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* Note: The text of the first paragraph has been corrected - the published version referred to 15 year olds instead of 14 year olds in year 9.
A simple solution to those annoying water restrictions, Sydney Morning Herald, 23 March 2005
As the demands on our water supply have steadily increased, Australian governments have imposed ever more stringent rules on water usage.
Recently, the Victorian Government announced that Melbourne will follow Adelaide in making its water restrictions permanent. It seems only a matter of time before Sydney follows suit. Yet if we are to make the best use of our water resources, we could do no better than to abandon arcane restrictions across all Australian cities - and raise the price of water.
Under Sydney's present level two water restrictions, gardeners are banned from using sprinklers, and may water with hand-held hoses only between certain hours on certain days. Car owners may not use hoses to wash their vehicles.
And if you spot your neighbours doing the wrong thing, Sydney Water invites you to call its "dob in a gardener" hotline, so it can hit them with a $220 fine.
Water restrictions impose a social cost - chiefly on ardent gardeners and car enthusiasts, but also on the rest of us. Juggling our chores to water the garden on the right day can be a hassle. Being forced to water by hand rather than using a sprinkler system uses time that could be spent with family or friends.
Individually, these costs are small - but collectively and over time, they add up.
There is only one reason for such restrictions: the price of water is too low. Plenty of other goods in society are both important and scarce.
Almost every household consumes bread, milk and electricity daily, but without government restrictions on when and how they can be used. The trick with bread, milk and electricity is that the people who supply them charge a price that reflects the cost of production.
Presumably because it fears political backlash, governments prefer to set a price for water that is too low, and then employs a plethora of regulations to keep consumption down.
A better approach would be to raise the price of water, and let individuals choose precisely how they want to save on consumption.
Some might choose to put a brick in the toilet cistern, while hosing the car down once a fortnight. Others might be happy to pay a higher price for water so that they might have the freedom to hose the occasional dog dropping off the driveway.
In international terms, Australian water prices are relatively low. A UNESCO report in 2003 found that water was cheaper in Australia than in the US or anywhere in Europe. The British and French pay more than twice as much for water as we do, the Germans more than triple.
Can raising the water price reduce water usage? The evidence seems to suggest that consumers and businesses respond to price signals with water, just as they do with other commodities. Reviewing 50 studies from various countries on the effect of water prices on demand, the Dutch researcher Jasper Dalhuisen and his co-authors found that on average, a 10 per cent increase in water prices led to a 4 per cent drop in consumption.
Higher water prices have another advantage: they create incentives for the market to discover new ways of increasing supply. If we allowed the price to rise to an appropriate level, and permitted competition in the market for supply, alternatives such as recycling sewage into water for industrial use might flourish.
The most common objection to raising the price of water is that it may hurt the poor. This is an important consideration, but one which is easily addressed by a direct rebate to low-income households. Some of these households will use the money to cover the price rise, while others will reduce their usage, and put the money towards something else.
Low-income households should be compensated for a rise in the price of water, but we should not forget that the rich use more water than the poor. As a result, artificially low water prices primarily benefit the affluent. Maintaining water restrictions to help low-income Australian households is about as efficient as sending your bank details to a Nigerian scam-emailer to reduce poverty in Africa.
Sydney Water recycles only a small amount of the city's water supply at present, with demand for it constrained by the low price for fresh water. This makes it difficult for the utility to justify the outlay involved in getting more recycled water into the market. Perhaps not surprisingly, half of Sydney Water's recycled water is used in-house.
Scrapping water restrictions comes down to one simple insight: when it comes to managing demand, individuals are smarter than governments. Setting the right price for water will force consumers to decide how best to conserve water, empower us to use water when and how we choose, and create incentives for suppliers to find new ways of increasing the amount of water available. Ultimately, this is the best way to manage Australia's scarce water resources.
Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.
Program paved the road to re-election, Australian Financial Review, 10 March 2005
Who really benefited from the Roads to Recovery program? Responding to research by the AFR showing that spending from the $2.7 billion fund was overwhelmingly directed towards coalition-held electorates, Deputy Prime Minister John Anderson defended the program on the basis it had a high benefit-cost ratio.
The basis for Mr Anderson's claim was a report jointly prepared by the Commonwealth Department of Transport and Regional Services and the Australian Local Government Association, which found that Roads to Recovery produced a benefit (safety and transport efficiency) of $1.80 for every $1 invested.
Yet there is reason to doubt this finding. Most of the data underlying the report was provided by local councils, who surely had a strong incentive to exaggerate the benefits. A benefit-cost ratio of $1.80 is unusually high for a road-building project, yet councils claimed that even their own regular road programs had an equivalent benefit.
To measure the political rate of return on the Roads to Recovery program, I calculated the swing towards the coalition by comparing its share of the two-party preferred vote in the 2001 and 2004 elections. Nationally, the swing towards the coalition in 2004 was 1.8 per cent.
I compared the swing in the electorates that benefited most and least from the program. In the 20 electorates that received the largest allocations (averaging $28 million apiece), the typical swing towards the coalition was 2.8 per cent. In the 20 electorates that got least from Roads to Recovery (averaging just $2 million), the typical swing was just 0.6 per cent.
A more rigorous way of testing the relationship is to run a regression of the relationship between the swing to the coalition and Roads to Recovery funding. I obtained data for nearly all of the 150 federal electorates and found a statistically significant relationship between road funding and the coalition swing.
On average, each additional $10 million in road funding was associated with an extra 0.4 per cent swing towards the coalition. For each additional $28,000 in funding, the coalition won an extra vote.
Of course, it is entirely possible that the relationship is coincidental. Perhaps the Howard government's policies in 2004 were particularly appealing to voters in electorates that did well out of Roads to Recovery. But the correlation suggests that the program was largely targeted towards coalition-held seats, and voters in these favoured seats responded by voting for John Howard in larger numbers than in 2001.
US President Calvin Coolidge once remarked: "Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody." Without independent analysis or a transparent allocation system, it's difficult to avoid the conclusion that Roads to Recovery was simply a means of paving the way back to the Lodge.
Andrew Leigh is an economist in the Research School of Social Sciences at the ANU. He was an adviser to the federal ALP from 1998 to 2000.
P-plater training is useless, The Australian, 15 December 2004
The NSW, Victorian and Federal governments will today announce a compulsory driver education program for P-Platers. According to early reports, the scheme will require all new drivers to undergo eight one-hour training sessions. Unfortunately, international evidence suggests that it is unlikely to make any impact on the road toll.
Over the past decade, Australia has steadily reduced the fraction of young people killed in road accidents. Yet because other causes of death have fallen too, motor accidents remain the leading cause of death for those aged 15-24. Each year, 1 in 6250 youngsters is killed in a motor vehicle crash, with males three times as likely as females to perish.
Surely then, we should celebrate any attempt to reduce the problem? Sadly, no. While they may sound appealing, driver education programs have been subject to a multitude of rigorous studies over the past two decades, with little to recommend them.
Reviewing these studies last year, the Cochrane Collaboration, an international non-government organisation that systematically evaluates policy interventions, sought out all the randomised trials they could find that assessed post-licence driver education. Combining 19 separate studies, with a total of 300,000 participants, the researchers concluded that there was “no evidence that post-licence driver education is effective in preventing road traffic injuries or crashes”.
The same researchers also looked at pre-licence driver education (typically conducted in high schools), and arrived at an identical conclusion: driver education didn’t work. Indeed, the evidence on these programs is so poor that it prompted the Cochrane Collaboration researchers to write an article in the Lancet, arguing that driver education was “a waste of the scarce resources for road safety”, and publicly calling on the Blair Government to abandon its programs.
Why, then, are Australian governments so keen to try a program that has done so poorly elsewhere? Personal experience, it seems, has played a part. Ironically for a government that recently criticised Opposition Leader Mark Latham for drawing too heavily on his personal story during the election campaign, Deputy Prime Minister John Anderson justifies driver education on the basis that he thinks driver training helped him when he was a young driver. He also notes that car manufacturers support the approach: not surprising, given that one of the mooted alternatives has been to install speed-limiters in new cars.
To give the governments some credit, the driver education program to be announced today will not be fully implemented immediately. Instead, it will be evaluated through a randomised trial, with the results to be known by 2007. But given the weight of international evidence suggesting that driver education makes no difference to accident rates, it would be surprising if this trial proved a success.
