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Your Sex Can Drive the Way You Vote, Australian Financial Review, 21 November 2007

One of the great surprises of election 2007 is that there has not been more discussion of sex. I’m not referring to the squishy kind, of course – but questions of gender and politics. Social commentators often tell us that men and women behave differently in the workplace, in relationships, and on the sporting field. But political commentators seem to take a strangely asexual approach to their discussions of how men and women differ as voters and candidates.

Are male voters from Mars and female voters from Venus? According to the first Australian election survey, conducted after the 1966 election, the answer seemed to be yes. Women in those elections were significantly more right-wing than men: nearly 10 percent more likely to vote for the Coalition.

Over the following decades, the gender voting gap has steadily narrowed, with women becoming more left-wing (relative to men). Yet even in the early-1990s, a gap existed. If we had banned men from voting in 1993, John Hewson would have beaten Paul Keating. And by the 2001 election, the voting patterns of men and women had crossed over, with women slightly more left-wing than men.

And it’s not just in Australia where women have been moving left. As Lena Edlund and Rohini Pande have shown, women in the United States and Western Europe have done the same. Indeed, in many of those countries, women are much more likely to support left-wing parties than men. Judging by these studies, and by the long-term trend in Australian women’s attitudes, it seems likely that their steady drift to the left will continue.

The second way that gender affects politics is via the sex of the candidates. In a forthcoming study of male and female candidates, Amy King and I analysed election outcomes from 1903-2004. We found that major party female candidates receive about one and a half percent fewer votes than male candidates from the same party. For female candidates, perhaps the only consolation is that the gap is not as large as in the past. In the 1940s, the penalty to female candidates was over 5 percent, perhaps explaining why only three women were elected to the House of Representatives in the first seven decades of the twentieth century. But even in the most recent elections, we found no evidence of a premium for female candidates in Australian federal elections. As in the labour market, it seems, females face a penalty in entering political life.

The underrepresentation of women in parliament (women make up 50.3 percent of the population, but 25 percent of the House of Representatives) may even have implications for policy outcomes. When surveyed about their attitudes to trade unions, taxes, education and defence, female candidates in Australian elections are consistently more left-wing than male candidates from the same party. And if America’s experience is anything to go by, the extent of female representation may directly affect policy outcomes. In the United States, legislatures with more women pass more laws that help women, children and families, more generous workers’ compensation schemes, and stricter child support enforcement policies.

The final way that gender can affect elections is perhaps the most surprising of all. It turns out that the sex of your children can change the way you vote. In studies looking at Germany and the United Kingdom, Andrew Oswald and Nick Powdthavee have shown that parents with daughters are more likely to be left-wing, while parents with sons are more likely to be right-wing. What is particularly interesting about these studies is that the sex of your child is entirely random, so we know that the association is truly causal. Moreover, the effects are more than trivial. Oswald and Powdthavee estimate that every additional daughter makes you two percentage points more likely to vote for a left-wing party. We’ve all heard of the bumper sticker “Insanity is hereditary – you get it from your kids”. But perhaps the same is true of political attitudes.

And it looks like voters are not the only ones affected by the gender of their children. On the other side of the Atlantic, Ebonya Washington has shown that politicians are affected by the gender of their children. Analysing voting patterns in the United States Congress, she finds that politicians with daughters are more likely to vote in favour of abortion rights than politicians with sons.

Voter gender, politician gender, and child gender. Now surely that’s three good reasons to bring sex back into politics?

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

Help the Poor, and Cut Taxes, Australian Financial Review, 1 November 2007

This week’s Treasury tussle featured an unusual moment, in which the debate turned to past reforms, and Peter Costello acknowledged the benefits of the macroeconomic reforms undertaken by previous Labor governments. But missed in the discussion was a chance to also consider another major shift of that era – from universal welfare to a carefully-targeted social safety net.

During the 1980s and early-1990s, means-tested public pensions, childcare benefits, and housing benefits meant that we could be proud of the way we looked after our poorest, while maintaining one of the lowest tax burdens in the developed world.

Unfortunately, the past decade has seen a steady slide away from that philosophy. With a few exceptions (such as the improved targeting of private school funding), much of the increased social spending in Australia has been devoted to universal benefits. The First Home Owner Grant, Private Healthcare Rebate, and Family Tax Benefit Part B are just three examples of policies that have enormous budgetary costs, but minimal social impact. By international standards, Australia’s welfare system is still reasonably well targeted, but we’re headed in the wrong direction.

Peter Saunders, from the Centre for Independent Studies, calls middle-class benefits the “tax/welfare churn”. But this implies that the problem is simply one of moving money around. In fact, because taxes have an efficiency cost, each dollar raised in taxes reduces economic output. Estimates of the efficiency cost varies, but the best recent estimate for the “deadweight burden” in Australia is around 20 cents in the dollar. Perhaps “tax, burn and churn” would be a better description.

Since most middle-class welfare benefits would probably fail an economic cost-benefit test, why does a government that touts its economic credentials support it? Because middle-class welfare always passes the political cost-benefit test. The well-hewn median voter theorem has a simple prediction: two parties competing for office will focus most of their energies on winning the support of the voter in the middle of the distribution. Targeted welfare may be good economics, but middle-class welfare is good politics. (As John Howard said last year, “People like getting a cheque from the government.”)

For its part, the Labor Party have raised questions in parliament about the wisdom of universal benefits, but have resisted calls to scrap such programs. Part of the explanation lies in the belief that universal programs are likely to be more politically robust than targeted ones: if we can put in place a program that will endure, why not accept a little waste? Yet the evidence for this argument is mixed. When the next recession hits, and the ‘razor gang’ comes to scrutinise at government spending, will they really preserve all those low-impact universal programs?

Moreover, there is a strong progressive argument in favour of targeted spending over universal benefits: it is more likely to reduce inequality. Rather than giving a flat education credit for two-thirds of families, why not pour more resources into improving the life chances of the neediest children?

Perhaps what we need is a new campaign advertisement, paid for by “Australians for Helping the Poor and Lowering Taxes”.  The commercial could start with a simple visual depiction of how middle class welfare works. A taxpayer hands over five $20 notes. The government representative calmly burns one of them, and hands back the remaining four.

The voiceover could then point out that people enjoy getting the Baby Bonus, but there’s little evidence that scrapping it would affect fertility rates or the wellbeing of new parents (camera shows new parents installing a plasma television). By contrast, an Indigenous child born today can expect to live as long as a non-Indigenous child born at the time of Federation (camera shows scenes from one of a dozen disadvantaged communities). If we scrapped the $1.1 billion Baby Bonus, we could put half the proceeds into tax cuts, and the other half into a series of randomised policy trials of programs designed to improve Indigenous health. Fade to black.

What is striking about middle-class welfare is that it offends values that both right and left should hold dear. Since our first major tax uprising at Eureka, Australians have resisted oppressive levels of taxation, and demanded that governments take no more from us than they need. At the same time, we have supported the underdog, reaching out a generous helping hand to those who need it most. A targeted welfare state fulfils both these principles. Middle-class welfare offends them both.

Commentators have long derided politicians who ‘spin’ the truth. But maybe the ones we need to watch for are those who spin our tax dollars out of our wallets and back in again – wasting 20 cents in the dollar along the way.

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

First, Find out What Works, Australian Financial Review, 4 October 2007

Among the most interesting debates in economics today is the dispute between Jeffrey Sachs and William Easterly over how best to help the world’s poor. The discussion is interesting not only because it concerns the most important question in all of economics, but also because Sachs and Easterly happen to be exceptionally good communicators.  And like the longtime Mets-Yankees rivalry, both happen to be at New York universities: Sachs at Columbia University, and Easterly at New York University. 

At stake is the question of whether development economics requires a Big Push or piecemeal reform. In The End of Poverty: Economic Possibilities for Our Time, Sachs argues that the world’s least developed countries are caught in a poverty trap, and that success requires a doubling of foreign aid. In The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, Easterly contends that much foreign aid has been wasted, and that it would be better to focus on taking modest, deliverable steps to make poor people’s lives better.

