Fiscal Policies There Are Many Issues Within

¶ … Fiscal Policies

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 president later in the fiscal year negotiate a long-term policy of spending cuts mixed with some additional revenue.

Question TWO: What are the three basic functions of money? How can rapid inflation undermine money's ability to perform the three functions?

The three basic functions of money are: a) a medium of exchange; b) a unit of account; and c) a store of value. According to the book Basic Economic Principles: A Guide for Students, money is a medium of exchange for anyone that has money. The young man has a birthday and one of the gifts is a hundred dollar bill. He goes to the mall to buy a sports-related jacket with his favorite team's logo on it; he finds what he wants for $40, hands over the hundred-dollar bill, and receives his change. He has just completed the process because the money he had was accepted as a medium of exchange (O'Connor, et al., 2000, 107).

As a unit of account, O'Connor explains, "money is & #8230; important because it allows you to compare prices of goods and services" (107). If a person sat down at a deli and the menu showed that a six-inch ham sandwich costs $4 and a six-inch hot pastrami sandwich is offered at $8, it is obvious that the price of hot pastrami is twice that of the ham sandwich. "As a unit of account," O'Connor goes on, "money can tell you the relative value of each type of sandwich in that particular marketplace" (107). Of course it remains the individual's decision as to how to spend his lunch money, but the unit of account becomes the measure of the value of that item. In the book ISC Economics for Class Xii, the author (Mukherjee, 2002) explains that the unit of account is the "second most important function of money." Even under the barter system -- for example, how many apples are to be exchanged for one juicy orange? -- there must be an appropriate "rate of exchange" which is the unit of account (Mukherjee).

The third basic function of money, store of value; this function is described by the ISC Economics book as the concept of putting money away for a future use. "The money we deposit in a savings account serves as a store of value," the Mukherjee explains. That money that has been salted away represents "stored-up purchasing power." In other words, the money a person possesses, when saved or stored away, should have about the same purchasing power as it does when it was placed into a savings account in a bank. Of course, due to inflation, the money one puts aside in 2011 isn't necessarily going to have the same power at the cash register in the mall in 2012.