Decision Lags

Suppose you were hiking in the wilderness and suddenly realized that you were lost. What would you do? Your process of trying to solve this problem would take time, just as many other decision-making processes do. There is a lag between the time a problem starts and its discovery. Making a decision about what to do takes more time, and implementing that decision may also take time. Finally, once a decision is made and implemented, results may not be immediate but occur with a delay.

Many problem-solving situations have the sorts of lags described above. However, the decision and implementation lags are short for monetary policy because a simple majority of the FOMC can change policy in a telephone conference and open-market operations can begin within hours of a decision. The length of these lags for fiscal policy, however, is substantial. Decisions about which spending programs or taxes should be changed are made in the White House and are submitted to Congress. Legislation must go through committees and hearings, and pass both houses of Congress. If there are differences, the bills go to a conference committee that reconciles differences and then this compromise bill must be voted on again. After the president signs the legislation, time may elapse before any change occurs in the amount of money spent or taxes collected. If the time lag for deciding and enacting fiscal policy is less than six months, the system has worked very fast.

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Copyright Robert Schenk