Fiscal Ease

Amendment XX of the United States Constitution states that he’ll begin leading the House as Speaker on January 3, 2011, but Congressman John Boehner has little inside lag time prior to that day for extending President George W. Bush’s tax cuts before New Year’s Day, when they’re due to expire.

Inside lags, delays inside the policy making process, usually put fiscal policy at a disadvantage for manipulating current economic conditions, due to the long time required for authorizing revenue and expenditure changes through the annual budget process.  These inside lags are in direct contrast to fiscal policy’s outside lags, delays between the action that results from policy making and subsequent economic activity, with rapid effects working within a matter of months.

As opposed to fiscal policy, monetary policy – like the second round of quantitative easing (QE2) announced by the Federal Reserve – is characterized by short inside lags, due to the Fed meeting every six weeks for consideration of necessary policy changes.  But as explained in the Handbook of Government Budgeting, outside lags for monetary policy like QE2 tend to be long and variable.

Production most sensitive to interest rates – those of inventories, construction, and consumer durables expenditures – tend to be affected first, but even these sectors, in the aggregate, experience less than half the full impact of an interest rate change within the first year.  For exports and particularly for business investment, the effects are delayed several years; for total aggregate demand, more than half the impact would be delayed beyond two years.

“My goal is to make sure that we don’t have a huge spike in taxes for middle-class families,” Barack Obama said, avoiding a candid response to a question asked in a news conference about his fiscal policy to prevent the Bush tax cuts from expiring for all Americans.

In order to effect safety and happiness, Representative Boehner should judge it as necessary and expedient to prevent Obama’s lagging response from leading to a huge tax spike for the small businesses that rely on the Bush tax cuts to provide Americans who comprise middle-class families with jobs.

References

Roy T. Meyers, ed., Handbook of Government Budgeting (San Francisco: Jossey-Bass, 1999).

Barack Obama, “Press Conference by the President,” November 3, 2010.

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