Whoever is right (my own view is that the truth lies somewhere between the two), the Sachs-Easterly debate has helped to galvanise a revolution in development economics. Integral to the development economics revolution has been the advent of rigorous randomised trials to find out what works. Long regarded as the ‘gold standard’ in medicine, a spate of randomised trials are taking place across the developing world.

In Kenya, researchers have shown that deworming drugs dramatically reduce school absences, while worm-prevention education programs had no impact whatsoever. In the Philippines, savings incentives have been shown to boost the assets of the poor. And in India, a program that paid teacher bonuses raised student test scores by a significant margin.

The reason randomised trials are so powerful is that they allow us to know the counterfactual: what would have happened if the program was not implemented? Because participants are assigned to the treatment and control groups by the toss of a coin, we can be sure that any systematic differences in outcomes are due to the program itself.

Beyond program evaluation, randomised trials have also been used to help researchers learn more about issues of governance, which have long bedevilled development efforts. In a famous randomised trial in Benin, researcher Leonard Wantchekon persuaded presidential candidates in the 2001 election to randomly alter their campaign strategies: giving high-minded public policy speeches in some villages, and pork-barrelling clientelist speeches in other villages. He found that candidates won more votes when they delivered a clientelist speech, and that male voters tended to be more easily swayed by offers of local patronage than female voters.

More controversially, Marianne Bertrand and co-authors recently followed a group of Indian applicants through the notoriously corrupt process of obtaining a driving licence. One group were offered a financial reward if they obtained their licence fast, while others were not. The researchers found that the payment did indeed lead applicants to get their licences faster, but their skills were no better. Given a surprise driving test afterwards, 69 percent failed. Evidence from the randomised trial helps understand how corruption in the licensing process operates, and may assist reformers in improving the system.

As the results from these and dozens of other randomised trials begin to pour in, development economists will continue to hone their knowledge about what works best, and whether the kind of grand strategy of Sachs or the more piecemeal approach of Easterly is likely to offer more promise for raising the living standards of those in developing countries.

Yet while randomised policy trials are transforming development economics, it is startling that our homegrown development challenge – raising the living standards of Indigenous Australians – has seen so little attention to rigorous evaluation. With Indigenous life expectancy at third world levels, too much of Indigenous policy seems to be driven by instinct, and too little by results.

Instead of digging in behind their favoured solutions, wouldn’t it be better if both sides of politics admitted that most social policies aimed at improving Indigenous living standards have failed? Once we acknowledge how little we know, we might then begin by applying the same gold standard evaluation technique to Indigenous social policies that we apply to new drugs.

A dozen randomised trials of Indigenous social programs would cost comparatively little, but provide valuable new evidence. In health and education, employment and family policies, Indigenous policymaking could do with a little less rhetoric and a little more of the modest searching that characterises the best of development economics today. Think your policy works? Let’s toss a coin and find out.

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

Forget the Polls, Ask the Hard Questions, Australian Financial Review, 13 September 2007

There are three ways to report on an election: as a horserace, a football game, or a national conversation. Horserace reporting focuses on the leader – what are they doing, how much weight are they carrying, and who’s going to win? Football reporting analyses the team – who is likely to take the field, are they fit enough, and how well are they playing together?

Reporting on an election as a national conversation is rarer, and harder. It involves analysing the policies put forward by the parties, thinking about what’s being left off the agenda, and asking questions like ‘what’s your vision for Australia in 2025?’.

The trouble is, with a limited number of newspaper pages and political journalists, a growth in horserace and football-type reporting tends to crowd out deeper analysis. So it helps to ask: what simple rules of thumb can minimise the time spent analysing the races, and maximise the amount of airplay devoted to the big issues?

The first is to recognise how little opinion polls can tell us. Suppose a poll tells us that one party has 52 percent of the vote. In theory, with a sample of 2000 voters, the confidence interval is approximately ±2 percent. So 95 percent of the time, the true result should lie between 50 and 54 percent. The other 5 percent of the time, the true result will lie below 50 percent or above 54 percent.

Unfortunately, this assumes that the sample is random. Since pollsters undersample mobile phone users, and miss the many households who hang up on them, the assumption of random sampling is probably a stretch. As a result, polls are probably much less precise than the above results suggest. Based on the yo-yo volatility we observed in pre-election polls in 2004, Justin Wolfers and I estimated that the true confidence interval for Australian polls is probably closer to ±12 percent.

Given that polls are about as accurate as a drunken dart-thrower, it is surprising that any newspaper ever gives them front-page billing. Even more surprising is that the media gives attention to changes in opinion polls. If two polls are measured with error, then the difference between them will be even more imprecise. Any commentator who reports on small poll changes without mentioning error margins is at best wasting readers’ time, and at worst actively misleading them.

A simpler alternative to polls is to use betting markets. These have three chief advantages over polls. The first is that they are more accurate. Over the past decade, researchers in Australia, Germany, Sweden and the United States have compared the predictive power of polls and betting markets. Every time, betting markets have been found to perform at least as well, and usually better, than the polls.

While most academic research on election betting markets is new, the markets themselves are not. In the United States, thriving gambling markets existed on Presidential elections since the late-nineteenth century, and the odds from those markets have been shown to be an accurate predictor of the results in the 1884-1928 elections.

The second advantage of betting markets is that they are available on a wide range of outcomes. In addition to the half-dozen bookmakers who are currently offering odds on the headline race, Portlandbet has opened betting markets on every federal seat, while Sportingbet has a betting market on the most likely election date.

The third advantage of betting markets is that they are more boring than polls. At present the markets suggest that the Coalition is a 30 percent chance of winning, and that John Howard has a 52 percent chance of retaining his own seat. After Howard steps down as leader, the markets suggest that Peter Costello is a 53 percent chance of succeeding him and Malcolm Turnbull a 23 percent chance (the other contenders together have a 24 percent chance). Rather than naively hope for certainty, the efficient approach is to estimate probabilities as best we can, and move on to more interesting questions.

Which brings us back to elections as a national conversation. Elections are not just about choosing a party to lead the country. They also provide the chance to talk about the best and worst in the nation, what must be preserved, and what needs changing. This is too valuable an opportunity to be squandered with sportsplay reporting. Enough with the polls – let’s talk about the kind of Australia we want our kids to live in.

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

Interest Scares Shouldn’t Rate, Australian Financial Review, 9 August 2007

Another RBA decision, another dose of rate rise rhetoric. Did you know that rates are now higher than they’ve ever been this millennium? Or that the last time the cash rate was this high, the Spice Girls were on the pop charts, Fitzroy was still in the AFL, and most Australians had never used the Internet?

Economically, there is little to complain about with the RBA’s latest decision. In announcing that the cash rate would increase to 6.5 percent, Governor Glenn Stevens pointed to the upswing in underlying inflation, coupled with high capacity utilisation, strong business confidence, and relatively low unemployment. It’s difficult to imagine that there was much wrangling among board members about the economic fundamentals.

A tougher question is whether the RBA should have waited until after the federal election to raise rates. For two decades, it has been an unwritten rule that rates do not rise in an election year. While yesterday’s decision broke that rule, the alternative may well have been worse. In the face of an overheating economy, should we expect the RBA to wait for a non-election year before taking action? Just because of our ridiculously short three-year election cycles, it’s hard to see why an independent central bank should be forced to put monetary policy on ice one-third of the time.

Politically, the challenge for the Howard Government will be to deflect questions about interest rates. In 2004, Howard opened the campaign by asking voters “Who do you trust to keep interest rates low?”. Although a Reuters survey of 14 financial market economists found that none believed the party in government would affect interest rates, many felt that interest rates were critical to his victory.

Perhaps they were, but not directly. While some commentators argued that mortgagees were responsible for Latham’s loss, the evidence provides little support for this. Analysing seat-by-seat swings, Newcastle University researchers Steve Easton and Richard Gerlach found that (holding constant voters’ level of education), electorates where more voters were paying off their homes were no more likely to swing towards the Coalition.

