Implementation of Fiscal Policy Vs Monetary Policy
As explained above, the action lag is nearly always only a significant factor for fiscal policies because the monetary authorities can act more or less immediately once a problem has been recognized. There is no need to pass new legislation for normal monetary operations to take place, and implementation is done via the click of a few keys on a computer keyboard.
There are occasions when the financial system itself requires significant new legislation, and this may be the one exception where there is an action lag that applies to monetary policy, but even then there will not be any time lost in implementing operations once the new legislation is in place.
The relevance of the implementation lag relates most strongly to physical infrastructure projects or any other investment project that requires building works to take place. The planning and approval process here is extreme because of burdensome regulations relating to planning and procurement. I'll explain these next.
How Long is the Implementation Lag?
Since, for the most part, we are talking about fiscal operations when considering the implementation lag, it follows that we are primarily concerned with the rules and regulations that delay actions from being taken. There is, of course, a reasonable time period that needs to occur for efficient planning to occur, but the time delay is amplified beyond all reason due to excessive red tape regulations from the government.
When new legislation is passed with regard to regulating how firms do business, it is done with noble intentions. However, the law of unintended consequences usually causes negative side effects that hinder efficiency in the economy.
Regulations apply to many concerns:
- Environment & the Green Agenda
- Heritage & Conservation
- Equality & Diversity
- State Aid & Procurement
My own experience of working in economic development was very much centered around these rules and regulations. In order to fund a project, the red tape that had to be complied with directly caused project start dates to be delayed for months, and sometimes years. The regulations themselves overlapped with older regulations in ways that did not conform with each other, and the project appraisal process would be done by people who sometimes had little experience of those regulations.
Additionally, before the government can provide funds to an organization, there has to be a lengthy period for procurement purposes. It is not allowed to simply award funding to a preferred organization because 'state aid' rules prevent preferential treatment of one private sector organization over another. That is perfectly reasonable as a general rule, but it always takes more time, and even in cases where it is obvious that there is only a single firm that is capable of completing a project, still there needs to be a lengthy procurement procedure to select that firm.
All these regulations overlap with impact assessments with regard to the desired project inputs, outputs, and outcomes necessary to account for 'additionality' i.e. net benefits to society over and above the direct results. It gets technical but some account had to be given for deadweight loss, leakage effects, displacement effects, substitution effects, and multiplier effects. The whole process was extremely inefficient, and politics would always override any real economic objectives.
Implementation Lag Example
An example of the implementation lag is provided by the 'American Recovery and Reinvestment Act' that was introduced to boost the US economy following the 2007-08 financial crisis. The PDF report linked to below sets out the components of that policy, and it shows that whilst there are some things that the government can do to reduce the implementation lag of fiscal policy, even in times of crisis it takes a lot of time for these things to roll out.