The key to the decision lag is simply the time needed for government leaders to make choices. In some cases, the choice might be obvious, a "no brainer," but more often than not the choice is not so obvious. The decision makers usually need to reach some sort of agreement, often through a majority vote.

And these decision makers inevitably have different concerns, represent different constituencies, and seek different consequences. The resulting tug and pull, trade-offs, and negotiations take time -- giving rise to the decision lag. This decision lag could be as short as a few hours, but is often likely to take days, weeks, or even months.

More on Government Choices

In theory, the appropriate government stabilization policies can be easily selected to address business-cycle problems. Expansionary fiscal and monetary policies both can be successfully aimed at fixing the unemployment problems of a business-cycle contraction. Contractionary fiscal and monetary policies both can be successfully aimed at fixing the inflation problems of a business-cycle expansion.

However, the specifics of the policies can have a myriad of consequences beyond just "fixing the business cycle." Monetary policy affects interest rates and the size of the government sector differently than fiscal policy. The tax side of fiscal policy affects disposable income and consumption differently than the government spending side.

If fiscal policy is used, then Congress and the President need to balance constituency interests and reach an agreement on the specifics. Should the policy involve government purchases, transfer payments, or taxes? If monetary policy is used, then the Federal Open Market Committee of the Federal Reserve System need to reach an agreement on the specifics. Should the policy involve open market operations, the discount rate or reserve requirements? These decisions could take days, weeks, or months.

Monetary versus Fiscal

• Monetary Policy: The decision lag for monetary policy tends to be relatively short. Monetary policy decisions are made by the Federal Open Market Committee of the Federal Reserve System, a small group consisting of 12 members and an relatively powerful chairman. Monetary policy is their primary task. This committee meets every six weeks or sooner if needed usually comes to a policy decision when faced with a business-cycle problem with very little delay.


• Fiscal Policy: The decision lag for fiscal policy tends to be relatively long. Fiscal policy decisions are made by Congress and the President, more often than not, literally involving and act of Congress signed into law byÊthe President. Because Congress represents diverse interests, finding a fiscal policy that is acceptable to a majority can take time. And hopefully this decision is acceptable to the President, as well. If not, then the decision making process, and the decision lag, continues.

Other Lags

• Recognition Lag: This is the time it takes to identify and document the existence of an economic problem that might require government action. The recognition lag arises because it takes time to collect and analyze economic data; to verify that an actual problem exists. This lag is seldom less than a month and typically lasts a couple of months.


• Implementation Lag: This is the time it takes for the government sector to take the steps needed to activated or implement the chosen policy. This lag is also likely to take weeks if not months.


• Impact Lag: This is the time it takes for full effect of a government policy to work its way through the economy and cause the desired changes in production and income. This lag works through the multiplier process and is likely to take a couple of years.