Macroeconomic Policy

The administrative lag is an important limitation with fiscal policies. It limits their usefulness as an activist stabilization policy device and makes even the more passive fiscal stance of balancing the full-employment federal budget difficult to accomplish. Other problems with fiscal policies as an activist demand management tool include the crowding out effect, impact lags, and the fact that the greater portion of government purchases do not lend themselves well to cyclical variation.

The impact lag is a problem with monetary policies. This lag, together with uncertainty, gives rise to the target problem facing money managers and to the possibility that fine-tuning with monetary policies will destabilize the economy rather than stabilizing it. The absence of a significant administrative lag for monetary policies is their strong point as an activist stabilization policy device.

Price and wage controls probably are not very effective in containing demand-pull inflationary pressures for more than brief periods. However, they should not be needed for this job, since monetary and fiscal policies can do it.

Price and wage controls probably could be effective in checking chronic wage-push inflationary pressures of the type contemplated by the wage-push trade-off hypothesis if such pressures should become a problem in the United States. They might be needed for a serious problem of this kind, since monetary and fiscal policies provoke unacceptable unemployment when applied to check such pressures.

The debate over an active or passive role for government in economic affairs is a broad and enduring one. It exists apart from current labels and specific points at issue.