Fiscal Policy Lags
Management of the National Economy
In the United States there are only a few avenues available to the government for management of the economy. These opportunities fall under the broad headings of monetary and fiscal policy. Monetary policy is under the primary control of the Federal Reserve Board. Its tools include interest rates and the supply of money. Fiscal policy, on the other hand, is open to the purview of the legislative and executive branches of government. It refers to government policy using taxes and spending to influence the economy .
The subject of controlling the national economy presents professionals and ordinary citizens alike with fodder for lively discussion and debate. It is also a topic whose popularity ebbs and flows with the times. The focus in recent years has been on the use of monetary policy. But do not tell that to the politicians. Some people will not let go of what they are familiar with and to what gets them votes. So Congress and the President constantly battle to find the most “correct” fiscal policy to pursue given their assessment of the economic conditions at any point in time. And therein lays a potential weakness in the argument that favors the use of fiscal policy to smooth the troughs and peaks of the United States economic machines. Fiscal Policy Lags
In order for there to be a reasonable chance of achieving the outcome desired from the application of particular economic policies it is important for there to be an ability to recognize the existence of a challenge, to correctly diagnose the condition, to take action in accordance with the approved policy, for all of it to be timed appropriately and to have some luck. This one rather tedious sentence encompasses the array of arguments against the use of fiscal policy for control of our national economy. Put another way, we are describing recognition lag, decision lag, implementation lag and take-effect lag. These “lagging” concepts...
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