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There are many issues within the context of federal fiscal policy that are complicated and technical, which is why lay people likely don't fully understand those policies and practices and problems. Those issues are fully flushed out in this paper.
Question ONE (a): Explain the problem of time lags that occur in the enacting and applying fiscal policy. Nadia Macdonald explains in her book (Macroeconomics and Business: an Interactive Approach) that time lags occur because it takes -- in many cases -- a "long time for the government machinery to produce outcomes" (Macdonald, 1999, 141). The government machinery she is referring to is the legislative process (that is, a bill produced by the executive branch or by a member of Congress has to work though committees, through debates, before it is finally acted upon by vote), the "bureaucracy" and the "red tape" that is inevitably involved in new legislation. The time lag can be a year or longer, Macdonald writes.
The very fact that a fiscal policy -- enacted into law when the Congress passes the bill and it is signed into law by the president -- can take up to a year "or more" is a time lag that potentially has a "destabilizing effect rather than a stabilizing one" on the economy and the nation (Macdonald, 141). The author mentions three distinct types of time lags, "recognition lags," "implementation lags," and "response lags."
Recognition lags exist because it takes a certain amount of time for policymakers to actually discern / recognize a "boom" or a "slump" in the economy, Macdonald explains (141). The time it takes to collect data (many fiscal statistics are only available quarterly), and often those data are "only preliminary" so there is a degree of difficulty in fiscal policy managers' ability to interpret the data. Implementation lags result because of the time it takes for the Congress and the White House to agree on a fiscal policy; the bills have to be debated, altered, are re-written to satisfy concerns from all parties. The current standoff in Washington D.C. over the issue of raising the debt limit is a classic example of an "implementation lag" with reference to fiscal policy. The third time lag, response lags, is simply the window of time it takes once a policy has been enacted for the economy to respond to the legislation.
ONE (b): How could politics complicate fiscal policy? And how might expectations of a fiscal policy being temporary weaken the effects of the policy? Washington D.C. is notorious as a place for Democrats and Republicans, liberals and conservatives, to square off in the battle of wills. Quite often, the political climate of Washington D.C. -- which includes members of Congress, the executive branch, the thousands of lobbyists, mainstream media and bloggers from a diversity of persuasions -- is toxic and polarized. That situation has been in full view over the past few months as President Barack Obama tries to negotiate with a divided Congress to reach an agreement over the need to raise the debt ceiling.
Right wing politicians from the House of Representatives (many recently elected thanks to support from the far right wing "Tea Party") are demanding enormous cuts in spending including gutting Medicare and Social Security (and other spending cuts) prior to giving their vote on a debt ceiling. Basically politics in this instance have greatly complicated fiscal policy. The conservatives demand that no new taxes be introduced and that huge cuts be made in popular programs -- some even demanding that the recent health care overhaul legislation be wiped from the books -- or they won't sign on to raising the debt ceiling. In plain language, these ideologically motivated members of Congress are holding the American economy hostage to their unreasonable demands.
As The New York Times editorialized on July 20, when a bipartisan group of six senators offered a reasonable compromise plan to temporarily lift the debt limit -- so the nation won't default and send economic shockwaves through the global economy -- "It makes the House Republicans look even more ridiculous and isolated." This would be a temporary band-aid but it would not weaken the policy if, and it's a big "if," Congress and the…[continue]
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