Friday, February 15, 2008

Diononomics

It's rare we see (borderline) supply-sidism from the central-left. From The Globe:
Mr. Dion said his windfalls-for-potholes proposal would not disrupt the goal of reducing Canada's federal debt so it only amounts to 25 per cent of economic output by 2012.

”In fact, it may accelerate it by generating economic growth,” the Liberal Leader said.

No. If the government has $10, it can pay down the debt by $10. It cannot spend that $10 on fixing potholes and expect to generate more than $10 (let alone more than $10 in present value) in taxes or other government revenues to "accelerate" the debt repayment schedule.

Admittedly, Dion is hedging a little bit, talking about the debt-to-GDP ratio. Can growth-generating 'fiscal stimulus' actually lower debt/GDP? Well, not sustainably. Presumably nobody believes that infinite government spending leads to a debt/GDP ratio less than some arbitrary epsilon. What about a little bit of fiscal stimulus?

Net federal debt = $508.1 billion.
Nominal GDP = $1,321.4 billion.

So what Dion claims is that the debt-GDP ratio would be lower if money was spent rather than applied to the debt, or mathematically, (508.1 - x)/1321.4 > 508.1/(1321.4 + f(x)), where f is our multiplier function. Take x=1, and we can compute Mr. Dion's beliefs about the size of the Canadian fiscal multiplier. We'll give him some more credit than is due and restrict ourselves to short-run thought because he's talking about a 2012 target. I don't think many people believe increased government spending causes long-run higher GDP.

Some calculator work gives me that the multiplier must be at least 2.6 for the above inequality to hold. (Which some calculus-loving folks might note is simply the inverse of the debt-GDP ratio.) This is not a reasonable result.

I'll cut him a little bit of slack, because introductory macro examples always have multipliers around 3, however unrealistic that is. However, there's now solid evidence that Mr. Dion's grasp on economics is less than sound - though there's nobody I know of up there who has a near-spotless economic record.

POSTSCRIPT: Greg Mankiw has a good idea: tax people as individuals, not family units. Not only does this cater to the collapsing defintion of 'family', but it's probably more efficient.

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