The Implementation Lag of economic policy refers to the time that is lost between an agreed course of economic action being finalized, and it then being put into effect. It is the second half of the action lag, the first half being the legislative lag, and it almost always relates to fiscal policies only.
There may be some special cases where it applies to monetary or financial actions of one sort or another, but standard monetary policy is conducted without any significant lag in implementation, simply via immediate Federal Reserve open market operations (or equivalent bodies in countries other than the United States).
The implementation lag of discretionary fiscal policy varies greatly depending on the nature of the action to be taken. The lag may be of short duration e.g., if it relates to a simple tax cut (or increase), but will be much longer if it entails infrastructure expenditures e.g., on road improvements. This is because the government will need a lengthy period of several months, if not years, for planning and procurement procedures before anything actually happens.
In this article I will explain the lag in implementing different sorts of policies and provide several examples. Before doing that, it helps to visualize this particular lag in the context of the entire framework of stabilization policy lags.
As illustrated in the chart below, stabilization policies are hindered by many time delays, and in aggregate can render the entire effort futile since an economic shock mat self-correct by the time an expansionary or contractionary package takes effect. Nevertheless, there are times when the government can assist the economy to return to a long run stable growth path.
The 'inside lags' illustrated in the top half of the chart refer to various lags that apply before any action on the ground can take place. It all starts with the recognition lag, since it takes time for official statistics to notice any sort of excessive downturn or upturn in the economy, and then proceeds to the decision phase of deciding what, if anything, should be done about it. If it is agreed that something does need to be done, there will then be an action lag that is subdivided into a legislative lag and the implementation lag.
Once all this is completed, there will then be a period of time before the full effect of an action is felt in the economy. This is the outside lag, or 'operational lag' although it also goes by many other names as illustrated by the bottom half of the chart.
For details on the these other sorts of lags, see my articles at:
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.
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:
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.
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.
To get my latest updates sent straight to your inbox, just add your details below: