Make Trade - Not War, Australian Financial Review, 3 August 2010

We sometimes think of globalisation as something new, but it’s easy to forget that the world economy of a century ago was highly integrated. As John Maynard Keynes famously described the world economy of 1913: ‘The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth … he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.’

What is striking about this era of globalisation is that it was bracketed by wars. The vast expansion of trade began after the Napoleonic Wars, and ended with the muddy carnage of World War I. One after another, countries raised their trade barriers, and the world moved from integration to isolation. To use the analogy of the great economist Joan Robinson, some nations placed rocks in their harbours, and other nations retaliated by placing rocks in their harbours.

But does the lesson of World War I have anything to teach policymakers today? In the latest issue of the American Economic Review, Daron Acemoglu (MIT) and Pierre Yared (Columbia University) revisit the relationship between trade and militarisation in the modern era. Using data on military spending (and the size of countries’ armies), they investigate whether countries that are more militaristic also tend to be less enmeshed in the world economy.

Pretty much any way they cut the data, Acemoglu and Yared find that countries which became more militarised tended to do less international trade. The relationship holds up using either measure of militarisation (spending or personnel), and remains strong even omitting countries that are engaged in war. On average, the pair estimate that a 10 percent increase in military spending is associated with a 2 percent drop in that country’s trade share.

Indeed, the effect holds up even if the authors focus only on the degree of militarisation in a country’s trading partners. This implies that if military spending rises in our lead trading partners (countries such as China, the United States, Japan and Korea), then they are less likely to trade with us than they would otherwise have done.

As Acemoglu and Yared admit, it’s difficult to be sure about the direction of causation. Their results are consistent with the theory that militarisation undermines trade, that healthy trade links make countries less likely to boost defence spending, or both. However, anecdotal evidence does suggest that trade helps to expand mutual understanding.

Underpinning Australia’s $400 billion of imports and exports are a web of personal relationships which help to build trust across countries. As Austrade’s chief economist Tim Harcourt shows in his entertaining book The Airport Economist, these ties help to bind businesspeople together across national borders. Stronger trade relationships make it more likely that Australians will learn a foreign language, and develop an understanding of the culture and history of another country.

Naturally, not all trade improves wellbeing. For example, the trade in slaves, heroin and AK-47s clearly contribute to human misery. But these are rare exceptions. In general, the flow of goods and services across national borders greatly improves our standard of living.

Indeed, one estimate by the Centre for International Economics found that trade liberalisation over the past two decades had benefited the average Australian working family by $3000-4000 per year. Part of this is because trade provides consumers with access to cheaper products and services. Trade also leads to higher productivity – shifting our employment base towards more highly skilled jobs. And there is a benefit from administrative simplicity: as the CiE points out, the 1987 regulations setting out customs duties ran to over 500 pages, with separate tariffs for everything from umbrella handles to bicycle tyres. Reducing this source of complexity helped make Australia more productive.

In addition to these economic benefits of trade, we now we have evidence that the rise in trade flows may also have contributed to making Australia safer. Plenty of nations have been bankrupted by war, but as US Founding Father Benjamin Franklin pointed out, ‘no nation was ever ruined by trade’. In fact, Acemoglu and Robinson show that international commerce goes hand-in-hand with lower military spending. Perhaps organisers of the next major peace rally should ask participants to carry placards saying ‘Make Trade, Not War’.

Andrew Leigh is the Labor candidate for Fraser.

Good Schools, Less Crime, Australian Financial Review, 20 July 2010

Notorious gang rapist Bilal Skaf dropped out of school at age 14. Convicted murderer Neddy Smith writes in his autobiography that he last saw the inside of a classroom at age 13. Port Arthur killer Martin Bryant could not read or write when he left school. In Australia’s jails, the typical prisoner has under 10 years of education – substantially less than the general population.

Could improving school quality help cut the crime rate? To date, the evidence has been pretty limited. We know from the Perry Preschool program that high-quality early childhood programs for disadvantaged children can reduce crime rates later in life. But some commentators have argued that by the time children start school, the window for life-changing interventions has closed.

Enter David Deming, an assistant professor at Carnegie Mellon University in Pennsylvania, whose thesis work exploits two aspects of American social policy. First, over-subscribed US schools frequently use a lottery system to allocate scarce places (on the basis that this is fairer than other alternatives such as first-in, best-dressed). Second, many US cities have a policy of posting arrest records online (yes, that’s where those mugshots of Hugh Grant and Lindsay Lohan came from).

Using data from a county in North Carolina, Deming cleverly matched school lottery results with online arrest records. This allowed him to compare otherwise identical students who had won or lost a school choice lottery. Competition for the best-performing schools was fierce, with around 40 percent of students applying to a school where they were not guaranteed a spot.

Success in the school choice lottery, Deming shows, had a substantial impact on a youth’s criminal behaviour. Focusing on the group of students who were most at risk of committing crimes, he finds that winning a school choice lottery reduced the number of felony arrests from 8 arrests per 10 students to 4 arrests for every 10 students. In the seven years after the school choice lottery took place, high-risk students in the losing group spent an average of 56 days in jail, while those in the winning group averaged 17 days in jail. This is particularly striking given that both groups continued to live in the same neighbourhoods.

These results back up the old adage that great schools can save us the trouble of building more jails. But fewer jails is only part of the public benefit of cutting crime. The largest cost of crime to the community is its impact on victims. To put a dollar value on this, Deming uses figures such as jury awards, value of life estimates and victims’ medical bills to calculate an approximate social cost for each crime. Crunching the numbers, he estimates that for high-risk youth, each year of enrolment in a first-choice school saves society over US$55,000 in criminal victimisation costs. Simply put, great schools for disadvantaged youth are a bargain for the community.

For the US, Deming argues that the worst schools are not only dangerous on a day-to-day basis – they may also be doing long-term damage to their students. Education administrators, he argues, should provide students in these environments with the chance to move to better schools. As Deming puts it: “For high risk youth on the margins of society, public schools may present the best opportunity to intervene.”

Supporting evidence for these findings comes from another study looking at the impact of school desegregation in the 1960s and 1970s. Researchers have long recognised that desegregation had the effect of raising the quality of schools attended by the most disadvantaged students. Now, new work led by David Weiner (University of Pennsylvania), has shown that court-ordered desegregation in the nation’s largest school districts led to a significant drop in the homicide rate. Weiner’s team estimate that school desegregation reduced youth homicide by about one-tenth. They conclude that some of the best crime-prevention strategies may have nothing to do with the criminal justice system.

In Australia, much of the debate over school quality to date has focused on the impact that a terrific education can have on raising productivity and participation. But Deming’s North Carolina results show that for the most disadvantaged students, education also offers a path away from crime. This implies that programs such as the federal government’s $1.5 billion program to improve low-SES schools may have an unanticipated payoff. Great schools may be the most effective social policy we know.

Andrew Leigh is the Labor candidate for Fraser.

Reasons to be Irrational, Australian Financial Review, 6 July 2010

Joshua Bell stood in a Washington DC subway station during morning peak hour. Dressed like any other busker, he took his Stradivarius out of its case, and began to play. A hidden camera recorded the reaction: would passers-by stop to hear one of the world’s finest violinists?

At the end of an hour, 1097 commuters had passed. Only 27 stopped to listen to Bell. His total takings were $32 – less than he would earn in a minute’s playing at Carnegie Hall.

In Predictably Irrational, psychologist Dan Ariely argues that the results show how strongly expectations influence our enjoyment of a situation. Just as we don’t expect buskers to be great musicians, it turns out that people enjoy coffee more if it’s served in a stylish mug than a dowdy one.

Expectations bias is just one of the ways in which we deviate from what ‘rational’ people would do. By understanding these systematic deviations, Ariely argues, we can make better decisions – and better public policies.

One key distinction is between market exchanges and social exchanges. Invited to carry out pro-bono work for $30 an hour, most lawyers refuse. Asked to perform the same work for free, many are happy to contribute. Ariely recounts the Seinfeld episode in which Jerry hires an attractive maid to clean his apartment, and then begins dating her. When his new girlfriend stops bothering to clean the apartment (but keeps taking Jerry’s money), a horrified Kramer tells Jerry that he is now effectively paying for sex. Mixing market norms and social norms can be dangerous. Jerry eventually tells the woman that the relationship is over – and she’s fired.

Another form of predictable irrationality is procrastination. In one experiment, Ariely varies the assignment deadlines in his university course. One group of students has their assignment deadlines evenly spaced through the semester. Another group has all the assignments due at the end of semester. With less freedom to procrastinate, the first group hands in better assignments than the second. Just as compulsory superannuation solves the problem of deferring savings, so too fixed deadlines help university students learn more.

The flipside of procrastination is self-control. Most of us can live with our tendency to make occasional impulse purchases. But for some, an inability to control their credit balance causes major financial stress. If you’re in this category, Ariely suggests putting your credit card into a glass of water, and storing it in the freezer. That way, you’ll force yourself to spend an hour thinking ‘do I really need it?’ while the ice melts.

Another of Ariely’s experiments looked at the role of hormones in decision-making, by presenting a series of hypothetical questions to university students in a normal state and an aroused state. (Since this is a family newspaper, I’ll let you guess the precise methodology.) When aroused, students were one-quarter less likely to say that they would engage in safe sex. Young adults who opt not to carry a condom in their wallet might be deluding themselves about their self-control in the heat of the moment.

Marketers understand many of our predictable irrationalities. An ‘endowment bias’ leads us to become overly attached to items we already own. Recognising this, companies delight in offering ‘money back guarantees’ and ‘trial periods’, since they know that few customers will be willing to part with something they already own.

Firms also know that zero is not just another discount. As a succession of experiments have demonstrated, customers over-react to free offers (which explains the proliferation of ‘buy one, get one free’ and ‘free shipping’). There may be little you can do to avoid being tricked by such offers, but Ariely suggests one way that we can capture the benefits of this in our own lives. If you regularly go out to dinner with the same group of friends, you should take it in turns to pay rather than splitting the bill each time. The average cost is the same either way, but taking it in turns to pay means that you get to enjoy the pleasure hit of a ‘free’ meal.

We should not lose track of the fact that the rational model does pretty well in most situations. Humans typically buy more when the price goes down, work harder when the tax rate falls, and choose the job we think will make us happiest. But as Predictably Irrational shows, the rational model isn’t perfect. Biases such as expectations, procrastination, self-control, hormones and the power of zero are virtually hard-wired into our brains, and understanding them can help us live happier lives.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is also the Labor candidate for Fraser in the coming federal election.

At the Heart of Footy Fever, Australian Financial Review, 22 June 2010

In 2006, the World Cup was held in Germany. Following the tournament, a team of Munich cardiologists analysed the pattern of heart attacks. On days when the German team played, cardiac emergencies doubled for women and tripled for men. The increase was so dramatic that the researchers suggested fans with heart conditions might consider increasing their beta-blockers or having an extra asprin on game days.

If you’ve missed sleep for the Socceroos lately, you’ll know that sport isn’t always good for your health. But as a series of research papers have shown, the relationship between what happens on and off the football field isn’t always as straightforward as it looks.

In a novel experiment, a team of psychologists tested testosterone levels among male Brazilian and Italian fans before and after the 1994 World Cup grand final. Brazilian fans, whose team won after a penalty shoot-out, saw their testosterone levels rise. But Italian fans saw their testosterone levels drop. Individual sportsmen have been shown to get a testosterone boost from a win (and a testosterone slump from a loss). It seems that fans react in the same way.  

Yet just because losing fans have lower levels of testosterone, it doesn’t mean that they’re better-behaved. Analysing US NFL games, researchers have shown that when the home team suffers an unexpected loss, domestic violence rates surge upwards. (The size of the increase is comparable to the rise that occurs on hot days.) Here’s hoping that Australian soccer fans are less aggrieved in the event that Thursday morning’s game against Serbia doesn’t go our way.

But the new wave of ‘soccernomics’ research doesn’t just analyse the impact of sport on society – it also looks at the reverse. In a carefully conducted study of yellow and red cards given to soccer players in the European professional leagues, a team of researchers show that players from countries that have recently experienced a civil war are more likely to engage in rough play. Experiencing violence as a child, it appears, translates into playing more aggressively on the field. The researchers note that soccer players from Colombia and Israel are among the roughest. (Playing for Inter Milan, Colombian defender Iván Ramiro Córdoba acquired 25 yellow cards in just two seasons.)

Another intriguing way that society affects soccer is through players’ birthdays. It turns out that national soccer teams have a disproportionate number of players whose birthdays fall early in the competition year. For example, European leagues are populated disproportionately with players born in January. Although various explanations have been proposed for this curious fact, the most persuasive story is that youth soccer coaches are pressured to worry too much about winning, and not enough on nurturing the relative young members of their squad. As early as age 12, those who are born late in the competitive year can be seen dropping out of the sport.

The effect of this can be seen in Australia too. When FIFA moved the cutoff date for Australian youth soccer games from January 1 to August 1, researchers observed a tangible shift in the birthday distribution of professional soccer players. Under the old regime (which applied until 1987), teams tended to have more players born in January. Under the new regime, Australian professional soccer teams tended to have an excessive number of August-born players.

Indeed, in the current 23-man Socceroo squad, 4 have birthdays in August (twice as many as chance would predict), while 15 are born in the six months from August to January (one-third more than chance would predict). It’s a fair bet that if we hadn’t changed the cutoff age for youth soccer, the national team would look different than it does today.

So, soccer can be unfair, its players sometimes reflect their violent past, and its fans can occasionally find the result tests the ticker. Would we expect anything else from the game once described as ‘the opera of the people’? For all its oddities and foibles, soccer remains the world’s most popular game. And to Pim and the boys: no pressure, but a nation’s testosterone levels are in your hands.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is also the Labor candidate for Fraser in the coming federal election.

Republicans Down Under, Australian Financial Review, 8 June 2010

When Barack Obama won the presidency, the US Republican Senate leadership made a tactical decision. Unlike Democratic Senators, who had opted to negotiate with President Bush on his top priorities of tax cuts and schools reform, Republicans sought to block Obama on healthcare – his signature campaign issue.

As former Bush speechwriter David Frum describes it: ‘No negotiations, no compromise, nothing. We were going for all the marbles.’ The strategy was based on pure politics, but even Frum had misgivings. ‘Politically, I get the ‘let’s trip up the other side, make them fail’ strategy,’ he told the New York Times. ‘But what’s more important, to win extra seats or to shape the most important piece of social legislation since the 1960s?’

The result of the Republican strategy, of course, is well known. Far from winning all the marbles, the Republicans got none. The biggest threat to mainstream Republicans today is the Tea Party, who lost their marbles long ago.

Although the Australian Liberal Party are clearly less reactionary than the US Republicans, there are times when the two parties seem to be working from the same playbook. Under Malcolm Turnbull, the Opposition voted against a fiscal stimulus package that saved around 200,000 jobs.

Despite this, it looked as though a Turnbull-led Opposition would strike a deal to pass climate change legislation. It is easy to forget now, but the emissions trading scheme really went down by only one vote: the 41-42 margin in the Liberal Party leadership ballot. (It also gave political dinner parties another ‘what if?’ question to add to ‘what if Harold Holt hadn’t gone swimming?’ and ‘what if Vince Gair didn’t like prawns?’)

Since Abbott’s ascendency, the blocking game has accelerated. Alongside climate change, the Opposition have voted against means-testing the private health insurance rebate and updating the Medicare levy surcharges, and have announced that they will oppose the Resource Super Profits Tax package.

The Senate’s role, of course, is not to merely rubber-stamp legislation. At its best, the Australian Senate has been a critical house of review and a check on government excess. But the unusual configuration of minor parties and independents in the current Senate has made the Opposition’s strategy particularly damaging.

In the US, the filibuster allows Republicans to effectively block legislation with just 40 out of 100 Senators. Australia has no such supermajority rules. Yet the reality is that the polar differences between Steven Fielding and Bob Brown allow the Liberal and National Parties a veto power that is out of proportion to their Senate numbers.

Another clue that US Republicans have some close followers downunder is the fact that the Coalition has often sought to cast its position as delay rather than obstruction. In the midst of the US health care debate, a key Republican strategy memo argued that the best way to defeat Obama’s health care bill was by putting on the brakes. Republicans were urged to use the message ‘Slow down, Mr. President.’

In Australia, Tony Abbott has accused the government of moving too quickly on fiscal stimulus, health reform, and an emissions trading scheme. In the short-term, this may be  a clever approach. But delaying would have been absurd in the case of fiscal stimulus, since the very point of such a package is timely action. And because the cost of climate change abatement rise over time, the Coalition’s decision to block an emissions trading scheme has merely raised the future price tag for businesses and households.

Indeed, it is not even clear whether obstruction serves parties’ long-term political interests. A policy of ‘Just say no’ may temporarily fire up the base, but the current chaos in the US Republican party shows where it leads. Politicians who play obstruction for its own sake merely fuel the rise of radical fringe movements.

It may feel good to pander to a sense that government is broken, but as any student of history knows, the best leaders have always been willing to engage with the other side. Or to use a gameshow analogy, you don’t win ‘Deal or No Deal’ by saying ‘No Deal’ every time.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is also the Labor candidate for Fraser in the coming federal election.

Beware the Zac’s Siren Call, Australian Financial Review, 25 May 2010

Australia and Greece represent the two extremes of how developed nations are faring in the world economy. With low debt, solid growth and falling unemployment, Australia’s timely fiscal response to the 2008-09 crisis has seen us dodge the worst of the downturn. So is there anything we can learn from Greece, now teetering on the edge of the economic abyss?

To begin, let’s take a moment to run through the events that have brought Greece to its current situation. Shortly after their election last October, the new Socialist government announced that their predecessors had fudged the figures, and the 2009 deficit was at least twice as large as had been reported.

Rapid sell-offs of Greek debt followed, and by January the IMF had announced that it would send a team to Athens. Reminiscent of the ‘technical advisers’ that the US sent in the early days of the Vietnam War, this group was described as merely a ‘technical mission’. But the symbolism of the IMF sending its grey-suited boffins into a member of the Eurozone was lost on no-one.

As the risk premium on Greek bonds soared, the credit rating agencies followed what had become conventional wisdom in the markets, and downgraded Greek government bonds to ‘junk’ status. Standard and Poor’s predicted that if the bonds were restructured, investors would get back only 30-50 percent of their principal.

With unemployment at 11 percent, street demonstrations were held in Athens at the start of this month. Since emerging from dictatorship in 1974, Greece tends to do mass protests frequently and gracefully. But this time a firebomb thrown into a bank led to the deaths of three people.

In return for a European Union ‘stabilisation fund’ and IMF loan guarantees, Greece has now agreed to a jaw-droppingly tough plan for recovery. Among the austerity measures are public service pay cuts, increases in the pension age, higher tax rates on luxury goods, and reductions in the number of state-owned firms.

If all goes according to plan, 2012-13 will see unemployment peak at 15 percent and net public debt peak at 149 percent of GDP. Even the IMF admits that ‘the scale and frontloading of the adjustment are unprecedented’. Prime Minister George Papandreou has compared the voyage ahead to that of Odysseus (prompting wags to point out that Odysseus took ten years and lost all his companions).

While Greek tragedies are supposed to eschew simple lessons, commentators have been unable to resist drawing moral conclusions from this particular tragedy.

One camp describes this as a lesson about the cost of excessive wage growth and public spending. After a decade in which wages outpaced productivity growth, and spending rose faster than revenue, some regard this as the recession Greece had to have. The solution: gritted teeth and fiscal austerity.

The other view of the crisis is that it shows the problems that arise from big currency areas. Since adopting the Euro in 2001, Greek inflation has outpaced the European average. Unlike a country with its own currency, it cannot devalue. And unlike a province in a larger nation, it cannot hope for substantial fiscal transfers. On his blog, US economist Paul Krugman argues that if Greece stays in the Eurozone, Greek wages need to fall by 20-30 percent relative to German wages. Assuming this is impossible, an alternative would be for Greece to drop the Euro and bring back the drachma.

For Australia, there is something to be learned from both diagnoses. The Greek crisis reminds us of the importance of good fiscal management and sensible microeconomic reforms. Productivity growth is pretty much the only way of securing sustainable increases in living standards.

Greece’s problems also flag a weakness of large currency areas. A perennial proposal in Australia and New Zealand has been the idea of a common currency (former Deputy PM Tim Fischer suggested that it be called ‘the Zac’). But in the unlikely event that New Zealand got into fiscal strife, would Australian taxpayers be willing to send cash across the Tasman?

Even although New Zealand represent just one-tenth of the combined GDP, the effect of Greece on the Eurozone shows that within a monetary union, contagion is a serious problem. Think hard before joining a currency union, because breaking up is hard to do.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is also the Labor candidate for Fraser in the coming federal election.

The Budget in Perspective, Australian Financial Review, 11 May 2010

If there’s one prediction we can confidently make about tonight’s budget, it’s that it will contain some really big numbers. Although most of us hardly ever see a $100 note, the national income is about $1.2 trillion dollars, and the federal budget is about $300 billion. So it’s no surprise that even National Party Senators get their millions and billions mixed up occasionally.

Can we bring the budget back to a more human scale? One way of doing so is to take annual budget figures and divide them by the number of people in Australia. Since I don’t have a leak, the following exercise is based on last year’s budget figures, giving students and pedants everywhere a good excuse to update them when the Treasurer speaks tonight.

Australia’s economy amounts to about $55,000 per person. Of this, the federal tax take is approximately $13,000 – around the price of a small hatchback. The largest chunk comes from individual income taxes, which raise about $5600 per person. Next comes company taxes at $2500 a head (down from $3000 at the height of the boom), and the GST at $2000 per person. A host of smaller taxes, including petroleum taxes, superannuation taxes, and customs duty make up the remainder.

How does the federal budget get spent? The three biggest items are social security and welfare ($5100 per head), health ($2300 per head) and education ($1600 per head). That’s two-thirds of the budget already.

Defence clocks in at $1000 per person – of which only about $200 is capital spending such as new aircraft, helicopters, and submarines. Buying Super Hornets is a pricey decision, but from a budgeting standpoint, it pales alongside even modest changes to the aged pension or Family Tax Benefit.

Other notable budget items are public order and safety ($200 per person), assistance to the agricultural sector ($200 a person), recreation and culture ($100 a person) and housing, which increased from its usual $100 per person to $300 in 2009-10 thanks to the fiscal stimulus package.

According to one US poll, most Americans believe that a larger share of their budget goes to foreign aid than Medicare (the fact is that US Medicare spending is about 15 times larger than overseas aid). Although I am not aware of similar Australian evidence, it is possible that similar misconceptions exist here. On a per-person basis, Australian overseas development assistance amounts to $150 a year.

Other small-ticket items in the federal budget include basic research funded through bodies such as the CSIRO and the Australian Research Council ($120 per person). The ABC’s radio and television services cost $50 per person (that’s 12 cents a day for anyone who recalls the old advertisements). Federal spending on Indigenous health amounts to $30 per person. And next time you see commentators expressing outrage at the latest tourism promotion, keep in mind that ‘Where the bloody hell are you?’ and its successors cost each of us less than $10 a year.

Of course, it would be foolish to assume that all large programs are inefficient, and all small programs are efficient. But keeping the relativities in mind is useful when thinking about what particular reforms can achieve. For example, the Disability Support Pension is more than 10 times as large as all federal spending on the arts and cultural heritage, while the Pharmaceutical Benefits Scheme costs nearly 30 times as much as national parks.

Downsizing the federal budget to a human scale also helps keep debt in perspective. According to the Household, Income and Labour Dynamics in Australia survey, the average debt level of Australian households is around $100,000 (this includes households with no debt). By contrast, the government’s Mid-Year Economic and Fiscal Outlook projected that net government debt would peak in 2013-14 at about $7000 per person, before falling to zero in about a decade’s time. Government borrowing to avert a serious downturn amounts to a small fraction of what Australian households would borrow to get an education, buy a car, or start a small business.

With a budget containing more zeros than a Melbourne Storm league ladder, it doesn’t hurt to bring things down to size. So if you’re having trouble keeping track of what a new promise means for the nation, just divide it by the Australian population (22 million), and see how it makes you feel. 

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is the Australian Labor Party’s candidate for the federal seat of Fraser in the coming election.

Teaching Becomes a Class Act, Australian Financial Review, 27 April 2010

Recruiting teachers in an attempt to revitalize local schools, New York City put posters on the subways saying: “You remember your first grade teacher’s name. Who will remember yours?”. So many teachers applied to the program that recruiters were able to take just the top 20 percent.

Now in its third decade, Teach for America has based its success on two vital truths: there is no more important job than teaching disadvantaged children, and there is a reservoir of idealism among talented university graduates for making a community contribution. At Harvard, more than one in ten undergraduates apply for a position at Teach for America, making it one of the most sought-after jobs on the market.

Starting this year, Teach for Australia (TFA) is attempting to bring the idea downunder. After six weeks of intensive, in-residence summer training at the University of Melbourne, 45 new teachers began work in Victorian schools at the end of January. Over the next few years, the TFA team hopes to roll the program out to other states and territories, including some remote areas.

There is no question that TFA teachers are a bunch of smarty-pants. Inundated with 750 applicants last year, the program was able to apply extraordinarily selective standards. As a result, the average university entrance score of TFA teachers is 97.

But can they teach? Anecdotally, the program has some strong backers. Tony Simpson, principal of Copperfield College in Melbourne’s outer west, describes his TFA teachers as “mindblowingly successful”.

Yet the program’s critics say that the program takes short-cuts to train teachers. If teacher education students wanted to work in a community legal centre with six weeks of legal training, they’d be laughed off by the profession. So why should law students be allowed to enter the classroom without an education degree?

When I put this challenge to founder Melodie Potts-Rosevear, she argued that TFA offered an “employment-based pathway”. “TFA allows select individuals to complete roughly one-third of their degree, and then to combine theory and practice by doing the rest of the degree over the course of the next two years as they are teaching.”

In general, international evidence backs up the TFA model. Independent evaluations of Teach for America (and its UK counterpart, Teach First) have come to the conclusion that such students are at least as effective in the classroom as traditionally-trained teachers. For example, a randomised evaluation carried out by Mathematica Policy Research found that the benefits from having a Teach for America teacher were equivalent to one more month of learning.

Yet the real value of programs like Teach for America comes through the impact it has on the educational system. With about two-thirds of its alumni working in education, Teach for America has started to shape the US education debate. KIPP Schools, a set of charter schools that operate on a model of long days and high educational standards, were founded by two Teach for America alumni. And there are now 26 US elected officials that have direct experience of teaching disadvantaged schools due to their work in Teach for America. Like Obama’s education secretary, Arne Duncan, who worked with poor children in Chicago and Melbourne, these politicians instinctively know the power of a great education to transform lives.

For TFA to succeed in Australia, it will need to ensure it places teachers in the most disadvantaged schools. Sending TFA teachers into affluent schools would be like the Australian Volunteers Abroad program recruiting idealistic youth who want to tackle global poverty – and then sending them to Switzerland.

Another challenge is that because TFA is a new pathway, it runs up against rigid rules that that traditionally determine subject competence. Regardless of how much a person knows about a topic, the current rules say that they cannot teach it if they did not study it at university. This bars the typical economist from teaching maths, and prevents most lawyers from teaching English. Modernising these rules will be critical in getting more talent into the classroom.

Amidst the heat of education policy debates, it’s easy to forget what a hard job teaching can be. If you’ve ever tried to teach just one child how to complete a maths problem, read a book, or catch a ball, you’ll know how much time and effort teaching can take. Multiply that by 25, and you have an idea of the challenges that classroom teachers face every day of their lives. The measure of TFA’s success will be not only in how many new teachers it attracts to the profession, but also its ability to boost student learning, and raise the status of teachers nationwide.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is the Australian Labor Party’s candidate for the federal seat of Fraser in the coming election.

The Economics of Sleep, Australian Financial Review, 13 April 2010

Did you get enough sleep last night? According to time use surveys, the typical Australian gets about eight hours of sleep. But one-fifth of us kip for less than 6½ hours per night. Certain workers, such as bankers, truckers and new parents, often boast about how little sleep they can survive on. ‘Did you know I only sleep five hours a night?’, a colleague will say as she falls asleep in her espresso.

The standard economic perspective on sleep is that higher wages make sleep less attractive. The more you earn by putting in another hour on the job, the likelier you are to go to bed late and arise early. This helps explain why the rich sleep less than the poor, as well as why average hours of sleep have fallen over the past century. Moreover, the fact that wages rise over the lifecycle may also account for the fact that 25 year-olds get more sleep than 45 year-olds. Indeed, sleep is negatively associated with the business cycle, suggesting that more red eyes on Martin Place and Collins Street may point to a strong economy.

Should we care if people are cutting back on their shut-eye? There is clear medical evidence that too little sleep can be unhealthy. Physiologically, sleep allows the body to repair tissues and replenish hormones. Sleep deprivation has been linked to an array of health problems, including heart disease, diabetes, and weight gain. In one experiment, patients were given a vaccine, and then kept awake that night. A month later, their immune response was half that of patients who had a full night’s sleep after getting the vaccine.

However, if sleep deprivation were only about people opting to live longer days and fewer years, the rest of us should probably stand back and let them make that tradeoff. So the question is: does sleep deprivation also have adverse impacts on those around you?

To test the impact of sleep deprivation on workers’ productivity, an intriguing new strand of research takes volunteers into the laboratory and keeps them awake for 30-40 hours (the equivalent of pulling an all-nighter). They are then asked to complete tests alongside other subjects who are properly rested. In one experiment, sleep-deprived individuals were less willing to trust others. Another experiment indicated that sleep-deprived individuals did only about half as well on cognitive tests as their rested counterparts. Corroborating this, evidence from brain scans of sleepy and well-rested participants indicates that sleep-deprivation leads to less rational and more emotional behaviour.

In practical terms, employees who are untrusting, dim and over-emotional are likely to be bad for the firm’s bottom line. Much of business is about knowing who to trust, and carefully balancing decisions on their merits. Without enough sleep, you may miss key details, and make vital decisions based on gut instinct rather than careful reasoning.

Within the firm, sleep-deprived bosses who lose their temper with are likely to cause subordinates to quit or slack off. On the road, sleepy drivers have the reaction time of drunk drivers, and contribute to more crashes. Perhaps it is no surprise that major accidents such as Chernobyl and the Exxon Valdez oil spill are associated with sleep deprivation. And in a team that works at the pace of its slowest member, sleepy workers can cause decision-making processes to lag (this is the point at which I should apologise to my Dean for falling asleep at last month’s research committee meeting).

Despite the potential negative impacts of sleep deprivation on those around us, it is probably not all that surprising that policymakers have stayed away from yawn taxation and sleep subsidies. Yet it is a trifle strange that firms do not do more to encourage well-rested employees. While many large Japanese firms have ‘nap rooms’, any Australian who lies down under their desk risks being awoken by the shriek of ‘he’s fainted!’.

We all have a bad night’s sleep from time to time. In certain high-pressure occupations, working late may be the norm. And some people simply have the genetic luck to need less sleep. But for the rest of us, it could be time to start changing the culture. Rather than seeing sleep deprivation as a sign of toughness, perhaps we should begin to regard it as a problem to be addressed. Just as unions fought for the eight-hour day, does Australia need a social movement to bring back the eight-hour night?

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is presently a candidate in the ALP preselection for the federal seat of Fraser.

High Taxes Not Without Sin, Australian Financial Review, 30 March 2010

In The Australian Legend, Russell Ward wrote ‘no people on the face of the earth ever absorbed more alcohol per head of population’ than Australians in the 1800s. While scholars debate Ward’s precise claim, it is clear that European settlers consumed vast quantities of alcohol. And 80-90 percent of men smoked.

Substance abuse is inextricably linked to Australian history, where rum and tobacco often took the place of cash. Today, 19 percent of us are regular smokers, while 13 percent of us are risky drinkers (defined as more than 4 drinks a day for men, and more than 2 drinks a day for women). Compared with other developed countries, we have relatively few smokers, and a slightly above-average level of alcohol consumption.

Can sin taxes make us pure? In the case of cigarettes, you might expect that most buyers would be addicts, and therefore unresponsive to prices. But it turns out that smokers are surprisingly price-sensitive. On average, a 10 percent price hike cuts cigarette sales by 5 percent. Although this is offset slightly by an increase in intensity (higher taxes induce smokers to take a few extra puffs out of each cigarette), the health benefits are still substantial. Teens are two to three times as price-responsive as the rest of us.

Put another way, if tax increases were to raise the price of a cigarette from 50 cents to 55 cents, we might expect 150,000 of Australia’s 3 million smokers to kick the habit. The same price rise would probably also deter thousands of high school students from becoming addicted in the first place. Because many smokers want to quit, half of all smokers support higher cigarette taxes – suggesting that such a policy might find favour at the ballot box.

For alcohol, it is less obvious that higher taxes lead to better health outcomes. Unlike smoking, moderate alcohol consumption does not seem to be bad for you (indeed, occasional tipplers may even gain a health benefit). So raising the price of grog is only a good public health measure if it reduces the kind of heavy consumption that is associated with cirrhosis of the liver and misuse (such as drink driving and domestic violence). If higher alcohol taxes deter grandma from having a glass of sherry, but do nothing to prevent the lad on the corner pub from sinking his sixth schooner, we should rate them a public policy failure.

It turns out that alcohol taxes deter both groups. On average, a 10 percent increase in price reduces overall consumption by 5 percent, and lowers heavy drinking by a little less – perhaps around 3 percent. There is also some direct evidence that higher alcohol taxes reduce drink driving, with one US study suggesting that a 10 percent increase in alcohol prices would reduce road fatalities by 6 percent (saving perhaps 90 lives annually). However, because binge drinkers are less price-responsive than the rest of us, alcohol taxes are a blunt instrument for cutting road deaths.

What about the equity implications of sin taxes? In the case of alcohol, drinking rates rise with incomes, so alcohol taxes are modestly progressive.

Cigarette taxes create something of a paradox. Since the poor are more likely to smoke, cigarette taxes are regressive. Yet a rise in cigarette taxes induces more quitters among the low-income population. So for hard-core addicts, cigarette taxes fall more heavily on the poor. But cigarette taxes can be a powerful tool for improving health outcomes among the disadvantaged. Over recent decades, much of the drop in smoking has been due to higher prices, so you don’t have to be a wowser to see the potential for increased taxes to produce better health outcomes.

Will this election give Australian headline writers the chance to bring out those old front pages that said ‘Beer, cigs up’? In conjunction with restrictions on sales and advertising, sin taxes have proved an effective public health policy. Alas, they also have unintended consequences – reducing moderate alcohol consumption, and acting as a regressive tax on low-income smokers who are never going to quit. Even virtuous taxes have their vices.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University. He is presently a candidate in the ALP preselection for the federal seat of Fraser.

Abbott Tax Hits Workers, Australian Financial Review, 16 March 2010

On the morning that Tony Abbott released his proposal to pay for paid parental leave with a tax on Australia’s 3200 largest firms, I was reading Norman Lindsay The Magic Pudding to my three year old son. As you know, it involves a pugilist strolling around outback Australia, punching his enemies on the nose and promising his friends a free lunch. The Magic Pudding has a similar storyline.

Promising to raise company taxes has an visceral appeal to any ambitious opposition. Perhaps some voters will think that they will be borne by the companies themselves, leaving all living persons miraculously unharmed. Slightly savvier citizens might think that company taxes are entirely borne by investors.

A central tenet of public finance, however, is that the entity that has the legal obligation to pay a tax is not necessarily the one that bears the burden. For example, payroll taxes are levied on firms, but we know that they are mostly borne by workers. Raise payroll taxes, and firms cut wages. Lower payroll taxes, and most firms will pass on a pay rise.

The GST is another case in which the burden of a tax doesn’t fall on the entity that pays the tax bill. Although the law says that the tax is levied on those who supply goods and services, it is customers who end up bearing most of the burden.

Which brings us to company taxes. For decades, economists have argued over how the burden of company taxes are shared between investors, employees and customers. In the short-term, it is difficult to change prices and wages, so a higher company tax rate will be paid in the first instance by shareholders.

But over time, the burden is likely to shift. Investors are a footloose bunch, with the ability to shift their money into sectors like real estate where they can avoid company taxes. For an open economy like Australia’s, higher corporate income taxes will lead investors to buy foreign shares instead (which is why small countries have been cutting company tax rates over recent decades). To keep their investors, companies may respond to the tax rise by raising revenue and cutting costs.

What will a company tax rise do to prices? While the evidence is thin, theory suggests that companies will be most likely to put up prices on consumers when they do not face competition from importers. So an Australian shoe manufacturer (do we have any left?) may be unable to shift the burden to consumers. But a fast food outlet will have greater capacity to raise prices.

In the case of wages, the empirical evidence is stronger. In a recent review of the literature, William Gentry (Williams College) concludes that most of the impact of a corporate income tax rise falls on workers. Increase company taxes by 10 percentage points, and wages fall by 6-10 percent.

Assuming Gentry’s finding applies here, this means that Abbott’s paid parental leave plan will be mostly paid for by those who work for big firms. For these companies, Abbott proposes to raise the company tax rate by 1.7 percentage points. If Gentry is right, we should expect to see wage drops of at least 1 percent in these companies.

Which workers will cop the pay cut? Abbott’s plan applies to companies with taxable income over $5 million, and we know that employees of such firms tend to earn a bit more than the average worker. But the difference is largely due to managerial salaries (you can’t be a high-ranking manager in a small firm). Further down the pecking order, there are plenty of modestly-paid workers toiling in the retailers and banks that make up Australia’s largest businesses. If a company tax increase is passed on to employees, these are the people who will pay for parental leave.

Abbott’s plan aside, it is useful to recognize that company taxes are not as progressive as they may appear at first blush. If the corporate income tax was solely an investor tax, it would fall largely on the rich. But if it is mostly a worker tax, then this means that the corporate tax burden is spread broadly across Australian society.

Good economics doesn’t always make good politics. Indeed, politicians can sometimes look as through they’re living by Bill Barnacle’s maxim (‘as we’re perfessional puddin’-owners, we have to fight them on principle’). Enjoy the spectacle, but don’t forget who’s in the pud.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University.

Equality is a Just Cause, Australian Financial Review, 2 March 2010

Australian economic policymakers have a zippy self-confidence these days. Having dodged the 1997 Asian financial crisis, avoided the 2001 US tech-wreck, and emerged largely unscathed from the Global Financial Crisis, our economic growth seems remarkably robust. Adjusting for buying power, Australian incomes per person are 70 percent higher than they were in 1980.

Averages are handy, but can sometimes conceal more than they reveal (every time James Packer enters a bar, the average drinker becomes a millionaire). Since 1980, the top 10 percent of Australians have seen their incomes more than double, while the bottom 10 percent have experienced a 55 percent increase. Over the past thirty years, Australia has had a two-speed economy: with the gains from growth going disproportionately to the rich.

Most workers have enjoyed a pay rise, but at the top, earnings are shooting up spectacularly. Due to technological change, internationally mobile labour markets, and the decline of unions, Australian inequality is considerably higher than a generation ago.

Should we care about the earnings gap between city professionals and the men and women who clean their offices? Or is it enough to know that both groups are steadily getting richer?

The straightforward answer to this question is that policymakers ought to worry about inequality if it offends the typical person’s sense of justice. We all have different feelings about how much inequality is tolerable, but most people have a visceral sense that at a certain point, the income gap can grow too wide.

But over recent years, some scholars have argued that there are other arguments in favour of equality too. Among the contentions sometimes made are that inequality is bad for your health, increases crime, and slows the national growth rate.

The first wave of studies that looked at these issues compared results across countries, at a single point in time. In the case of health, it turns out that the worst health outcomes are found in the US (the most unequal country in the developed world), while some of the best health outcomes are found in the famously equal nations of Scandinavia.

But over time, researchers began to point out that these results might be biased by other factors. Perhaps the reason that Americans die younger than Norwegians is something to do with the two countries’ racial mix, political systems, or natural resources. So in a second wave of studies, researchers took a different tack. Instead of taking a snapshot in time, they examined how changes in inequality affected changes in health. Do big rises in inequality make you sick?

Answering the question this way, the case against inequality is considerably weaker. For the most part, studies that have looked at changes in inequality find no evidence that they are associated with increases in mortality. In a review chapter that I wrote with Christopher Jencks and Tim Smeeding, we concluded that ‘the relationship between inequality and health is either small or inconsistent’.

In the case of crime, the evidence against inequality is a smidgin stronger. But even here, high-quality studies point in differing directions. It is possible that widening the income gap may increase violent crime a little, but the evidence is fragile.

Perhaps inequality is bad for growth? If anything, the evidence seems to point in the opposite direction. In the post-war era, Dan Andrews, Christopher Jencks and I find that rises in inequality have been associated with small increases in the growth rate. Yet the magnitude is small – definitely a case of trickle-down rather than flow-through.

Those who believe in the ideal of a more equal Australia be disappointed to learn that the ‘instrumental’ case against inequality is so weak. But these were always the flimsiest arguments in favour of egalitarianism. A person who believes that the free market outcome is the morally just result is unlikely to have ever been swayed by the effect of inequality on health, crime or growth.

Dropping the instrumental arguments brings the debate about inequality back to one about justice. The strongest case in favour of more progressive school spending or reinstating inheritance taxes is a moral one: that such reforms accord with Australians’ fundamental beliefs about fairness. Politicians who want less inequality will be on firmer ground if they discard the instrumental arguments, and start talking ethics.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University.

Girls Need to be Pushed, Australian Financial Review, 16 February 2010

In the latest round of nationwide school tests, girls trounced boys in reading, writing, spelling and grammar, and were only narrowly beaten in numeracy. On university campuses, there are 6 female students for every 5 male students. The labour market is steadily feminising: women now comprise 45 percent of all workers.

Yet at the upper echelons of Australian business, men still tend to occupy the corner office. Women comprise just 8 percent of ASX200 board directors and 2 percent of CEOs. Although a majority of law graduates are women, four-fifths of barristers are male.

Explanations for this huge disparity include a lack of mentors, a family-unfriendly work culture, and discrimination. Yet a fascinating new line of research opens another possibility: that attitudes towards competition might help to explain part of the gap. Intriguingly, there are also suggestions that this may have more to do with nurture than nature.

One experiment asked male and female university students to solve straightforward mathematical problems. When paid a flat rate for every correct answer, men and women did equally well. Students were then given the chance to enter a four-person tournament, in which the top-ranked player won a handsome prize, and everyone else got nothing. Since men and women had similar ability, they stood a similar chance of sweeping the pool – but it turned out that men were twice as likely to enter the tournament as women.

Other studies suggest that gendered attitudes to competition emerge at a young age. When 9 year-old school children in Israel were timed running a short sprint on their own, boys and girls did equally well. When they were paired up and asked to race against another student, boys ran faster. But girls ran equally fast in a race as they did on their own.

A plausible interpretation of these results is that they represent an evolutionary norm, under which the genetic advantage lies with competitive males and cautious females. Another possibility is that the differences have more to do with culture and upbringing than with innate biological differences.

One way to separate the hypotheses is to look at extremely different societies. One of the most innovative tests involved economists carrying out the same experiment in an extremely patriarchal society (the Maasai in Tanzania) and a matrilineal society (the Khasi in India). The task in this case was throwing a ball into a bucket placed some distance away. In both societies, men and women were equally accurate. Then they were invited to enter a competition, in which the most accurate thrower won the prize. In the patriarchal Maasai society, the researchers found a higher take-up rate among men. But in the matrilineal Khasi society, women were more inclined to compete (indeed, Khasi women were even more willing to compete than Maasai men).

Another way to see the effect of context on competitiveness is to look at sex-segregated education. In two experiments involving British 15 year-olds, researchers tested students’ willingness to enter a competition that involved skill (solving mazes), and another competition that involved luck (tossing a coin). When the experiments were carried out with boys and girls from co-educational schools, girls were less likely to enter either competition. But girls from single-sex schools were just as willing to compete as co-ed boys.

The Australian National University’s Alison Booth, one of the co-authors of the project, is quick to point out that ‘our research should not be interpreted as saying that we should all immediately enrol our daughters in single-sex schools’. But the study does suggest that context matters. If the stereotype that girls are averse to competition can be broken by something as simple as single-sex schooling, it should be possible to change it in other ways too.