However, interest rates may have affected the result in a different way. At its core, Howard’s claim that rates would be lower under a Coalition government was a challenge to the ALP’s economic credibility. Having planned its campaign messages, Labor was forced to change tack midway, hastily rolling out advertisements to counter the interest rate ‘scare campaign’. After the election, the Australian Election Study found that voters tended to prefer the Coalition’s stance on taxation, unemployment, and industrial relations; and Labor’s policies on the environment, health and education.

The big challenge for the ALP will be convincing the electorate that it can run the economy almost as well as the Coalition. “Almost”, because the belief that right-wing parties are better economic managers is so pervasive in developed democracies that few can hope to topple it from opposition. Even on the eve of British Labour’s 1997 victory, a majority of UK voters thought that the Conservatives would do a better job of managing the economy than Labour. But because they thought that Labour would be a lot better on social issues, the opposition won in a landslide.

The ALP’s economic credibility is now less likely to be hit – as it was in 2004 – by claims that interest rates will rise under Labor. Yesterday’s rate rise probably ensures that that the term “interest rates” is likely to join “WorkChoices” and “Iraq” on the Coalition’s list of unmentionables. Yet given that Labor devoted a considerable amount of energy in the last election to pointing out that governments do not control interest rates, it would be difficult for them to now turn around and blame high interest rates on the Coalition. Hopefully this double-edged sword will ensure that interest rates are not a first-order campaign issue, thus making room for more meaningful policy debates.

This would be good news indeed. Another “keeping rates low” election would not only be mind-numbingly boring – it would also represent a missed opportunity to discuss some of the real challenges that Australia faces as a nation. Forget interest rates: let’s talk about something the government can affect, like improving the performance of our schools and universities, how to decide on our infrastructure priorities, or getting the tax mix right.

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

Intervention: Better Earlier, Australian Financial Review, 12 July 2007

Mentioning disadvantage in an economic boom is sometimes regarded as a faux pas, like asking the host at a fashionable party why she didn’t invite her badly-dressed friends. But given that today’s golden age isn’t glittering for everyone, the right response is to work out how to improve the life chances for the poorest Australians.

The trouble is, the cycle of disadvantage has proven agonisingly hard to break. We know relatively little about patterns of poverty, but we do know that a son whose father is out of work for six months has triple the odds of being long-term unemployed when he grows up. And a boy who witnesses parental violence in childhood is six times as likely to hit his spouse in later life. Correlation isn’t causation, but early experiences seem to matter.

One promising solution is high-impact early childhood intervention programs. In the US, careful economic evaluations - based on randomised trials from the Abecedarian, Perry Preschool, and Early Training Projects - have shown that providing intensive assistance to disadvantaged children and their parents isn’t just morally right – it can be wildly cost-effective too.

These programs admitted children into preschool at an early age (sometimes as young as 4 months), and focused on developing cognitive, language, and social skills. The target population was extremely disadvantaged. From a young age, their IQ scores were below the US average. In the Perry Preschool program, two-thirds of girls in the control group had fallen pregnant in their teens, while more than half the boys had been arrested.

When researchers followed both the treatment and control groups, they found that those who received early childhood interventions were doing better on most measures than those in the control group. The programs cost A$15,000-50,000 per child, yet they easily paid for themselves in reduced welfare spending, higher tax revenues, and less crime.

Set against other anti-poverty programs, early childhood interventions look even better. Put to the test, many programs designed to help low-income adults have only minimal results. Job training programs for unskilled workers are rarely very effective. Prison education programs often fail to prevent recidivism. A steady diet of welfare payments does make people less poor, but has its own negative consequences. Until we find better solutions, it would be rash to defund these other programs. But when a promising solution for breaking the poverty cycle comes along, it’s time to grab it with both hands.

You would think that the lessons from the United States’ early childhood intervention programs were obvious: high-impact programs are effective, and randomised trials are the best way to work out whether a program makes a difference. Yet Australian policymakers act like they read the headline, but skipped the story. They have largely eschewed targeted, high-impact interventions in favour of universal, low-impact programs. Offering more publicly provided childcare to the middle class may have a high electoral impact, but it is not going to transform the life chances of the poorest.

So far as evaluations are concerned, a handful of randomised trials of small early intervention programs have been run by researchers at the University of Queensland. But for the most part, Australian early childhood programs are not rigorously evaluated in this way. Ironically, the effect of this will be to ensure that the next generation of early childhood researchers will be as disadvantaged by lack of evidence as we are today.

Unlike the United States, where Struggle Street and Main Street intersect in the CBD, low-income Australians tend to live in regional areas, or on the outskirts of cities. Clontarf and Campsie may both be Sydney suburbs, but it’s a fair bet that most residents of the former have never visited the latter. While the media spotlight has lately highlighted run-down Indigenous communities, anyone who has walked through some of the rougher housing estates on our urban fringes knows that you don’t have to be Indigenous to be part of the underclass.

The fact that you can’t see disadvantage from the city shouldn’t blind us to action. If equality of opportunity means anything, doesn’t it mean that governments should allocate more money to poor children than rich ones? Unlike ‘tax and churn’ programs like the Baby Bonus, early childhood intervention allocates resources where they are needed the most. Devoting a few extra dollars to early childhood intervention programs today sure beats spending it on jails tomorrow.

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

Pay a Fee or Pay the Toll, Australian Financial Review, 14 June 2007

In nineteenth century Britain, the law required all steam cars to be preceded by an attendant carrying a red flag. In cities, cars were not permitted to drive faster than 6 km/h. In twenty-first century Australia, convention requires that every peak hour driver in Australia must have steam coming out their ears, and be preceded by an equally red-faced driver. In cities like Sydney, this ensures that peak hour speeds average 12 km/h.

Congestion costs are a classic example of what economists call a ‘negative externality’ (or what your grandmother might have called ‘just plain selfishness’). In deciding whether to drive or take the train, I consider only on my own costs: fares, fuel, tyres and time. But I ignore the impact that my decision to drive has on you and everyone else on the roads.

In his book Gridlock, Ben Elton described traffic jams as the experience of being “choked on carbon monoxide and strangled with a pair of fluffy dice”. But they have a price tag too. According to the Bureau of Transport and Regional Economics, the economic cost of congestion is about $9 billion per year, most of which comes from wasted work hours and increased air pollution. By 2020, the BTRE projected, this cost will have doubled.  

A natural solution is to force drivers to ‘internalise’ the negative externality, by raising the price of driving into busy areas. Just as ‘sin taxes’ on alcohol, tobacco and gambling recognise the potential harm that can be done to the rest of us, so a congestion fee is society’s way of making drivers take account of other road users.

Recognising the potential of congestion fees, London and Singapore now charge drivers a fee to enter the city during peak times. In April, New York has announced a plan to charge drivers US$8 to enter the southern half of Manhattan. Following successful trials last year, Stockholm will implement a congestion charge in July.

What is notable about these examples is that they come from across the political spectrum. In London, the chief proponent for the congestion fee was mayor Ken Livingstone (known as “Red Ken”). In New York, Republican mayor Michael Bloomberg is backing the charge. Congestion fees are a commonsense reform, not an ideological one.

Moreover, contrary to the fears that congestion fees would hit low-income households hardest, modelling by the Institute for Fiscal Studies suggests that the effects are evenly spread. While the rich can more easily afford to pay London’s £8 congestion fee, affluent Londoners also drive more often. Once commuting frequency is taken into account, congestion fees end up being mildly progressive, meaning that the rich spent a greater share of their income on congestion fees than the poor.

In Australia, the use of public-private partnerships to build new motorways has led to a proliferation of toll-roads. Yet for the most part, those fees are not designed to reduce congestion. Busy old streets in the CBD are free. Quiet new toll-roads in the outer suburbs are pay-per-use. While a congestion fee should be higher in peak hour, Melbourne’s City Link and the Sydney Cross City Tunnel cost exactly the same whether you’re using them at 5pm or midnight.