Rather than conducting yet another trial of driver education, state and federal governments would be better to experiment with other ways of cutting the youth road toll. And there is no shortage of alternatives. Several studies have shown that traffic calming devices can work to reduce fatalities, and it would be valuable to know more about what sorts of devices work best. A paper recently published in the Journal of Political Economy showed that across US states, lower speed limits save lives. And natural experiments in New South Wales, Victoria and Queensland have demonstrated that the use of speed cameras reduces accident rates considerably. If we really want to save lives on the road, then evidence, not anecdotes, should drive policy.
The NSW, Victorian and federal governments are to be applauded for using a randomised trial to test an approach for reducing the road toll. It’s just a pity that their proposed solution has failed in just about every other randomised trial so far. As every good driver knows, it doesn’t hurt to occasionally check the rear vision mirror.
Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University. His paper on randomised policy trials is available here.
Betting experts know a slow horse, Sydney Morning Herald, 11 October 2004
The art of prophecy, Mark Twain once said, is very difficult, especially with respect to the future. Yet after months of pre-poll speculation, it’s worth spending a sober moment asking the question: who got it right, and who got it wrong?
First, how did the election-eve polls perform? With the Electoral Commission now estimating the Coalition's two-party preferred vote at 52.5 per cent, the best-performing poll appears to have been the Galaxy poll (52), followed by ACNielsen (54), Newspoll (50) and Roy Morgan (49). The wooden spoon goes to the ANU Online Poll (46), suggesting that we have some time to go before internet polls are as accurate as phone polling.
One curious fact is that three of the pollsters - Newspoll, Morgan and the ANU Online Poll - were further away from the eventual election result than their reported margin of error. One possible explanation for this is that voters simply changed their minds at the last moment. But recent work by Simon Jackman, an Australian political scientist at Stanford University, indicates that the problem may be that polling margins of error are bigger than we think not the 2-3 per cent that pollsters typically report, but potentially as large as 5-6 per cent. Jackman argues that the best way to deal with this is to pool the polls, combining multiple opinion polls together to determine the true mood of the electorate.
What if we assess the pollsters not on their predicted two-party preferred vote, but simply on whether they picked the winner? Thumbs up to Galaxy and ACNielsen. Thumbs down to Morgan and the ANU Online Poll. Thumbs sideways to Newspoll. Comparing the pollsters' track records over recent elections, newcomer Galaxy now has a perfect record (1/1), as does ACNielsen (2/2). Based on elections since 1987, Morgan is now 3/7, while Newspoll's fence-sitting makes them 4/6 with one no-ball.
What of the betting markets? Since election betting opened in mid-2003, the Coalition has always been firm favourite. Even throughout the first half of 2004, with Latham ahead in many of the polls, the betting markets remained confident that Howard would be returned. By election eve, the betting market was paying $1.20 for a Coalition win, and $4 for a Labor win, suggesting that they thought the Coalition had a 77 per cent chance of victory.
How about the betting odds in the marginals? Writing in the Australian Journal of Political Science after the 2001 election, Justin Wolfers and I noted that the favourites had won in 43 of the 47 seats where Centrebet had allowed punters to place a bet. This time, Centrebet offered betting in 33 marginal seats, and on current returns, the favourite appears to have won in 27/33 instances - somewhat down from the stellar predictive power of the betting market in the 2001 election. Yet among the 33 seats, the betting markets did correctly predict a net gain to the Coalition. Overall, the betting markets seem to have again performed at least as well as the polls.
Because betting odds change daily, we can also use them to track the performance of the parties over the course of the campaign. While Labor was rated a 40 per cent chance to win on the day Howard called the election, it steadily slipped behind during the six-week campaign. Although Latham's stock rose on the day of the ALP campaign launch, it fell sharply after the Jakarta bombing on September 9, and again in the wake of Howard's speech to Tasmanian timber workers last Wednesday.
How did the pundits go? While most forecast a Coalition victory, few foresaw that Howard would increase his majority.
A Sunday Telegraph survey of 10 experts on October 3 found that three thought Latham would win, while seven thought Howard would win, but with a smaller majority than in 2001.
Writing in the Herald on polling day, Alan Ramsey stated firmly: "At the very least Labor will eat into the Government's majority."
Mike Carlton wrote: "This time the Coalition will get back, but it will be trudge and plod." The strong swing to Howard surprised most pollsters and virtually all pundits, though not the betting markets.
Election tragics might turn their eye to the November 2 US presidential election. Since the US election coincides with the Melbourne Cup, it seems only appropriate to look to the bookies. According to the Iowa Electronic Markets, George Bush is favourite. But John Kerry is closing fast, and is now a 45 per cent chance.
Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University, and a member of the ALP.
Pollsters at odds with simple probabilities (with Justin Wolfers), Australian Financial Review, 7 October 2004
With the federal election almost upon us, the most important number in Australian politics today must surely be the probability that Prime Minister John Howard is re-elected. So is this the number that the polls report?
Unfortunately not. Instead of calculating the simple probability of victory for each candidate, pollsters report to us just what we tell them: the proportion who say they plan to vote for each candidate.
It is left to the rest of us to work out what to make of a 3 percent lead in a poll with a 2 percent margin of sampling error.
Yet by using simple statistics, pollsters should be able to take the results of their poll and the margin of error, and tell us how confident they are that each candidate will win.
Suppose two polls each find that 52 percent of their respondents plan to vote for Howard, and 48 percent plan to vote for Opposition Leader Mark Latham, but one has a sample size of 500, while the other has a sample size of 2000.
Obviously, the pollster with the larger sample is more confident that Howard will win. But by how much?
According to standard statistical tables, the smaller poll would make one 81 percent sure that Howard would win, while the larger poll suggests confidence in the forecast as high as 96 percent.
Combining the two polls would make one even more certain - giving a 98 percent likelihood that Howard would be re-elected.
Turning polls into probabilities is akin to what meteorologists do every day. Rather than tell us about what their instruments are recording, and how accurate they think they are, weather forecasters produce a single number - the percentage chance that it will rain on any given day.
What do the latest polls tell us? ACNielsen says Labor is a 7 percent chance, Galaxy rates Labor a 10 percent chance, Morgan indicates that Labor is an 83 percent chance and Newspoll gives Labor a 34 percent chance. Weighting the four polls by their sample sizes, they together suggest Labor has only a 12 percent chance of winning.
Of course, this requires us to believe that the polls are as precise as the pollsters say; if not, Labor is probably a better chance than 12 percent (indeed, Centrebet rates it a 23 percent chance).
While these numbers take the pollster's estimates of their errors at face value, there are other types of polling error that go beyond random statistical error. Poll samples may be skewed towards a particular kind of voter. "Don't knows" may not be representative of all other respondents.
And, as Kim Beazley can testify from 1998, our electoral system makes it possible to win 51 percent of the two-party vote but lose the election.
Yet even with these other problems, existing poll results can still be better presented. It's time for the pollsters to follow the meteorologists, and start talking probabilities.
Andrew Leigh is in the research school of social sciences at the Australian National University. Justin Wolfers is an assistant professor at the Wharton School, University of Pennsylvania.
Blind trusts for political gifts are a surer bet than trusting blindly, Sydney Morning Herald, 7 October 2004
In the 2001 federal election, advertising spending by the major political parties topped $30 million. This time, the figure is sure to be higher, raising questions such as: do donations buy favours? And how might we reform the system?
Politicians routinely deny that money influences the way they vote; money buys access, not outcomes. Yet as Kim Beazley admitted: "It is simply naive to believe that no big donor is ever likely to want his cut some time."
Do political donations affect policy outcomes? In the absence of persuasive local research on the topic, two recent US studies use a simple insight: if donations do not buy results, then a company's share prices should be unaffected by its political donations. But if donations shift policy outcomes, then firms who give a lot of money should find their share price affected by which way the political wind is blowing.
Brian Knight, of Brown University, looked at the relationship between party donations and share prices during the 2000 presidential election campaign. He found that when the probability of a Bush victory rose, firms that had given more money to the Republican Party increased in value. Conversely, when the probability of a Gore victory was higher, the share prices of Democratic Party donors rose.
Seema Jayachandran, of the University of California, Los Angeles, takes a somewhat different tack, focusing on a single event: the unexpected resignation of Senator Jim Jeffords from the Republican Party in May 2001, tipping control of the US Senate to the Democrats. In the week following the switch, firms lost 0.25 per cent of their sharemarket value for every $100,000 they gave to the Republicans in the previous election cycle.
While US politicians and firms may say that donations don't buy influence, the sharemarket disagrees. Is this true in Australia? Some clues might be offered by sorting through Australia's political donations system, using data from an election donations database (www.democracy4sale.org) and pooling donations over the past five years.