Together, evidence from economics laboratories suggests that researchers and policymakers should use a variety of strategies to raise the number of women at the top. Of course, this means continuing to tackle discrimination and change workplace cultures. But if we assume that success in business will always require a competitive streak, it may be worth investing on the supply side as well. To smash the glass ceiling, we may also need to improve female confidence about risk-taking.

Andrew Leigh is a professor in the Research School of Economics at the Australian National University.

Breaking Up is Easy to Do, Australian Financial Review, 2 February 2010

Why are there so many countries in the world? At the end of World War II, there were 74 nations. Today, the United Nations has 192 members. Proliferating nations are more than an academic curio. As trade ministers and environment ministers know, one of the reasons it is so difficult to strike an international deal these days is because it requires the agreement of a couple of hundred representatives.

In The Size of Nations, Alberto Alesina (Harvard) and Enrico Spolaore (Tufts) present a theory of country size that is as simple as it is powerful. In determining how big countries should be (and therefore how many countries there are in the world), they argue that there are two opposing forces. For economic reasons, nations should be big. For political reasons, countries should be small.

Economics favours large nations because it means more of us share the costs of running the central bank, paying for embassies, and maintaining an air force. And because commerce is easier within borders than across them, businesses are more likely to prosper in a big nation than a small one.

But politics drives towards smaller nations because large nations are hard to control. Smaller nations are more homogenous on several dimensions. Incomes tend to be more equally distributed, there is less ethnic and racial tension, and people are more likely to share a common language and religion. It’s a lot easier to find common ground when you’re the President of Costa Rica than if you happen to be President of the United States.

Sure, you say, but why are countries these days breaking up quicker than a Hollywood marriage?

The answer is that the two great forces of the post-war era – globalisation and democratisation – both favour smaller nations. Globalisation does it by making secession more attractive. In 1950, when average tariffs were around 40 percent, regions paid a large price for going it alone. Now that the average tariff is around 5 percent, breaking up is easier to do.

Democratisation raises the pressure to split off because it gives voice to regional interests. Among their many talents, dictators specialise in repressing separatist voices. From the Roman Empire to the Soviet Union, authoritarian regimes have forcibly imposed national symbols and languages. When regimes democratise, it can prove impossible to hold together a large and diverse country. It is no coincidence that East Timor’s independence quickly followed Indonesia’s democratisation. When China finally democratises, it is almost certain that outlying provinces will split away.

From Greenland to Georgia, Scotland to Somalia, the dominant pressure in the world is towards more nations, not less. Mergers (such as German reunification in 1990), are the exception that proves the rule. It’s a fair bet that the UN will have more than 200 members before long.

For policymakers, Alesina and Spolaore’s book has three major implications.

First, it challenges the old theory that Africa’s biggest problem is that the continent has too many countries. While mergers would have economic advantages (particularly given the substantial trade barriers that prevail), they would also have political costs. Africa’s ethnic, racial and religious diversity means that mergers could well end up creating new countries as ungovernable as Sudan and the Democratic Republic of the Congo are today.

Second, it suggests that the tectonic forces of geopolitics are moving against an Australia-New Zealand merger. The easier our Kiwi friends find it to trade with the world, the less likely they are to become the seventh state. And speaking of states, if you thought that Australian separatist movements were dead, you may be in for a rude shock. Western Australian secession would be costly for them, but the price keeps falling.

Third, we have to rethink the way that international organisations operate. Would the post-war negotiators have thought their new institutions would be viable in a world with nearly three times as many countries? Consensus may be a fine way to choose a family holiday, but when it comes to a trade deal, perhaps it’s time to start voting. (Ironically, getting the World Trade Organisation back on track will reduce global trade barriers, in turn fuelling secessionist fires.)

So get used to hearing the phrases ‘separatist movement’ and ‘autonomous region’ plenty more times. Unless we press the pause button on globalisation and democratisation, splintering nations are set to be the way of the future. But perhaps parents could stop chastising the younger generation for not knowing their maps. Honest, mum – geography really is harder than when you studied it.

Andrew Leigh is an economist in the Research School of Economics at the Australian National University.

What Makes Martyrs Tick, Australian Financial Review, 19 January 2010

In a Pew poll last year, Muslims in various countries were asked whether suicide bombing against civilian targets is sometimes justified in defence of Islam. Yes, said 68 percent of Palestinians, 15 percent of Egyptians, 13 percent of Indonesians, and 5 percent of Pakistanis.

These figures highlight an intriguing puzzle. Why were hardly any lives lost to suicide bombing in the 1970s, but over 10,000 in the 2000s? What makes suicide bombing so popular in the modern age?

Most people find it impossible to answer this question without using the word ‘crazy’. But a fascinating strand of research has begun to use the tools of economics to try and better understand what drives suicide attacks, and how we might stop them in the future.

In his new book, Radical, Religious and Violent: The New Economics of Terrorism, economist Eli Berman (University of California, San Diego) takes a cold-blooded look at one of the hottest policy questions today.

He begins by popping a few myths. Interviews with families and friends of suicide bombers, as well as with failed bombers, show that they are not particularly motivated by the afterlife, but by concerns closer to home. This is consistent with the fact that the worst barrage of suicide attacks in the twentieth century were carried out by the nominally atheistic Tamil Tigers. It’s time to stop pinning all suicide attacks on those 72 virgins.

Careful studies of suicide bombers suggest that they are not generally depressed or mentally ill, and would not be the kinds of people who would otherwise kill themselves. Rather than regard suicide bombers as mad zealots, Berman argues, we should think of suicide bombers as misguided altruists, who truly believe that their acts will bring great benefits to their community.

To understand why suicide bombing has become more common, Berman contends, we need to stop focusing only on the motivations of bombers, and consider the ‘hardness’ of their target. As it becomes more difficult for terrorists to do damage, they are more likely to switch to suicide bombing. Developed nations ‘have sent well-armed, well-equipped forces into battle against low-technology insurgents’. Faced with no other option, ‘rebels counter with suicide attacks’. Thus the rise in suicide bombings over the past quarter-century has a lot to do with the improvements in the military capability deployed against them. We send armoured personnel carriers; terrorists respond by driving car bombs into police stations.

What can we do to reduce the number of terrorist attacks in the future? One approach is to limit the amount of money reaching insurgent groups. Since some of this comes from the export of hard drugs and petroleum, it is straightforward to see how drug legalisation and a climate change deal would represent a pay cut for terrorist groups.

But Berman’s main focus is the relationship between terrorism and social service provision. It is no accident, he says, that the Taliban run law courts, Hezbollah collects garbage, and Hamas operates health clinics. Social services provide a way of harvesting new recruits, and testing their commitment to the leadership. And because they can be withdrawn at will, social service provision gives leverage over the local population, reducing the chance that an informant will leak the latest plan.

To really shut down terrorist groups, Berman argues, we need to undermine their social service provision. He gives the historical example of Egypt’s President Nasser, who undermined the Muslim Brotherhood by nationalising their network of schools and clinics in the 1950s. By directly providing electricity, healthcare and welfare services, governments improve the outside options for young people. Using soldiers to protect an NGO who is opening a new school is unglamorous work, but it may be the best way of crippling insurgents. (Insurgents know this, of course, which is why aid projects have been targeted so often in Iraq and Afghanistan.)

In the past, researchers such as Princeton University’s Alan Krueger have pointed out that the typical suicide bomber is better-educated than other members of their group. If suicide bombers are well-schooled, the argument goes, antipoverty programs won’t reduce terrorism.

Yet by looking at groups rather than just individuals, Berman’s book shows why the two are intertwined. Like Australian military expert David Kilcullen (who calls counterinsurgency ‘armed social work’), Berman argues that ‘social service provision creates the institutional base for most of the dangerous radical religious rebels’. Demolish that base, and you begin to unravel the organisation.

Unusually for a book about terrorism, Berman keeps it in perspective. Global terrorism is not the greatest threat to the world. Adam Smith’s combination of markets, religious pluralism and tolerance are a winning combination. The more we can help poor governments provide basic services to their citizens, the less space we allow for radical rebels to fill the void.

Andrew Leigh is an economist in the Research School of Economics at the Australian National University.

Have a Go, It Can Bear Fruit, Australian Financial Review, 5 January 2010

In a British fruit farm, the seeds of a quiet revolution in management are being sown. While the neighbouring farms go about business as usual, the owners of this establishment see each season as a chance to run experiments aimed at raising productivity and profits.

Halfway through the 2002 season, the pay scheme for all fruit pickers was suddenly switched from one that paid workers relative to their co-workers, to a scheme that paid based on absolute performance. Midway through the 2004 season, a managerial bonus scheme was introduced, allowing the best managers to increase their earnings by around 25 percent. In 2005, fruit-picking teams found their performance charted at the end of each day. Later that season, the best teams began winning bonus payments.

In each case, the changes were engineered by a trio of young economists: Oriana Bandiera, Iwan Barankay and Imran Rasul. Tracking the changes, they found that rewarding workers for absolute performance raises productivity by a whopping 50 percent, and that managerial bonus schemes boost output by 21 percent. Yet when it comes to motivating teams, it turns out that charting performance is a bad idea (the underperformers become discouraged), while rewarding performance is effective (the best try even harder).

To see how radical this approach is, imagine how the typical firm would have approached the same problem. Step one: hire a team of well-dressed management consultants. Step two: pay six-figure bill. Step three: hold nose and implement recommendations.

Business experiments turn this logic on its head. Rather than paying for expert wisdom, the experimental approach says ‘try it and see’. Where the traditional literature is passionate and confident (with titles like ‘Straight from the Gut’ and ‘Re-engineering the Corporation’), the experimental approach is modest and open-minded (with titles like ‘Team Incentives: Evidence from a Field Experiment’).

While the traditional approach listens to the consultant or the highest paid person in the room, the experimental approach listens to the data. Just as new drugs are evaluated using randomised trials, business experiments aim to bring both simplicity and scientific rigour to evaluating the impact of new strategies on the bottom line.

Perhaps the aspect of business that has made the best use of experiments is advertising. In formulating advertising campaigns, firms are increasingly recognising the limits to what can be learned from experts and focus groups. Rather than pick between two possible campaigns, the smarter approach may be to find test markets, and try both. This is most easily done in direct mail or online campaigns, where it is possible to get customer-level variation (indeed, Google’s AdWords software even allows small-time users to run such marketing experiments). But by exploiting variation across chain stores, or in regional markets, firms have found ways to test other marketing strategies too.

Business experiments have also helped to quantify the value of a strong track record. In a series of experiments on eBay, Paul Resnick and co-authors compare the prices of batches of vintage postcards sold by an established seller with a strong reputation versus a first-time seller. They find that first-time sellers receive prices that are 8 percent lower, illustrating that reputation on eBay carries considerable financial value.

Experiments can even help firms decide how to set prices. Economist Steven Levitt gives the example of his work with a direct-marketing travel service, which experimented with randomly changing prices on its mailings, and found that demand barely fell when it raised prices. Not surprisingly, the company now charges considerably more than it did in the past.

Randomisation, Levitt argues, ‘cuts through the complexity’. He points out that ‘All you have to do is flip a coin and put people into treatment and control groups. In the end, you just have to be able to add it up and say, “Am I selling more or am I making more profit in the group that got the treatment versus the group that got the control?”’.

From fruit farms to travel agencies, experiments represent a powerful challenge to business as usual, who are increasingly embracing the opportunity to get better feedback on everything from their human resources policies to their pricing strategies. Why settle for grizzled wisdom when you can try it and see?

Andrew Leigh is an economist in the Research School of Economics at the Australian National University.

Yes, You Can Buy Happiness, Australian Financial Review, 15 December 2009

Which would make you happier: a $1000 holiday bonus (knowing that every other Australian worker got half as much), or $2000 (knowing that everyone else got twice as much)?

For years, social scientists have puzzled over whether individuals care more about their absolute income or their income relative to others. Sparked by Richard Easterlin’s seminal 1974 paper, thousands of scholars have devoted their attention to the “Easterlin Paradox” – the apparent finding that increases in national incomes had no impact on self-reported happiness.

The Easterlin Paradox is no academic parlour game. If people only care about keeping up with the Joneses, then policies to increase economic growth are misguided. Since rapid national growth is likely to benefit Jones as much as me, it will not make either of us any happier. In its most radical form, this critique suggests that governments should let the growth rate stagnate, and find other ways of improving wellbeing.

In a recent article, University of Pennsylvania economists Betsey Stevenson and Justin Wolfers have revisited Easterlin’s original findings. Something of a Rose and Milton Friedman team, Stevenson and Wolfers are an academic couple whose work aims to tackle big questions through an exhaustive analysis of the data.

In studying happiness, Stevenson and Wolfers use hundreds of new surveys that have been conducted since the 1970s. Across countries, they find robust evidence that people in rich countries are happier than people in poor countries. On a 0 to 10 life satisfaction scale, respondents in Chad and Benin place themselves between 3 and 4; residents of India, Korea and Russia put themselves between 5 and 6; and people in Australia and most other developed countries place themselves between 7 and 8. A given percentage increase in GDP buys at least as much happiness in a rich country as a poor one.

This remains true when looking at other measures. For example, the Gallup World Poll asked people whether they had experienced various emotions the previous day. People in richer nations were more likely to have felt enjoyment and love, and less likely to have undergone pain, boredom, depression or anger.

For the most part, a similar finding holds when looking at the same country over time. In dozens of nations, rising incomes have bought higher levels of happiness. An exception is the United States, where average happiness has flatlined despite rising incomes. Score that one for Easterlin; but pretty much everywhere else on the globe, rising GDP has translated into more happiness.

Not content with having despatched one paradox, Stevenson and Wolfers propose one of their own. In a second paper, they put aggregate trends to one side in order to focus on the gender happiness gap. Since the 1970s, have women grown happier than men?

There are plenty of reasons to expect that this should have been the case. Employment discrimination has fallen substantially. Fewer jobs entail heavy-lifting, and more require interpersonal skills. Given that women have typically taken time off work to care for children, the pill and legalised abortion ought to have benefited women more than men. And because women have traditionally done more housework, the microwave, dishwasher, and vacuum cleaner should have made women happier than men.

Yet the reverse is true. In 12 out of 13 countries with long-run life satisfaction data, the growth in happiness has been smaller for women than for men. In the early-1970s, US women were happier than US men. Today, American men are the happier sex.

Probing the data, Stevenson and Wolfers find that the decline in happiness is not confined to particular groups of women. Among married and unmarried, young and old, working and non-working, parents and childless, a gender happiness gap has opened up.

While leaving the puzzle unsolved, they offer a few theories. Other large-scale social trends (more risk, less social capital) might have disproportionately made women less satisfied with their lives. The large-scale entry of women into the paid workforce may have led to unmet expectations at home and at work. Or it could be that the increased opportunities available to women have had the perverse effect of raising the bar required for a modern woman to declare herself happy.

For those of us who believe that the feminist revolution was fundamentally a good thing, Stevenson and Wolfers’ findings also urge a modicum of caution in placing too much weight on self-reported happiness as a measure of wellbeing. While life satisfaction surveys clearly capture an element of national wellbeing, they miss something of the texture of lived experience. As the philosophers have known for years, there is more to ‘the good life’ than happiness.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Mixed Results for School Tests, Australian Financial Review, 1 December 2009

Some of George Bush’s best verbal slips came when speaking about education. “Is our children learning?”, the former President asked one audience. “The illiteracy level of our children are appalling”, he warned another group of bemused listeners. According to Bush, the remedy was clear: “childrens do learn when standards are high and results are measured”.

Signed into law in January 2002, No Child Left Behind (NCLB) was the largest reform US education had seen in over forty years. Like the schooling reforms implemented through COAG by Kevin Rudd and Julia Gillard, the centrepiece of NCLB was standardised testing and public reporting. So understanding the impact of the US reforms may provide a window into the future of Australian schools.

At the heart of NCLB are two requirements: all public school children must be tested annually from grades 3 to 8, and states must report on whether each school is making ‘adequate yearly progress’. The reporting requirements apply not only to the student body as a whole, but also to particular sub-groups: including six racial minority groups, pupils with limited English proficiency, and children from low-income families.

According to its proponents (among them the late Senator Edward Kennedy), public reporting creates stronger incentives for teachers and school administrators to fix problems, encourages educational innovation, and pushes schools to devote more attention to the neediest pupils. By contrast, NCLB’s detractors claim that it devalues non-tested subjects such as art and music, and creates an incentive to focus too much energy on underperforming students (possibly to the detriment of high achievers). Some even darkly allege that publicly reporting test scores might pressure teachers and administrators into falsifying students’ exam results.

In a new study, Thomas Dee (Swarthmore College) and Brian Jacob (University of Michigan) have produced the leading assessment to date of NCLB. The key to the Dee-Jacob analysis is that some states (such as Texas and North Carolina) already had stringent accountability regimes in place. Earlier work has shown that those states which adopted accountability measures in the 1990s tended to have faster growth in student achievement. But NCLB had little impact on the early adopters. So in the Dee-Jacob analysis, states like Texas and North Carolina are used as a ‘control group’, and compared with ‘treatment group’ states who only adopted accountability measures when forced to do so by NCLB.

To measure the impact of the reforms on student achievement, Dee and Jacob use results from the National Assessment of Educational Progress; a test that allows comparison across states and over time, but which is not reported at a school level. Since schools’ incentives are tied to state-based tests, improvements on the national exam ought to reflect substantive learning, and not ‘teaching to the test’ (or ‘cheating to the test’).

Looking across grades and subjects, the Dee-Jacob analysis finds large positive impacts on mathematics, particularly at the primary school level. However, the researchers find little evidence of any impact (positive or negative) on reading scores. This may reflect the general finding that schools can have more influence over numeracy than literacy (since parents are more inclined to read books with their children than they are to do maths puzzles).

Evaluating one concern about NCLB, Dee and Jacob also look at test scores at the top and bottom of the distribution. Reassuringly, they find no evidence that the reforms caused a decline in performance by the best students.

Due to a lack of data, they are unable to delve much inside the ‘black box’, so it is still unclear precisely how public reporting of test scores led schools to improve their performance. A critical next step is to find out precisely how schools responded to NCLB: did they change the curriculum, lengthen the school day, vary their hiring and firing policies, revamp administration, or do something else entirely?

Of course, some will argue that because Australia outperforms the US on the international PISA tests, we should ignore everything that is happening in their schools. Hubris aside, this misses the fact that US students surpass their Australian counterparts on TIMSS, the other major international exam. According to the international league tables, we beat them on broad conceptual skills (PISA), but they outshine us on curriculum-based knowledge (TIMSS).

Perhaps neither side of US politics would like to admit that the result of their 2002 schools reforms is neither disastrous nor transformative, but something in between. Following NCLB, the US has ‘fewer children left behind’. If the same can one day be said of Australia’s school accountability reforms, Rudd and Gillard can be quietly pleased.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Prison Reform Hard Labour, Australian Financial Review, 17 November 2009

It’s a set-piece of every Hollywood movie featuring an ex-con. A clean-shaven man walks out the prison gate carrying his possessions in a box under his arm, and puts his hand up to shade his eyes from the unfamiliar glare of the sun.

In 2009, over 20,000 Australians got a ‘get out of jail’ card, and walked through the gates of one of the 120 or so prisons dotted across the country.

But the sobering fact is that during the next two years, nearly half of them will have been sent back. Some will get to play that prison release scene again and again.

Prisons do reduce crime, but mainly because of what criminologists call ‘the incapacitation effect’ (when you’re doing time in Long Bay, it’s harder to hotwire a car). There may also be some deterrence effect, but this is small by comparison. And there is little evidence of a rehabilitation effect.

Why are prisons less a portal to a new life than a revolving door? Part of the problem lies in the fact that politicians and public servants have few incentives to create better rehabilitation programs. A policymaker who creates a cutting-edge program to improve inmates’ sense of self-worth risks being ridiculed by the shock jocks. A politician who advocates work release programs must worry about the tabloid headlines if some inmates abscond.

To encourage innovation, we should start publicly reporting the outcomes that matter most. Rather than merely telling the public how many people are held in each jail, governments should publish prison-level data on recidivism rates and employment rates.

Just as with schools and hospitals, ‘prison league tables’ would need to take account of each institution’s caseload. Effectively, such comparisons should aim to answer the question: given the mix of inmates they handled, which prisons did the best job? Carefully constructed prison league tables should give taxpayers and policymakers a strong sense of where innovation is occurring in the system, and help smarten up the criminal justice debate. (A similar approach could also be taken in the case of community corrections programs, which handle about twice as many people as jails.)

As well as focusing on the important outcomes, Australian states should rethink the contracts they write with private providers. At present, about 16% of inmates are held in a private jail. Unfortunately, the contracts for private jails bear a remarkable similarity to sheep agistment contracts.

Providers are penalised if inmates harm themselves or others, and rewarded if they do the paperwork correctly. Yet the contracts say nothing about life after release. A private prison operator receives the same remuneration regardless of whether released inmates lead healthy and productive lives, or become serial killers.

A smarter way to run private jails would be to contract for the outcomes that matter most. For example, why not pay bonus payments for every prisoner who holds down a job after release, and does not reoffend? Given the right incentives, private prisons might be able to actually teach the public sector a few lessons on how to run a great rehabilitation program.

According to the Productivity Commission’s annual Report on Government Services, states and territories have formally agreed to ‘Provide program interventions to reduce the risk of re-offending’. Yet the reality is that less than one-third of prisoners are engaged in any formal education program, and that many of the jobs done by inmates do not provide the skills required by the regular labour market.

Given that each prisoner costs the taxpayer about the same as a five-star hotel room, reducing recidivism rates has a direct benefit for all of us.

But criminal justice – and particularly juvenile justice – is also the pointy end of social policy. Ex-prisoners are disproportionately high users of other government services, such as counselling and income support. So improving corrective services helps in other social areas as well. This particularly affects Indigenous Australians, who comprise one-fortieth of the general population, but one-quarter of the prison population.

As a nation where a convict ancestor is a badge of pride, Australians know better than anyone that life can have a second act. The challenge today is to encourage our corrective services to correct, not just punish. Can we make jail work?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Give Reform a Bit of a Nudge, Australian Financial Review, 3 November 2009

It turns out that lemmings don’t actually follow one another off the edge of a cliff. Thanks to some investigative journalists, we now know that a 1958 Disney documentary depicting the event was made by the filmmakers throwing large numbers of lemmings to their deaths.

