Heed the Coyne Reverse Hypocrometer

A 1% cut in the GST, according to Finance department calculations, will cost the federal government between $4.5- and $5-billion in forgone revenues next year, and every year after that -- more, in fact, in future years, in line with economic growth. Of course, what looks to Finance like forgone revenues looks to you and me like a pay raise: you get to keep more of your money, rather than hand it over to the feds every time you make a purchase.

Now, $5-billion is, according to my calculations, a lot of money, or to use the technical term, “loadsadough.” If the federal government were to announce it planned to spend $5-billion on something -- even once, let alone every year -- you can be sure it would be treated as a big deal. The sponsorship scandal, to take a less happy example, concerned a program that cost about $300-million, total, spread over several years.

So, you would think that a $5-billion cut in the GST would also be a big deal, an unambiguously good news story. Well, good news to everyone but a handful of disgruntled economists, plus the odd pasty-faced columnist, who would prefer the government had cut income taxes instead. But who listens to them? Everyone else, surely, is out celebrating their $5-billion increase in purchasing power.

If so, someone forgot to tell the media. In an impressive display of unanimity, reports in newspapers across the country emphasized how trivial the resulting price reductions were, how little consumers would save, if indeed they saved anything at all. Some representative headlines: The 1% illusion. The 1 per cent loophole. Big cut a big bust. GST cut arrives in Canada with a whimper, not a bang.

You get the picture. One story even warned readers, “Booze buyers beware: July 1 GST cut could actually hike price of spirits.” It wouldn’t do anything of the kind, of course: the rise in booze prices, as logic would suggest, was due to an increase in another, entirely separate tax. But it fit the prevailing media frame, that the GST cut was much ado about very little, if not an outright con job. Or as a Vancouver Sun story groused, “GST cut won’t benefit people on pensions.” (Why? Because it would lead to lower prices, and therefore a smaller adjustment for inflation. Oh my.)

This remarkable waving away of what would otherwise appear to be a sizeable windfall for consumers is in part a variant of Easterbrook’s Law, named for the American journalist Gregg Easterbook, who first conclusively proved that all economic news is bad: all news means change, and all change, no matter how broadly beneficial, makes some people worse off -- who are invariably the focus of media attention. In the case of the GST cut, troublingly, there are no losers, so the media instinctively switched to the next best thing: the winners don’t benefit as much as all that.

In part, too, it reflects an important principle of physics, familiar to generations of politicians: a given sum of money may expand or contract in size, even in Newtonian space-time, depending on whether it is concentrated in a bunch or divided up into little piles. $5-billion spent all at once, ie by the government, is a lot of money. $5-billion spent in dribs and drabs, ie by consumers, is chicken feed. (See: daycare debate.)

But in part this is simple demagoguery. The best way to see this, as always, is to apply the Coyne Reverse Hypocrometer. That is, run the experiment in reverse: suppose, rather than cut the GST by 1%, the Tories had increased it by the same amount. Would the press and opposition be dismissing the resulting rise in prices as trivial? Or would we be hip-deep in stories that began: “A dollar more on the price of a child’s snowsuit might not seem like much to most people, but to a single mom like Deedee Smythe, it’s the difference between...”

Actually, we don’t even have to suppose. Those few stories that were not snickering at how little consumers would save from the GST cut were outraged that consumers might in some cases be denied these same savings, by conniving merchants who, it was theorized, might simply pocket the tax cut for themselves -- in some cases by an offsetting increase in their own prices, in some simply by leaving the tax-included price unchanged.

If the former -- that is, if merchants could increase their profits any time they liked, by the rather obvious strategy of raising prices -- it would be interesting to know why they would not have done so before this. If the latter, then we really are talking about small change: a newspaper that might otherwise drop to 49.5 cents is left at 50 cents.

You understand: a $5-billion tax cut is nothing -- but to be cheated out of a half-a-cent, that’s serious money.