With many cars now equipped with e-tags, Australia has the technology to get congestion charges right. An ideal system would charge commuters a fee to enter the city centre on weekdays. But simple changes could help immediately. For example, why not replace the $3 Sydney Harbour Bridge toll with a charge of $5 during weekdays, and $2 on nights and weekends?

Despite an outcry at the time it was implemented, British policymakers now generally recognise that the London congestion fee has been a success. Traffic volumes are down. Public transport usage is up. And average road speeds, which had fallen to jogging pace, are now increasing again.

With 6 out of 7 Australian commuters travelling by car, a city congestion fee might encourage a few more people to take the bus instead. It might also encourage people to think about sharing a car, rather than the present situation in which 90 percent of drivers travel solo to and from work. (Harvard political scientist Robert Putnam argues that individualistic car commuting is one of the factors that has led to the breakdown of social capital in America.)

As the Soviet Union eventually realised, queues help no-one. Time spent waiting in a traffic jam is neither devoted to productive activities, nor enjoyed with family and friends. With the typical worker spending the equivalent of seven days a year sitting in their car, coming up with clever ways to beat gridlock should be a high priority. A modest congestion fee might just be the solution that our lungs – and kids – have been looking for.

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

Economics of Media Bias, Australian Financial Review, 17 May 2007

Two years ago, a team of economists from Yale University decided to answer a question that many a journalist has pondered in the pub: does the newspaper you read affect the way you vote? To test the theory, Alan Gerber, Dean Karlan and Daniel Bergan randomly chose one thousand households in the Washington DC area, and gave them a free subscription to either the left-leaning Washington Post or the conservative Washington Times. A few months later, they surveyed both groups – plus a control sample – to see how they voted. The finding? Those who received the Post were 8 percentage points more likely to vote for the Democratic Party. Getting the Times had no impact on how you voted.

In recent times, economists have expanded their research well beyond topics such as macroeconomics and labour markets that have traditionally constituted the bread-and-butter of the discipline. One of the subjects that the new economic imperialism has laid its tentacles upon has been media bias. What impact does the media you consume have on your political behaviour? And how and why do media outlets shape the news?

From a theoretical standpoint, one of the most important contributions has been a paper published last year by two young researchers at the University of Chicago, Matthew Gentzkow and Jesse Shapiro. Contrary to the simple explanation that media bias is driven by the personal predilections of proprietors or journalists, they argue that media slant emerges mainly as a result of outlets trying to tailor their news reporting to consumers’ prior beliefs. For example, people who buy a progressive broadsheet will be more likely to think that it provides accurate news if the newspaper gives a positive spin to Labor’s policy ideas. Similarly, those who listen to a conservative talkshow host will be more likely to tune in the next morning if the host praises the Prime Minister.

In a separate study, Gentzkow and Shapiro set about testing their theory, focusing on media bias in local newspapers. To estimate each newspaper’s bias, they develop a unique index. Searching the 2005 Congressional Record, they identify the phrases most commonly used by Democratic and Republican politicians. Among the top phrases used by Democrats are “change the rules”, “budget deficit”, “American workers” and “veterans’ health care”. Among the top phrases used by Republicans are “death tax”, “personal accounts”, “private property” and “stem cell”. Some of these reflect a concerted effort by political strategists, such as the campaign by Republicans to re-label estate taxes as death taxes, and to refer to personal social security accounts instead of private accounts.

How much of this subtle difference in language was picked up by the media? The duo then look to see which newspapers opt for the Democrats’ favourite phrases, and which outlets tend to use Republican phrases. When writing about tax reform, will the economics correspondent use the Republican phrase “tax relief”, or the Democratic phrase “tax cuts for the wealthy”? Will the international reporter talk about the “global war on terror”, or the “war in Iraq”? Using these subtle differences, they place all local US newspapers on a left-right spectrum. According to this index, the Tri-Valley Herald (circulating in the San Francisco Bay area) is the most left-wing newspaper, while the Houston Chronicle is the most right-wing.

Gentzkow and Shapiro then turn to explaining media slant. Consistent with their theory that media bias is mainly driven by customer tastes, they find that reader ideology explains significantly more of the variation in media bias than the identity of its owner. This finding holds up even when they take account of the possibility of reverse causality. Places with more churchgoers (a trait unlikely to be affected by newspaper bias) tend to have more right-wing newspapers. Conversely, cities with fewer churchgoers tend to have more left-wing newspapers.

So while Gerber, Karlan and Bergan have shown that left-wing newspapers make people more likely to vote for left-wing candidates; Gentzkow and Shapiro demonstrate that in areas with more left-wing people, newspapers are also likely to be more left-wing. These mutually reinforcing results raise the prospect of a vicious cycle, in which the media feeds and reinforces voters’ prejudices. How can we stop it?

Reassuringly to economists, the answer is a familiar one: more media competition. In the 2000 US election, places with a larger number of local television stations tended to give more equal airtime to the two presidential candidates. In the Middle East, countries with more competition between media outlets tend to provide more balanced reporting on politics. The more journalists are reporting on a topic, the less biased each can be.

In the Australian context, this finding has a straightforward implication: policymakers who want to reduce bias should focus on boosting the number of independently owned media outlets, rather than worrying too much about foreign ownership. All the news that’s fit to print doesn’t come from one source.

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

Little House on the Contrary: A Stock Picking Tool, Australian Financial Review, 20 April 2007

In the Harvard Business School cafeteria, students sometimes play a game. It’s called ‘what’s your number?’. Players take it in turn to nominate how much money they are aiming to make in their career, before they stop working hard and relax on a beach. For some, it’s $5 million, for others it’s $70 million. But the principle is the same: given enough money, even students at the world’s most famous business school will swap dividends and buyouts for daiquiris in the Bahamas.

All well and good for those lucky enough to make it. But for shareholders, this poses quite a different problem. Those of us owning shares would like to know what happens to the firm when the CEO reaches his or her ‘number’. But without knowing the number, how can we answer the question?

In a recently-released working paper, Crocker Liu (New York University) and David Yermack (Arizona State University) have come up with a clever way of answering the question. Using data from the Fortune 500 companies, they investigate the impact on a company’s sharemarket performance when its CEO buys real estate. The idea is simple: if one of the CEO’s goals in life is to secure a grand home, then perhaps he or she won’t try so hard when the dream comes true.

Since a dataset of the real estate holdings of senior executives isn’t sitting on the Internet waiting to be downloaded, Liu and Yermack have to engage in the kind of clever sleuthing that has come to characterise many of the most interesting papers in empirical economics today. Combining real estate databases, voter registration data, aerial photographs, and Google Maps, they are able to estimate the value and characteristics of 98 percent of the CEOs in America’s largest firms. The typical house of a Fortune 500 CEO has 11 rooms, 4 bathrooms, and is worth US$2.7 million (about ten times the US median house price).

So how does a CEO’s house relate to the performance of the firm? Comparing share market returns in recent years, Liu and Yermack find that firms whose CEOs have the most expensive mansions significantly underperform firms whose CEOs live in more modest residences. They find that an portfolio of ’small-home CEO’ firms would have outperformed a ‘large-home CEO’ portfolio by about 15 percent per year.

Knowing that big mansions are correlated with small firms leads naturally to the question of why CEO pay has increased so dramatically in recent years. According to Liu and Yermack, many of the homes of America’s top CEOs feature swimming pools, tennis courts, boathouses, separate guest houses and servants’ quarters. At least one estate includes private polo fields and an equestrian ring. For the very top executives, the past generation has been another Gilded Age, with CEO salaries increasing sixfold in the United States over the past twenty years, and fourfold in Australia over the past decade.

Until now, two explanations have been put forward to explain the rise in CEO pay. One set of economists have attributed it to the widespread adoption of high-powered incentives (particularly stock options). Related to this was the increase in CEO turnover, which meant that managers had to be compensated for a higher risk of termination.

The other popular explanation for rising CEO pay has been the ’skimming view’. Proponents of this approach have argued that rising remuneration has been driven by the loosening of social norms against generous pay packages, and a clubbish relationship between CEOs and those who advise on executive remuneration.