Nonetheless, the lemming myth has stuck in the popular consciousness – perhaps because it’s such an accurate metaphor for the way many of us make our daily decisions. At a café, we tend to eat the daily special. Our mobile ringtone is probably the default factory setting. We are more likely to vote for the candidate at the top of the ballot paper.

In Nudge: Improving Decisions About Health, Wealth and Happiness, Chicago University academics Richard Thaler and Cass Sunstein argue that economists and politicians have overestimated the attention that citizens devote to decision-making. Rather than assuming that people have the time of a monk and the skills of an actuary, it might be better to craft policies for busy lives. Or to put it another way, the representative citizen is closer to Homer Simpson than to HAL.

One set of Nudge reforms aim to improve default options. In the political arena, wars have been waged over optional versus compulsory systems. Yet in many choice regimes, people simply stick with the default option. Getting defaults right can make a big difference to people’s lives.

The best known application of this kind of ‘behavioural economics’ research is in the area of savings. Recognising that the typical person under-saves for retirement, Australia introduced compulsory superannuation in 1992, and steadily increased the compulsory contribution. But for all the talk of superannuation choice, the vast majority of us are in the default fund chosen by our employer and the default plan chosen by that fund.

A series of nudges would improve retiree wellbeing. We should raise the default contribution rate from 9% to 12%, but allow people to opt down to 9% if they choose. The default superannuation fund should be a low-fee index-tracking fund, with people free to pick a boutique fund if they so desire. And the default investment strategy ought to rebalance over the lifecycle (high growth for young people, more cautious investments for those approaching retirement).

Other nudges help people make better choices by putting the right information in front of them. Despite punitive interest rates on credit cards, many do not pay their full bill each month. So Thaler and Sunstein suggest that credit card companies should be required to send everyone an annual breakdown of the fees they have incurred.

Similar information reforms could help in other domains. When renting a car, the cost of fuel can exceed the cost of hiring the car. So why not mandate that all rental car companies list fuel efficiency on their selection sheets? And in the bewildering mobile phone market, we could require all phone companies to also offer a standardised product (e.g. 300 minutes per month). Neither reform would constrain choice, but people would now choose guzzling cars and complex phone plans because they wanted them, not because they didn’t know any better.

Nudges could also improve the way in which government agencies currently operate. The Australian Taxation Office automatically knows most taxpayers’ incomes. So why doesn’t it simply post out letters in August, telling each of us the amounts it has on file? Anyone with complex affairs or who wished to claim deductions would still be welcome to lodge a tax return. Otherwise, taxpayers would merely be required to make a quick phone call to confirm that the letter was accurate.

Another nudgeable policy area is helping welfare recipients manage their money. Centrelink has recently developed a system of ‘voluntary income management’, which lets income support recipients choose to have part of their payments quarantined for use only on essentials such as groceries and rent. For anyone with an addiction problem or an overbearing partner, this kind of scheme can make life a little easier. It should be available to any welfare recipient who wants to sign up.

Or take organ donation. At present, driving licence renewals include a box that can be ticked by anyone who wants to donate their organs. Although three-quarters of Australians do not tick the box, some are surely just sidestepping the issue; preferring not to think about an issue with morbid undertones. We could raise organ donation rates by requiring everyone to either tick ‘Yes – I will donate’ or ‘No – I will not donate’.

Changing defaults, improving information, and making government more effective are all part of what Thaler and Sunstein have tagged ‘libertarian paternalism’. Unlike most government programs, these reforms aim to improve wellbeing without constraining choice. Perhaps our cash-constrained governments could be nudged into checking them out?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

A Lesson in Education’s Value, Australian Financial Review, 20 October 2009

If Australian universities employed spruikers, they would be shouting through megaphones at the front gates right now. “Check out these amazing discounts! Get your bachelor now! Economics is economical! Music going for a song! Psychology so cheap you’ll think we’ve gone crazy!”

At first blush, such a pitch might seem deceptive. After all, HECS hasn’t been reduced this year, and textbook prices continue to rise. But to the student, tuition is only a small portion of the cost of going to university. The bulk of the cost of a degree isn’t fees, it’s lost wages. Since the typical twenty-something earns about $40,000 per year, an undergraduate degree costs around $120,000 in foregone earnings.

However, a university student only forfeits $120,000 in lost earnings if she could have landed a well-paying job. Over the past year, the unemployment rate among 15-24 year olds has risen from 9 percent to 12 percent. In a tighter labour market, those who get jobs often have to settle for lower salaries. The lower the expected earnings of young people, the less they forego by attending university. In a downturn, education is a bargain.

Young people know this, of course – which is why theAustralian Financial Review last week reported that universities admissions centres around the nation are observing a sharp rise in applications for 2010. Accentuating the crunch, fewer students are expected to defer their places (“sorry darling, we can’t fund that year backpacking through Europe”). And more students are likely to stick around for their honours year, further reducing the number of available spots.

In such an environment, you would expect Australian policymakers to be doing all they could to create extra university places. Yet as higher education expert Andrew Norton pointed out on his blog last week, there is some risk that the reverse might occur. Due to oddities in the way that Australian universities are funded, Norton warns that “some universities may aim for fewer domestic commencing students in 2010 than they did in 2009”.

Cutting the number of university places in a downturn is precisely the opposite of what any sensible government should do. Investing in human capital during a downturn is not only optimal from the individual’s standpoint; it also helps take some of the pressure off the youth labour market.

Yet it makes little sense to blame universities, who are simply responding to the incentives embodied in the current funding agreements (the new demand-driven system does not start until 2011). Fixing the problem will require some creative thinking from the federal government, to ensure that universities have strong incentives to expand their 2010 intake.

For all the talk of overeducation, a university degree still looks like one of the best investments around. Tracking the returns to a bachelor’s degree over the past quarter-century, Melbourne University researchers Michael Coelli and Roger Wilkins find that although the share of working age adults with a degree has tripled, the university wage premium has remained constant. Just as in the early-1980s, university graduates can expect to earn a cool 50 percent wage premium over someone with no post-secondary qualifications.

In taking action to expand education in the downturn, federal policymakers could learn from their state counterparts. Despite copious economic evidence on the benefits of higher school leaving ages, states had dithered for years over raising the school leaving age. The awful state of the youth labour market has finally spurred some action, and from 2010 the majority of Australian children will face a leaving age of 17. Although this will strain budgets and classrooms, it brings Australian education into line with the demands of an increasingly computerised labour market (indeed, one-third of US states now have a leaving age of 18).

For the federal government, expanding the number of available university places in 2010 will probably involve messy negotiations. Neither the fiscal hawks nor the media tarts will look warmly upon a complex deal that temporarily boosts the number of student places. But students should not suffer because of the anomalies in Australia’s university funding system. If nothing else, the spectacle of thousands of school-leavers moving from the university application line to the dole queue should make Federal Cabinet shudder.

Occasionally events lay down a simple character test. A government that’s serious about an Education Revolution doesn’t let university places shrink in hard times.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

You’re Only as Old as they Feel, Australian Financial Review, 6 October 2009

On his 64th birthday, Paul McCartney suggested that he might change the lyrics of one of his most famous songs to “When I’m 84”. While most took this as a sign that old age is in the eye of the beholder, it also reflects the fact that 64 isn’t 64 anymore.

The Australian life tables tell us that a 64 year old in the Beatles Era could expect to live for another 15 years. Today, a 64 year old can expect to live for 21 more years – an improvement of 6 years. According to work by Harvard’s David Cutler and co-authors, the improvement in health has been even greater. They find that the self-reported health of men aged in their early-70s today is similar to the levels recorded for men aged in their early-60s three decades ago.

So in terms of life expectancy, 70 is the new 64. And in terms of health, 74 is the new 64.

With a steady decline in the share of backbreaking jobs, and ongoing improvements in medical technology, it is reasonable to expect these numbers to keep rising. Yet to look at many of the statutes on our books, you would think that none of these changes had ever occurred.

The one area in which government appears to have correctly accounted for rising longevity is the eligibility age for the pension, which is now scheduled to rise to 67 in 2017. Yet the federal government has poured cold water on suggestions that the superannuation preservation age should also rise: a decision that is both inefficient (given longevity increases) and inequitable (since it advantages richer superannuants over poorer pensioners).

When each proposal to raise age limits is taken in isolation, it is no surprise that policymaking will be ad hoc. A better approach would be to index upper age limits in all laws, ensuring that they rise together as lifespans increase.

We already have a precedent for this kind of across-the-board indexation: the use of ‘penalty units’. Rather than write specific dollar figures into legislation, Australian parliaments typically set maximum fines as a certain number of penalty units. The intuition for this is straightforward: a fine of $1000 in 2009 is considerably less harsh than a fine of $1000 in 1999. Updating penalty units to keep pace with inflation is a straightforward way of ensuring that fines remain constant in real terms over time. It also helps ensure that the relative magnitude of different fines (eg. tax fraud and welfare fraud) remains unchanged.

How might age indexation operate in practice? One approach would be to mandate that all elderly age limits should increase by 3 months every year (approximately the rate at which life expectancy is presently rising).

More radically, we could define ages in terms of time from death rather than time from birth. For example, we might legislate so that the typical person is eligible for the pension for the last 20 years of their life (which on current life tables would be age 65½). While this approach is a tad morbid, it does have the advantage of focusing directly on the policy parameter of interest, namely the expected number of years that a law will affect the typical individual.

Age indexation should apply not only to laws that provide special benefits (age pensions, Veterans’ pensions, superannuation), but also to legislation that imposes additional requirements on the elderly. For example, drivers in many states are presently required to undergo annual tests after a certain age. As longevity improves, this age should steadily be shifted upwards. Similarly, laws that allow exemptions for the elderly (such as jury duty or voting) should have their age limits indexed so that they steadily rise over time.

Naturally, such indexation would only apply to upper age limits, since rising lifespans do not strengthen the case for lowering the age at which young people can leave school, drink or vote. If anything, longer lifespans suggest that such ages should be raised rather than lowered (today’s 18 olds will vote in 3 more federal elections than when the voting age was first lowered to 18 in 1973).

With limited political resources, parliament should aim wherever possible to find across-the-board solutions that are fair over time and across groups. Indexing fines and allowances has allowed politicians to spend less time debating dollar figures, and more time discussing the big issues of the future. Likewise, a move to age indexation could avoid the unseemly battle that arises each time a particular age change is suggested. Rather than age limits being determined by lobbyist power, wouldn’t age indexation be a fairer approach?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Yours to (Hopefully) Spend, Australian Financial Review, 22 September 2009

How effective are household handouts in kickstarting a flagging economy? Are they a fast and effective means of boosting demand? Or are stimulus payments like taking a bucket of water from the deep end of a pool and dumping it into the shallow end (as George Mason University economist Russell Roberts has argued)?

Compared with infrastructure projects – which typically take over a year to commence construction – sending cheques to households has the virtue that it can be done in a few months. Yet there has been considerable debate in the academic literature over their efficacy. For Australians, this debate is more than an academic bunfight: if household handouts are always saved, the federal government just sent out $20 billion to no effect.

It turns out that this is one of those areas where economic theory doesn’t take us very far. At one extreme lies the ‘permanent income hypothesis’. This implies that when politicians say ‘Cash bonus this year!’, voters hear ‘Tax rise next year!’, and put the money in their piggybank. In its pure form, this theory implies that household stimulus has no impact on total expenditure. Indeed, if you add in the fact that raising tax revenue reduces economic activity (by dampening work incentives), it is theoretically possible that a dollar of government cash handouts reduces economic activity by 20 cents or so.

But it is possible to imagine that taxpayers might not be quite so cool and calculating. Experiments from psychology and economics have shown us that individuals tend to undervalue consumption tomorrow in favour of consumption today. Despite knowing that regular gym attendance, going on a diet, or starting a savings plan would be good in the long run, many people have difficulty starting today. Send a myopic taxpayer a few hundred dollars, and she might just spend it.

Empirically, there are three main techniques that economists use for estimating the impact of handouts on total expenditure. The first is to analyse aggregate data, trying to observe sudden changes in the month when the payments were delivered. Yet the problem is that it is extremely hard to know the counterfactual: what would the aggregate figures have looked like in the absence of the payment? Although this approach has dominated the Australian debate, it is a bit like trying to evaluate a single player by looking at whether the team makes the grand final.

The second approach to evaluating the impact of household payments is to use random variation in their timing. In the United States, stimulus payments mailed out to households in 2001 were randomly ordered according to the penultimate digit in the taxpayer’s social security number. This allowed David Johnson (US Census Bureau) and his co-authors to add a few questions to the main consumer survey in the US, and see whether early recipients spent more than late recipients. Restricting the analysis to non-durable goods, they conclude that 37 percent of the payments were spent in the first quarter, and 69 percent the following quarter. (A recent analysisby Christian Broda at the University of Chicago and Jonathan Parker at Northwestern University finds similar results for the 2008 payments.)

The third strategy is to ask households what they did with their money. While economists are typically leery of using stated preference over revealed preference, such a strategy is much more straightforward to implement than the second approach. In studies of the 2001 and 2008 US payments, Matthew Shapiro and Joel Slemrod from the University of Michigan find that around 20 percent of households report spending their tax payments, with the rest saving it or using it to pay off debt.

In Australia, similar questions record much higher spending rates. My own analysis, using data from a June 2009 poll conducted by the Australian National University, found that around 40 percent of recipient households reported spending the stimulus payment. Since this was only based on the months immediately after the cheques were mailed out, the six-month impact on expenditure was likely to have been larger than 40 percent. (A differently worded Westpac survey suggested that around 70 percent was spent.)

Who spends, and who saves? Comparing Australian households, I found several statistically significant patterns. Recipients were more likely to spend the money if they were less worried about someone in their household losing their job. Those who were less concerned about government debt were also more likely to be spenders. But perhaps the most curious pattern was that – even holding constant demographics such as age and income – Labor voters were more likely to spend than Coalition voters.

On face value, a government that levies taxes so it can send cheques to the voters hardly looks a paragon of fiscal rectitude. But for the US and Australia, the evidence suggests that one-off payments can play an important role in cushioning the worst effects of a downturn.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Economics Rules the Street, Australian Financial Review, 8 September 2009

There are few standard findings in labour economics: wages generally rise over the lifecycle, there is a large pay premium for education, and women generally earn lower wages than men. Yet the world’s oldest occupation satisfies none of these criteria. So it is perhaps not surprising that economists have only recently begun to turn their attention to understanding the economics of prostitution, and asking questions such as: Why are wages so high? What policies best reduce sexually transmitted diseases? And is legalisation a good idea?

First, some basic facts. According to recent work by theAustralian Institute of Family Studies, there are around 20,000 prostitutes working in Australia at any given time, suggesting that Australia has around twice as many prostitutes as dentists. One US survey found that over their lifetime, about 2 percent of women sold sex, and about 18 percent of men paid for sex.

Generally speaking, prostitution falls into three main categories: brothel workers, escorts (who typically make arrangements online), and street workers. About one-tenth of sex workers in Australia are street workers.

On the street, wages tend to be lower, and the risk of violence higher. A survey of street workers in Chicago by Steven Levitt (University of Chicago) and Sudhir Venkatesh (Columbia University) found that these women earn just US$25-30 per hour. These women are frequently subjected to violence, and mistreatment by the police is common (in one widely reported result, Levitt and Venkatesh noted that a prostitute is more likely to have sex with a Chicago police officer than to get officially arrested by one).

Yet escorts earn substantially more. Analysing around 40,000 Internet escorts in the US and Canada, Lena Edlund (Columbia University) and co-authors observed that escorts earned on average US$280 per hour, which places them in the top 0.5 percent of the earnings distribution. These wages are similar to those found on escorts’ websites in major Australian cities.

Economists have proposed two theories for why prostitutes (at least, those not working the street) earn such high wages. Clearly, part of the answer is that these earnings are a form of ‘hazard pay’, akin to that received by coal miners, window cleaners and motorcycle couriers. Another more controversial explanation is that prostitutes’ high pay is effectively a form of compensation for the fact that current or former prostitutes have more difficulty finding a marriage partner. Intriguing as it is, the marriage hypothesis is not yet compelling, since the evidence shows that many women combine prostitution and marriage.

Another question is how best to regulate the health of sex workers. In this regard, a key contribution that economists have made is to prove that different policy regimes can affect prostitutes’ choice of sector. Drawing on survey data from Ecuador, Paul Gertler (University of California, Berkeley) and Manisha Shah (University of Melbourne) show that mandatory health checks affect whether prostitutes work in brothels or on the street. Their research clearly shows that if authorities want to reduce the incidence of sexually transmitted diseases, they should focus their attention on carrying out on-street health checks.

In regard to its overall enforcement of prostitution, Australia seems to have struck a reasonable balance. For the most part, states and territories ban kerbside solicitation, while permitting escorts and brothels. Since the rates of violence are much higher in street-level prostitution, this effectively discourages the most problematic part of the market (which also happens to be the lowest-paying).

Internationally, the two alternatives that are most commonly proposed are the Swedish model of banning prostitution but only arresting clients, and the United States model (excepting a few states), of arresting both clients and sex workers. Yet both these approaches would be likely to have only a minimal impact on the demand for prostitution, which is driven by the combination of testosterone, cultural attitudes towards women, and high male earnings.

As Harvard’s Jeffrey Miron points out, there is little evidence that banning prostitution reduces violence towards women. More likely, re-criminalisation would merely shift more workers towards street prostitution. Indeed, the Australian experience with prostitution regulation suggests that harsher legal regimes have led to more police corruption, without making prostitutes any safer. While it would be nice to live in a society where prostitution did not exist, this is one area where a ban would be counter-productive.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Leadership is Overrated, Australian Financial Review, 25 August 2009

According to the betting markets, NSW Premier Nathan Rees is currently the fourth-favourite to lead his party to the next state election. If the odds are to be believed, Frank Sartor, John Della Bosca and Carmel Tebbutt are all more likely to lead Labor than Rees.

Just as with prior leadership battles, the temptation for the commentariat will be to follow each twist and turn, analysing the strengths and weaknesses of every contender. There is little doubt that political parties are important. But rarely do we ask whether it matters who leads a particular party. Should we care which jockey rides the horse?

One of the strongest proponents of the leadership-is-overrated school of thought was Leo Tolstoy, who argued that ‘great men – so called – are but labels serving to give a name to the event’. Yet as a plethora of political biographies attests, the view that individuals matter remains powerful. Isn’t it tempting to believe that individuals matter more than mere political parties and the nameless forces of history?

Perhaps the most tantalising version of the leadership-is-everything perspective is counterfactual history. If Harold Holt had not drowned at Cheviot Beach on 17 December 1967, would he have pursued a different set of policies from his successors? If Queensland Senator Bertie Milliner had not suffered a heart attack on 30 June 1975, might Gough Whitlam have avoided the Dismissal, and been able to do more with his time in office? If Neville Wran had not been handicapped by a throat operation in June 1980, would he have entered federal politics before Bob Hawke, and been an even more successful leader? The more one reads about the players in these events, the easier it is to be seduced into believing that they fundamentally changed the course of Australia.

In an intriguing article, Ben Jones (Northwestern University) and Ben Olken (MIT) have set about trying to estimate the impact of leadership on national outcomes, such as economic growth and fiscal policy. Ideally, we would like some random variation in leadership turnover, but Jones and Olken use the next best thing: instances in which leaders die from accidents or natural causes. In effect, they ask: did the deaths of John Curtin, Gamal Abdel Nasser and Franklin D. Roosevelt change their nation’s trajectory?

The answer, according to Jones and Olken, is that Tolstoy was half-right. Leaders matter in autocracies, but not in democracies. The deaths of Ayatollah Khomeini and Mao Tse-Tung were followed by rapid improvements in living standards for ordinary Iranians and Chinese. But in a typical democracy, economic outcomes are unaffected when a leader passes away. Constrained by political parties, institutions and interest groups, democratic leaders have less scope to change the world than the typical biography (or autobiography) might have you think.

Admittedly, these results do not rule out any leader effects whatsoever. It could be that while most leaders are interchangeable with the other grey suits in their party, a handful stand out from the crowd. Or maybe leaders have little impact on economic growth, but nonetheless leave their mark on foreign policy, public infrastructure, or the configuration of the public service.

Yet when we flip the question around, it turns out that the economy has a big impact on how long leaders stay in office. Caucus members may think that they are judging the contenders on merit, but one of the best predictors of whether a party will turf out its leader is the national growth rate. Just as the early-1990s recession saw the UK Conservative Party oust Margaret Thatcher in favour of John Major, and the Australian Labor Party remove Bob Hawke in favour of Paul Keating, so too the latest slump has already caused plenty of heads to roll.

Indeed, empirical research by Australian National University PhD student Paul Burke suggests that the global downturn will lead to an additional 11 national leaders being removed from office. Conversely, as Peter Costello can attest, economic good times are bad news for a leadership pretender.

The impact of the economy on leadership turnover reflects what psychologists have termed ‘the fundamental attribution error’: our tendency to overestimate the role of individuals, and underestimate the importance of luck and context. Comparing Nathan Rees with other Australian Premiers in the last decade, it is difficult to escape the conclusion that if he had been elevated to the Premiership in a boom time, Rees might now be regarded as a decent performer. Leaders may not affect the economy, but the economy sure affects them.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Cultures of Corruption, Australian Financial Review, 11 August 2009

Leisha Harvey was jailed for a year for using her official credit card for personal expenses, including taking her husband to enjoy the Grand Prix. Brian Austin was imprisoned for 15 months for misappropriation. Merri Rose spent 18 months behind bars for attempting to blackmail the Premier. Gordon Nuttall was jailed for seven years for corruptly accepting $360,000 from two businessmen.

What do all these cases have in common? They all involve Queensland politicians. Indeed, of the 16 state politicians who have been convicted of crimes in the past 20 years, 8 were from Queensland. According to Tony Fitzgerald, whose 1987-89 inquiry was meant to have ended official corruption in Queensland: “Access can now be purchased, patronage is dispensed, mates and supporters are appointed and retired politicians exploit their political connections to obtain success fees for deals between business and government.”

