Flat Earth Economics

    Say you're trying to navigate around your neighbourhood and you want to keep the total distance travelled to minimum. Let's pretend you're not limited to roads, and can always travel in a straight line to any particular destination. You go 4 km to your first destination, and then turn 90 degrees to your left to go 3 km to the next destination, and then you can go home. By the Pythagorean Theorem, the straight-line distance to get home is the square root of (3 squared + 4 squared), or 5 km.

    That's the correct answer, or close enough for any practical purpose. In reality the world is not a flat surface, but the curvature is so big that for distances of only a few kilometres we can just treat it as flat without any significant error in calculation. Or, to put it another way, the 40,000 km circumference of the Earth is so big compared to 5 km that we might as well treat it as infinite, which is what it would be if the Earth were in fact a truly flat surface.

    Of course, the math breaks down when you start dealing with bigger portions of the whole planet. If you go 10,000 km on a flat surface, turn right and go another 10,000 km, you'll be about 14,000 km from your starting point, but on the Earth you'll still only be 10,000 km away. And if you travel 20,000 km from your starting point, the next step you take, in any direction, will take you closer to your starting point. The farthest you can possibly be from any other point on the planet is 20,000 km. (I am assuming all distances are measured along the surface, rather than taking a shortcut through the mantle...)

    Scale makes a difference. It's fine to approximate small portions of the planet's surface as flat, but it's a mistake to apply those assumptions to the whole. And the same principle applies to economies.

    When I sit down to balance my household budget, the total number of dollars I have anything to do with is a negligible fraction of all the Canadian dollars circulating around out there. For my purposes, I might as well treat the dollars that aren't mine as infinite in quantity. If I spend $100, it'll take me $100 of income to get back where I started. Simple, straight, flat-plane geometry. 

    And that's more or less true for most businesses and even local municipal governments or individual government agencies. If you spend X dollars, you generally need at least X dollars in revenue to cover it. 

    But that's when the dollars you have anything to do with are a negligible fraction of the sea of dollars sloshing around out there. At the level of a national government with a sovereign currency, that's no longer the case. The federal government of Canada has something to do with literally every Canadian dollar in circulation anywhere, because every Canadian dollar is a creation of the Bank of Canada. To continue with our analogy, the Canadian government operates at a scale that encompasses the entire globe of the Canadian economy. 

    There's a lot more to this than I've described here, and I don't mean to suggest that national governments are completely immune to the sorts of considerations that apply to private individuals and corporations. Nor am I making specific claims here about the mathematics of government debt and deficits and how much spending and taxation is appropriate. All I'm saying at this point, in this post, is that the common rhetoric about government spending is based on an inappropriate comparison. Yes, it's completely reasonable to worry about revenue and expenditures at the scale of the individual household or business, just as it's completely reasonable to use Pythagorean calculations while navigating around your neighbourhood. It's just that the math is different when you get to global scales; you have to take into account curvature if you don't want to get lost.