Science and Mr. Shriver

Adam Shriver discusses the earnings tax over at the 'Hub, and doubts whether its negative effect on cities has been adequately proven:

So if one wanted to honestly study such a phenomenon he or she might begin with some research before performing analysis. How many cities have earnings taxes in the U.S.? answer 14 states and the district of Columbia a list encompassing hundreds of cities. Has there ever been a documented scientific study that demonstrates that employers avoid such cities? In truth I do not know.

The Sun King visits the Academy of
Sciences--but where are the marginal
value model equations?

He doesn't specify what he means by "scientific study," but I suspect he has in mind something like this: an empirical study demonstrating a correlation between cities employers avoid and earnings taxes. In the physical sciences, where work is done by isolating variables and demonstrating causation, such an approach can be quite productive.

But human societies cannot be readily reduced to controlled laboratory conditions -- which is why the constant reminder about statistics is that correlation does not necessarily prove causation. Say Portland enacted an earnings tax and didn't see any avoidance on the part of employers. Hypothesis demolished, right? But hold on -- we don't know what else Portland is doing. Are its other taxes (or wages!) attractively low? Does it ply potential employers with tax breaks? Is it the only game in town for certain industries, which allows it to extract (in an essentially monopolistic way) its earnings tax?

Such messy variables are the reason Austrian economists, for example, reject statistical studies of correlation as a valid basis for economic inquiry. Instead, economics must seek to understand the commonsense principles all human action is based on (what Mises called "praxeology"), and then derive economic conclusions from those principles. Such commonsense principles intuitively include the idea that, if I can do the same business in Clayton I can do in the City of St. Louis, but have less of my earnings taken away from me, then, all other things being equal, that's where I'm going to go!

Now, we can call that analysis "scientific" in the sense that it's pretty obviously true, but my suspicions are that Mr. Shriver wants something with charts and graphs. There are excellent reasons to think, though, that human diversity is more obscured than clarified by attempting to reduce it to colored bars and pie sections.

Senor Shriver Tilts For Windmills

Since it seems my comment will never be allowed to escape moderation limbo, I'll summarize my criticism of Adam Shriver's paean to windmills here.

Let's start with the relatively elementary fallacy that government spending on windmills will generate jobs. The problem with this plan is that the government has to get its funds ultimately from the private sector (it can take the long way around and print the money, but ultimately such a deficit must be paid for with taxes or inflation). That really deserves emphasis: anything the government does is ultimately parasitic on funds created by the private sector.

Reducing the amount of money in the private sector is going to invariably have one or more of several effects: a) it will reduce the revenues of firms; b) it will reduce the amount of capital investment in firms; c) it will reduce the amount of savings accrued in banks; d) it will reduce the amount of private consumption. Obviously, all of these effects have a negative impact on jobs. (This reasoning is best exposited by Hazlitt in Economics in One Lesson.)

At best, the government can shift employment from (unsubsidized) firms to (subsidized) firms. Of course, it will only be a "shift" if the government uses its tax dollars as efficiently as the private sector would have -- and considering that those funds must be funneled through a vast bureaucratic apparatus of collection, decision and distribution, none of which is susceptible to market incentives towards economy, that is a virtual impossibility.

Shriver paints a roseate picture of the possibilities of subsidies:

There's no reason our country couldn't become the leader in a new green economy if we invested in green energy as much as we do in fossil fuels.

I'm not sure what he means by money "invested" in fossil fuels (as far as I'm aware, there are no subsidies comparable to the ones being proposed and implemented for windmills), but why in any case should oil or wind be subsidized at all? If wind is really a better source of energy than fossil fuels, why not let the companies duke it out in the ledger books, and let the investment capital flow to the victor?

Such a contest would seem, at least, more chivalric, which you would think would be more suitable for a man who tilts for windmills (if not at them).