Yet social norms evolve slowly, whether it be in the boardroom or on the street. While both the incentive theory and the skimming theory predict some increase in CEO pay, neither is able to account for the meteoric rise over recent decades.

By contrast, a new theory – propounded by Xavier Gabaix (MIT) and Augustin Landier (New York University) – claims to be able to fully account for the rise in CEO pay. Their point is startlingly simple: CEOs are paid proportionately to the size of their companies, and a wave of mergers has seen the largest companies become larger still. Over the past two decades, they point out, there has been a six-fold increase in market capitalization of large US companies, which perfectly explains the six-fold increase in CEO pay.

So next time someone tells you that CEO pay is all Gordon Gecko’s fault, point out to them that the ‘greed is good’ decade also saw a major rise in firm size. Today’s top executives are now managing substantially bigger companies than their predecessors. But regardless of how large their firm is now, if the boss buys a mansion, it probably means you should sell your shares.

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

Breaking the Pay Deadlock, Australian Financial Review, 8 March 2007  

Over recent weeks, Federal Education Minister Julie Bishop’s call for Australian schools to move to a system of teacher merit pay has faced stiff opposition from state and territory governments and teacher unions. In response, Bishop has stood firm behind her plan. With a federal election looming, the remainder of the year will most likely see both sides hunker down still further.

Is there a way to break the merit pay deadlock? One possibility is to strike what policy wonks have called a ‘grand bargain’ over teacher merit pay – in which teachers who wish to stick with their current contract are free to do so, while those who wish to choose a merit pay contract can do so instead.

Such a grand bargain over teacher pay has several important advantages. First, it recognises that many of Australia’s 264,000 teachers entered the profession in the expectation that they would have security of tenure and certainty of earnings. Preserving uniform salary structures for those who want them honours that bargain.

By contrast, the new merit pay contract would look quite different. For a start, the new contract would carry greater rewards. At a conference I ran recently at the Australian National University, US researchers Eric Hanushek, Hamilton Lankford and Jonah Rockoff presented studies that analysed teacher performance in terms of test score gains. Their work suggests that difference between a high-performing and a low-performing teacher is substantial. Switching from a teacher at the 10th percentile to a teacher at the 90th percentile would raise a typical student’s grades by 10 percentage points. Yet experience explains only a little of that gap, and teachers with a Masters degree do not appear to obtain significantly higher test score gains.

One solution is simply to reward teachers whose students experience significant test score gains from year to year. Analysing the effects of an Israeli teacher bonus scheme, Victor Lavy found that it significantly increased educational outcomes, but did not lead to adverse effects such as decreasing the performance of teachers who did not get the bonus, or causing teachers to manipulate test results.

Another alternative is to allow principals to decide which teachers receive the bonus. Work by Brian Jacob and Lars Lefgren indicates that principal ratings of teacher effectiveness at the beginning of the school year are highly predictive of the teacher’s test score value-added. Moreover, principal ratings may capture aspects of teacher performance that are missed by a narrow focus on test scores, such as their ability to raise performance in non-tested subjects, or to mentor new teachers.

Whether the bonuses are determined by test score gains (objective, but narrow), or principal ratings (subjective, but broader), they should be large enough to make a real financial difference. At present, the best-paid teachers in Australia earn no more than $79,000 (less in most states). Like lawyers, doctors and politicians, why shouldn’t our best teachers make six-figure salaries?

In the United States, author Matt Miller goes further, putting forward a plan to make teaching poor children the most exciting career in America. The best teachers working in the most disadvantaged schools, he argues, should be able to earn up to $150,000 – allowing them to retire as millionaires. While rewarding results, we should also make it more lucrative for experienced teachers to work in tough schools. Unfortunately, uniform salary schedules do just the opposite – by paying all teachers the same, the best teachers tend to gravitate to the most affluent schools.

The new contract would carry not only greater rewards, but more risk. Unlike the current teacher salary contract, which carries virtually no risk of dismissal (eg. Victoria fired 3 of its 39,434 government school teachers last year), removal for poor performance would be a real possibility under the new contract. Every occupation faces the problem of the 1-2 percent of workers who are just badly suited for the job. Teaching is no different. And allowing for the possibility of dismissal might also make it more feasible to recruit mid-career professionals into the teaching profession. Not everyone who wants to try will make the transition from the office to classroom – but we should open the door to those wish to give it a shot.

Striking a grand bargain with Australia’s teachers may be the only politically viable solution to the looming deadlock on merit pay. Putting another contract on the table provides teachers with a choice, not an ultimatum. As we learn more about what works best in measuring teacher performance, an increasing number of teachers will hopefully come to choose the new contract. And maybe then, more young people will regard teaching poor children as the most exciting job in Australia.

The downside of difference, The Australian, 31 January 2007

Since the time of European settlement, Australia has been shaped by immigration. Successive waves of newcomers from Europe, the Americas, Asia, the Pacific and the Middle East have enriched Australia in many ways. From a purely economic standpoint, immigration supplements our labour market with much-needed skills.

In a deeper sense, immigration is valuable because it weaves new threads into our cultural tapestry. Native-born children have much to learn from their migrant peers, just as adults can gain a deeper understanding of the world from yarning over the back fence with their foreign-born neighbours.

And our restaurants would be bland imitations of themselves without the flavours brought by successive waves of Italian, Thai and Vietnamese immigrants. Yet the impact of immigration goes beyond the economic and the culinary effects. One area that is less commonly discussed is the relationship between ethno-linguistic diversity and interpersonal trust. The results of a succession of studies suggest that we may have to work harder if we are to make Australia diverse as well as high in trust.

Trust is important because it acts as a kind of social glue that enables business and communities to operate more effectively. In regions where people trust one another, institutions, markets and societies seem to work better. Trusting societies have more effective bureaucracies, schools that function more efficiently, less corruption and faster growth. For these reasons, social capital, once solely the domain of sociologists, has increasingly attracted attention from economists.

An important question in this research is why trust is higher in some areas than in others. To better understand patterns of trust across Australia, I used data from the Australian Community Survey (carried out by Edith Cowan University and NCLS Research), which asked 6500 respondents whether they agreed with the following statement: "Generally speaking, you can't be too careful in dealing with most Australians." Holding constant individual characteristics, clear neighbourhood patterns emerge. Trust is higher in rural Australia than in cities, and higher in richer neighbourhoods than in poor ones.

Neighbourhood-level analysis also throws up a startling finding: trust is lower in ethnically diverse neighbourhoods. Residents of multiracial neighbourhoods are more likely to agree that "you can't be too careful in dealing with most Australians". In particular, neighbourhoods where many languages are spoken tend to have lower levels of trust, suggesting that the main issue may be whether people can communicate effectively with those living nearby. The effect of diversity operates on immigrants and locals alike. In more linguistically diverse suburbs, both foreign-born and Australian-born respondents are less inclined to trust those around them.

The negative relationship between trust and ethnic diversity is not unique to Australia. Separate studies looking at the US, Britain, India, Kenya and Pakistan have shown that diversity is associated with lower levels of trust and less investment in shared resources. In the US, work by Alberto Alesina and Eliana La Ferrara has produced very similar results to my own: holding constant a raft of other factors, US cities that are more diverse tend to be less trusting. Other research has reached similar conclusions.

One study that looked at productivity on a British farm found that more ethnically heterogenous teams picked less fruit. In the American Civil War, desertion rates from the Union army were higher in more ethnically diverse companies. Across communities in Pakistan, infrastructure projects are better maintained where there are fewer clan, religious and political divisions. Across Kenyan school districts, ethnic and linguistic diversity is associated with worse school facilities and less voluntary fundraising.

Across countries, there is a negative correlation between ethnic fractionalisation and growth, which researchers William Easterly and Ross Levine attribute to ethnic diversity making it more difficult for countries to agree on the provision of public goods and pro-growth policies.

