The Macroeconomics Anti-Textbook by Tony Myatt;

Author:Tony Myatt;
Language: eng
Format: epub
Publisher: Bloomsbury UK (Minor Textbooks)

2.9 Timing issues

Mainstream textbooks say that the implementation of fiscal policy involves long time lags, longer than those required for monetary policy, and is therefore too slow an instrument to stabilize the economy. Let us deconstruct this claim.

First, both fiscal and monetary policy involve the same recognition lag. With regard to the second and third lags—the planning and implementation lags—we need to consider how interest rate changes affect the economy. Most textbooks assume that investment is the interest-sensitive component of spending. If so, why would investment spending have shorter planning and implementation lags than government spending? All spending is planned. Why should corporate planning and implementation lags be shorter than those of the government?

Perhaps textbook authors have in mind a political situation such as the United States where different branches of government are controlled by different parties, leading to long periods of wrangling. But the political situation of the United States, over the most recent period, is a poor basis for generalizations about fiscal policy in all economies.

Parliamentary systems can respond quite quickly. Even though national budgets are traditionally only once a year—usually in March—governments can respond earlier than that. For example, when the Canadian economy began to slow mid-2000, the government brought forth a mini-budget in October 2000. Similarly, following the downturn that became undeniable by November 2008, a stimulative budget was announced in late January. Indeed, in 2009 an extremely wide range of economies responded in timely fashion to the call by the IMF and the G20 for expansionary fiscal policy to counter the unfolding global recession.

Further, austerity has created a backlog of suitable projects ready to be implemented. And currently there is the overriding need for government investment in a Green New Deal to wean economies off fossil fuels.

There seems very little substance to the view that monetary policy necessarily involves shorter time lags than fiscal policy. Mainstream textbooks fail to look critically at the usual claim concerning the relative lags of fiscal and monetary policy.

Question for your professor: Why do textbooks presume that the planning and implementation lags of the nongovernment sector are shorter than the planning and implementation lags of the government sector? Isn’t all spending planned?

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