Looking not at total donations, but where the gap between donations to the federal Coalition and federal Labor was largest, the biggest advantages for the Coalition were in the finance sector (ANZ, JP Morgan), food and pastoral (Inghams, Manildra), industrial and manufacturing (Pratt, Amcor) and resource companies.
Sectors that most strongly favoured the ALP were professional firms (accounting, law), clubs and hotels (the Australian Hotels Association) and the union movement.
Based on US evidence, it might not be surprising to see some degree of favouritism towards the sectors most generous in donating money towards each party. Is there any better way of structuring the system? Perhaps. One option would be to adopt a system of blind trusts for political donations.
An individual or company who wished to donate to a party would not be permitted to give directly, but would deposit the money into a blind trust. The donor would get a receipt showing the amount, but not the recipient. For their part, the party would know their net receipts for the previous month, but not the particular amounts, nor the donors. Variants of this scheme have been successfully implemented in Chile and South Korea.
The advantage of blind trusts over reforms such as pure public funding or strict ceilings on donations is that they encourage people to put money into politics. Large political donations should not be troubling in themselves. Indeed, with Telstra's advertising spending this year likely to exceed that of all political parties combined, there is a good argument that there is too little money in Australian politics, not too much. The challenge is to break the link between donations and favours.
Making all political donations anonymous would prevent corruption without impoverishing the system. Better, such an innovation may serve as an example to the world. Just as Australia quashed vote-buying by inventing the secret ballot, so a system of blind trusts could allow effective fundraising to continue, but without the risks of influence-peddling inherent in the present system.
Dr Andrew Leigh is an economist at the Australian National University, and the co-author of Imagining Australia: Ideas for Our Future (Allen & Unwin, 2004). He is also a member of the ALP.
Where have all the optimists gone? New Matilda, 29 September 2004
Does the scope of the current election campaign really span the gamut of what matters for the future of our nation? Is there nothing more to the once great Australian project than Medicare reform, tax breaks for the middle class, payments for mature aged workers, and reallocation of private school funding?
Australia is bigger than many of the current debates taking place in the political arena. In our recently released book, Imagining Australia: Ideas for Our Future, Macgregor Duncan, David Madden, Peter Tynan and I argue that reinvigorating the Australian project today means expanding the political agenda: tackling new challenges that affect more than the hip pocket nerve.
The first challenge is to renew Australia’s national identity, an issue untouched in the current election campaign. While the ANZAC story has come to serve as a surrogate national legend, it cannot speak to our democratic traditions, maturity, or self-confidence. If Gallipoli represents our biblical Exodus, we are still searching for our Genesis.
One way of renewing our national identity would be to claim the story of the Eureka uprising as our central national legend. A movement against oppressive taxation and arbitrary colonial rule, the Eureka miners fought for justice against an unjust regime. In this sense, Eureka is Australia's equivalent of the Boston Tea Party. Described by Sir Robert Menzies as 'an earnest attempt at democratic governance', Ballarat marks the spiritual birthplace of Australian democracy. December 3 this year will be the 150th anniversary of Eureka. What better moment to revive a legend that speaks to our core values: democracy, egalitarianism, mateship and multiculturalism?
The second challenge is to achieve a lasting reconciliation with the nation's original inhabitants. Perhaps the toughest problem facing Australia today, achieving reconciliation has eluded political leaders for a generation. In the current campaign, Labor has committed itself to reconciliation, but has said little about how it might be achieved, while the Coalition's indigenous policy spends more time attacking Labor than discussing new ways of advancing reconciliation.
To succeed, reconciliation should be made more celebratory, improving understanding of indigenous stories and languages, rather than focusing exclusively on past injustices. Simple symbolic changes can help too. We ought to celebrate the handing down of the Mabo judgment as a national holiday, assign dual names to capital cities as the New Zealanders do (Melbourne might be known also as Narloke or Narrm), and pursue a treaty between indigenous and non-indigenous Australia.
The third challenge is to begin a real debate about inequality. During the 1990s, average incomes rose rapidly, boosting living standards for most Australians. But the fraction of income going to the richest one per cent rose too – from six and a half to nine per cent. Will the widening gulf between rich and poor in Australia ultimately strain our social fabric?
Rather than ignoring inequality, or pretending that it does not matter, it is time for Australian politicians to engage in an open and honest discussion about how much inequality we wish to bear. Then, if we decide as a society to devote a larger share of our national pie towards the poorest, we must engage in what Franklin D. Roosevelt once called 'bold, persistent experimentation', testing antipoverty programs in randomised trials just as we test new pharmaceuticals. Put to the test, many of the programs favoured by both sides of politics might well be found to be ineffective, and have to be abandoned. This would be a good thing. What matters most is not whether antipoverty programs accord with the ideological flavour of the day, but whether they actually deliver results.
The fourth and final challenge is to commit Australia to become the exemplary international citizen, using our middle-power status and our strong international standing to find solutions to some of the world's most intractable problems. This means going beyond the issues of Iraq and terrorism that dominate today's agenda. Australia should revive the Canberra Commission on nuclear weapons, broadening its mandate to take in the global trade in guns and other small arms. We should draw on our experience in East Timor to create a new strategic recovery facility, coordinating experts and money in the wake of tragedies like Rwanda, the Balkans and Darfur. And we ought to also use our middle-power status to replace the Kyoto Treaty on global warming with a better alternative; one that might win agreement across the developed world.
National identity, reconciliation, inequality, and international citizenship tend to have one thing in common: they require a leader who will ask the Australian people to focus on a goal larger than self-interest. This requires no more and no less than the rebirth of the great Australian project – born of altruism and reared on optimism. As Victoria's greatest son, Alfred Deakin, told the second constitutional convention: 'There is no process of accretion by which a weak political body becomes a strong body ... You will find that you cannot creep the chasm; you must leap it'.
A century on, can Deakin's vision and passion inspire us anew?
Dr Andrew Leigh is an economist at the Australian National University. He has worked as a lawyer and political adviser in both Britain and Australia and is a former research fellow with the Progressive Policy Institute, a Washington DC thinktank. Andrew is co-author of Imagining Australia: Ideas for Our Future (Allen & Unwin, 2004). This is an edited version of a public lecture delivered at the State Library of Victoria on 21 September 2004.
Matched on mojo, powers to persuade, Sydney Morning Herald, 16 September 2004 (Blueprint Article)
Howard and Latham have different strong points in selling conflicting visions, writes Andrew Leigh.
Leadership. One of the most important words in Australian politics is also one of the most misused. What does it mean to exercise leadership? And how does understanding leadership help us to gauge John Howard and Mark Latham?
According to the typical business text, leadership is about influencing, persuading and mobilising others to follow your goals. Successful leadership requires a modicum of strategy, and a pinch of charisma, or what Austin Powers would call "mojo". Leadership of this type is value-free. Bill Clinton and Adolf Hitler had vastly different philosophies, but both were highly charismatic, and succeeded in influencing others to follow them.
John Howard's critics have often sneered at his lack of charisma. Working a room, Howard lacks the magnetism that characterised Bob Hawke's prime ministership, or the soaring oratory that Alfred Deakin, Robert Menzies and Paul Keating so relished. Yet if we are to measure Howard solely on his ability to influence the electorate, he must be counted as a success.
As political scientist Murray Goot has pointed out, the characterisation of Howard as a poll-follower is mistaken. On issues that mattered to him - the privatisation of Telstra in 1996, the GST in 1998, the republic in 1999, and the war in Iraq in 2003 - Howard took a stance at odds with public opinion, and set about persuading the electorate.
Howard's persuasive skill is reflected in results from the Australian Election Study. When first elected in 1996, 54 per cent of the population thought that Howard provided strong leadership. By 2001, this figure had risen to 72 per cent. Yet persuasive prowess is not synonymous with honesty: over the same period, the fraction of people who agreed that Howard was honest fell from 74 per cent to 55 per cent. It seems that the more people believe Howard is a strong leader, the fewer believe that he is honest.
What do we know about Latham's skills of persuasion and influence? While it is more difficult to judge an Opposition leader than a prime minister, three pieces of evidence are relevant. First, despite most pundits predicting that the Labor caucus would select Kim Beazley as leader on December 2, 2003, Latham was able to persuade a majority of his colleagues that he would do a better job. Second, he then managed to dominate the political news agenda for several months - presenting Labor's policies in a compellingly straightforward manner. Yet against this should be set the published views of how a Latham cabinet might operate. When Latham biographer Barry Donovan asked Simon Crean whether it was true that Latham sometimes turned up to shadow cabinet 10 minutes late, saying "I'm going to do this", Crean agreed. It appears that Latham's powers of persuasion may not extend to all members of his shadow cabinet.
