As you may have noticed, I tend to show you various errors so that you do not make them in the future. In a commentary to the Statistics Canada report discussed in the previous post, Canadian Business makes two mistakes that are instructive. They provide the dollar estimates of the underground economy ($18.8 billion in 1992 and $35.7 billion in 2008). These numbers are meaningless, since they are in current, and not in constant dollars.
Canadian business estimates what would have happened if all the underground activities had been taxed and all extra proceeds were used to reduce the deficit. This is naive: government spending does depend on its revenue. So the assumption that all the extra revenue would have been saved by the government is incorrect.
This type of reasoning is quite common. Something changes and the writer assumes all the effects fall on one thing only. But the economy is an interconnected system; if one thing changes, a lot of others do as well.
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