Time Lags in Discretionary Fiscal Policy
When congress or the president proposes fiscal policies to correct unhealthy economic conditions, the time it takes from the recognition of the problem, to the proposal of a solution, to the implementation, up to the time that the effects would yield some result normally takes a considerable amount of time. These time lags can be grouped into three different phases, the recognition time lag, the implementation time lag, and the response time lag. Time lags in Discretionary Fiscal Policy, besides consuming some considerable amount of time, are also very unpredictable.
Studies have shown that “discretionary actions have shown little consistent response over time” (Taylor, 2003). With these three time lags adding up together, we can say that when the government generates one proposal to ease out economic health, one must foresee that within the period of lag, there are no roadblocks or events that could alter the eventual outcome of such a solution. Given the initial information that time lags are very unpredictable, it makes it more difficult to know what range of time needs to be foreseen.
So within the period of the time lag, the conditions may alter in such a way that when the discretionary policy is already in place it is no longer applicable, or it could make the situation worst where the change of conditions within the time lag would work in such a way that it makes things worst. Let us focus first on a condition where discretionary fiscal policies would end up useless or delayed as the chain of events within the time lag would make it inappropriate.
One example is President George Bush response to the September 11 attack where he immediately requested $40 billion in emergency supplemental appropriations. In the late October of that same year, he added additional stimulus that includes, “reduced taxes for low- and moderate-income households, accelerating the tax cuts passed in 2001, allowing partial expensing on business capital equipment, eliminating the corporate alternative minimum tax, and extending unemployment benefits” (Cooper, 2002). Five months later President Bush added expensing provisions and unemployment benefits.
The result was that the people believed that the added policy was short and late. This is because there was no way for the President to directly quantify the needed policy to ease out the economic stress after the September 11 attack. The delay took so long that the needed effects came late. The events that occurred due to sentiments and fear where overlooked while the effects of the discretionary policy were not yet in effect. According to Auerbach (2002), “the impact of policy on current activity depends on expectations about the future”.
The worst scenario would occur when discretionary fiscal would actually work against what it was intended for. This is because discretionary fiscal policy is an inexact science with congress having different agendas trying to work out with the President using present data that are already in effect and taking time to generate a corrective action for the present conditions. For example “temporary investment incentives may work in the opposite direction strengthening the immediate response but also, potentially, weakening prior investment” (Auerbach, 2002).
This is because when the data are collected and fiscal policies are put in place, the progress of investment within this period could well be depending primarily on prior investment that are expected to boom during the period where the discretionary fiscal is still in the process of being implemented. Upon implementation of the discretionary policy, these prior investments could be affected by massive competition of new investment resulting in a scenario where the discretionary fiscal will worsen the economic condition.
In the end, this document does not discourage the use of discretionary fiscal policy but puts caution that discretionary fiscal policies should be well thought off, assessing the possible future risk before it is being implemented. Effective discretionary fiscal policy is just like mastery of any art, that a group of body, the congress and the president, must become a guru in order for discretionary policies to be effective.
References
Taylor,J. (2003). Reassessing Discretionary Fiscal Policy. Stanford University, Retrieved September 15, 2007 from http://www.stanford.edu/~johntayl/Papers/Reassessing+Revised.pdf
Cooper, K. (2002). Monetary Policy. Economics: Principles, and Policies, 16/e.. Retrieved March 23, 2007 from https://www.esa.doc.gov/Speeches/NABEFINAL.doc
Auerbach, A. (2002). Is There a Role for Discretionary Fiscal Policy?. The Federal Reserve Bank of Kansas City. Retrieved September 15, 2007 from http://www.kansascityfed.org/publicat/Sympos/2002/pdf/S02auerbach.pdf
