During discretionary fiscal policy the government spends and taxes to change the economy during a particular problem. Both Congress and the president have to take action when they agree that the economy is in need. When they do this they are trying to simulate the economy during a time of recession. Economists thought discretionary fiscal policy would eliminate the instability of the recession, however most had given up on the idea by 1980.
The most noticeable discretionary fiscal policy is the discretionary budget. These are the expenditures calculated in the United States budget that are within the appropriations bills. These are negotiated between Congress and the president each year. This includes almost all the spending in the federal department. For an example, during the Great Depression many unemployed people found jobs through the government. Cooley and Ohanian argued, “The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. Unfortunately, these same factors pose a similar threat today.” Numbers had shown that spending declined from the years 1937 to 1938.
By the 1960s, economists were overconfident with discretionary fiscal policy because they thought it would eliminate the instability of the recession. They thought of discretionary fiscal policy as more of a fantasy. The economists believed this idea because in the 1950s, and 1960s they thought Congress would know how to use the desired stimulus to get the economy back to a desired level of RGDP. However they were wrong, since the poor performance during the 1970s the economists have transformed to ardent detractors. The reasons discretionary fiscal policy didn’t work back then was because three-fold.
The first part of the three fold dealt with the lags. There are three types of lags recognition lag, administrative lag, and operational lag. From those lags you must determine if they were an attribute to the failure. Each lag takes time to notice. Recognition lag measures the state of the economy. This is a resultant from GDP because its not measured neither quick enough nor easily found. During administrative lag the president and Congress agree on a course of action. Two legislative bodies must agree and then agree with the president. Congress doesn’t solve problems without any...