The bottom line? On the traditional definition of leadership - influencing others to follow you - Howard is probably the better leader, with a proven track record of moulding his party in his own image and convincing the nation to support him at several critical moments. Yet in Sunday night's debate, Latham wormed his way to victory - indicating that if he is to win on October 9, he too may be able to transform his party and persuade the nation to adopt his agenda for change.
A more challenging form of leadership is creating the conditions in which people can come up with their own solutions to difficult problems. Harvard University's Ronald Heifetz argues that leadership should not be viewed as influence at all, but rather as providing an opportunity for a group to tackle a difficult problem. What Heifetz calls "adaptive leadership" can only take place when people delve down to the root of a problem, rather than merely dealing with its symptoms. Eschewing easy answers, adaptive leadership requires that people take ownership of a problem, and devise a solution themselves.
So far, the 2004 election campaign has been narrowly focused - fought over a suite of hip-pocket issues that would have been familiar to voters 20 years ago: Medicare and taxation, welfare and private school funding.
This has left precious little space for the parties to debate fundamental questions of national identity. Aboriginal reconciliation, for example, is one of the most difficult issues facing the nation today, and a natural opportunity for a leader to put adaptive leadership into practice. Seven years after the Reconciliation Convention, and four years after the Sydney Harbour Bridge walk, reconciliation seems to have lost its way. Part of the reason for this was Howard's preference for "practical reconciliation", with its emphasis on improving the living standards of indigenous Australians; and the downplaying of interpersonal reconciliation, which seeks to change the relationships between indigenous and non-indigenous people.
At certain moments of his prime ministership, Howard has displayed adaptive leadership. His 1999 Regional Australia Summit encouraged local leaders to find local solutions to reinvigorate the bush, rather than looking to Canberra for additional assistance. As the Deputy Prime Minister said in his closing address, securing the future of the bush should be guided by the philosophy "that we do things best when we do things from the bottom up and from the inside out". Likewise, Howard's Stronger Families and Communities Strategy is aimed at giving communities "the power to develop their own solutions to local problems and helps them help themselves". Yet in other areas, the Howard Government has tended to operate from the centre, instead of turning difficult problems back to the communities themselves.
We know less of Latham's ability to employ adaptive leadership, but his emphasis on community-driven solutions offers some reason to believe that he might be willing to encourage local groups to solve their own problems. In his 1998 book Civilising Global Capital, he wrote that "social democracy needs to give closer consideration to the relations between citizens rather than simply working from the assumption that all social issues can be resolved in the state-to-citizen relationship".
A third form of leadership is policy entrepreneurship - the willingness to engage the public in debate about where the nation should be in 20 years, and pursue new and innovative solutions to policy problems. In Looking for Leadership: Australia in the Howard Years (2001), Donald Horne argues that over the past 30 years, Australia has never had a leader who can communicate on matters of economic policy as effectively as Franklin Roosevelt did with Americans during the Great Depression. If the people running Australia rust up, Horne argues, Australia will rust up.
In past decades, Australia has been fortunate to have policy wonks on both sides of politics. In 1972 Gough Whitlam's policy manifesto included 140 specific promises - the most comprehensive election platform ever seen in Australia at the time. In 1982, Labor - largely driven by the intellectual energy of Gareth Evans - produced a series of policy monographs around the theme of "Preparing for Government". And the record for policy entrepreneurship must surely go to John Hewson, who oversaw the production in 1991 of Fightback! - a 650-page policy platform whose executive summary alone ran to 70 pages. Whether one agrees or disagrees with the contents of Fightback!, Hewson's loss at the subsequent election was a body blow for ambitious party platforms. Since 1993, the political wisdom has been that oppositions should present "small targets", offering not bold visions of the future, but small increments on the status quo. It is difficult to imagine that this philosophy does not carry through to the way in which a successful opposition goes on to govern the nation.
There has been less sense of Australia as a bold policy entrepreneur in recent years, even though Howard's eight years have been marked by some strong policy initiatives. In the early days of federation, there was a sense that Australia was the "social laboratory of the world". Social reforms (the minimum wage and the aged pension) and democratic reforms (the secret ballot and the right for women to vote) were implemented in Australia decades before they were put in place in other developed nations. In the 1980s, there were flashes of this: the Higher Education Contribution Scheme and our child support scheme are two policies now being copied. The GST was radical for Australia, and in a broader context it brought us in line with the rest of the developed world. Other initiatives - such as work for the dole, the offshore processing of asylum seekers, or the free trade agreement with America - are more in the nature of incremental amendments to our existing policy infrastructure than bold reforms to bring the rest of the world knocking at our door, asking for policy advice.
Some have also argued that the Howard Government should have done more to engage with voters on matters of economic reform. As Rod Cameron, one of Australia's most prominent pollsters, noted in 1999: "There were a few brief years in the late 1980s and early 1990s, when ... concerns about the debt, the deficit and the balance of payments really did reach ordinary voters. Times have changed. Macro-economic issues are off the agenda of the general public. And they are off the agenda largely because the Government has stopped forcing them on to that agenda. With the exception of the goods and services tax, the Government is no longer trying to educate the Australian people about the need for continuing reform."
Would a Latham prime ministership be different? It is true that no other federal politician has published so many books, articles and speeches, on so many different topics. Over the campaign, we will discover how many of these ideas have found their way into ALP policies. Latham's other challenge is to weave his many ideas into a consistent story. For the campaign, the "ladder of opportunity" may be sufficient. But if he finds himself in the Lodge, Latham will need to paint on a larger canvas. A committed economic liberal, he will also need to find new ways of engaging with the public on economic matters. From free trade to competition policy, having the right policies will mean little if Latham is unable to articulate the case for economic reform.
So who would make the better leader? If leadership is defined traditionally, as an ability to influence and persuade, then Howard is the better leader. If leadership is providing a crucible for communities to address challenges by themselves, there is little to choose between the two. If leadership means policy entrepreneurship, Latham is likely to be ranked ahead of Howard.
The next three weeks will determine not only who will run the nation, but also how history will remember the two who would be prime minister. Will Howard be remembered as he would like - as the Robert Menzies of his age, carrying his party to repeated electoral success before a graceful mid-term retirement? Or will future generations think of him as Stanley Bruce, prime minister from 1923 until 1929, swept aside because of his uncompromising stance on industrial relations, credited with little by way of policy innovation, and largely forgotten?
And will Latham be remembered as a latter-day Gough Whitlam, his political mentor - a political leader who inspired his own adjective (Whitlamesque) and retains a dedicated following nearly 30 years after leaving office? Or is he destined to become the next H.V. Evatt, the most brilliant Opposition leader never to become prime minister?
Dr Andrew Leigh is a Fellow in the Research School of Social Sciences at the Australian National University. He is co-editor of The Prince's New Clothes: Why do Australians Dislike Their Politicians? and co-author of Imagining Australia: Ideas for Our Future. From 1998 to 2000, he served as an adviser to the federal ALP.
Politicians have us thinking 'used car salesman' again, Sydney Morning Herald, 16 September 2004
Paul Keating went to the 1996 election with a one-word slogan: leadership. For John Howard, the 2004 election is about trust. But why? With the "children overboard" affair merely the latest scandal to come to light, surely the standing of federal politicians is lower than ever?
The story is more complex. In 1976 Roy Morgan began asking people to rate various professions, including politicians, for their ethics and honesty. Until six years ago, as the graph at right shows, the Morgan poll showed a steady decline in the proportion of people who gave federal politicians a high or very high rating for ethics and honesty, from 19 per cent in 1976 to a nadir of 7 per cent in 1998.
Briefly it looked like times had changed. Last year 17 per cent of the public gave federal politicians a high or very high rating for ethics and honesty. Even more surprising, unpublished data from Morgan indicated that the rise was greatest for young voters. In 1998, just 9 per cent of those aged under 25 rated politicians ethical and honest, but in 2003, 29 per cent did so.
Yet it now appears that the trust in politicians has again plummeted. In the survey released today only 9 per cent of the public gave federal politicians a high or very high rating for ethics and honesty. Trust in politicians is again in decline.
Three factors help explain this trend: media reporting that is overly focused on personalities over substance; a long-time decline in social capital (membership of organisations such as unions and bowling clubs); and the rise of issues outside the left-right spectrum of party politics.
While last year's figures might have given hope for a turnaround, the latest numbers indicate the decline in trust in politicians continues.
The so-called trust election seems to be taking place in an atmosphere of distinct distrust. Less than one in 10 Australians thinks their politicians are ethical and honest. Whoever is prime minister after October, regaining trust in politicians should be high on the agenda.
