Policy Time Lag Essay

In today’s economy, fiscal policy plays a vital role in influencing the financial direction and economic goals of the United States. Furthermore, government spending and taxation are two main economic activities that influence a nation’s economy and are generally referred to as the fiscal policy. Not only does the fiscal policy help determine a nation’s budget, but it also determines how much resources need to be allocated to help achieve their economic goal. Therefore, the fiscal policy has many functions and consists of allocating, distributing, stabilizing and developing the nation’s economy. One of the main policies that the government has set into place to regulate an economy is fiscal policy. A fiscal policy involves the discretionary

For instance, there are a number of fiscal policy time lags that policymakers face revolving the conduct of fiscal policy. The first policy time lag is the recognition time lag, which is the time needed to gather information about the current state of the economy. Once the financial problem has been identified, the policy time lag is put into effect, thus, “the time between recognizing an economic problem and implementing policy to solve it. The action time lag is quite long for fiscal policy, which requires congressional approval” (Miller, 2012, p. 285). Finally, after the fiscal policy is implemented, the effective time lag occurs, which includes the time that passes between the enactment of a policy and the outcome of that policy. The fiscal policy is affected by the recognition time lag, action time lag and effect time lag because increasing government spending will take time. For that reason, it may possibly take several months for the fiscal policy to pass through the economy and affect aggregate demand, which by then may be too late. In addition, time lags are downsides to fiscal policy because they could make an economic problem worse rather than better. Another downside to fiscal policy is the impact it has on national debt. According to the article, Our Democratic Debt, from 2009 to 2013, the federal government’s total debt is approaching $18 trillion, with current debt of 103 percent of U.S. gross domestic product and the 2013 deficit was 4 percent of GDP and 20 percent of federal spending (Demuth, p. 28). In addition, Demuth mentions, “the GDP ratio shows the burden of the debt (a larger economy can afford to borrow more, just as a higher-income family can afford a larger home mortgage), and the spending ratio shows how much of our government we