Over the coming decades, it is a safe bet that most developed countries will become more ethnically and linguistically diverse. Several factors will drive pressure for high levels of immigration: among them are the growing political constituency for family reunion, the falling cost of airfares, and large wage gaps between developed and developing nations. For Australia, this represents more of the same. At the end of World War II, 10 per cent of Australian residents were born overseas (2 per cent in a non-English-speaking country). In the most recent census, 23 per cent of Australians were born overseas (15 per cent in a non-English-speaking country). To a greater extent than most countries, immigration will continue to shape Australia into the 21st century. And English will not be the native language of most new Australian immigrants.

A spate of studies suggests that continued high levels of immigration will most likely bring a raft of economic and social benefits to Australia. But we should not gild the lily. Most likely, higher diversity will lead to lower levels of interpersonal trust. One "solution" would be to reduce diversity by drastically cutting our immigration intake. Although this might raise levels of trust, it would probably be detrimental to Australian society on balance. Lower immigration would impose an economic cost, barring businesses from importing much-needed skills. And there would be social costs too: families denied any chance of sponsoring their close relatives are less likely to participate wholeheartedly in Australian society.

The challenge for policymakers is how to maintain the high levels of immigration while mitigating the impact on our social fabric. When it comes to interpersonal trust, one useful strategy would be to focus more attention on the problem itself: building local trust in immigrant communities. Since the benefits of programs to build social capital are probably greatest in places where community ties are weakest, such programs should be targeted towards communities that are poorer and more diverse.

Over time, we may also hope that race and ethnicity become less salient divisions in Australian society. Robert Putnam, who is conducting research on diversity and social capital in the US, argues that one of the reasons diversity reduces trust is because people "act like turtles", hunkering down to avoid those who are somehow different. Yet he also sees hope in the declining importance of the Catholic-Protestant divide in tbe US over the past half-century:

"Growing up in a small Ohio town in the 1950s, I knew the religion of just about every kid in my 600-person high school ... When my children attended high school in the 1980s, they didn't know the religion of practically anyone. It simply didn't matter ...

"In my lifetime, Americans have deconstructed religion as a basis for making decisions. Why can't we do the same thing with other types of diversity?"

On the issue of diversity and immigration, the challenges for Australia and the US are surprisingly similar. The big question is: will those who support diversity and trust recognise the tensions between their goals, or will they hunker down like turtles?

Dr Andrew Leigh is an economist in the research school of social sciences at the Australian National University. This is an edited extract from an article published in Dialogue, the journal of the Academy of the Social Sciences in Australia.

Led by Donkeys (with Amy King), New Matilda, 4 October 2006

Australians have long prided themselves in their electoral system. Australia invented the secret ballot, was among the first to allow women the vote, and pioneered compulsory voting. Electoral systems translate public opinion into parliamentary representation, and Australia’s is claimed to be one of the fairest.

Yet there is an element of chance in the system: candidates’ order on the ballot is determined by lottery. So one might reasonably ask how often the hand of Lady Luck sways the result.

To estimate the size of the ballot order effect, we analysed federal elections conducted since 1984, when ballot order was first randomised.

Our research aimed to answer a simple question: if you’re lucky enough to get pole position on the ballot paper, how many more votes do you get? What share of the electorate are “donkey voters”, who stubbornly vote for the first person on the ballot paper?

It turns out that the answer isn’t so simple. Male candidates who are listed first get an additional 1.4 percent of the vote (an extra 1000 votes in the typical electorate). But female candidates get no benefit from being listed first on the ballot paper.

This odd gender bias is not a quirk of recent polls, but a systematic feature of donkey voting in Australia over the past 20 years. Because past research has combined male and female candidates, it has missed this surprising feature of donkey voting.

Our best characterisation of donkey voting today is that one in seventy Australian voters (about 160,000 voters in the 2004 election) are willing to vote for the first-placed candidate on the ballot – but only if that candidate is a man. When a woman is listed first on the ballot, donkey voters move to another candidate.

Our ballot order effects are not only statistically significant – they are large enough to affect the result. In a typical election, one in ten seats (15 out of 150) are decided by a margin of less than 1.4 percent. Were a man from a major party to draw first spot on the ballot in these electorates, he might well tip over the line.

Indeed, we were able to identify five recent races in which a man from a major party drew first position on the ballot and won by a margin of less than 1.4 percent. These lucky beneficiaries of ballot order were Kim Beazley and Michael Lee in 1996, and Ross Cameron, Gary Nairn and Paul Neville in 1998. Without ballot order effects, the Labor Party might today have a different leader.

While the typical Australian voter has more schooling today than in the past, we found no evidence that the share of donkey voters has declined since 1984. So it seems reasonable to assume that a similar proportion of voters will continue to vote for the first-placed man in future elections.

Supporters of the current system often describe random ballot ordering as “fair”. It is true that before the ballot draw, all candidates have the same chance of getting the top spot. But after the ballot draw, the system is manifestly unfair, since a man in the first position will do better than his rivals.

Fortunately, there is a simple solution, presently used in elections in the ACT and Tasmania. Rather than having only a single ballot paper, the Australian Electoral Commission could simply produce multiple versions, re-ordering the candidates each time. In this way, any ballot order effect is shared across the candidates. This electoral system, known as Robson Rotation, produces a fairer result. And thanks to advances in printing technology, the extra cost is minimal.

In World War I, allied troops were described as “lions led by donkeys”. Whether or not we lionize our federal politicians, do we really want them chosen by donkey voters?

Amy King is a student at the University of South Australia. Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University. Their study is available at http://econrsss.anu.edu.au/~aleigh/

A failure to make the grade (with Chris Ryan), The Australian, 28 August 2006

Imagine you ran the economy and could choose between two options. You could allocate the brightest workers to school teaching, where they would spend six hours a day nurturing the intellectual development of the nation's children. Or you could assign the most intelligent workers to dentistry. Societies as diverse as ancient Greece and modern South Korea have attempted to take the former path. Some have said that Australia is choosing the latter.

Yet for all the anecdotes about cut-off scores for teacher education courses, surprisingly little has been written about how the academic aptitude of new Australian teachers has changed over time. Past studies on the teacher labour market have tended to focus on whether we will have enough teachers entering the profession. Instead, we look at whether the academic skills of new teachers make the grade.

To map the trends in teacher aptitude in Australia, we studied the career choices of six cohorts of young people, using surveys by the Australian Council of Educational Research. These surveys administered literacy and numeracy tests to students while they were at school, then followed them into their 20s.

The tests allow us to observe how new teachers compare with the rest of their age cohort, those who became plumbers, doctors, bricklayers and lawyers.

In most of the ACER cohorts, more than 100 respondents entered teacher education courses and many of these went on to become schoolteachers. But the academic make-up changed considerably. In 1983, the average person entering teacher education was at the 74th percentile of the aptitude distribution and the average new teacher was at the 70th percentile of the distribution. By 2003, the average percentile rank of those entering teacher education had fallen to 61, while the average rank of new teachers had slipped to 62.

The decline in the academic aptitude of new teachers has occurred at the top and bottom of the distribution. Focusing on women (who make up about three-quarters of new teachers), the probability of a woman in the top 20 per cent of the academic aptitude distribution entering teaching approximately halved from 1983 to 2003. Meanwhile, the probability of a woman in the bottom 50 per cent of the aptitude distribution entering teaching approximately doubled.

Naturally, there are limitations in our method of measuring teacher aptitude. Academic aptitude may be poorly measured in the ACER tests or it may change during the life cycle. Teacher performance also may be amenable to development through effective training. But our results do accord with evidence from cut-off scores into teacher education courses.

For example, we were able to track entry scores at one of Australia's most distinguished universities, the University of Sydney. In 1977, the cut-off for entry into a bachelor of education (365 out of 500) was nearly as high as law (390), and well above our own discipline of economics (284). But in 2005 the cut-off for entry into a bachelor of education (86.4) was below economics (91.1) and substantially below law (99.6).

The drop in Australian teacher quality is consistent with the findings of US researchers Sean Corcoran, William Evans and Robert Schwab, who estimate that the typical new female teacher in the US was at the 65th percentile in the early 1970s but at the 46th percentile in 2000.

Should we worry if the literacy and numeracy of new teachers has fallen? As the footy aphorism goes, a good player does not always make a good coach. Yet all else being equal, evidence from overseas studies suggests that children learn more when their teachers are more academically talented.

As well as charting the decline, our research also attempts to understand its causes. One factor that seems to have changed substantially during this period is average teacher pay. Compared with non-teachers with a degree, average teacher pay fell by more than 10 per cent during the period 1983 to 2003.

Another driver is pay dispersion in alternative occupations.

In the '80s and '90s, non-teacher earnings at the top of the distribution rose faster than earnings at the middle and bottom of the distribution. For someone with the potential to earn a wage at the 90th percentile of the distribution, teaching looked much less attractive in the 2000s than it did in the '80s.

We believe the fall in average teacher pay and the rise in pay differentials in non-teaching occupations have contributed to the decline in the academic aptitude of new teachers during the past two decades. While our research does not look at the issue, it is also possible that non-salary aspects of teaching may have worsened during this period.

Last, it should be noted that our study focuses on the reasons for the decline in the academic aptitude of new teachers in Australia during the past quarter-century. Reversing these factors is not the only way of raising teacher aptitude. While boosting average teacher pay may be one way of encouraging more able people to enter teaching, it is also possible that increasing the returns to aptitude (or even actual classroom performance) may be a more cost-effective way of raising the quality of the teaching profession.

Andrew Leigh and Chris Ryan are economists in the research school of social sciences at the Australian National University, Canberra. Their study is available at econrsss.anu.edu.au/~aleigh/

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There goes the neighbourhood (with Ian Davidoff), The Australian, 24 August 2006

With the drift to private education, parents' preferences for schools are under the microscope. Nearly 35 per cent of Australian school students attend non-government schools and the rate has been steadily rising. A common perception is that many more parents would go private if only they could afford it. Implicit in the last claim is the notion that when it comes to deciding on their child's education, parents face a clear choice: send your child to an expensive private school or a free public one. But is this characterisation accurate? Are public schools really free; and, if not, how much are parents willing to pay for them?

To find out how much public schools really cost, we recently looked at the relationship between house prices and school quality in Australia for the first time. The answers are illuminating for parents and policy-makers alike.

As any real estate agent will confirm, when parents with school-aged children look for a house to buy, the quality of local public schools is often a key consideration. Just as house prices are higher when they are close to good parks, transport nodes and shops, they should also be higher when the quality of nearby schools is better. The question is: by how much?

To answer this question, we take advantage of the fact that public schools often have attendance zones with clear boundaries.

These boundaries mean that we can compare the price of houses that are close to one another but assigned to different schools. In other words, the only thing that differentiates the houses is the school that the children can attend.

We find that parents are willing to pay significantly more for a house assigned to a better quality public school. To send their children to a high school where the average Universities Admissions Index (also known as an ENTER or TER score) is five points higher, parents are willing to pay an extra 3.5 per cent for their home. This result is in line with previous studies that have analysed schools in Britain and the US.

If you want a house on the right side of the boundary line, you'll have to pay for it. And the differences aren't trivial.

Based on property prices in Canberra, where we draw our data, parents are willing to pay $13,000 extra to secure access to a house assigned to a better public school.

The implications of these findings are far reaching.

For the first time we know exactly how much value Australian parents place on better public education. Our results give the lie to those who suggest that all public schools are created equal. Parents recognise large gaps between non-government schools and are willing to pay to send their children to one public school rather than another.

Knowing the extent to which parents are willing to pay for better education is not only intrinsically important, it also allows policy-makers to make better decisions. It provides the means to rationally assess educational reforms aimed at higher achievement levels, by pitting the estimated costs of these policies against the estimated benefits. For example, a program targeted at improving outcomes in a particular school should raise house prices in its catchment area.

If real estate prices are unaffected, politicians may ask themselves why parents don't think the reforms have improved the school.

Another implication of our findings is that high-quality public education may not be free.

While our results are below the level of private school fees for the typical family, the true cost gap between public and private schooling is smaller than is generally suggested. Not only can poor families not afford access to private schools, they are often also locked out of the best public schools.

Given that education can transform the social and economic opportunities of the underprivileged, this may perpetuate the cycle of intergenerational disadvantage. The possibility of educational exclusion indicates that government funding should be directed towards schools with less talented teachers and substandard facilities to boost the quality of schools in low-income areas.

Ian Davidoff is a recent graduate of the John F. Kennedy School of Government at Harvard University. Andrew Leigh is an economist at the Australian National University. Their paper is available at: http://econrsss.anu.edu.au/~aleigh/

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Lies and Statistics, Australian Financial Review, 8 July 2006

To the flexible Australian labour market of today, the rigid working hours of the 1970s are but a distant memory. Yet the flipside of flexible work is irregular socialising. When few people worked evenings or weekends, social life was easier to organise than it is today. Over recent decades, it has become easier to buy milk at 11pm, simpler to find a part-time job, and harder to arrange leisure activities with friends and neighbours.

 

As working hours become more unpredictable, public holidays play an increasingly important role. In economic jargon, public holidays solve a coordination problem: both you and I would like to get our families together to socialise sometime. But if we have to sort out work schedules, we may never get around to it. A public holiday solves the coordination problem, since both of us know that the other will be available.

 

Despite major changes in the nature of work, state and territory governments do not appear to have rethought the question of whether we have the “right” number of public holidays. Most Australians enjoy 10 public holidays a year, the same as the typical American, but fewer than Canadians (12), Spanish (13), Japanese (14), or Israelis (34). And Australia’s public holidays are clustered towards the first half of the year. With half the year still ahead of us, most of us have already had 7 of our 10 public holidays.

 

Not only do public holidays have a direct impact on socialising, recent economic analysis suggests that there may also be an indirect benefit. Using variation in the number of public holidays across Germany, Joachim Merz and Lars Osberg have shown that in Länder (German provinces) with more public holidays, social ties are stronger during normal weekdays and weekends. In other words, an extra holiday in September helps strengthen interpersonal ties in October.

 

Policymakers who care about social capital – the bonds of trust and reciprocity that knit us together as a society – should consider increasing the number of public holidays. In the Australian case, the best time for a new holiday would be in the second half of the year. For example, we might consider making Melbourne Cup Day or Remembrance Day a national holiday, commemorating Sir Henry Parkes’ Tenterfield Oration (24 October) or marking the anniversary of the Eureka Stockade (3 December)

 

The cost of a new public holiday is likely to be minimal. For businesses and government departments, the creation of a new public holiday would be taken into account in wage negotiations. In the event that a firm wished to continue operating on the new public holiday, it would simply need to pay a penalty loading. Given that there are about 250 working days per year, the impact on the annual wage bill would be trivial. Public holidays are an effective way of coordinating social life: are ten a year really enough?

 

Dr Andrew Leigh is an economist at the Australian National University. His weblog is andrewleigh.com.

 

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Being dead on time can save taxes  (with Joshua Gans), The Age, 27 June 2006

There are two certainties in life, according to Benjamin Franklin: death and taxes. But can changes in taxation affect the death rate? Is it possible that some people will prolong life to reduce their inheritance tax bill?

To test this, we studied one of the most dramatic changes in inheritance tax law in the developed world — Australia's abolition of inheritance tax.

While Australia is today one of the few developed countries without an inheritance tax, this has not always been the case.

In 1978, the man then known as the "boy treasurer", John Howard, legislated to scrap federal inheritance taxes. Anybody dying on or after July 1, 1979, would be exempt.

For about one in 10 decedents, the value of avoiding inheritance taxes could be considerable. Before abolition, there was no attempt to decrease the tax rates. In the extreme case, an estate worth more than $1 million would be taxed at a 28 per cent marginal rate if its owner died on June 30, 1979, but zero if he or she died on July 1, 1979.

We asked a simple question: in the week before and after the abolition, how many people prolonged their lives to avoid the tax? Comparing deaths in 1979 with deaths in June and July of other years, we estimated that about 50 people cheated death for long enough to avoid the tax.