Bookies are a better bet than pollsters, Sydney Morning Herald, 1 September 2004
With Athens behind us, a new sport has burst into the limelight: poll-watching. If you thought Olympic commentators could be predictable, stand by for four weeks of “How should we interpret the latest poll figures, Minister?” and “Do you feel you’re the underdog in this race?”, and the hoary reply: “At the end of the day, there’s only one poll that matters”. But do the polls lie? And if so, how often?
In an Australian Journal of Political Science article following the last federal election, Justin Wolfers and I noted that the two grand dames of election polling – Morgan and Newspoll – had similar success rates in forecasting the election winner. In its election-eve polls, Morgan got it wrong on three of the past six elections (1990, 1993, 2001), while Newspoll did only marginally better, incorrectly calling two of the six (1993, 1998). As for relative newcomer AC Nielsen, they correctly forecast the 2001 election, but are yet to demonstrate a long track record. Indeed, we found that in 2001, election betting markets run by the Northern Territory bookmaker Centrebet were a better guide than the pollsters (as in horse-racing, when there’s money on the line, bookies have a strong incentive to get the odds right).
It is hardly surprising that pollsters don’t do a perfect job of predicting elections. One problem is that voting patterns are never stable: on average, my research shows that about 10% of us change our vote from one election to the next. But a bigger issue is that since a typical poll samples only 1000-2000 voters, we can’t be confident that the poll result is an accurate reflection on the whole electorate.
What is the right margin of error to employ? The most common approach is to use a margin of error such that in 19 polls out of 20, the gap between the real figure and the poll estimate will be smaller than the sampling error. If the poll samples 1000 people, its sampling error will be 3% either way. With a sample of 2000, the sampling error falls to plus or minus 2.2%. Sample sizes for recent polls have been Newspoll 1100, AC Nielsen 1400, Roy Morgan 1900.
But although the sampling error is sometimes noted in small print at the foot of an article, it rarely makes its way into the text. By contrast, the best US papers take a much more careful approach; explicitly using the statistical margin of error in discussing the results. This better informs the reader, and can be done without needless jargon. For example, the New York Times last week said of the US Presidential contest: “the Times poll and several others released on Thursday showed the race to be deadlocked, with neither candidate holding a lead beyond the margin of sampling error.”
Taking into account sampling error, what do the polls tell us about the Australian race? In their latest polls, AC Nielsen and Roy Morgan have Labor with a lead that exceeds the margin of error. However, according to a Newspoll released yesterday, the gap between the two parties is smaller than the sampling error.
Another factor to remember is that the sampling error when comparing two polls is larger still, since both polls have their own margins of error. For example, while the usual sampling error for a single AC Nielsen poll is plus or minus 2.6%, the standard error of a movement from one AC Nielsen poll to the next is plus or minus 3.6%. The bottom line? Changes in polls from one week to another are even more error-prone than the polls themselves. So statements like: “since the last poll, Labor’s vote share is up 2%”, should betaken with a pinch of salt.
Accurate reporting of the polls may make for less reading of the tea-leaves by the nation’s amateur psephologists. But if this clears more space for journalism about the parties’ vision for the future, that’s no bad thing.
Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University, and co-author of Imagining Australia: Ideas for Our Future (Allen & Unwin 2004).
[This is the original version - the version as published contained some minor differences]
Our Games heroes owe something, The Age, 30 August 2004 (with Bruce Chapman)
Australia has plundered Athens gold faster than the Spartans. Once again, our elite sportspeople have done the nation proud. And the Australian Institute of Sport, home to many Olympians, is sure to bask in the reflected glory. But like our best athletes, the AIS should not be resting on its laurels. Instead we should be asking: how could the AIS do better?
At Athens 2004, more than half the nearly 500 athletes in the Australian team were present or former AIS scholarship-holders, receiving an amount that The Australia Institute's Richard Denniss estimates to average about $23,000 a year. Thanks in part to the AIS, some of its alumni, such as Lleyton Hewitt, Mark Viduka and Shane Warne, go on to earn seven-figure salaries.
If Hewitt, Viduka and Warne had been stockbrokers, lawyers or doctors, their education would also have been essential to their success. But as their earnings rose, they would have repaid a proportion of the cost of their education to the community that provided it to them, through the Higher Education Contribution Scheme.
Our proposal is a modest one. We suggest that those AIS scholarship recipients whose earnings exceed a certain threshold be required to repay the cost of the scholarships.
To ensure that only the most successful sportspeople are taxed, we suggest fixing the threshold at an annual income of $60,000 - earnings that place them in the top 25 per cent of Australian full-time employees. The threshold would, of course, be indexed to rise with average earnings.
Those sportsmen and women who don't earn enough to place them in the top 25 per cent would not be required to repay a cent of their AIS scholarships, just as those former students who do poorly won't pay any HECS. And like HECS, those doing very well would be asked to pay back their scholarships, through the tax system, so others might have the same opportunities.
How much money would this generate? While it is difficult to forecast precisely, the back of our envelope suggests it would provide enough to expand the size of the AIS by about one-quarter. This would allow the number of AIS scholarship holders to be boosted from about 700 today to nearly 900.
Requiring our most successful athletes to pay back their AIS scholarships to help the next generation is consistent with the values of egalitarianism and fairness that are fundamental to Australia. And it wouldn't hurt our chances in Beijing and beyond either.
Professor Bruce Chapman and Dr Andrew Leigh are in the economics program of the Research School of Social Sciences at the Australian National University.
Nelson takes a leaf out of Bush reform plan, The Australian, June 28, 2004
A suite of school reforms released by a conservative government have prompted substantial debate among educators and parents. The mantra of the package is testing, accountability and choice.
Teacher unions are critical, while the Left seems to be split on whether to bury or praise the reforms.
The story of federal Education Minister Brendan Nelson's school reform package over the past six months? Yes, but also the tale of another controversial education reform package: President George W. Bush's No Child Left Behind legislation of 2002.
The two reforms are so uncannily similar that the Nelson proposals might be better described as NCLB II.
At the core of both packages is regular student testing.
NCLB mandates annual student testing of US children from years 3 to 8, while Mr Nelson has persuaded state and territory education ministers to agree to test all Australian children in years 3, 5 and 7.
Testing underlies accountability, and test score measures can be used to create smarter incentive structures for schools and teachers.
Accountability is another key aspect of NCLB and Mr Nelson's reforms – requiring that all parents be informed of how well their children and their child's school are performing.
Many US states publish detailed information on their websites about the academic performance and socio-economic composition of every school in the state, and NCLB will require this to become universal across the US.
In Australia, the changes are happening more slowly, but with a modicum of resistance, states and territory governments seem to have agreed that parents have a basic right to information about their children's schools.
Research by Harvard University's Caroline Hoxby has demonstrated clear benefits from greater accountability: those US states that gave parents detailed information about the performance of their schools experienced larger test score gains than those states that did not.
Perhaps the most controversial aspect of both countries' plans is their emphasis on choice.
NCLB requires that students in underperforming schools be given free tutoring and assistance in transferring to another school in their neighbourhood.
Likewise, under the Nelson proposals, struggling students would be provided with a $700 voucher to spend on private tutoring (oddly, the voucher will not be means-tested).
Moreover, the Howard Government's reforms to the private school funding formula over recent years appear to have been aimed at making the system as close to a de facto school voucher system as possible. How has the Left responded to testing, accountability and choice?
In the US, NCLB was co-sponsored by Senator Edward Kennedy, an icon of the left-wing of the Democratic Party. And while the package has come under fire from some Democrats (such as Governor Howard Dean), the party is aware that it needs to tread carefully.
NCLB commands significant support among inner-city African-Americans, who have long been frustrated at the state of their children's schools. In a curious parallel, Nelson claims that Aboriginal parents have been among the strongest supporters of his proposed reforms.
The Australian Labor Party is right to support Nelson's proposals, creating a bipartisan consensus for schools policy that is driven by research and results, not stymied by inertia and ideology.
Labor should also remember that the reforms represent a shift in the thinking of their political opponents.
Just as US Republicans argued in 1994 that the federal government had no place in schools policy, so the Coalition's 1993 Fightback! manifesto contained little of the activist educational policymaking now evident in Nelson's reforms.
This is not to say that either NCLB or the Nelson reforms represents more than a starting point for reforming education.
Testing, accountability and choice are all important, but other reforms should be on the agenda too: improving teacher incentives through a carefully designed system of performance pay; raising the school leaving age (as Queensland has done); exploring options for a longer school day; and targeting resources to the neediest schools.
More police mean fewer mean streets, The Australian, May 11, 2004
With the federal Government unveiling a new community crime prevention program in the budget today, and Labor emphasising community policing, it looks likely that crime may soon become a major federal issue. That well-known state candidate, Laura Norder, may soon appear on the federal ballot too.
While some see politicians talking about crime as a sure sign that good policy is headed for the slammer, a serious debate about tackling crime is long overdue in Australia. In the midst of an era of steady economic growth, an international survey of crime victimisation found that Australia had the highest rate of crime victimisation in the developed world.
According to a survey of 17 developed nations, we came top of the list for assault, burglary, personal theft and sexual assault. One in five people in other developed nations said that they had been the victim of a major crime in the previous year. The figure for Australia was nearly one in three.
Yet while crime in Australia is high and rising, the US has seen the opposite trend. During the past decade, crime in the US has plunged, with violent crime and property crime rates down by one-third during the 1990s. And according to a recent article by the University of Chicago's Steve Levitt, several oft-cited explanations were in fact pretty irrelevant to the reduction in crime.
So-called "zero-tolerance policing" tactics seem to have had minimal impact on crime rates. Strong economic growth might have had a small impact on property crime, but is unlikely to account for any of the change in violent crime. And Levitt dismisses the notion that gun laws mattered much - either in the form of laws allowing citizens to carry concealed handguns, or gun buy-backs carried out by local jurisdictions (since criminals are pretty good at trading guns from one city to another).
So what does explain the fall in crime? The first factor that Levitt credits is the increase in police numbers. Using quasi-experimental evidence, Levitt finds that a 10per cent rise in police numbers cuts crime by about 4per cent. So thanks to several major state and federal initiatives during the past decade, more police on America's streets meant less crime.
Second, the growing prison population has had a major effect. With longer and stricter sentences, the US presently has more than 2million of its citizens behind bars. This lowers crime both by incapacitating existing prisoners and by deterring would-be criminals from committing crimes. But while building more jails cuts crime, Levitt warns that incarceration has its own risks. Imprisoning a large fraction of young African-American men may keep crime down today, but at the cost of rising social problems tomorrow.
Third, a fall in drug-driven crime played a notable part in the overall crime drop. As any fan of Miami Vice or Beverly Hills Cop will know, the crack cocaine epidemic of the late-1980s was responsible for a large portion of the rise in inner-city violent crime in the US. But since the mid-'90s, stiffer penalties for crack use have deterred existing users and turf battles between drug gangs have become less common.
Lastly, Levitt argues that the legalisation of abortion in the early '70s helped reduce crime two decades later. This controversial theory rests on two premises - that unwanted children are more likely to grow up and commit crime, and that abortion reduced the number of unwanted births. Using variation in abortion rates across US states, Levitt concludes that nearly one-quarter of the total decline in crime during the past decade can be attributed to the legalisation of abortion. My own research (with Stanford University's Justin Wolfers) suggests that the same may be true for Australia.
So according to Levitt, America's crime success comes down to more police, more prisons, less crack and legalised abortion. On prisons and abortion, there is little for Australian policymakers to learn. Abortion is de-facto legal throughout the nation, and we are probably at the point where the social gain from increasing the jail population would be outweighed by the scarring effect of incarceration.
But on police and drugs, US criminologists may have something to teach us. Innovative policing, it seems, matters less than the pure number of police on the streets. And while crack-related crime was falling in the US, heroin and amphetamine-related crime was rising in Australia. Finding new ways to restrict the prevalence of hard drugs may help Australia bring crime down in the future.
Add a year abroad, for a richer education, Sydney Morning Herald, 11 May 2004
Our focus on short vocational degrees means Australians are missing out on studying overseas, writes Andrew Leigh.
As anyone who's travelled knows, Australians are famously peripatetic. From Kensington to Kabul, Seoul to San Francisco, you're sure to come across a friendly accent if you stay in town for a few days.
But as yesterday's Herald revealed, a surprising feature of our overseas population is how few Australians go abroad to study. With only about three in 1000 undergraduates on overseas exchange programs in any semester, it seems likely that only about 1 per cent of Australian students end up having the chance to enjoy an overseas study experience during the course of their degree. And while a few of us later leave the country for postgraduate study, this is far from the norm.
So why are young Australians intrepid backpackers, yet reluctant overseas scholars? Part of the explanation surely lies in our reluctance to move far to attend university - nine out of 10 students attend a university in their home state or territory. Another factor is the strongly vocational nature of Australian university degrees, in which students are channelled into highly focused courses from the start.
This stands in contrast to the Canadian and US system in which students apply to universities, not particular degrees, and choose their major only at the end of the first year. This system provides greater flexibility for students to take a semester studying abroad, without fearing that they will fail to graduate on time.
How might Australia boost the number of students on exchange programs? One option would be for universities to follow the lead of the University of Technology, Sydney, which offers a bachelor of international studies that incorporates a full year at an overseas university (disclosure: my mother works with this program).
Students in the UTS program add an international studies year on to their regular degree in arts, science, engineering or nursing. With tens of thousands of foreign students paying full fees to study in Australia, shouldn't other universities consider tapping these resources to allow domestic students the opportunity to spend a semester overseas?
A second solution would be to allow students whose parents are unable to assist them with overseas study to use the Higher Education Contribution scheme (HECS) to pay for the tuition, travel and living expenses associated with time abroad. Just as HECS has recently been extended to those who wish to complete a master's degree, so we should expand it to cover those who wish to deepen their undergraduate education.
We might even consider whether Australia's systems of narrowly vocational three-year degrees is appropriate for the rapidly changing job market of the 21st century. Four-year degrees, with students given the flexibility to choose their specialty at the end of their first year, might give them the breathing space to consider overseas study, as well as the time to gain a more rounded education.
Study abroad can deepen and enrich the university experience in many disciplines. A semester studying in Beijing may equip a business student to negotiate across cultural lines. A stint in Florence could enable a budding history teacher to bring the past to life for his class. And a semester in San Francisco might help a computer science student realise how to transform her ideas into reality.
International study provides an opportunity to form lasting overseas friendships, breeding tolerance and trust across national borders. Australian universities have a mission to create global citizens; giving students the chance to study overseas is one way they can fulfil it.
Assistance to industry needs new strategies, Australian Financial Review, 3 March 2004 (with Richard Holden)
The fallout over sugar’s exclusion from the Australia-US free trade agreement has once again put the spotlight on the question of how much money the federal government should devote to industry assistance. An honest and open debate over industry subsidies – including sugar – will be healthy for Australia. But it should not be restricted to federal aid. In our view, the most serious flaw in our system of corporate welfare is the interstate bidding war among states and territories.
To see how industry policy now works, imagine if states and territories offered the same incentives to people that they now offer to firms. Bored with your current address? Perhaps you’d like to consider Queensland’s tempting offer of an $11,000 property tax rebate? Or Victoria’s offer of $11,000 in theatre subscriptions? Or the Northern Territory’s unique offer to pay your first $11,000 in speeding fines?
If this sounds crazy, it shouldn’t. If the total amount of state and territory government money given as incentives to firms was instead divvied up among those who move interstate each year, it would amount to about $11,000 per person. And despite the tenuous truce signed last August, there is every reason to think that state industry assistance will continue apace. After all, the most aggressive provider of corporate welfare, Queensland, refused to sign up to the deal.
Total industry assistance by state and territory governments amounts to $3.3 billion annually – nearly as much as is spent on policing. As Productivity Commissioner Gary Banks has pointed out, the rationale for much industry assistance is rather muddy thinking: “investment is beneficial, so subsiding investment must also be beneficial!”. Instead of paying high-profile companies to relocate, states and territories should concentrate on improving the business environment for all firms, regardless of whether they are as sexy as the biotech industry, or rich enough to hire as many lobbyists as Richard Branson.
Troublingly, our research suggests that there is a political cycle in industry assistance. Comparing Productivity Commission figures for industry assistance in 2000-01 and 2001-02 (the latest figures available), we found that in an election year, state governments raised corporate welfare by an average of 33 percent. By contrast, in non-election years, industry assistance seems to be basically unchanged. Governments seem to be hoping that splashing around a little extra pre-poll cash will help endear them to the punters.
While corporate welfare may provide a clear benefit to politicians, it is far from clear that the benefits that taxpayers receive from industry assistance outweigh the cost. Industry assistance is typically designed for maximum media coverage, and minimum transparency. Watching the behaviour of some state Premiers, it’s hard not to feel like they’re buying you a lavish birthday present with your own credit card… and then hiding the bill.
One valid rationale for assistance is to mitigate the potentially devastating effects of structural unemployment when large employers shut down operations, affecting large numbers of people in particular cities (BHP and Newcastle quickly come to mind). Providing assistance for retraining and relocation of redundant workers is extremely important. In limited circumstances, it may even be preferable to provide assistance directly to the firm so that they remain viable. But this assistance should be provided by the federal government, ensuring coordination, and preventing a race-to-the-bottom competition between states.
We propose two alternatives to the current industry policy. First, we should demand transparent, quantifiable statements of the benefit that an industry assistance package is expected to bring to the taxpayer. Voters deserve better than the lazy claim that “Thanks to our help, Pete’s Pork will create 100 new jobs”. The media has an obligation to probe further. How many jobs would have been created if the government gave nothing? How many will simply be diverted from surrounding firms? And how much will each job cost the taxpayer? With public expenditure comes public accountability, and commercial-in-confidence should not be a smokescreen for governments. We should make sure that politicians make quantifiable claims, so our state auditors-general can follow up on them in years to come.
A second alternative would be for states and territories to replace industry assistance programs with more direct forms of job creation. Here, the best strategy would be for states to create an earned income tax credit – a work subsidy to make employment more attractive for low-wage workers.
Like the Five Economists’ plan put forward in 1998, state-based income tax credits would have the advantage of bringing down long-term unemployment, while transferring money to the working poor. The money could either be paid as a direct state wage subsidy, or administered by the federal government through the income tax system.
Wage subsidies have been proven to be effective in the US. About one-third of US states currently offer some form of tax credit to low-wage workers, and state income tax credits have been shown to lower poverty and unemployment. With Labor governments now in power in every state and territory, the heirs to Ben Chifley might consider which approach he would have preferred: selective tax breaks to large corporations, or wage subsidies for all low-paid workers?
In its current form, industry assistance is clearly good for politicians, but is it really in the interests of voters? With a bit more hard thinking from policymarkers, and scrutiny from journalists, we might well find that there are smarter ways of creating jobs for those who need them most.
[This is an unedited version of the op-ed published in the AFR]
Count the cost of higher minimum wage, Australian Financial Review, 14 January 2004
Setting the federal minimum wage is a balancing act. On the one hand, a higher minimum wage improves the living standards of thousands of working Australians. At the same time, raising the minimum wage may cost jobs. To get the balance right, we need to know whether a higher minimum wage causes employment losses that are large, small or non-existent.
To date, much of the Australian debate over minimum wages has centred on findings from a controversial US study. Comparing employment rates in New Jersey and Pennsylvania after a 1992 rise in the New Jersey minimum wage, economists David Card and Alan Krueger found that there the minimum wage rise had zero impact on low-wage workers.
Even those who criticise this study tend to agree that the employment cost of boosting the US minimum wage is fairly small. Most US labour economists believe that a 1 per cent rise in the minimum wage would decrease employment by between zero and 0.25 per cent.
Given that Australian minimum wages are higher (compared with median earnings) than US minimum wages, translating this research into the Australian context is not straightforward. In recent years, the Australian Industrial Relations Commission has borne witness in its annual minimum wage case to polarised arguments from both sides.
While the Australian Council of Trade Unions contends that raising the minimum wage has zero effect on unemployment, employer groups and the federal government argue that the cost could be much higher, citing a 1998 Productivity Commission study that found that a 1 per cent rise in the minimum wage causes youth employment to fall by up to 5 percentage points (a figure so high as to be scarcely believable).
In an effort to more precisely estimate the employment effect of Australian minimum wages, I adopted an approach similar to Card and Krueger, exploiting what is known as a “natural experiment”. While minimum wages in most states move in concert, Western Australia under the Liberal government of Richard Court was unique in setting its own statutory minimum wage, meaning that increases in the WA statutory minimum wage did not coincide with increases in the rest of Australia. In experimental terms, WA was the “treatment” group, while the rest of the nation served as the “control”.
This allowed me to ask the question: do we see a difference in employment rates between WA and the rest of Australia when WA raises its minimum wage? Aggregating the results from six increases in the minimum wage, it appeared that a 1 per cent rise in the WA statutory minimum wage was associated with a 0.13 percentage point fall in employment. This suggests that the employment effects of Australian minimum wages are around the midpoint of estimates for the US.
Though some may be disappointed to discover that the employment cost of raising the minimum wage is not zero, they should instead be heartened to learn that the cost is relatively low. These findings indicate that modest increases are not likely to cause significant employment losses.
What does this mean for both sides’ claims in the 2004 minimum wage case? While the ACTU is calling for a 6 per cent increase in the federal wage floor, the federal government is likely (based on its submissions in recent years) to call for about a 2 to 3 per cent rise. My findings suggest the ACTU’s claim would result in a 0.8 percentage point fall in employment, while the government’s would cause a 0.3 percentage point drop.
Only half a percentage point separates the employment effect of the two claims a relatively small amount, given that the employment rate often moves by this amount from one month to the next due to seasonal variation. The employment costs of raising the minimum wage appear relatively small, while the chance to provide a boost to the incomes of the working poor is real.
The evidence from the West Australian minimum wage experiment appears to provide support for regular, moderate increases in the federal minimum wage.
Lies and Statistics, Australian Financial Review, 20 December 2003 (with Justin Wolfers)
How likely is Mark Latham to win the next election? Early polls point to a real chance of success; various pundits describe him as a risk.
To parse out honeymoon effects from real effects, we need a more reliable indicator than the polls - one that helps reveal Latham's true potential in the 2004 election.
In an article published in the Australian Journal of Political Science last year, we argued that betting markets provide such an indicator. In the 2001 federal election, the daily odds posted by Centrebet, Australia's largest private bookmaker, predicted voting patterns far better than any pollster.
By forcing punters to put their money where their mouth is, we learn their true feelings. And with powerful financial incentives in play, the betting market aggregates information across the nation's political pundits, insiders and informed gamblers.
According to the betting market, Latham was a sound choice for the ALP. That Simon Crean's number was up was clearly reflected in the odds: he had drifted in the betting, with the probability of a Labor victory in the next election falling to 28 per cent just before his resignation.
These odds remained unchanged when Crean announced his resignation, indicating that the ABC slogan ("Anybody But Crean") was not supported by the betting market.
Following Latham's elevation to the leadership, many press pundits initially thought that the ALP caucus had pulled the wrong rein - so too did the bookies, letting Labor's odds drift further to a 25 per cent chance of winning.
But it seems that the punters disagreed, and there has been nearly $20,000 bet on Labor since, with the latest odds of a Latham prime ministership improving to 33per cent (about the same as John Howard's odds six months before the 2001 election).
Centrebet's Gerard Daffy admitted that "we got it wrong", suggesting that Latham "has been fairly impressive to date".
The betting odds can also suggest what would have happened under Kim Beazley. If the pre-ballot probability of a Labor win (28 per cent) reflected an average of the election-winning abilities of candidates Beazley and Latham, we can infer from the fact that, with Latham as leader, Labor is a 33 per cent chance, and that Beazley would have been about a 23 per cent shot.
According to the punters, the Labor caucus backed the more likely winner.
As for opinion polls, our research suggests that long-range polls are generally so inaccurate that they are best ignored.
While polls taken a year before an election have predicted vote shares with an average error of about 5 percentage points, simply guessing that previous election's results will recur is about as accurate, and guessing that the election will be close actually yields more accurate predictions.
So if you want to predict the outcome of the next federal election, remember, the current favourite in the election forecasting stakes isn't the polls - it's the bookies.
Nelson effort needs more creative grip, Canberra Times, 26 November 2003
The recent entry by Federal Education Minister Brendan Nelson into the school-quality debate has shown that he is willing to wrestle with his state colleagues over issues traditionally outside the ambit of the Federal Government.
In a carefully researched speech, Nelson touched on issues of closing failing schools, implementing nationwide standards and publishing more data on schools.
But what we've seen so far can only be described as a "half-Nelson", a collection of ideas that may make some small difference, but are unlikely to really boost the quality of our schools.
If Nelson is serious about being remembered as one of Australia's great reformers, he should use his position as the nation's most senior education policy-maker to present some truly radical ideas about education.
He should tackle the issue of low school completion rates. Today, only six out of 10 Australians have completed high school, compared with eight out of 10 Canadians, Germans and Americans.