Of course, other states have had political corruption scandals of their own. New South Wales corrective services minister Rex Jackson’s cash-for-early-release scheme was nothing if not audacious. And Western Australia deserves a special mention for having had a Liberal Party premier and a Labor Party premier jailed in the 1990s. But for convictions, Queensland tops them both.

True, just 8 convicted politicians is a crude basis on which to attach the tag ‘most corrupt state’. Another approach is search the national media, and estimate what share of the approximately 100,000 state political stories published in the last 14 years mention corruption. On this metric, Western Australia and Queensland are the most corrupt states (with 10% and 8% respectively of political news items mentioning corruption), while the ACT and NT rank as the least corrupt (with 6% of political news items mentioning corruption).

What explains why some states are more corrupt than others? Since Gary Becker’s seminal work in 1968, most economists have regarded crime as a function of the expected benefits and the expected costs. When the potential gains from corruption are high, we should expect to see more of it. Conversely, when the penalties are large, or detection is likely, we should expect to see less corruption.

This suggests that states with more dispersed populations might experience more corruption, since a more dispersed population means fewer people in the capital city to keep an eye on the politicians. As one of the least urban states in Australia, it may have been harder for Queenslanders to prevent their MPs from misbehaving. Another factor could be the level of development. In the United States, Mississippi and Louisiana are among the states with the highest proportion of public officials convicted of corruption, while New Hampshire and Oregon are among the least corrupt. The fact that Queensland incomes have historically been below the national average may be relevant here.

But economists are also beginning to recognise the importance of a ‘culture of corruption’. When everyone around is thumbing their nose at the law, an otherwise scrupulous politician may be more tempted to do likewise. Or as Governor Willie Stark says in All the Kings’ Men, “dirt’s a funny thing. Some of it rubs off on everybody.”

Intriguing evidence on cultures of corruption comes from a study by Ray Fisman (Columbia University) and Ted Miguel (University of California, Berkeley), who observe that diplomats from countries with high corruption ratings (such as Egypt and Chad) are more likely to exploit their diplomatic immunity to accumulate unpaid parking tickets in New York City. Holding constant a country’s level of development, more corruption back home means more unpaid parking tickets in Manhattan.

Partly because of these cultural norms, fighting corruption is no quick process. But the most promising solution is to raise the chance of detection. In the words of former US Supreme Court Justice Louis Brandeis: “sunshine is the best disinfectant”.

In Australia, independent corruption-monitoring bodies have doubtless helped. But perhaps just as important is the role of an active and independent media. Just as the Crédit Mobilier and Teapot Dome scandals were both brought to light by the US media, so too the Courier Mailand Four Corners helped expose Queensland police corruption in the 1980s.

In the Internet age, the media should also press for more data to be available online. Political donations could be posted quarterly rather than annually. Lobbyists ought to report on their fees (as occurs in the US), not merely their client list. And political parties’ ‘business liaison’ programs should be fully reported. If something dodgy is going on, posting the jigsaw online raises the odds of someone piecing it together. Perhaps the “Sunshine State” could lead the way?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

The Economics of Obesity, Australian Financial Review, 28 July 2009

Ask an economist why obesity rates are rising across the rich world, and you’ll likely get two answers. First, the shift away from occupations requiring serious amounts of physical labour means that the typical worker burns fewer kilojoules on the job than in the past. Second, advances in agriculture and food technology have made kilojoules cheaper and yummier than ever before. (Empirically, it turns out that the former explained weight gain until about 1970, and the latter is the key factor since then.)

But would you trust an economist to tell you how to lose weight? Strikingly, part of the growth of behavioural economics has involved the dismal science turning its analytic toolkit to understanding why many of us overeat, and how we can reduce our food consumption.

The economic approach to estimating which kinds of dieting strategies succeed involves identifying cognitive biases, which are then tested in randomised experiments in the laboratory or real world. Coupled with this is the evaluation of policy changes, to see whether initiatives such as kilojoule labelling help or hurt consumers.

A trio of papers in the May 2009 issue of the American Economic Review summarises some of the new research in this field. Analysing eating patterns across the day, Marianne Bertrand and Diane Schanzenbach find that while Americans spend less time eating as their primary activity, it has been increasingly common to eat while doing something else (I hope you’re enjoying that sandwich, by the way). About a tenth of US kilojoules are consumed while watching TV. And while people tend to eat less when they have consumed more in the previous six hours, this rule doesn’t apply to television eating: people eat just as much in front of the television regardless of what they have recently consumed.

So could just turning off the television make a difference? To test this, Brian Wansink and co-authors ran a horse race between ten dieting strategies. Randomly assigning 1000 participants from a weight-loss website to one of the strategies, they were able to monitor compliance and weight loss.

The upfront finding – not surprising to anyone who has ever gone on a diet – is that very few people stick to the plan. No dieting strategy garners more than a 40 percent compliance rate.

Yet the successful strategies are not always those that are easiest to stick to. The best ways to lose weight are to use 25 cm plates (an average 0.9kg weight loss in a month), avoid eating while watching television (0.7kg weight loss), and eat fruit before snacking (0.5kg weight loss). If you’re munching through The Biggest Loser, you may be missing the point.

These results are consistent with the notion that we eat more with our eyes than our stomachs. Indeed, other evidence shows that those who decide when to stop eating based on external cues (of the kind ‘I stop eating when my drink runs out’) are more likely to be overweight than people who say they stop eating when they feel full.

Can public policy help too? One popular solution among politicians is to require restaurants to label the kilojoule content of each dish. In principle, one might think that more information can only benefit consumers. But by surveying customers before and after New York City’s 2007 adoption of such a law, Julie Downs and co-authors conclude that the rule did not reduce food consumption. Indeed, the authors find some evidence that dieters consumed more kilojoules after the labelling law came into effect, which they attribute to the fact that dieters tend to overestimate the amount of energy in a meal. If the legislature’s intention was just to increase information, then the law succeeded; but if they had hoped that it would help people lose weight, it was an abject failure.

Although behavioural economics is still a relatively young field, research such as this may be helping to bring a little more rigour into the notoriously unscientific diet industry. With obesity being one of the leading health concerns in developed nations today, even modest advances in our knowledge can have a substantial payoff. Who knows: perhaps the ‘behavioural economics diet’ will be coming soon to a bookshop near you?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

In a Class of Their Own, Australian Financial Review, 14 July 2009

Few education policies are more popular than class size reductions. Alongside her faithful friend Laura Norder, Somala Classiz has appeared on the ballot in just about every state election over the past decade. And thus class sizes in Australia have steadily ratcheted downwards, gobbling up more money than any other educational reform.

The logic of class size reductions is easy to see. With fewer children in the room, teachers can spend more time with each student. Discipline challenges can be more easily managed, and lessons can be better tailored to the particular needs of the student.

Yet while smaller classes create the potential for better learning, there is no certainty that this potential will be realised. If teachers do not adapt their teaching style for a smaller group, there may be no improvement in performance. Indeed, it is even possible for a class size cut to reduce student performance. Smaller classes require hiring more teachers – and if the new hires are less effective than the incumbents, students could lose out.

In estimating the impact of class size on student performance, economists are naturally wary about drawing causal conclusions from the correlation between class size and student performance. If schools systematically stream gifted or struggling students into smaller classes, it will be difficult to know the true impact of class size on outcomes.

One way of solving this problem is to exploit class size rules, which grant schools an extra teacher when the number of students hits a given threshold. Across a number of developed countriesthis approach suggests that once class sizes get below 30, students gain little benefit when another teacher joins the school and reduces class sizes.

Another research design is to randomly assign students into different sized classes, say by the toss of a coin. In the mid-1980s, Tennessee governor Lamar Alexander agreed with the state’s teachers to conduct a randomised class size experiment. If those in smaller classes did better, then class sizes would be reduced statewide. Although the experiment succeeded in showing that smaller classes raised test scores, some have worried about the incentives that Governor Alexander created. Can we be sure that the promise of across-the-board reductions didn’t influence how teachers behaved in the experiment?

In a new paper, Columbia University economist Jonah Rockoff brings some older evidence back into the debate, by reviewing the results of a series of randomised class size experiments conducted in the early-twentieth century. Prior to World War II, US education researchers conducted 24 randomised experiments to test the impact of class size reductions. In 22 of these experiments, there was either no difference in performance of children in large and small classes, or children in larger classes did better. Only two of the 24 experiments supported the notion that smaller classes improve student performance. Although these experiments might have had methodological shortcomings, they do suggest that modern policymakers should think twice before hitching their wagon to the class size horse.

Are there better policies than class size cuts? A growing body of evidence in the economics of education is pointing to the role of teacher quality as being paramount. And while salaries are not the only factor attracting skilled individuals into the teaching profession, higher pay does buy more effective teachers.

A rarely recognised fact is that if the education budget is not increased, smaller classes translate into pay cuts for teachers. In joint work with my ANU colleague Chris Ryan, we have tracked teacher pay since the mid-1980s. We find that relative to other university graduates (or relative to all employees), average teacher pay has fallen by about 10 percent. Over the same period, the student-teacher ratio (which closely tracks class size) fell by about 10 percent. The simple story of the past two decades is that teachers have bought class size reductions from their own wallets.

Put another way, new teachers in the 1980s were paid about a tenth more than the typical university graduate. Today, new teachers earn approximately the same as the typical university graduate. And as earnings inequality has opened up in the non-teaching sector, the uniform salary schedule in teaching looks increasingly unattractive to talented youngsters. It is therefore hardly surprising that the average academic aptitude of new teachers has also declined.

So next time you hear Australian politicians spruiking smaller classes, ask why they’ve never been willing to put their rhetoric to the test with a randomised evaluation of smaller classes. Better-paid teachers doesn’t look so good on a manifesto, but it might just have a bigger impact in the classroom.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Age No Bar to Brilliance, Australian Financial Review, 30 June 2009

Einstein’s major contributions to physics were published when he was aged 26. Mathematician Terence Tao won the Fields Medal (maths’ Nobel Prize) at age 31. ‘When Mozart was my age, he had been dead for two years’, quipped 37 year-old Tom Lehrer.

Yet at the other end of the lifecycle, examples abound. Frank Lloyd Wright designed the Guggenheim Museum from ages 76 to 91. Clint Eastwood directed Unforgiven at age 62. Paul Cézanne’s most valuable work was painted in the year of his death, aged 67.

Understanding the lifecycle of innovators is a puzzle with major implications for how we fund researchers and artists. Should we devote more towards early-career innovators, and risk wasting it on fizzling fireworks? Or is it better to look for established track records, at the risk of funding extinct volcanoes?

One researcher who has been studying the lifecycle of innovation across a variety of fields is University of Chicago economist David Galenson. Over more than a decade, Galenson and his co-authors have studied the careers of economists, poets, novelists, directors, architects, and artists. To identify the stars of each field, he gathers empirical data: rankings of ‘all time greats’, auction prices, prizes, citations, and even the number of times works appear in textbooks and anthologies.

Across a diverse set of fields, Galenson claims to have consistently identified two types of innovators: ‘conceptual’ innovators, whose work implements a single theory, and ‘experimental’ innovators, whose work evolves from real-life experience and empirical observation. Like Isaiah Berlin’s hedgehogs (who relate the world to a single vision) and foxes (who pursue many ends), Galenson’s dichotomy can be applied across many fields of creative endeavour. And the recurring pattern seems to be that conceptual innovators do their best work at an earlier age than experimental innovators.

What marks a conceptualist from an experimentalist? In art, Galenson distinguishes conceptual artists (Pablo Picasso, Edvard Munch) whose work aims to communicate specific ideas and emotions; from experimental artists (Edgar Degas, Wasily Kandinsky) whose ideas are vaguer, and often regard the artistic process as a journey.

Among architects, conceptualists are motivated by geometry (Renzo Piano, Walter Gropius), and experimentalists are inspired by nature (Frank Lloyd Wright, Frank Gehry).

For novelists, conceptualists have specific goals, and are best known for their plots (F. Scott Fitzgerald, Ernest Hemingway). Experimentalists are more focused on character development (Charles Dickens. Virginia Woolf).

In poetry, conceptualists (E.E. Cummings, T.S. Eliot) are technically sophisticated and grounded in literary history, while experimentalists (Wallace Stevens, Robert Frost) draw more from ordinary speech and observation.

Among great directors, conceptualists (Steven Spielberg, Stanley Kubrick) are those whose movies are carefully planned and animated by single ideas. Experimentalists (Robert Altman, Woody Allen) are generally less sure on their goals, and often make major changes to the movie during shooting.

And for Nobel-prize winning economists, conceptualists are theorists and methodological innovators (Paul Samuelson, Kenneth Arrow), while experimentalists make contributions that are principally empirical (Simon Kuznets, Robert Fogel).

Across these fields, a similar pattern can be seen – conceptual innovators tended to do their best work at a younger age than experimental innovators. Conceptual poet T.S. Eliot penned “The Love Song of J. Alfred Prufrock” at age 23. Conceptual novelist F. Scott Fitzgerald never regained the success of The Great Gatsby, published when he was 29. Among experimentalists, Wassily Kandinsky painted his best work around age 50, while economist Robert Fogel published his most cited work, Without Consent or Contract, at age 63.

Yet while Galenson’s research studies the relationship between age and the type of innovation, another approach is to ask whether the peak age has changed over time. Work by Benjamin Jones (Kellogg School of Management) analyses the age at which Nobel laureates made their prize-winning contribution.

Across physics, chemistry, medicine and economics, Jones finds that the age at which laureates made their greatest contribution has shifted upwards over time. In the early-twentieth century, the typical prize was given for work when the winner was aged in their late-thirties, but these days it is typically given for work done in the forties.

Looking carefully at lifecycles, Jones concludes this is due to the increasing educational burden that each generation of innovators imposes on their successors. While the great minds of the early-twentieth century became research-active at age 23, those of the late-twentieth century only became research-active at age 31.

As the knowledge frontier moves out, it takes longer for the next generation to attain it. Using patent data, Jones also shows that as science has become more complex, there are more collaborations and fewer ‘renaissance men’ making contributions across different sub-fields. In the absence of a paradigm shift, the normal process of scientific accumulation steadily moves the knowledge frontier outwards.

While lifecycle economics has policy implications, it also naturally leads to introspection. I couldn’t resist asking 37 year-old Jones how studying age-creativity patterns has made him view his own research. He responded: ‘My studies suggest my current age is one of peak productivity - and soon there will be a decline - so I'd better get back to work!’

Andrew Leigh is a 36 year-old economist at the Australian National University.

Chasing Value for Money, Australian Financial Review, 16 June 2009

If Kevin Rudd were an Australian CEO, how would his pay packet compare? According to the Australian Financial Review’s Executive Salary Database, Rudd’s $330,356 would rank him 440th, just ahead of the CEO of The Reject Shop.

Should Australian politicians be paid more? At Federation, we certainly thought so. In 1901, the base salary of an Australian backbencher was £400, more than 5 times the average wage. Today, it is $127,060, less than 3 times the average wage (though MPs also enjoy other perquisites). And although our federal politicians are not yet cutting their pay (as they did in 1932), they have opted for a one-year pay freeze.

In most occupations, we have strong evidence that higher pay increases the quality of the applicant pool. But in the case of politics, there is reason to think that a bigger honeypot might attract the wrong kinds of bees. Economist Max Weber famously worried that: “Either one lives ‘for’ politics or one lives ‘off’ politics”. Perhaps a pay rise will merely increase the share of people who want to live ‘off’ politics?

Fortunately, two recent economics studies allow us to move beyond theory, and directly observe the impact of changes in politicians’ pay packets on the kinds of people who run for office, and the behaviour of legislators.

In a study of US governors, Tim Besley (London School of Economics) tested the theory that higher pay allows voters to buy representatives whose ideology is closer to their own. Analysing data across US states over three decades, Besley found that when states increase the governor’s salary packet, they are more likely to end up with a governor whose political views match those of the citizenry. Curiously, this effect seems to be partly driven by the increased probability that the governor will be a lawyer – perhaps reflecting that occupation’s ability to see the world through their client’s eyes.

New evidence from Brazil also supports the view that higher salaries raise the quality of elected officials. Cleverly exploiting a federal formula that capped the salaries of local politicians, Claudio Ferraz (PUC-Rio) and Frederico Finan (University of California, Los Angeles) found that municipalities with higher salaries attracted more candidates to run for office. More generous salaries also changed the composition of the candidate pool, boosting the average education level, the number of candidates from skilled occupations, and the share of female candidates.

Ferraz and Finan’s natural experiment also showed an effect on the productivity of legislators. Better-paid Brazilian legislators tended to submit more bills, and pass more laws. Most importantly, this did not seem to be mere busywork. Municipalities with highly-remunerated politicians had superior public services, as measured by the number of schools, health clinics and doctors.

There is also good evidence that politicians respond not merely to the level of base pay, but the generosity of retirement benefits. When the US Congress enacted a deferred increase in pensions for those who remained in office until 1992, many incumbents who would have retired in the 1990 election decided to run again, and the retirement rate leaped sharply in 1992.

In the Australian context, the old parliamentary superannuation scheme – which applied to MPs elected before 2004 – created a strong incentive for members to stay in office for at least 8 years (at which point they became eligible for a pension equal to 50 percent of salary). There is anecdotal evidence that that this stretched out the political careers of more than a few backbenchers.

Abolishing pension thresholds was probably a sensible reform, and perhaps lowered the number of timeservers warming the backbench. But the 2004 reforms also significantly cut the total remuneration available to members of parliament. Assuming the US and Brazilian results apply in Australia, the eventual effect is likely to be a lower-quality candidate pool, and perhaps even a reduction in the quality of political decisions. The same goes for the current pay freeze and mooted restrictions on electoral allowances.

Commentators sometimes make the assumption that allowing members of parliament to set their own pay is like letting the fox guard the hen-house. Yet while it is possible that politicians will seize the chance to grant themselves excessive pay increases, we should not ignore the reverse risk. When parliamentary pay comes up for public scrutiny, there is a real risk that hairshirt politics will take over, as both sides seek to outdo themselves with promises of greater austerity. Cut-price pollies may sound like a tempting reform, but it could prove costly in the long run.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Culture Key to Share Plans, Australian Financial Review, 2 June 2009

A cut of the action, or the unkindest cut? Since Budget night, commentators have been debating the merits of employee share ownership programs (ESOPs), and whether their current tax-preferred status is too generous. But with interest groups dominating the discussion, surprisingly little attention has been paid to the economic evidence. Would Australia be better off if we raised our current level of employee share ownership (6%) to that of the US (19%)?

There are two reasons economists typically worry about ESOPs. First, they expose workers to additional risk: when Enron collapsed, its employees lost not only their jobs, but also a large portion of their retirement savings, held in the form of company stock. Second, economists have had a tricky time understanding why employees in a moderately large firm should work harder because they get a fixed share of the profits.

But recent findings from Harvard economist Richard Freeman and co-authors suggest that economists should be comfortable with ESOPs. In a series of papers, they present evidence that modest holdings of company shares (less than 10% of an individual’s portfolio) do not expose people to undue levels of risk. Firms with ESOPs also seem to have less turnover and enjoy greater loyalty from their staff.

All well and good, but what do ESOPs do for the bottom line? In a one-worker firm, we might expect ESOPs to have large impacts. Adam Smith famously extolled the productivity benefits of the 18th century French sharecropping system, under which landowners provided farmers with seed, cattle and equipment, and then landowner and farmer split the profits at the end of the season.

But the incentives weaken as the firm grows. Suppose your 100-person firm decides to introduce an ESOP. The next day, you must decide whether to work harder. If you do, then part of the gain goes to capital, and of the labour share, you get 1/100th. You know that Lazy Joe who works alongside you isn’t going to pick up the pace, but he’ll still benefit from your extra sweat. In this scenario, standard economic theories struggle to explain why ESOPs should have any effect on productivity.

Yet they do have an effect. Drawing together studies from the US and the UK (where the Treasury recently completed a major impact assessment of ESOPs), Freeman shows that productivity is higher in firms that have ESOPs. And workers gain too – wages and training are higher in companies with ESOPs than in those without. Moreover, it does not appear that workers are merely trading off salary for shares: in studies that have looked at the transition to such a plan, salaries continue to rise at about the same rate as in other firms in the same industry.

The reason that ESOPs succeed appears to be because they reduce shirking. In US surveys, most say that they have seen a fellow employee “not working as hard or well as he or she should over an extended time period”. But despite observing shirkers, many do not bother to say anything to their co-worker or a manager.

ESOPs can change this. Having a stake in the firm makes workers more likely to speak out when they feel that a colleague is not pulling his or her weight. This is easier to reconcile with the 100-person puzzle, since the cost of an occasional chat with a shirker is plausibly pretty low.

Freeman’s research also indicates that it isn’t just ESOPs that deliver these gains: similar impacts are observed from other high-powered incentives, such as profit-sharing and individual bonuses. Moreover, such ‘shared capitalist’ incentives seem to operate best in conjunction with plenty of on-the-job training, employee involvement teams, and limited managerial supervision. For workers to effectively monitor each other, management has to take a step back.

Although much of the research is based on cross-sectional correlations, it seems to indicate that ESOPs are good for firms and workers. Does that mean it’s thumbs-up for a tax break?

Not so fast. One of the notable features of Freeman’s work is the emphasis on firm culture. Referring to the current Australian debate, he told me: “I have been struck in the UK data and at least in US stories that when firms choose ESOPs or related profit-sharing schemes, the ones that do so for reasons beyond the tax incentives tend to do better.  If all the firm wants is a tax break it may not change its ‘culture’ and benefit from worker participation.”

Put another way, aligning workers’ incentives with a firm’s bottom line can induce higher productivity. But it doesn’t follow that generous government incentives will transform the managerial style of a corporation. ESOP tax breaks may be money better spent elsewhere.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Predictions on the Money, Australian Financial Review, 19 May 2009

With economic forecasters now about as well-respected as astrologers and tarot card readers, it is little surprise that the federal government’s official projections for economic growth have been greeted with some scepticism. Yet the fact that predicting the future is difficult does not make it any less important. In tumultuous times, policymakers cannot afford to drive by watching only the rear-vision mirror.

One way to get a better sense of the future is to turn to prediction markets, which have proven surprisingly accurate in forecasting election results. Such markets aggregate information from a large number of individuals, weighting it in proportion to each person’s degree of certainty about the outcome. Ask experts what they think will happen, and you’ll discover that talk can be pretty cheap. But ask those experts how much money they’d wager that the predicted event will come to pass, and you’ll find out how confident they really are.

Over the past decade, a wealth of evidence has accumulated on the power of prediction markets. In the words of George Mason University’s Robin Hanson: ‘in every known head to head field comparison between speculative markets and other social institutions that forecast, the markets have been no less, and usually more, accurate. Orange Juice futures improve National Weather Service forecasts, horse race markets beat horse race experts, Oscar markets beat columnist forecasts, gas demand markets beat gas demand experts’. And many firms – including General Electric, Google, Hewlett Packard, Nokia and Pfizer – have established internal prediction markets to shape their decision-making.

For policymakers, two of the greatest unknowns are the state of the economy next year, and the likely trajectory of the H1N1 flu virus. On both counts, there is strong evidence that prediction markets can do a good job of forecasting the future. In an analysis of futures markets in economic indicators such as employment and retail sales, Refet Gurkaynak (Bilkent University) and Justin Wolfers (University of Pennsylvania) found that these ‘macro derivatives’ performed at least as well as the average from a panel of professional forecasters. Right now, online bookmaker Intrade estimates a 70 percent chance that US unemployment will top 10 percent by December 2009.

Influenza prediction markets have been the subject of a careful study by University of Iowa researchers Philip Polgreen, Forrest Nelson and George Neumann. Under the auspices of a new ‘Iowa Electronic Health Market’, they found that a market on future flu outbreaks (in which the traders are health care professionals) was able to accurately forecast flu activity up to one month in advance. These markets now provide estimates of the mortality rate for H1N1 swine influenza in the US by the end of July (a 93 percent chance that it will be below 1 in 100), the number of countries with at least one confirmed case by the end of July (the shortest odds are on “101 or more”), and when the US will be able to vaccinate 50 million or more people (most probably not until December 2009).

What do prediction markets say about unemployment and swine flu in Australia? Unfortunately, we don’t know, because such markets do not currently exist. Part of the problem is regulatory – gambling laws treat a bet on an important event the same way they treat a bet on two flies crawling up a wall. This ignores the fact that there is a public benefit to improving our knowledge about future macroeconomic and disease events. Governments should lightly regulate – if not subsidise – prediction markets.

Prediction markets are not perfect, but many of the early critiques turn out to have been overblown. Trading volumes are generally thick enough to provide good estimates, and arbitrage opportunities are rare. Market manipulation is difficult, and prices generally revert to their true value as smart money happily soaks up ideological wagers. Structural details – such as whether the markets are run as betting markets or futures exchanges – do not seem to matter much.

At risk of undermining my own status, the strongest argument for prediction markets is the abysmal record of expert commentators in forecasting the future. One study that followed up the forecasts of several hundred political and economic pundits concluded that their forecasts were about as accurate as would have been produced by a team of dart-throwing monkeys. Armed with grand theories, experts are often too slow to adapt their ideas to fit the facts.

Allowing betting on future events will create greater competition in the forecasting market, and increase the precision with which we can anticipate coming events. In a volatile world, a little more certainty about the future has substantial value. Time for policymakers to take a bet on prediction markets?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

A Home on the Scrapheap, Australian Financial Review, 5 May 2009

Firsts are invariably memorable. Whether it’s a first love, a first job, or a first rock concert, there’s something that sears the memory. So it’s little surprise that canny politicians have decided that when it comes to first homes, they want to be a part of the experience, in the hope that the voter might repay the favour when the next election comes around.

The conservative side of politics, tend to argue that we should subsidise home ownership because it encourages economic independence. In the words of Robert Menzies: “one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours”. For Labor, home ownership ought to be subsidised on equity grounds. As Gough Whitlam once said: “It is the people's land, and we will fight for the right of all Australian people to have access to it at fair prices.”

Over the years, the benefits of home ownership have been mythologised by social commentators. An array of lobby groups – from builders to real estate agents to social housing advocates – have touted its advantages. Yet little has been said about the downside. Just because many people eventually buy a house (disclosure: I am one of the 70 percent of Australians that own my home), it does not follow that governments should subsidise first home purchases.

The strongest evidence against home ownership comes from Andrew Oswald, of Warwick University, whose research has shown that countries and regions with higher rates of home ownership tend to have more unemployment. Across Europe, Oswald compares Switzerland, with a home ownership rate of 37 percent and an unemployment rate of 3 percent; with Spain, which has a home ownership rate of 85 percent and an unemployment rate of 17 percent. The explanation for the link is that owning your home tends to lock people into the local labour market. When a region suffers a local downturn, it is easier for renters to follow the jobs. By contrast, owners may opt to stay put. Higher rates of home ownership make for less flexible labour markets.

This is particularly true of Australia, where stamp duty imposes a heavy penalty on residential mobility. In some other parts of the world, residential turnover taxes are about the price of a bicycle. Here, the cost of stamp duty on a given house is likely to be pretty close to the value of the car parked in the driveway.   

The potential lock-in effect of home ownership is particularly important when thinking about the First Home Owner Grant. Early in their careers, young workers often switch jobs a few times until they find the firm that is the best match to their talents. But buying a house too early can curtail this process, with the result that employees might end up in jobs that are a bad fit for them in the long run. Alternatively, high levels of home ownership can increase traffic congestion, as job-switchers end up driving across town to get to work.

Another downside of home ownership is that having virtually all your wealth locked up in one piece of property is a risky investment strategy. Although Australian property prices have risen substantially over the past decade, local housing markets can be volatile. Just as government policies on superannuation encourage diversification, housing policies should not push young Australians to over-invest in a single housing asset.

Introduced by the Howard Government in 2000 as compensation for the GST, the First Home Owner Grant has proved as difficult to dislodge as any other piece of middle-class welfare (actually, this one is more like upper-class welfare). In response to the looming recession, the federal government has recently increased its value to $14,000, or $21,000 for newly-built homes. Some states offer generous top-up programs. For example, if you buy a new home in regional Victoria, the state government will kick in an additional $8000.

With the federal grant due to be reduced on 30 June 2009, the government is under pressure to extend the generous credits. In making the decision, they would do well to consider Oswald’s research on the link between home ownership and unemployment. This suggests that as a society, we should be pleased that many young people are renters, and refrain from pushing them to buy too soon. (For similar reasons, public housing should be no more generous than rent assistance.)

Subsidising home buyers may be a good job creation scheme for real estate agents and builders. But if it locks young families into jobless regions, we might end up with a longer recession.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Make Taxpayers Literate, Australian Financial Review, 21 April 2009

Would the rich pay more tax if we replaced the current income tax system with a flat tax? What about if we abolished the income tax and raised the GST?

If you answered ‘no’ to both these questions, then you’re in line with what virtually all tax experts – left and right – believe is true in developed countries. But when researcher Joel Slemrod put these questions to a sample of the US population, 41 percent said ‘yes’. They thought that under a flat income or consumption tax, the rich would pay more tax. Assuming the experts are correct, it looks like 4 out of 10 Americans fundamentally misunderstand their tax system.

What is startling about this is that most tax analysis generally begins from the premise that people have a perfect understanding of the system. For example, a major policy focus in Australia over recent years has been on ensuring that the tax and benefit system does not overly penalise the move from welfare into work. Implicitly, most of those who argue for lowering  ‘effective marginal tax rates’ assume that people are well-informed about the system, and can calculate how getting a job or changing their hours will affect their tax bill and welfare cheque.

In many contexts, the economic assumption of ‘perfect information’ is a reasonable approximation of the real world. But when it comes to complex systems like taxes and family benefits, it becomes increasingly tenuous to claim that the typical person knows the system.

Lately, economists working in the field of ‘behavioural public finance’ have begun to implement a series of randomised experiments to test the extent to which salient information matters. One of the leaders of this field is Raj Chetty, a lanky whiz kid who at the ripe age of 29 is a full professor at Harvard University.

With co-author Emmanuel Saez, Chetty ran an experiment in which tax agents were randomly required to inform low-income workers about the parameters of the Earned Income Tax Credit (EITC), an in-work benefit for poor families. Tax agents who complied with the program induced a substantial increase in earnings among their clients. Indeed, Chetty and Saez estimate that a small amount of additional information (a two-minute tutorial and a follow-up letter) led to a big increase in earnings. ‘Teaching the tax code’ had the same impact as a one-third increase in the generosity of the credit.

The results of this experiment fly in the face of conventional economic wisdom. Under the US EITC, poor families can be eligible for thousands of dollars annually. For economists, observing taxpayers who are ignorant about the basic parameters of the system is like seeing pedestrians stepping over a pile of $20 notes strewn on the footpath.

In another exercise, Chetty and his co-authors Kory Kroft and Adam Looney showed that it is not only information about taxes that matters, but also whether that information is ‘in your face’. For this experiment, they exploited the fact that product prices in the US do not include sales taxes. Working with a grocery store, they posted tax-inclusive prices on a series of randomly selected products, and watched to see how it affected consumer behaviour. When surveyed, consumers typically knew that tax would be applied at the checkout – yet posting a tax-inclusive price on the shelf still reduced demand by 8 percent. (Subsequent Harvard research backs up the finding that sales taxes are especially salient: incentives to buy a hybrid car are seven times more effective if delivered through sales tax waivers than via income tax credits.)

Although I know of no Australian surveys that have comprehensively measured ‘tax literacy’, there are reasons to think that Chetty’s findings might apply here. The expansion of family tax benefits and child care benefits to the middle class – and the sheer frequency with which these policies change – make it pretty improbable that everyone is up to date with the latest policy. And Australians are world-leaders in our use of tax agents. When three-quarters of individual taxpayers require professional help to lodge their return, it’s surely a hint that the system has grown too complex.

Speaking to the National Press Club last November, Treasury Secretary Ken Henry told the tale of his conversation with ‘Jim from Jericho’, and emphasised the wisdom of ‘bar room conversations of practical people’. But as well as listening to what voters already know, tax reformers should focus on issues of information and salience. Indeed, the way a policy is designed and understood might be as important as its price tag.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

A Downturn’s Silver Lining, Australian Financial Review, 7 April 2009

Australia has enjoyed a steady decline in the road toll over the past generation. Thanks to safer cars and tougher road rules, the road toll has fallen about 3 percent a year for the past few decades. But two years stand out from the data: 1983 (down 15 percent) and 1990 (down 17 percent).

Is it just a coincidence that the two biggest drops in the Australian road toll coincided with the last two recessions? Probably not, if research by University of North Carolina Christopher Ruhm is to be believed. In a series of papers, Ruhm and his co-authors have meticulously documented that mortality tends to rise in booms and fall in busts. Recessions make you live longer.

With titles like “A Healthy Economy Can Break Your Heart”, “Good Times Make You Sick” and “Healthy Living in Hard Times”, Ruhm’s research challenges the meme that economic downturns are unambiguously bad. We know that losing a job can be a searing experience, so how can a higher unemployment rate improve overall health?

The answer is that losing your job probably is bad for your health, but most people don’t lose their jobs in a recession.  If Australian unemployment were to rise to 10 percent, nine-tenths of the labour force would still be employed. Even in severe downturns, most people keep their jobs – they just work fewer hours and earn less.

At least in the short term, shorter hours and a slimmer pay packet seem to be good for average health. On-the-job injuries fall when there is less work around. We also have robust evidence that there are more alcoholics and chain smokers in good times than in downturns. Even severe obesity seems to drop when the economy hits the skids (suggesting that belt-tightening might be literal as well as figurative). In recessions, families are more likely to eat at home, and there is more time to exercise. People also get more sleep, which may not make you wealthy or wise, but certainly contributes to good health.

To quantify these effects, let’s look at current predictions of unemployment. In early-2008, the Australian unemployment rate was around 4 percent. This February, Treasury’s Updated Economic and Fiscal Outlook forecast that unemployment would rise to 7 percent by June 2010. (Treasurer Wayne Swan has since hinted that it could be higher than this, but has not given an updated figure.) So what would a 3 percentage point increase in unemployment do to mortality in Australia?

To answer this, I used estimates from a cross-country analysis of 23 OECD countries (including Australia) by Ruhm and co-author Ulf Gerdtham. Their headline result is that a 3 percentage point rise in unemployment would reduce mortality in Australia by about 1 percent – saving around 1,650 lives per year.

Which categories of deaths are likely to fall? In proportionate terms, the largest reduction would be a 6 percent drop in vehicle accidents (about 80 fewer deaths), since less economic activity means fewer cars on the road. We can also expect a 5 percent drop in deaths from liver disease (80 lives saved), partly as a result of reduced alcoholism. A slump would also reduce flu and pneumonia deaths by about 3 percent (90 lives saved).

In absolute terms, the biggest gain from a major downturn would be from heart disease. Although an economic slump would only cut deaths in this category by 1 percent, heart disease is the nation’s biggest killer, so that would represent around 500 fewer deaths per year. There might also be a small rise in suicide – though this was not statistically significant in Gerdtham and Ruhm’s analysis, and its magnitude was too small to offset the other improvements. Overall, those most likely to be kept alive by a downturn are prime-age men.

These results are provocative, but need to be kept in perspective.  Physical health may improve in a recession, but mental wellbeing and self-reported happiness decline. Less money reduces the capacity of households to enjoy the good life. And compared with joblessness, the mortality magnitudes are fairly small: a 3 percentage point rise in unemployment might avert 1,650 deaths, but it means that 340,000 Australian workers need to lose their jobs.

As Ruhm firmly notes in one of his papers: “Evidence that health deteriorates when the economy improves is not an argument for inducing recessions, which have overwhelmingly negative consequences even if worse physical health is not one of them.” Or to put it another way, the cloud may have a silver lining, but we’re still going to get wet.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Further details on calculations in this oped.

Execution Beats Teamwork, Australian Financial Review, 24 March 2009

Since the 1970s, Roy Morgan has surveyed Australians to ask them whether various professional groups are ethical and honest. When it comes to business executives, attitudes seem to follow the economic cycle. In good times, we are more likely to rate CEOs as ethical and honest. As the economy turns down, so does our view of executives.

Unless you think that all recessions are caused by a rapid decline in the quality of business leadership, there appears to be a tendency to give bosses too much blame in recessions (and too much credit in booms). True, executive incompetence probably mattered more in this downturn than in the typical slump. But in 2009 (as in the early-2000s), it remains the case that some executives are lazy while others are energetic; some are talented while others are in the wrong occupation.

One way of viewing executive bonuses is that they reflect an attempt on the part of shareholders to get executives to work harder. But the other part of the equation is that the choice of CEO matters. A company that chooses a great CEO might also persuade that person to put in more effort. But for the firm that picks a dud CEO, no bonus system in the world will save its share price.

How can we know who makes a good leader? The famously faddish management literature often claims that there is a single ‘secret’ to leadership. To believe airport business books, this could be anything from creativity to time management, strength to sensitivity. Yet while plenty of people have theories about business leadership, few of these theories have any strong statistical evidence to back them up.

Using an intriguing new dataset, US economists Steven Kaplan, Mark Klebanov and Morten Sorensen shed new light on an old problem. In 2000-2006, a group of private equity investors insisted on all their CEO candidates undergoing extensive personality testing. Using data from 316 personality testing interviews – each taking around four hours – Kaplan and co-authors are able to empirically test whether the assessments matter.

Comparing the subsequent performance of the firm (as measured by investors’ assessments and public information such as bankruptcies or IPOs), it turns out that personality testing is a robust predictor of CEO performance. While this may come as a surprise to those who have rolled their eyes as they and their co-workers were classified into the Myers-Briggs quadrants, this result probably reflects the fact that the CEO assessments were much more extensive than the typical multiple-choice psychological survey.

The researchers then test whether successful CEOs are more likely to be people who excel in execution-related capabilities (“aggressive”, “fast mover”, “persistent” and “proactive”) or team-related abilities (“teamwork”, “listening skills”, “open to criticism” and “treats people with respect”). As archetypes of these two sets of skills, they cite General Electric CEOs Jack Welch and his successor Jeffrey Immelt. While Welch was often referred to as “Neutron Jack”, Immelt was known for holding “dreaming sessions” with clients and building “imagination breakthrough” teams.

In theory, either set of skills could be important. Yet when Kaplan and co-authors turned to the data, they found clear evidence that execution-related capabilities mattered more than teamwork. Leaders who were conscientious and driven performed significantly better than good listeners who exhibited modesty.

The US finding that execution-related skills matter more than teamwork accords with results from Australian National University researchers Deborah Cobb-Clark and Michelle Tan, who look at the relationship between a five-factor personality metric and labour market outcomes. In the Australian workplace, they find that those who become managers are less likely to be agreeable and more likely to be conscientious. And if they focus just on managers, it seems that those who are less agreeable tend to earn higher wages. In other words, not only are bosses as a group less agreeable than people in other occupations; successful bosses are less agreeable than unsuccessful bosses.

(One caveat: the measure of success used in these studies is corporate value and managerial earnings. However, these narrow measures don’t capture the impact that a congenial manager can have on the happiness of those around them. Indeed, it is quite possible that ‘successful’ managers in these studies actually made their workers’ lives more miserable than ‘unsuccessful’ managers.)

To labour economists, hiring the right candidate and rewarding good performance are closely related. When it comes to executives, both are important. But if bonuses are curtailed, then the hiring decision will become even more critical. In such an environment, we can expect firms to spend more resources working out what kinds of people make the best CEOs.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Lucky miners can dig deep, Australian Financial Review, 24 June 2008

When British Labour assumed office in 1997, one of its first acts was to impose a one-off ‘windfall profits tax'. The rationale was simple - the previous Conservative government had undervalued and under-regulated the utilities, and the owners had made far larger profits than could have been reasonably expected. In a single budget, the government raised £5.2 billion, helping to fund its welfare-to-work reforms.

Fast-forward eleven years, and Australian coal firms are experiencing undreamt-of prices for their output. Over the decade to 2007, the price of coking coal doubled. This year, the price has tripled. Which raises the natural question: should the Rudd Government take a leaf from the Blair playbook and consider a windfall profits tax on Australian mining companies?

The arguments in favour of a windfall mining tax are easily stated. From a fairness perspective, the industry's massive profits have come not through producing a better product or service, but because of an outside factor - China's stratospheric economic growth. The coal leaving the docks today is the same stuff we sold a decade ago; it just happens to be six times as valuable.

From an economic standpoint, the strongest argument for a windfall tax is that it has the potential to be non-distortionary. A one-off windfall tax levied on past profits should not change firms' behaviour, since it does not affect future costs and prices. For example, if the Australian government were to announce on 1 July 2009 that it was imposing a windfall tax on coal companies' 2008-09 profits, there is almost nothing the companies can change about their future investment decisions that will cut their 2008-09 tax bill.

Now the counter-arguments. Morally, the mining companies would no doubt argue that they already pay company taxes. Moreover, they might point out that they made their investments in good faith, and responsible governments should not change the rules in the middle of the game. These points deserve reasonable consideration. But if we regard Australia's mining companies more like lottery winners than as toiling entrepreneurs, a windfall tax looks more reasonable. Taxing luck is fairer than taxing hard work.

The miners would also be quick to contest the claim that a windfall tax can have little economic impact on their future decisions. And it is true that as soon as mining companies hear of the tax, their decisions will change. As a result, surprise windfall taxes are more economically efficient than anticipated ones. This may be one issue on which a full and robust public debate does not lead to a better outcome.

Companies are also likely to raise the spectre of repeated raids on their revenue. Having been levied once, what is to stop a windfall tax being imposed again? To counter this, the government must be clear that the present minerals price increases are a once-in-a-lifetime event, and so is the windfall tax. The less credible this claim, the more the tax will deter future investment in the sector.

With its coffers flush, does the Australian government really need more revenue? In the short-term, the answer is probably no. But history suggests that the next slump cannot be avoided, merely delayed. When the downturn hits, it would be better to have a rainy day fund than to be forced to borrow internationally or raise taxes on a sluggish economy.

No government should lightly impose windfall taxes, but in the right circumstances, they can play a valuable role. When the High Court declared certain state taxes unconstitutional in 1997, the Howard Government imposed a federal windfall tax to claim the revenue. In the United States, Barack Obama's pledge to impose a windfall tax on oil companies has met with significantly more approval from economists than John McCain's proposal for a gas tax holiday. Even the newly-elected conservative government in Italy has approved a ‘Robin Hood' tax on the nation's energy companies, and is trying to convince other European Union countries to do the same.

Few issues require such careful political management as a windfall tax. But implemented properly, it is possible to imagine that such a tax could be both economically responsible and in line with fundamental Australian values. Why not raise a little more from our lottery-winning miners today, and squirrel it away for the next recession?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Keeping an Eye on the Ball, Australian Financial Review, 17 June 2008

Who let the economists out of the closet? As anyone who has followed economic research over recent years will have noticed, the profession has undergone a major shift in focus over recent decades. In the 1980s, most articles in the leading journals dealt with issues such as tariffs, inflation, growth and wages. Today, many economists are exploring corruption, happiness, drugs and religion. Issues that would once have been regarded as the exclusive domain of sociologists, medicos, or educationalists are now fair game for the dismal science.

Among the topics to which economists have turned their hand is the economics of sport, which has come off the bench and onto centre-field for one simple reason: researchers have shown that studying the sporting field can provide fundamental insights into human behaviour.

One sports economics classic is a paper by Pierre-Andre Chiappori, Steven Levitt and Tim Groseclose, who ask the question: are soccer players more likely to score a penalty if they aim at the left, middle, or right of the goal? Travelling at up to 200 kilometres per hour, a penalty kick reaches the line 0.2 seconds after coming off the boot. So the goalie must decide which direction to jump before the ball is kicked. Consequently, it isn’t surprising that penalty kicks score a goal 75% of the time. But for those that are kicked to the middle of the goal, this rises to 81%. So why don’t more players aim at the centre? Writing on his Freakonomics blog, Levitt points out that players face a difficult problem: “If you kick it right down the middle and you don’t score, it is damn embarrassing. … There are some things that are even more important than winning, like not looking like a fool.” Herein lies a useful lesson for managers: workers care about saving face as well as doing a good job. Seeing their players avoiding the middle too often, a clever soccer manager might offset the risk of embarrassment by secretly offering to pay players a cash bonus for every penalty kick scored down the centre.

