APIs are a way to access data that can be easily used and shared--mashed up with other data for example. This is important because it makes government data available for re-use in other applications.
Well, USAspending.gov might look like any other government Web site, but its API—that’s Application Programming Interface—allows access to the site’s raw data in an open, standard file format...Enterprising programmers, researchers, bloggers, or watchdogs like the Sunlight Foundation or Govtrack can grab that data and slice it, dice it, chart it, graph it, map it, or mash it up with new feeds.My favorite quote from the article, "It’s not 1995. A single Web site is not the endgame anymore."
It’s not just the API that’s a big deal, Greg Elin, Sunlight’s chief data architect, told me. “It’s the discipline an API imposes,” he said. To build one, an agency has to record and store data in a way that anticipates public use. “Data sharing is no longer an afterthought,” Elin explained. “You begin with the notion that you’re going to share information. And you’re going to make it easy for people.” (Compare that with the approach of the Federal Communications Commission, which allows only limited searching of filings and comments; or that of the Department of Justice, which puts out data on foreign lobbying in unwieldy PDF format and binders.) An API also encourages the release of data in real time, instead of in occasional reports, like Federal Election Commission figures, or earmark spending. --Read the whole article.
See also Marketing Profs Daily Fix for a better explanation of APIs for non-technical people, with a non-geek video.