The school leaving age in most Australian states is 15, unchanged since the 1960s, and below the leaving age in most other developed countries. Researchers have shown that teenagers often make short-sighted decisions to drop out of school. Where compulsory schooling laws bind, an extra year of school boosts lifetime earnings by 10-15 per cent. Australia should follow the lead of several other developed countries and raise the school leaving age to 17.
Next he should improve school quality by engendering a culture of policy experimentation. Australia has never conducted a randomised trial of a serious education policy initiative. Forced to choose between inaction and full-scale implementation, many promising policies are simply scrapped. Yet finding out what works, and what does not, allows us to better direct scarce educational resources where they can do most good. The Federal Government should provide fiscal incentives to state governments to test creative policies and assess them through randomised evaluations.
Politicians should also speak the truth on class-size reductions. Nelson ought to encourage Australian politicians of all stripes - particularly his NSW Liberal colleagues - to read the research on class sizes. Although intuitively appealing to voters, careful studies have shown that once class sizes drop below 30, there is little benefit from further reductions.
To see how this might be the case, imagine an analogous situation in the medical world. If we reduced the doctor:patient ratio in a ward from 1:25 to 1:20, we might improve patient care, but we could merely increase doctors' leisure time.
Likewise, research suggests that lower class sizes make teachers happier, but do little to improve student learning. In one of the leading class-size studies, Harvard's Caroline Hoxby looked at variation in student achievement from natural fluctuations in Connecticut class sizes and found that the impact of smaller classes was precisely nil.
Another prominent study, by Princeton's Alan Krueger, looked at a randomised trial in Tennessee. While Krueger found that smaller classes improved student achievement, the magnitude of the effect was minimal. Reducing class sizes by 25 per cent brought about a tiny gain in test scores - only one-fifth as large as replacing a low-performing teacher with a high- performing one. It is time Australian politicians climbed off the class-size- cutting bandwagon.
A more effective reform would be to make teaching more rewarding - by raising pay rates for our best- performing teachers. Each of us remembers the teacher who inspired us to read a new author, helped us understand calculus or made history come alive.
Yet it is difficult to think of another profession in Australia with less of a link between pay and performance. Australia's teachers face a flatter pay schedule than in most other developed countries, creating a perverse incentive for the best teachers to leave the profession after their first 10 years. And while principals are required to assess their teachers annually, a report by the NSW Auditor-General in May found that 99.6 per cent of teachers were given the highest possible rating.
A good performance-pay system should be based on multiple criteria. These could include the increase in students' test scores from one year to the next, an annual knowledge exam, classroom observation by an independent expert, an interview with the teacher, and separate questionnaires from parents, peers and principals. Rewards need not only be financial - they could also include higher status and responsibilities.
For all the talk of clever countries and knowledge nations, Australia has been remarkably timid on the issue of school reforms. It is time we moved on from class-size cuts to consider raising the school leaving age, rigorously testing new policies, and implementing performance-based teacher pay.
Brendan Nelson's report card so far reads: "Promising effort. Not afraid to speak in class. More creativity required."
Costello's call on social capital, Canberra Times, 24 July 2003
Peter Costello’s musings last week signal his engagement with the critical issue of social capital. And not before time. Researchers know that neighbourhoods with higher levels of trust and civic participation tend to have more effective governments, lower crime rates, better education systems, and more rapid economic growth. Every serious policymaker should be a social capitalist.
Today, Australia’s social fabric is in need of repair. Since the 1960s, unions, political parties, and churches have suffered declining membership. Trust in politicians has also fallen, with one in five Australians saying that politicians had high levels of ethics and honesty in the 1970s, and only one in ten agreeing by 2000. And particular challenges exist in some parts of Australia – my own research suggests that people are less likely to trust one another in poorer and more ethnically heterogenous communities.
But the real challenge is what governments can do to boost social capital. If Mr Costello wants to make his mark on this debate, he needs to move from talking about the problem, to actually proposing some solutions.
First, the Mr Costello should consider the effect that workplace reforms have on our ability to spend time with others. In a recent article directed at policymakers in Britain and America, Professor Robert Putnam and I argued that the work-family balance is one of the most important factors behind creating strong communities. In Australia, 30 percent of our workforce hold part-time jobs – the second-highest proportion in the OECD. While part-time work provides flexibility to employees and efficiencies for firms, it comes at a cost for social interactions. Non-standard work hours can prevent families from sitting down to dinner together. And when working hours are unpredictable, it becomes harder for people to get involved in parent-teacher organisations, neighbourhood watch, or join a political party.
Second, the federal government should create a domestic version of the highly successful Australian Volunteers International program. Founded in 1963 by Herb Feith and others, AVI has since sent thousands of young volunteers to work in communities throughout the Asia-Pacific. A domestic counterpart – call it AustraliaCorps – could help revitalise flagging community groups throughout the nation. To really boost civic engagement, AustraliaCorps should create positions for 5000 young Australians to volunteer for a year in a needy community, in return for an education credit. Volunteers could work with local bodies implementing after-school programs, refurbishing community facilities, and assisting indigenous communities.
Third, Mr Costello might turn his browser to craigslist.org and meetup.com, two websites that help community groups to get organised. Anyone from political activists to dog lovers can find like-minded souls who live in their local area, and hire a suitable venue in which to hold their meetings. Unlike internet chat groups – which are content to stay in the virtual world – these sites use the web as a tool to facilitate face-to-face interactions. With only modest seed funding from the government, Australian versions could provide new recruits for struggling civic organisations, and foster hundreds of new groups.
Fourth, federal politicians should tackle declining trust by reforming question time. For ordinary voters, it is the main window into how politicians behave on the job – and many are appalled. And reasonably so: no citizen should have to look at their political leaders and say “I wouldn’t let my children behave like that”. By contrast, in the British parliament, the questioning is equally rigorous, but interjections and catcalls are rare – proving that parliamentary accountability does not necessitate a daily slanging match. Indeed, Australian voters are so sick of question time that the party which makes a clear statement that it intends to transform its behaviour in question time (and sticks to its word) could reap a substantial electoral windfall. More importantly, the long-run result would be to increase trust in politicians, an important element of building civic engagement.
Mr Costello should not be derided as a late entrant to the social capital debate, and he is right to tread carefully. Using the public sector to boost civic engagement is a delicate balance. Government needs to create the conditions for families to spend more time together, without unduly limiting the freedom of workers and firms to make arrangements that suit them best. It needs to facilitate community groups, without establishing a cycle of dependence. And reforming question time is no easy task. Yet the decline of social capital is one area where Mr Costello should not be tolerant – it’s time to do something about it.
Safer for owners, not for others, Canberra Times, 4 July 2003 (also published as "Beware the arms race on our roads", The Age, 9 July 2003)
The rise in numbers of suburban four-wheel-drive utility vehicles has fuelled a fiery debate over road safety. Supporters say that one of the biggest attractions of these cars is their safety. Opponents say they make the roads more dangerous for other drivers. Who is right?
The answer, it seems, is both. According to a new report from the Monash Accident Research Centre, which analysed data from over a million Australian crashes, four-wheel-drives both reduce injury to their owners, and raise the risk to everyone else.
The researchers considered a range of factors, including the speed of the crash, when and where it occurred, and the age and sex of the drivers. The study did not take into account the risk to pedestrians.
From the perspective of their occupants, four-wheel-drives helped save lives. For every 1000 crashes they were involved in, 32 drivers of four-wheel drives were killed or hospitalised. For every 1000 crashes drivers of medium-sized cars were involved in, 36 suffered the same fate.
So by buying a four-wheel-drive instead of a medium-sized car, your risk of death or serious injury in a crash falls by four in 1000.
Next, the researchers looked at "aggressivity" - the damage different types of vehicles inflicted on other road-users.
For every 1000 crashes involving four-wheel-drives, 32 drivers of other vehicles were killed or put in hospital. By contrast, only 21 other drivers were killed in or hospitalised after an accident with a medium-sized car.
So if you crash after trading in your modest medium-sized car for a chunky four-wheel-drive, the chance that you will kill or hospitalise the other driver increases by 11 in 1000.
The net result? Four-wheel-drive buyers are making themselves safer, but the cost is being borne by other road-users. For every serious injury or death that is saved by buying a four-wheel-drive vehicle, nearly three more result.
This simple statistic explains much of the rise in sales of four-wheel-drives. In 1980, one in 50 new cars sold was a four-wheel- drive utility vehicle. Today the figure is one in seven, and most new sales are in urban areas. With more four-wheel-drives there are on the road, the more other drivers begin to wonder whether they should buy one too.
In the United States, this has led to the proliferation of larger and larger vehicles, in what University of California, San Diego, researcher Michelle White has dubbed "the arms race on American roads".
At the