What about that old couch potato question: does a good player make a good coach? Studying data from the US National Basketball Association, Amanda Goodall, Lawrence Kahn, and Andrew Oswald test what happens when a team hires a former star player as its coach. They find a large positive impact: if a team replaces a coach who never played NBA basketball with one who played many years of NBA All-Star basketball, it can expect to move 6 places up the ladder. One possible explanation is that a coach cannot push top players to their limit unless he has competed at their level. Or perhaps effective NBA coaching involves a considerable degree of ego-management, and only a former champion can win the players’ respect. Either way, the results have important implications for any high-performance workplace where the CEO must manage a large number of experts. From law to technology to universities, could it be that the best boss is a former all-star?

In the most controversial sports economics study of recent times, Joseph Price and Justin Wolfers test whether referees discriminate in favour of players of their own race. Using data from the NBA, where the assignment of referees is essentially random, they find strong evidence of an own-race bias. The more white referees, the fewer fouls that white players receive; the more black referees, the fewer fouls that black players receive. Since the referees tend to be whiter than the teams, this gives a slight advantage to teams with more white players. Although the study sparked outrage among the NBA, its findings accords with experimental evidence, which finds that when people are forced to make rapid decisions under pressure, subconscious racial biases come to the fore. And it suggests that when we ask individuals to make split-second decisions (police traffic stops, intense business negotiations, emergency rooms), we should expect to see discrimination rear its ugly head.

With its mix of competition and teamwork, high-stakes and high visibility, the sporting field turns out to be a valuable laboratory for testing many of the most interesting theories in economics. Optimal incentives, good management and racial discrimination are just a few of the questions upon which sports economics can shed light. As baseball great Yogi Berra said, “You can observe a lot just by watching”.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Class in the Classroom, Australian Financial Review, 3 June 2008

It is rarely recognised, but Australia in the 1960s had two ingenious ways of keeping teacher quality high. First, rampant gender pay discrimination in the professions pushed many talented women into teaching (where gender pay gaps were generally smaller). Second, a highly regulated labour market meant that many companies rewarded their employees based on tenure, not performance - just as teaching did (and still does).

Over the past half-century, these two factors changed radically. On balance, the large-scale entry of women into business, law, and medicine has been a terrific development. But an unintended consequence is that fewer talented women now become teachers. And while the growth of performance pay has benefited many occupations, it has made the uniform salary schedules in teaching look increasingly unattractive to today’s graduates.

Although there are many talented teachers in Australia’s classrooms, there is also a growing realisation that Australia faces a crisis in teacher quality if it does not do more to attract the best into the teaching profession. But how should ‘best’ be defined?

One simple way would be to pay a higher salary to teachers who obtain a Masters degree. If undertaking a Masters degree improves classroom performance, then this would be a no-brainer. Unfortunately, at least three US studies have found that students’ test score gains are unrelated to whether or not their teacher has a Masters degree. And my own work - using data from Queensland primary school teachers - comes to the same conclusion. Bonus payments for teachers who obtain a Masters degree therefore seem a bad idea.

Another strategy - advocated in a report last week from the Business Council of Australia - is to establish a form of professional licensing for teachers. On its face, this strategy sounds uncontroversial. If doctors, lawyers and accountants have licensing systems, surely a teacher accreditation hurdle must be good? Yet what is often missed is that accreditation systems have two effects: they impose a quality bar, but because they are time-consuming, they also act as an entry barrier, deterring some talented people from entering the profession. Since these two effects go in opposite directions, it is theoretically possible for accreditation systems to raise, lower, or have no effect on quality. Indeed, studies that have looked at the impact of stricter licensing regimes for doctors and dentists find no evidence that they benefit consumers (although they do appear to raise wages).

The accreditation system proposed in the BCA report is modelled on the National Board for Professional Teaching Standards, which has accredited about 2 percent of US teachers. Yet it omits to mention that the typical NBPTS applicant devotes a whopping 357 hours to preparing an application. Given that one of the chief complaints of Australian teachers is excessive paperwork, this potential discouragement effect should not be underestimated. Consistent with this, economists Joshua Angrist and Jonathan Guryan found that US states which implemented a teacher certification system did not raise the academic standards of new teachers.

Given the drawbacks of pay-for-credentials schemes, a natural alternative is to consider pay-for-performance, in which the best teachers are identified by their principals, school inspectors, or through some objective measure such as student test score gains. Radical as this sounds to teachers’ ears, such an approach would be pretty similar to the way that salaries are determined for most workers (including state and federal bureaucrats).  And while merit pay could theoretically have undesirable effects (breaking down staffroom camaraderie; encouraging teaching to the test; tempting teachers to cheat), the evidence from places as diverse as Israel, India and the US suggests that the advantages outweigh the disadvantages.

But don’t take my word for it. If we want to know the best way to identify the best teachers, let’s run a series of randomised trials: pitting the current system against various alternatives to see which one comes out on top. In the same way that we test new drugs before putting them on pharmacy shelves, we ought to be sure that strategies to attract and keep talented teachers actually work before rolling them out nationwide.

Looking back at the fall in teacher quality should give us some modesty about our ability to predict the future. In the 1960s, few would have predicted that less gender pay discrimination and more inequality would lower teacher quality. If the goal of policy is to boost teacher quality in the coming decades, let’s make sure it’s underpinned by the best evidence we can muster.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Sorting Good Aid From Bad, Australian Financial Review, 20 May 2008

In his 2005 book The Undercover Economist, Tim Harford revealed that fair trade coffee in some London stores cost an extra 25 pence per cup, but that only about a tenth of the markup actually reached the coffee farmer. A fair trade cappuccino might have given the drinker a warm inner glow, but it didn’t do much to reduce world poverty.

Its harshest critics sometimes say the same about overseas aid. They point out that unlike the voters who judge domestic programs, the recipients of foreign aid cannot punish bad policy at the ballot box. Aid’s critics say that with a few exceptions – like disaster assistance – the world would be better off with less aid, not more.

With this year’s budget promising a major increase, Australia’s overseas aid is set to rise from 0.3% to 0.5% of national income by 2015. So the billion-dollar question is: does aid work?

At an aggregate level, it turns out to be depressingly difficult to identify an impact of foreign aid on a country’s level of development.  In the 1990s, a series of studies reached ambiguous conclusions. In a famous paper in 2000, Craig Burnside and David Dollar found that that aid did raise growth – so long as the recipient country had good fiscal, monetary and trade policies. Three years later, William Easterly, Ross Levine, and David Roodman found that these results were fragile, and did not hold up when more years of data were added to the analysis. Subsequent research by Paul Collier contends that even in badly-governed Africa, poverty rates would today be much higher had the continent received no aid.

Most recently, Jeffrey Sachs has argued that much foreign aid in the post-war era was directed towards winning the Cold War rather than helping the poor. According to Sachs, we should not discriminate against countries with bad institutions; instead we should be ruthless about not giving the wrong kind of aid. Good aid, argues Sachs, can make a difference.

This research offers two challenges to Australia. If aid only works when policies and institutions are strong, should we keep giving around one-third of our aid to Papua New Guinea and the Pacific? Ethically, it would be tough to justify withholding charity from some of the world’s neediest people. And given that they are on our doorstep, it is difficult to imagine excluding ‘fragile states’ from the Australian aid program. Yet the research suggests that despite all the hard work that is being done by aid workers in these countries, there is little chance living standards will take off any time soon.

The other challenge for our aid program is to distinguish between good and bad aid. This is a particularly thorny question at a time when the program is being expanded. This year, AusAID’s budget will rise from $3.2 to $3.7 billion. The last thing we want to happen is for the agency to lower its standards in order to get more cash out the door.

Here, the brightest hope for the aid program is that AusAID is taking seriously the question of aid effectiveness. On the last parliamentary sitting day before Easter, Parliamentary Secretary Bob McMullan quietly tabled the first annual report of the Office of Development Effectiveness – an agency established to monitor the overseas aid program.

Carrying out what it called a “health check of the Australian aid program”, the report critiqued aspects of the aid program in surprisingly robust terms. Discussing technical assistance (providing advice, or sending an Australian public servant to fill a role in a developing country bureaucracy), it pointed out that we spend twice as much as other rich donors, and warned that some of our technical assistance programs may undermine the capacity of poor countries to govern themselves. Discussing evaluation, the report emphasised the importance of carrying out more impact evaluations – asking not only whether the program was properly administered, but also whether it helped improve the lives of the poor.

The frankness of AusAID’s Annual Review of Development Effectiveness stands in stark contrast to the self-congratulatory mush of most government reports. Indeed, it is impossible to imagine the health, education, or defence departments putting out such a self-critical report. This kind of hard-headed approach is particularly valuable given that overseas aid is an area where too many advocates have focused on inputs (aid as a percentage of national income) rather than outputs (poverty reduction). Alongside a multi-billion dollar increase in foreign aid must come more scrutiny of results. If we care more about making a difference than getting a warm inner glow, distinguishing good aid from bad aid is the only way to go.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Putting a HECS on Life, Australian Financial Review, 6 May 2008

With budget season upon us, stand ready for interest group after interest group to picture the government as kind old Uncle Oz. He gives to so many, they will argue, so why not to us? Surely a few more dollars to our special cause couldn't hurt? (Cue heartrending description of flashy infrastructure project, photogenic industry, or working family.)

The problem with this notion is that most kindly uncles don't come knocking on the door on 31 October, asking for a tax bill to pay for next year's goodies. So rather than focusing on government's role in distributing largesse, some economists - chief among them Australian National University economist Bruce Chapman - have argued that we should think of government as a piggybank, helping us to manage risk and uncertainty over our lives.

Chapman's leading contribution to policy has been the Higher Education Contribution Scheme. Adopted in Australia in 1989, HECS requires students to pay back a portion of their university tuition when their earnings pass a given threshold. If earnings drop below the threshold, no repayment is required. By requiring students to contribute to the cost of their education, HECS recognises the substantial private benefit to attending university. Its ‘study now, pay later' approach helps smooth income over the lifecycle, and ensures that the poor are not prevented from enrolling.

Since 1989, HECS has been taken up by Ethiopia, New Zealand, Thailand, and the United Kingdom. Having had more influence over worldwide policy than any other Australian economist of his generation, one might have thought that Chapman would retire to the ivory towers. But instead he has set about applying the same idea - loans instead of grants - to a wide variety of policies. Here are just a few.

* HECS for Drought Relief: When heavy rains reduce profits in beachside resorts, policymakers typically do nothing. Yet when drought hurts farmers, the government is ready with a handout. Politically, it is unlikely that we could scrap drought assistance programs. But a better way to deliver it would be through income contingent loans, repayable in good times. So long as loans are targeted towards farms with viable long-term prospects, they would help reduce volatility for farmers, while requiring those who are able to repay the loans to do so.

* HECS for Sportspeople: For those lucky enough to win a place, the Australian Institute of Sport offers elite athletes one of the best training programs in the world. Partly as a result, many AIS graduates go on to perform at the elite levels of their sport. Yet AIS graduates with seven-figure earnings - among them Lleyton Hewitt, Mark Viduka and Jelena Dokic - are not required to pay back a cent of the cost of their training. If a HECS-style loans scheme was put in place for elite athletes, the size of the AIS could be significantly increased with no additional cost to the taxpayer.

* HECS for Parents: Once upon a time, assistance to families went only to the poor. Over the last decade, changes in the Baby Bonus, Family Tax Benefits and Child Care Benefits have seen family payments grow steadily more generous for the middle and top of the income distribution. Yet Australia remains one of the few developed countries that without government-funded paid maternity leave, prompting calls for another family payment to be introduced. One answer would be for government to offer paid maternity leave through an income contingent loan - thereby providing families with more money at the time of life when they need it most, without unfairly redistributing resources from poor singles to rich families.

* HECS for Fine Defaulters: When it comes to collecting fines, governments are the world's worst debt collectors. One study estimated that the Victorian government managed to collect just 44 percent of court-imposed fines. Because we are reluctant to send non-payers to jail, and because enforcement often costs more than the fine itself, the justice system is left impotent in the face of rampant non-payment. In the same way as the taxation system is used to deduct Child Support payments from the incomes of non-custodial parents, it could be used to ensure that recalcitrant criminals paid their debts.

Once you start thinking about government as piggybank, the world starts to look very different. (You may find yourself asking questions like ‘if artists want more money, why not replace grants with loans?') Fundamentally, Chapman's simple idea accords with the Australian ideal of a fair go: helping people in their time of need, but also expecting them to give a little back when times are good. For a government with more ideas than dollars, expanding income contingent loans might be just the solution.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Some Nuggets in the Dross , Australian Financial Review, 22 April 2008

Was it the Bold and the Beautiful, or the Young and the Restless? Big Brother, or the New Inventors? By any measure, the weekend’s 2020 summit was an unusual event. Whether it was Philip Adams embracing Barry Jones, Hugh Jackman singing a duet with Ted Wilkes, or glimpses of Cate (‘I did but see her passing by’) Blanchett, there always seemed to be something to surprise. And by Sunday afternoon, even the more sceptical summiteers seemed happy to play Tenzing Norgay to Rudd’s Edmund Hillary.

From my own perspective, the greatest insights came from chatting with indigenous leader Tania Major  about her experiences in improving educational outcomes for children in Cape York. The sessions themselves had policy wonks clashing with practitioners, sometimes producing light, sometimes heat. The group discussing labour market reform was, in the words of one participant, ‘simulating a failed state’'. Yet the final communiqué was surprisingly coherent, proposing a major tax review, a rethink of early childhood intervention, and a new federalism.

Some of the outcomes might have been predicted from the outset. The foreign affairs and defence stream proposed the creation of five institutes, a forum and an advisory council. The journalist-heavy governance stream proposed a reform of Freedom of Information laws. And the culture stream proposed as one of their ‘low-cost’ ideas that an additional 1% of the federal budget ($2.5 billion) be devoted to the arts.

But other ideas were not so predictable. In particular, three small ideas caught my fancy.

* The communities stream proposed rewarding young Australians for volunteering in disadvantaged neighbourhoods by providing them with a HECS discount. Such a program might be modelled on AmeriCorps, a US scheme that provides education credits and a living allowance in return for spending a year working with a community sector organisation. Each year, approximately 75,000 young Americans participate in AmeriCorps, and many continue to work with the community after their service year ends. Implemented here, a similar program might have practical benefits for underprivileged communities. But its ‘eye-opening’ benefits could be greater still – giving affluent suburban youth a chance to spend a year facing disadvantage in all its complexity.

* The health stream proposed the creation of a ‘Healthbook’ (Facebook for your health information) that would allow people to share their medical records with their doctors. Ever had to cancel a doctor’s appointment because the x-rays have not yet been mailed across? Ever moved city and had to start from scratch with a new doctor? At a relatively modest cost, Healthbook could make medical records secure and portable. Indeed, it might even allow individuals to share their genetic information with doctors, while keeping it confidential from other organisations.

* The governance stream proposed that Australia establish a public affairs TV channel – AuspanTV – to provide Australians with first-hand access to policy debates, book launches, and conferences. Modelled on C-span in the United States, which has 50 million regular or occasional viewers, Auspan would aim to connect Australia to the global community of ideas. While Canada has two public affairs channels, Australians presently have no dedicated network through which to access local and international speeches, public lectures, and in-depth interviews. Established as free-to-air digital channel, AuspanTV might be an effective means of democratising public debates over the nation’s past and future.

The comparative advantage of an event like the 2020 summit is not in addressing the nation’s most complex problems. For all the good intentions of the summiteers, the event probably did little to advance debates around climate change or defence strategy. But I was struck over the weekend by how many nuggety little ideas emerged; not just in the official documents, but in conversations between participants, bureaucrats, and politicians. Putting these into action probably won’t change the course of history – but they might yet improve the lives of thousands of Australians.

The other recurring theme that came up in my conversations with other delegates through the weekend was the frisson of happiness that many felt at being allowed ‘inside the tent’. By definition, summits, community cabinets, and other listening exercises can only invite a few at a time. But those who enjoy permanent insider status should not underestimate the role that such events play in ensuring that new voices are heard.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University. He was a delegate in the productivity stream of the 2020 summit.

A Good Test of Public Policy, Australian Financial Review, 8 April 2008

To get a new drug approved in most developed countries, it is necessary to show that it works in a randomised trial. Yet to get a new policy approved, politicians need no evidence of efficacy. Consequently, while we can be confident that most pharmaceuticals work as intended, it is quite possible that some of our social policies do more harm than good.

To understand why medical scientists rely so heavily on randomised trials, we need to go back to the purpose of an evaluation. In judging the effectiveness of any intervention, we want to know the counterfactual: what would have happened if we had not intervened? In the case of a new pharmaceutical, those who choose to take a drug are probably different from those who choose not to take it. Perhaps pill-poppers worry more about their health, or maybe they live closer to the doctor. If so, then those who chose not to take the drug are a bad comparison group for those who actually took the drug.

Enter the randomised trial. By assigning participants to the treatment and control group with the toss of a coin, we can be sure that the characteristics of both groups are identical at the start of the trial. So at the end of the experiment, any differences in outcomes must be due to the intervention.

What works in the laboratory can also work in many areas of policy. Here, the power of randomised trials lies in two things. From a statistical standpoint, they are regarded as the ‘gold standard’ of policy evaluation, beloved by policy wonks. And from a policymaking standpoint, randomised trials are the simplest form of evaluation, providing compelling results in a simple graph.

In the policy arena, the United States has conducted many more randomised trials than any other country. For example, one of the reasons that early childhood intervention is so high on the policy agenda is the results from the Perry Preschool program. For social researchers seeking to understand neighbourhood effects, there is no better source of evidence than the five-city Moving to Opportunity experiment. Many of the early insights about health insurance came from the RAND Health Insurance Experiment. And wage subsidy programs rapidly gained ground after the National Supported Work Demonstration was conducted.

Randomised policy trials can also show up policy failure. A randomised evaluation of the US Job Training Partnership Act found that job training for low-skilled youths did not make them more employable. Randomised evaluations of pre-licence driver education programs have found no evidence that it makes youths into safer drivers. And DARE, a school-based anti-drugs program, was revised following randomised trials showing that the program did not deliver promised results.

One excuse that Australian policymakers sometimes give for failing to conduct randomised trials is that they cannot face the ethical dilemma of denying some people a potentially beneficial new program. But here again, the policymakers can learn from medical researchers.

For the past two years, an NRMA CareFlight team, led by Alan Garner, has been running the Head Injury Retrieval Trial, which aims to answer two important questions: Are victims of serious head injuries more likely to recover if we can get a trauma physician onto the scene instead of a paramedic? And can we justify the extra expense of sending out a physician, or would the money be better spent in other parts of the health system?

To answer these questions, Garner’s team is running a randomised trial. When a Sydney 000 operator receives a report of a serious head injury, a coin is tossed. Heads, you get an ambulance and a paramedic. Tails, you get a helicopter and a trauma physician. Once five hundred head injury patients have gone through the study, the experiment will cease and the results will be analysed.

Although he has spent over a decade working on the trial, even Garner himself admits that he doesn’t know what to expect from the results. “We think this will work”, he told me a in a phone conversation last week, “but so far, we’ve only got data from cohort studies”. Indeed, he points out that “like any medical intervention, there is even a possibility that sending a doctor will make things worse. I don’t think that’s the case, but [until HIRT ends] I don’t have good evidence either way.”

For anyone who has heard policymakers confidently proclaim their favourite new idea, what is striking about Garner is his willingness to run a rigorous randomised trial, and listen to the evidence. Underlying the HIRT is a passionate desire to help head injury patients, a firm commitment to the data, and a modesty about the extent of our current knowledge. What area of Australian public policy could not benefit from a little more of this kind of thinking?

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Getting School Funding Right, Australian Financial Review, 25 March 2008

Of all the policy debates in Australia, school funding is perhaps the feistiest. If you have children at school, you’re an instant expert. If not, you can always talk about how things were when you went to school. So even the merest whiff of change is guaranteed to prompt a barrage of talkback calls and bagfuls of letters to the editor. Add a dash of religion and a pinch of class warfare, and you have all the ingredients for a first order political barney.

Yet as Julia Gillard’s recent entry into the debate illustrated, school funding is an area that desperately requires reform. Indeed, it may be that the best way of delivering on the promise of equality of opportunity is to get school financing right.

The last revolution in school funding occurred with the Howard Government’s 2001 shift to fund private schools based on parents’ socioeconomic status. Introduced by then education minister David Kemp, the so-called ‘SES formula’ aimed to ensure that schools with more students in poor neighbourhoods got more money.

Unfortunately, the 2001 reforms also included a guarantee to all private schools that if the SES funding formula made them worse off, then they would receive their year 2000 funding amount, adjusted for inflation in the education sector. Seven years later, this ‘grandfather’ clause applies to about half of Australia’s private schools; making a mockery of the notion that private school funding is needs-based.

Another odd feature of the current school funding scheme is that private schools do not adjust their fees to take account of differences in the ‘voucher amount’ that parents bring to a school. For example, high school students in the most advantaged suburbs last year brought their schools just $1333 in federal funding, while those in the most disadvantaged suburbs were worth a whopping $6807 apiece. Yet the typical high-end private school did not offer a $5000 discount to poor parents.

Rather than arguing over particular policies (which themselves often reflect the oddities of historical compromises), the best way of moving the school funding debate out of the ideological mire might be to see whether we can reach agreement over the basic principles that should guide the debate. Here are four core notions that I think all sides should be able to agree to.

First, the wellbeing of children is more important than anyone else. Teachers and school administrators matter, but the top priority of education policies is to help kids, not adults.

Second, we should not penalise parents for spending more on their children’s education.  To the extent that education has ‘positive externalities’ (higher productivity, more social capital, better civic engagement), we should encourage it. There is a real difference between a policy that says ‘the richer you are, the less the government should give your child’ and one that says ‘the more you spend on your child’s education, the less the government should give you’. The former targets resources to those who need them most, while the latter operates like an education expenditure tax.

