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.