of government with every energy and facility.”

Greece

In exchange for bailouts, the EU and European Central Bank (ECB) embarked on an austerity program that sought to bring Greece’s finances under control. The program cut public spending and increased taxes often at the expense of Greece’s public workers and was very unpopular. Greece’s deficit has dramatically decreased, but the country’s austerity program has been a disaster in terms of healing the economy.

Mainly, austerity measures have failed to improve the financial situation in Greece because the country is struggling with a lack of aggregate demand. It is inevitable that aggregate demand declines with austerity. Structurally, Greece is a country of small businesses rather than large corporations, so it benefits less from the principles of austerity, such as lower interest rates. These small companies do not benefit from a weakened currency, as they are unable to become exporters.

While most of the world followed the financial crisis in 2008 with years of lackluster growth and rising asset prices, Greece has been mired in its own depression. Greece’s gross domestic product (GDP) in 2010 was $299.36 billion. In 2014, its GDP was $235.57 billion according to the United Nations. This is staggering destruction in the country’s economic fortunes, akin to the Great Depression in the United States in the 1930s.

Greece’s problems began following the Great Recession, as the country was spending too much money relative to tax collection. As the country’s finances spiraled out of control and interest rates on sovereign debt exploded higher, the country was forced to seek bailouts or default on its debt. Default carried the risk of a full-blown financial crisis with a complete collapse of the banking system. It would also be likely to lead to an exit from the euro and the European Union.

What Is an Appropriation?

Appropriation is when money is set aside for a specific purpose. A company or a government appropriates funds in order to delegate cash for the necessities of its operations. Appropriations for the U.S. federal government are decided by Congress through various committees. A company might appropriate money for short-term or long-term needs that include employee salaries, research and development, and dividends.

What Does an Appropriation Tell You?

Appropriations tell us how money or capital is being allocated whether it’s through the federal government’s budget or a company’s use of cash and capital. Appropriations by governments are made for federal funds each year for various programs. Appropriations for companies may also be known as capital allocation.

Appropriation could also refer to setting apart land or buildings for public use such as for public buildings or parks. Appropriation can also refer to when the government claims private property through eminent domain.

Federal Appropriations

In the United States, appropriations bills for the federal government’s spending are passed by U.S. Congress. The government’s fiscal year runs from October 1 through September 30 of each calendar year.

Each fiscal year, the U.S. President submits a budget proposal to Congress. Budget committees in the U.S. House and Senate, then determine how the discretionary portion of the budget will be spent through a budget resolution process. The process yields an allocation of an amount of money that is assigned to the various appropriations committees. The House and Senate appropriations committees divide the money up between the various subcommittees that represent the departments that’ll receive the money. Some of the departments include the following:

• Department of Agriculture
• Department of Defense
• Department of Energy
• Department of Commerce
• Department of Labor
• Department of Transportation

Federal programs such as Social Security and Medicare fall under the mandatory expenditures category and receive funding through an automatic formula rather than through the appropriations process.

Congress also passes supplemental appropriations bills for instances when special funding is needed for natural disasters and other emergencies. For example, in December 2014, Congress approved the Consolidated and Further Continuing Appropriations Act, 2015. The act approved $5.2 billion to fight the Ebola virus in West Africa and for domestic emergency responses to the disease. The act also allocated funding for controlling the virus and developing treatments for the disease.

Appropriations in Business

Corporate appropriations refer to how a company allocates its funds and can include share buybacks, dividends, paying down debt, and purchases of fixed assets. Fixed assets are property, plant, and equipment. In short, how a company allocates capital spending is important to investors and the long-term growth prospects of the company.

How a company appropriates money or invests its cash is monitored closely by market participants. Investors watch to determine whether a company is using its cash effectively to build shareholder value or whether the company is engaged in frivolous use of its cash, which can lead to the destruction of shareholder value.

Monitoring Corporate Appropriations

Investors monitor corporate appropriations of cash by analyzing a company’s cash flow statement. The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow of a company is divided into three activities or behavior:

1. Operating activities on the cash flow statement include any sources and uses of cash from business activities such as cash generated from a company’s products or services.
2. Investing activities include any sources and uses of cash from a company’s investments such as a purchase or sale of an asset.
3. Cash from financing activities includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. The payment of dividends, the payments for stock repurchases, and the repayment of debt principal (loans) are included in this category.

Example of Company Appropriations

Below is the cash flow statement for Exxon Mobil Corporation (XOM) from Sept 30, 2018, as reported in its 10Q filing. The cash flow statement shows how the executive management of Exxon appropriated the company’s cash and profits:

• Under the investing activities section (highlighted in red), $13.48 billion was allocated to purchase fixed assets or property, plant, and equipment.
• Under the financing activities section (highlighted in green), cash was allocated to pay down short-term debt in the amount of $4.279 billion.
• Also under financing activities, dividends were paid to shareholders (highlighted in blue), which totaled $10.296 billion.

Whether Exxon’s use of cash is effective or not is up to investors and analysts to debate since evaluating the process of appropriating cash is highly subjective. Some investors might want more money allocated to dividends while other investors might want Exxon to allocate money towards investing in the future of the company by purchasing and upgrading equipment.

Appropriations vs. Appropriated Retained Earnings

Appropriated retained earnings are retained earnings (RE) that are specified by the board of directors for a particular use. Retained earnings are the amount of profit left over after a company has paid out dividends. Retained earnings accumulate over time similar to a savings account whereby the funds are used at a later date.

Appropriated retained earnings can be used for many purposes, including acquisitions, debt reduction, stock buybacks, and R&D. There may be more than one appropriated retained earnings accounts simultaneously. Typically, appropriated retained earnings are used only to indicate to outsiders the intention of management to use the funds for some purpose. Appropriation is the use of cash by a company showing how money is allocated and appropriated retained earnings outlines the specific use of that cash by the board of directors.

Limitations of an Appropriation

For investors, the cash flow statement reflects a company’s financial health since typically the more cash that’s available for business operations, the better. However, there are limitations to analyzing how money is spent. An investor won’t know if the purchase of a fixed asset, for example, is a good decision until the company begins to generate revenue from the asset.

As a result, the investor can only infer whether the management is effectively deploying or appropriating its funds properly. Sometimes a negative cash flow results from a company’s growth strategy in the form of expanding its operations.

By studying how a company allocates its spending and uses its cash, an investor can get a clear picture of how much cash a company generates and gain a solid understanding of the financial well being of a company.