Third, schools should be judged on outputs, not just inputs. At present, the federal government allocates billions of dollars to private schools, but asks little in return. Taxpayers who fund these schools have a right to demand that they provide empirical data such as test scores, dropout rates, or parental satisfaction surveys.

Fourth, funding should be transparent. Parents should know precisely how much government funding they bring to their child’s school.

Acceptance of these four basic principles could lead to better reform of our education system.

Recognising that kids come first, we might agree that it is good for a child to move to a better school (though we might still argue about how to help those who remain).

Accepting that we should not penalise education spending might allow us to revamp the private school funding formula so that all schools are financed according to their needs. Middle-income parents who choose to send their children to high-fee schools should get more government assistance than rich parents who opt to send their children to low-fee schools.

Measuring outputs would help parents select the best school, and let voters find out which private schools are adding value, and which ones are skimming the cream.

And making funding transparent puts the bargaining power in the hands of low-income parents, who can march up to the principal and ask why they’re bringing the school nearly $7000 in federal funds, yet not getting a discount on their tuition.

Ultimately, getting private school funding right is essential if the system is to be applied to public schools, as Gillard has proposed. Tantalising as it is to envisage public schools in the poorest neighbourhoods bidding six-figure salaries to attract the best teachers, there’s a long way to go yet.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University. 

Shedding a Healing Light, Australian Financial Review, 11 March 2008

One of the astonishing statistical regularities of human life is the bell curve. Plot the test results of a class of students, the running times of a group of adults, or the blood pressure of men and women, and you will find that they trace out a bell-shaped pattern. At the very edges of the bell are a few people who do very well or very badly. As we move towards the centre there are others who are noticeably below average or above average. And the rest are clustered in the middle. So established is this pattern that statisticians call it “the normal distribution”.

In the case of the medical profession, the same pattern holds. Whenever data on the performance of hospitals or individual doctors is plotted on a curve, large gaps separate the best and the worst. There is nothing surprising in this; most of us can probably imagine the same distribution of performance in our own occupations. Yet it does suggest that choosing the right doctor can be good for your health.

Because information can help more patients choose the best service, and spur reform among the rest, it seems natural to think that data on hospital performance should be made publicly available. (Adjusted, of course, for the fact that some hospitals deal with older and sicker patients than others.)

To her credit, federal health minister Nicola Roxon has been pushing for just this outcome, supported by consumer group Choice. But attempts for more health data to be released into the public domain have been strongly resisted by the Australian Medical Association and some state governments. Their opposition to data release has been based around two arguments - both of which will be familiar to anyone who has followed the debate over the release of schools’ test score data.

First, they argue, the performance measures are imperfect. This is undoubtedly true, but it sets the bar too high. Last week, the Australian Financial Review published its list of Australia’s best lawyers, based on peer assessment. No-one would contend that these rankings are flawless, but they nonetheless provide a useful source of information to clients seeking to choose a lawyer, and may spur those who just missed out to lift their game.

Second, those who oppose data being released claim that it will lead to underperforming hospitals being stigmatised. But so long as the data are collected so as to minimise the potential for manipulation, and provide the broadest possible set of indicators, it will help identify the strongest and weakest hospitals. Rather than allowing poor performance to continue under a veil of secrecy, we should let a little sunlight in.

In his book Better: A Surgeon’s Notes on PerformanceNew, medical writer Atul Gawande discusses the impact that performance information had on the treatment of cystic fibrosis, a genetic disease that impedes lung capacity. While patients at the average treatment centre typically live to 33 years, those at the best centre typically live to 47. Over recent decades, the life expectancy of cystic fibrosis patients has increased substantially, as treatment innovations have percolated down from the leading centres. On its website, the Cystic Fibrosis Foundation now publishes data on the performance of all its centres in the United States. Yet even in an information-rich environment, the best centres have managed to outperform the rest. Information spurs innovation, but it cannot wipe out the bell curve.

Making hospital performance information publicly available should help all patients, but there are good reasons to think that the poor may benefit more than the rich. Under the current regime, information is restricted to doctors, nurses, and hospital administrators, who naturally share it with their friends. Publishing statistical data on hospital performance would democratise access to information - allowing everyone to see what the insiders already know.

In attempting to change the culture of information in Australian health, it is possible that those in favour of secrecy will prevail. Yet if they do, the effect may be to promote less reliable sources of information. For example, one rapidly growing website allows Australian patients to rate their doctors. But a quick browse shows it to be dominated by the ecstatic and the enraged. (Moreover, you also have to wonder about a site in which the infamous Queensland surgeon Jayant Patel is rated “average”.) The more comprehensive public data is, the less individuals will need to rely upon questionable sources of information.

Just as in the case of schools, making data on hospitals publicly available is a useful first step to spur reform. When insiders claim that the public can’t handle the truth, we should respond that taxpayers have a right to receive feedback on the services we fund. The more we can learn from the best, the better our public services can become.

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Give Peaceful a Chance, Australian Financial Review, 26 February 2008

Writing the story of his childhood, Barack Obama narrates an incident in which his father was drinking in a local bar, when a white man abruptly announced that he shouldn’t have to drink “next to a nigger”. The bar fell silent, expecting a fight. Instead, Obama’s father “walked over to the man, smiled, and proceeded to lecture him about the folly of bigotry, the promise of the American dream, and the universal rights of man”. When the speech finished, the white man reached into his pocket and handed over a hundred dollars on the spot; so ashamed of himself he wanted to purchase forgiveness.

Eighteen months ago, Presidential prediction markets had Obama just a 1 in 50 shot of winning the nomination. Now, he is a 4 in 5 chance of being the Democratic nominee. Obama’s meteoric rise can be traced to two themes – hope and bipartisanship.  But how has he managed to turn apparent platitudes into rallying cries? And could a little of the Obama magic rub off on Australia’s politicians?

Obama’s ability to use powerful rhetoric to inspire others has drawn comparisons with John F. Kennedy, Martin Luther King, and Abraham Lincoln. Few doubt that he is one of the best speakers of his generation. Yet the critics argue that stirring oratory matters less than solid public policy. So long as you get the ideas right, who cares whether you can make a crowd laugh and cry?

The problem with this critique is that it misses the point that successful politics is about building and maintaining coalitions. This is particularly true of the United States president, but also to a lesser extent of the Australian Prime Minister, who generally must win over a hostile Senate in order to pass legislation.

Creating broad-based coalitions is difficult if you regard your political opponents as knaves and ideologues. What is striking about Obama is that he goes out of his way to see the reasonableness in the other side’s positions. “Spend time actually talking to Americans”, he writes in his most recent book, “and you discover that most evangelicals are more tolerant than the media would have us believe, most secularists more spiritual. Most rich people want the poor to succeed, and most of the poor are both more self-critical and hold higher aspiration than the popular culture allows.”

Recognising that your political opponents are actually striving towards a better world sounds simple; but it is surprising how rarely it is done in Australia. Most federal politicians, and most federal political staffers, have no friendships with anyone from another party. This lack of social contact makes it easy for them to caricature and stereotype their opponents; and stymies the attempt to build lasting political coalitions for change.  

What many political players miss is that it is possible to respect and understand your opponents’ perspectives without compromising your own beliefs. Obama has one of the most left-wing voting records in the Senate, but that hasn’t stopped him from criticising the left-wing Daily Kos blog for its ad hominem style. In Australia, one wishes that more politicians walked into Question Time aiming to ‘disagree without being disagreeable’.

While the Rudd government has quickly demonstrated its commitment to rigorous public policy, it would be good to see it governing in both poetry and prose. The bipartisan ‘war cabinet’ to address Indigenous disadvantage is a useful start, but more could be done that unites the values of both left and right. Cutting back on middle-class welfare, improving the performance of schools in disadvantaged areas, improving the incentives for low-skill workers to join the labour market, and carrying out a raft of randomised trials are all initiatives that should be able to transcend the political divide. Yet without bipartisan support, it is easy to see how vested interests will torpedo them one by one.

How positive should we be about the politics of hope and bipartisanship in Australia? To answer this question, I searched the parliamentary database for speeches by Bob Hawke, Paul Keating, John Howard and Kevin Rudd, looking to see how often each used “hope” and “bipartisan”. To account for the number of speeches they had given, I then normalised this using other common parliamentary words: “speaker” and “member”. A rough proxy, to be sure, but one that might nonetheless give insights into the rhetorical priorities of Australia’s last four Prime Ministers.

According to this simple metric, Bob Hawke is the Prime Minister who has spoken most about hope, while Kevin Rudd is the Prime Minister who has spoken most about bipartisanship (Paul Keating scores lowest on both measures). Perhaps Rudd’s speechwriting team should take a leaf from Hawke’s book. And maybe they can learn from Obama’s style, and find fresh ways to tap into the fundamental optimism of the Australian people.

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Moving away from trouble, Australian Financial Review, 12 February 2008

As the machinery of government passes to Labor, a bevy of new buzzwords has hit Canberra. Less talk of free nations, markets, and efficiencies. More discussion of working families, apologies, and challenges. And among the new terms being bandied about is “social inclusion”. A new Social Inclusion Unit has been established in the Department of the Prime Minister and Cabinet, and the government is presently canvassing for a Social Inclusion Board.

If the example of British Labour’s Social Inclusion Unit is anything to go by, a core focus of the Australian social inclusion initiative will be on neighbourhood disadvantage, and on answering the question that has puzzled social scientists for decades: Would a poor family do better if they lived in a middle-class neighbourhood than if the same family lived in a low-income community?

From a theoretical standpoint, there are good reasons to think that neighbourhoods might matter. If getting a good job depends on informal ties, then it will be easier to find work if most people in your street are employed. If community norms count for a lot, then poor children who grow up in poor neighbourhoods may find it harder to break out of the poverty cycle. And because low-income communities also tend to have worse public amenities and higher crime rates, living in these places may be bad for your physical and mental health. If these theories hold, then they have major implications for housing policies; suggesting that mixed-income neighbourhood should be the name of the game. 

But separating the effects of being poor from living in a poor place turns out to be a tricky research problem. To find good answers, we have to cross the Atlantic to the United States, where an ambitious five-city randomised trial has provided some of the best evidence to date on how neighbourhoods affect individuals’ life chances.

Implemented in 1994, Moving to Opportunity offered families in public housing projects in Baltimore, Boston, Chicago, Los Angeles and New York a voucher that would enable them to rent in a lower-poverty neighbourhood. Because demand outstripped the number of available vouchers, the vouchers were randomly assigned through a lottery. As with a randomised medical trial, this ensured that at the outset, those who moved to lower-poverty neighbourhoods (the treatment group) were identical in all respects to those who stayed (the control group).

In the early-2000s, economists Jeffrey Kling, Jeffrey Liebman, and Lawrence Katz followed up the experiment, to judge how a change of neighbourhood affected those in the treatment group. Contrary to some initial expectations, they found no significant impacts on adults’ employment outcomes. Movers were no more likely to have a job than stayers, nor did movers tend to earn higher wages. Summing up the evidence on earnings, the researchers concluded that “housing mobility by itself does not appear to be an effective anti-poverty strategy”.

But money isn’t all that matters. Asked why they wanted to leave the housing projects, many participants said “to get away from drugs and gangs”. Consistent with this, the follow-up study found that those who moved to a lower-poverty neighbourhood had better mental health. Indeed, the psychological benefits of moving were so large and consistent that they alone could have justified the cost of the program.

Might Moving to Opportunity have implications for Australia? According to a paper by Australian National University researchers Bob Gregory and Boyd Hunter (in my view, the best piece of unpublished economic research in Australia), the economic indicators in Australian neighbourhoods have diverged markedly since the 1970s. If you walked across Australia in the mid-1970s, you would have seen much more similarity in employment and earnings than if you trod the same path today.

This growth in neighbourhood inequality led Gregory and Hunter to warn of the growth of Australian ‘ghettos’, and to suggest that better understanding patterns of poverty should be placed high on the national agenda. One way of building on this research would be for Australia to conduct its own Moving to Opportunity experiment – offering randomly selected families in large public housing projects the chance to move to a middle-income suburb.

The best way to redress disadvantage is to put our ideas to the test. As 19th century British economist Alfred Marshall once said, we should combine “cool heads and warm hearts”.  If the federal government’s social inclusion agenda prioritises evidence and results over ideology and rhetoric, it will be off to a fine start.

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Shares still beat roulette, Australian Financial Review, 24 January 2008

Despite talk in recent years about Australia being better shielded from global fluctuations, it still seems that when America sneezes, Australia catches a cold. And with our stock market losing nearly an eighth of its value over the past fortnight, some investors are naturally wondering whether shares are really such a good place to keep their assets (as distinct from, say, a shoebox under the bed).

In such an environment, it’s worth recalling a few lessons that economics research has taught us about the stock market. While some have become common wisdom among investors, others are yet to percolate from the campus to the trading floor.

The first is that the long-run record of stocks is very good. While shares are typically more volatile than property and bonds, their long-run performance has been better. Particularly for investors with a reasonable time horizon, nothing beats shares. This is why investment advisers typically suggest that a person in their twenties or thirties should have more than half of their investments in shares (a rule of thumb that is sometimes difficult to follow if you want to also buy a house in a big Australian city).

The second lesson is that most traders trade too frequently for their own good. In a paper in the American Economic Review last year, Ilia Dichev (University of Michigan) showed that in most share markets around the world, the typical ‘buy and hold’ return is higher than the ‘dollar-weighted’ return. From 1973-2004, the typical stock on the Australian market earned a return of 12.3 percent per year. But the typical investment dollar earned an annual return of 11.7 percent. The problem is that investors tend to buy and sell at the wrong times – overinvesting in stocks just before they peak.

The moral here for investors is that a passive investment strategy tends to lead to better long-term returns than jumping from fad to fad. Such a strategy avoids the mistakes identified by Dichev, and minimises brokerage fees. (Incidentally, the same often holds true in at the supermarket, where switching from one checkout line to the next is rarely optimal.)

The third lesson from economics is that in an efficient market, stock prices incorporate all publicly available information about the firm. Consequently, short-run changes in stock prices cannot be predicted. As Burton Malkiel put it in his 1973 classic, A Random Walk Down Wall Street, this means that a portfolio chosen by “a blindfolded monkey throwing darts at a newspaper’s financial pages would do just as well as one carefully selected by the experts”.

A clear implication of Malkiel’s study is that investors cannot make money from obvious information. For example, the recent rise in Australia’s birth rate is likely to increase consumer demand for baby toys. But any consequent increase in profitability in toy-making companies has already been factored into their share prices.

A less obvious implication is that index funds tend to outperform managed funds. Tracking 355 US equity mutual funds over the period 1970-2001, Malkiel showed that only 22 managed to achieve a higher return for their investors than the S&P 500 index. Of the remaining 333 funds, 50 achieved about the same returns as the market as a whole, 86 underperformed the index, and 197 did not survive.

But surely the 22 high-performing funds have something to brag about? Not so fast. To test whether their success was due to luck or skill, Malkiel took the best-performing funds of the 1970s, and looked to see how they did in the 1980s. In virtually all cases, outperformance in one decade was followed by underperformance the following decade. The same was true the next decade. The top mutual funds in the 1980s tended to be low-performers in the 1990s. Rarely do active money managers make enough to justify their fat fees. Most investors would do better in an index fund.

Of course, all this ignores the fact that many day traders are in the markets not only to make a buck, but also for the excitement of buying and selling. After all, where’s the adrenalin rush from following sensible economic principles and putting your money in an index fund? While few traders consistently beat the market, most still manage to turn a profit. If it’s a choice between the share market and the casino, go for shares – and may Lady Luck smile upon you. 

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

What turns the aid tap on, Australian Financial Review, 10 January 2008

Just over three years ago, the 2004 Boxing Day tsunami struck, wreaking havoc in Indonesia, Thailand, India and Sri Lanka. With little else to occupy the Australian media during January 2005, the tsunami received near-blanket coverage over subsequent weeks. In total, the Australian public donated nearly a third of a billion dollars to help the victims.

At the time, many commentators attributed this to the natural generosity of the Australian people. But might it also have had to do with the timing of the tsunami? Or to put the question another way: if the disaster had been on page ten rather than page one, would Australians have been as generous?

If two recent studies are to be believed, the answer is probably no. Analysing the factors that predict private donations to World Vision and public grants through AusAID’s emergency relief scheme, Simon Feeny and Matthew Clarke found that the more newspaper articles written about an overseas disaster, the more money Australians gave. A 10 percent increase in the number of articles was associated with a 10 percent increase in the amount of money given by private donors, and a 37 percent increase in the amount of money given by AusAID.

But while media coverage might be idiosyncratic, it could also tell us how ‘needy’ the victims are. So to get at the true causal impact of the media, we need some source of variation in coverage that is unrelated to the crisis itself. In their study of disaster relief provided by the United States government over the past thirty years, Thomas Eisensee and David Strömberg come up with a clever solution: they look at how domestic preoccupations affect a nation’s generosity. What happens when an overseas famine, volcano or flood occurs at the same time as an event of local interest such as the Olympics, the OJ Simpson trial, or an American school shooting?

Eisenee and Strömberg show that when the US media is preoccupied with another story, it is less likely to pay attention to the international crisis. In turn, this has a direct impact on US government donations. To have the same chance of receiving US assistance, a disaster the coincides with the Olympics needs to have three times as many casualties as a disaster occurring on a regular news day.

Coverage of international disasters also seems to skew aid in other ways. In both Australia and the United States, visually dramatic events such as volcanoes and floods receive significantly more media than famines and civil wars. According to Eisenee and Strömberg, for every person killed in a volcano disaster, 40,000 people must die in a drought to receive as much media coverage. Access matters too. For an African disaster to receive as much media coverage as an Eastern European disaster, 40 times as many people must die.

These studies have profound implications for slow-moving African crises, such as the humanitarian crisis in Darfur. With fewer images to put on the television screen and the front page, Darfur rarely rates a mention outside the foreign affairs pages of serious newspapers. As a result, Sudan’s evacuees probably receive a smaller share of international assistance than would people displaced by a volcano in South East Asia.

Sometimes the neediest causes are not the most newsworthy. Several months after the Indian Ocean tsunami, a famine in Niger killed around 360,000 people. As Feeny and Clarke point out, this was a higher death toll than in the tsunami. Yet the Niger famine received minimal media coverage, and less than one-hundredth of the aid that went to tsunami-affected countries.

No-one expects academic research like this to transform news priorities. But that should not stop policymakers and donors from taking them into account when deciding how to allocate money. As economist Robin Hanson argues, social science is increasingly uncovering instances in which individuals make systematic errors. In these cases, the right response is to work at overcoming our biases.

For the media, overcoming bias might involve finding innovative ways of bringing important stories to readers’ attention, such as Time Magazine’s recent feature on the ‘Top 10 Underreported Stories of 2007’. For individual donors, it could involve doing a bit more due diligence before choosing a charity. And for politicians, it may mean ensuring that Australia does not divert a disproportionate share of our aid budget to those who make the evening news.

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

Schools need a report card too, Australian Financial Review, 20 December 2007

As Prime Minister Kevin Rudd sits down with premiers and chief ministers at the Council of Australian Governments meeting in Melbourne today, one of the topics of conversation will doubtless be how to implement Labor’s “education revolution”.

Past education policy debates in Australia have often been unproductive. While the Howard Government proposed some useful reforms, they were ultimately unable to find a way to work with teacher unions, and found themselves caught up in distracting debates about Maoism. For its part, Labor’s rhetoric can give the impression that the party believes reform requires little more than opening up the funding spigot.

Breaking the ideological deadlock requires attention to the new productivity agenda in Australia: making public services work better. In the case of schools, there is strong evidence that reform is needed. Despite a significant increase in funding, literacy and numeracy scores of Australian teenagers have failed to rise over recent decades. On average, new teachers are less academically talented today than they were two decades ago.

Boosting the performance of Australian schools is far from straightforward, but one sensible reform would be to begin reporting on the performance of individual schools, so that parents can better choose between their local schools. Such a reform would bring us into line with Britain and the United States, where policymakers across the board take the view that a school’s test scores are quintessentially public information.

Now, new research has shown that better information has direct benefits for children. In a novel experiment in North Carolina, Yale University economists Justine Hastings and Jeffrey Weinstein randomly provided some parents with more information about the quality of their local schools. They found that that one in twenty parents responded to the additional information by switching their child into a better school. Notably, African-American parents were more responsive to test score information than white parents (perhaps because they had less school information to begin with).

But does school choice really benefit kids? The following year, Hastings and Weinstein followed up the children who switched schools, and compared their test scores to the non-switchers. They found that moving to a better school raised test scores substantially. In other words, the new schools didn’t just skim the cream; they added value. 

In Australia, very little information about school performance is presently available. Some states only release information on the top students, while others provide data to newspapers on the condition that schools be listed alphabetically. Most public information relates to year twelve, though the Western Australian government publishes a website with primary school results shown in a graphical format. The most restrictive rules apply in New South Wales, where an infamous 1997 Daily Telegraph headline (“The class we failed”) has stymied test score reporting for over a decade.

Fortunately, there now seems to be a bipartisan federal consensus for change. Prior to the election, Labor’s then education spokesman Stephen Smith said that a Rudd Government would attempt to make available test score data at a school level for literacy and numeracy tests in grades 3, 5, 7 and 9. Over the next few months, federal Labor can expect pushback from the states and territories, and should have its answers ready.

Some critics will argue that test scores aren’t all that matter. True, there is more to education than standardised tests, but a thorough knowledge of the basics complements critical reasoning. Moreover, plenty of research shows that employers prefer to hire literate and numerate workers. In the North Carolina experiments, Hastings and Weinstein estimate that switching to a better school may end up raising students’ lifetime incomes by as much as $100,000.

Others will claim that raw test scores don’t provide useful information. The simple answer to this critique is to produce what Bill Louden of the University of Western Australia calls “smart” league tables, which are adjusted to account for socio-economic status, or which measure value-added.

Another common criticism is that parents can always visit the school to get more information. Yet for disadvantaged parents, making an appointment with the school principal can be daunting. As the North Carolina experiments suggest, making test score data readily available may well benefit the underprivileged most of all.

As a first stage in the education revolution, Kevin Rudd and Julia Gillard should bring more sunlight into the schooling system, making public all test score data for all schools in Australia. School league tables are no magic bullet, but you can’t have a revolution without information. 

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.