U.S. fiscal policy stimulus for the digital age

Posted May 8th 2008 3:20PM by Joseph Lazzaro
Filed under: Forecasts, Politics, Federal Reserve, Recession

When one travels in economists' circles, one tends to tap into the issues, controversies and policy ideas 'dismal science' practitioners are debating.

And one issue economists have rattled around concerns the speed of fiscal policy stimulus, or more accurately, the lack thereof. In the digital age, the internet has propelled a host of speed-enhancing changes, and it occurred to this group of economists that U.S. Government policy is decidedly behind the curve in this area.

Here's why: economist David H. Wang noted that the U.S., in an attempt to jump-start its economy stalled by the nation's worst housing slump in more than 15 years, has implemented a host of monetary policy changes to provide monetary stimulus quicker. The U.S. Federal Reserve cut key, short-term interests multiple times during a 10-week span (and later implemented additional rate cuts), and devised two, new, Fed-administered institutions to address the credit crisis, provide liquidity, and ensure the orderly operation of financial markets.

Concerning fiscal stimulus, the U.S. Congress and President Bush did quickly pass and sign a $160 billion fiscal stimulus package in February 2008, Wang notes, but the disbursement of those funds? "It has been anything but speedy," Wang said.

Indeed, the first tax rebate checks and electronic transfer payments are set to be mailed/made this month, in May 2008. "That's a three month lag between passage of the bill, and when the fiscal stimulus can possibly start to help the economy," Wang said. "The problem is, all the while the forces of recession have had a chance to grind for another three months, and that's not good. It's delayed the recovery."

The fiscal stimulus speed question

Economist Glen Langan agreed with Wang, noting that the depth of the housing downturn -- and the size of GDP activity it removes from the economy -- places a premium on stimulus in all forms (monetary, fiscal), and, by extension, on the ability to get that stimulus into the economy as soon as possible. "You have to ask, if the fiscal stimulus distribution began immediately, by late February, would the U.S. economy have benefited from those increased dollars? I think the answer is yes, without question, even allowing for the fact that some rebate money will be saved or invested and not spent."

Further, the two agreed that in the age of electronic payments transfer and online financial transactions, etc. it seems almost anachronistic that the federal government has not implemented a tax cut distribution system that take less than three months to commence.

"We have monetary policy for the digital age, emergency Federal Reserve policies to deal with the sudden appearance of financial problems, it's high time that fiscal policy quickens its response time," Wang said.

Economic Analysis: Cogent analysis by economists Wang and Langan. Even allowing for the increased costs and delays associated with government processes, a way must be found to speed-up fiscal policy. If the digital age is about the compression of task time, it's 'high time' the U.S. Government's executive branch upgraded systems to operate quicker: the U.S. Federal Reserve has adjusted, and it's a good example to follow.

Tags: Bush Administration, Economic Stimulus Act of 2008, fiscal policy, GDP, housing slump, Internet, markets, monetry policy, technology, U.S. Congress, U.S. economy