When a trader was recently asked his view on the proposed Tobin tax on all financial transactions in the European Union, he responded unequivocally that this tax would reduce trading volumes and hence reduce investment and economic growth. Of course, he had no evidence to support his claim. He just took it for granted that any intervention that negatively affected his livelihood  could not be good. And we have become conditioned to accept this as fact whenever such a claim is made by an “expert” in the financial markets.

But there is no definitive evidence, nor is there likely ever to be such evidence, to support the proposition that any form of government intervention will make capital markets less efficient, thus less liquid and lead to lower levels of investment and economic growth. On the contrary, the lack of appropriate rules, weak enforcement of existing regulations, and the absence of a Tobin tax have turned financial markets into casinos with resulting higher levels of price volatility and more opaqueness regarding counter-parties in an increasing number of transactions. The increase in volatility and opaqueness do have a price, and the price and associated higher levels of risk do deter investment and economic growth. Alas, no one has run the experiment to see which side of the argument is correct. Too bad because the answer is very important for future economic prospects.

This is one of many cases where people can make any claim they want with flimsy or no evidence to support them. Once a particular argument is repeated often enough, it takes on a life of its own and begins to be treated as fact, even when in this case, it should be obvious that it is self-serving and most likely wrong. Common sense seems to be in short supply.

Critics of the fiscal intervention in 2008-09 to prop up the economies in North America and Europe have argued that tepid growth and stubbornly high rates of unemployment demonstrate clearly the failure of these policies. As a result, they argue that there is little risk for governments to pursue aggressively austerity measures at this time.

Once again, we do not have any evidence as to what would have happened in the absence of these stimulative fiscal measures. Most likely economic conditions would have been much worse.

Greece is falling into a deeper hole each day because of the austerity measures introduced thus far. China has been lauded for its dramatic recovery in 2008-09, oftentimes by the same critics of fiscal intervention in the West. China was able to produce double digit rates of growth by injecting a fiscal stimulus equivalent to between 10% and 15% of GDP – a stimulus far greater than the efforts in the West. Yet the critics ignore these facts, and once more their views are beginning to be accepted as fact as they keep being repeated.

When the citizens of British Columbia voted to reject the integration of the provincial sales tax with the federal sales tax, supporters of integration – Jack Mintz in particular – argued paternalistically that repeal would result in a loss of hundreds of thousands of jobs in the province. Mintz did have some crude model to back up his prediction, but the model depends critically on its basic assumptions and the data that are inputted. As a result, it probably suffers from the GIGO problem – garbage in, garbage out. In other words, a model can be structured to produce whatever results one desires.

It will be impossible for anyone, including Mintz, to determine the actual impacts five or ten years down the road. Personally, I believe he is out to lunch, and the impacts will be trivial at best. Of course, no one will be able to disprove my views either.

One should be wary of people making claims that cannot be disproved and do not jell with common sense, even when they claim to have a model to support their claims. No economic model is sufficiently sophisticated to disentangle the real world.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.