This suggests that more than half of those who would have paid the inheritance tax in its last week avoided doing so.

Because our analysis is based only on formal death records, we cannot reject the possibility that the effect we observe reflects misreporting of the death date, rather than changes in the timing of deaths.

Our results are consistent with earlier work by Wojciech Kopczuk and Joel Slemrod, who studied changes in US inheritance tax rates over the 20th century, and found some evidence that the tax rate affected the timing of deaths. It also accords with our own work on the millennium, in which we found that the rate of conceptions, births and deaths rose during the first week of January 2000.

Lastly, these findings have implications for any instance in which policymakers are proposing to abolish inheritance taxes. For example, under US law, the estate of an individual worth more than $3.5 million will be taxed at a marginal rate of 45 per cent if they die in the final week of December 2009, but untaxed if they die in the first week of January 2010.

Our results from the abolition of inheritance taxes in Australia suggest that a significant number of US taxpayers who would face the estate tax if they died in the last week of 2009 may well shift their reported death date to the first week of 2010.

Even the super-rich cannot cheat death forever, but some may be able to stay alive long enough to avoid the estate tax.

Professor Joshua Gans is an economist at Melbourne Business School, University of Melbourne. Dr Andrew Leigh is an economist at the Australian National University. Their economics blogs are at economics.com.au and andrewleigh.com respectively.

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Don't miss out on the world library, The Australian, 21 June 2006 

In 1989, Australia a technician at Melbourne University named Robert Elz switched on the internet. At the other end of the link was a University of Hawaii academic, Dr Torben Nielsen. His first words were: “Link is up…”.

 

Seventeen years on, the internet offers unprecedented opportunities for academics to engage with the world. By using websites to post working papers and finished articles, and blogs to engage in discussions with the broader public, the internet may potentially be the largest change in the way that academics convey ideas since the invention of the printing press.

 

Making academic work available on one’s own website has many advantages. As undergraduates, postgraduates and the general community increasingly turn to search engines such as Google Scholar, work that is readily accessible is more likely to be read and cited. A spate of studies has shown that making articles available online boosts citations by 50 to 250 percent. If you want to have your articles cited in other countries and other disciplines, your best bet is to post them on your website.

 

Despite the clear benefits of posting articles online, only about one-seventh of the research conducted by Australian academics is freely available on their websites. Go to the typical Australian academic’s website, and you will see a list of their publications in chronological order. While a website with full-text papers says to the reader: “Here are my papers – please read them”, a stale bibliography is more like saying: “I have written some clever papers – you should go to a library and read them”. To a reader who does not have access to a library, work that is not online might as well not exist.

 

A standard excuse for academics failing to post their papers on their websites is that copyright law prevents it. Yet as advocates of open access have pointed out, 93 percent of journals have policies that permit authors to post a copy of an article on the author’s own website. Of the remaining few, most have no objections to authors posting a pre-publication version of their article. In disciplines where books are the norm, academics can often obtain the consent of their publisher to post a sample chapter, or a link to the full-text version at Google Books.

 

Just as the printing press helped speed the decline of Latin, so too the internet is undermining existing ways of conveying information. As Washington Post columnist Dan Froomkin observes, the “wired intelligentsia” now assume that “they can find out pretty much anything on Google”. For academics who are willing and able to make their research Google-friendly, the internet offers plenty of new opportunities for conveying ideas to a broad audience. But it also suggests that libraries could be going the way of their card catalogues.

 

For those raised on the virtues of careful scholarly research, the declining patronage of libraries may seem a disturbing development. Common to most social scientists is a love of libraries – where the bliss of browsing is exceeded only by the delight of discovering the perfect volume. For centuries, the received wisdom of academia has been that carefully trawling through books and hard copies of journals is a necessary condition for producing high-quality scholarly output. Today, there are fewer reasons than ever for scholars to visit a library – making it increasingly critical for academics to make their articles available on their websites.

 

Alongside the rise of internet-based research has been the growth of blogs, a form of internet journal which allows you to post short articles on a daily or weekly basis. Over the past five years, the number of blogs has grown exponentially. There are now millions of blogs worldwide, and tens of thousands in Australia alone.

 

Blogs have also proliferated within Australian academia. Among the best-read academics in the blogosphere are Tim Lambert (a computer scientist at the University of NSW), John Quiggin (an economist at the University of Queensland) and Kim Weatherall (a lawyer at the University of Melbourne).

 

For an academic, blogging is a tempting proposition. As George Washington University Professor Henry Farrell observed last year: “Academic blogs offer the kind of intellectual excitement and engagement that attracted many scholars to the academic life in the first place, but which often get lost in the hustle to secure positions, grants, and disciplinary recognition.”

 

Yet academic blogging presents a difficult trade-off. On the upside, it provides a chance to engage with colleagues and non-specialists. A decent blog will have hundreds of readers each day; some have thousands. No Australian blog matches the readership of the nation’s largest newspapers, but plenty have more readers than the average academic journal.

 

For academics with an interest in public policy, blogs are an ideal chance to offer one’s own disciplinary perspective on current events. On issues such as climate change, copyright law reform, or congestion-pricing for roads, discussion on the blogosphere is considerably more sophisticated than in the broadsheets. They can be used as a teaching tool: both to post additional readings and to cultivate students’ interest in the subject. Blogs can even lead to unexpected spin-offs: I am currently co-authoring a paper with a brilliant student from the University of South Australia who contacted me through the blogosphere.

 

But blogs have downsides too. Posting a daily entry takes time that could be better spent on research, teaching or relaxing. Debating with commenters can easily become a distraction from the tedious work of getting a “revise and resubmit” back to a journal. And for junior academics, there is always the risk that professorial colleagues will view blogging as a sign that one is not a “serious” academic. From my own perspective, blogging has been a rewarding complement to my research – but the medium is not for everyone.

 

Over the decades, Australian universities have not always embraced change. A few months after connecting the nation to the internet, Melbourne University boldly asked its staff whether they wanted email. Almost every respondent said no.

 

Today, amidst the demands of teaching, administration and research, many academics reasonably wonder why they should bother with cyberspace. The answer is simple: the internet is rapidly becoming the world’s library. Posting articles on a personal website is the equivalent of making sure one’s book is on the shelf.

 

Once you’ve done that, the bloggers are the rowdy folks in the café next door. Join us if you have time.

 

Dr Andrew Leigh is an economist at the Australian National University, and has been blogging for nearly two years, at http://andrewleigh.com.

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Birthing pain makes health system suffer (with Joshua Gans), The Australian, 20 June 2006

Bringing down the 2004 budget on May 11 that year, Treasurer Peter Costello said he hoped every Australian family would have three children: one for the husband, one for the wife and one for the country.

To show he was willing to put his money where his mouth was, the Treasurer announced a new, simplified baby bonus. Unlike the old payment, which had been complex to calculate and understand, this one could not be simpler: for every new baby, the mother would get $3000. There was a small catch. As with most budget announcements, this one did not take effect until the start of the financial year. Only babies born on or after July 1, 2004, qualified for the bonus.

What the Government may not have fully anticipated is how expectant parents responded to the incentive.

These days there is some discretion as to the precise day you have a child. With planned caesareans and inducements, many parents really do get to pick junior's birthday. If your baby was due in late May or early June, this wouldn't really matter. But what about if your child was due at the end of June?

To test the effect, we obtained three decades of daily birth data from the Australian Bureau of Statistics. Since the mid-1970s, the population has grown but the birthrate has declined, so the total number of births a year has stayed pretty constant.

Of the past 10,000 days, one stands out.

On July 1, 2004, more babies were born than on any other day in the past 30 years. The day on which the new baby bonus took effect may well be called "the Great Australian Birthday".

Remember, the bonus was announced in May that year, so it could not have affected conceptions. The only way it could have had an effect was if parents chose to move their child's birthday from June to July.

Using daily data from the Australian Institute of Health and Welfare on caesarean sections and inducements, it is apparent that the rate of both procedures increased sharply in July 2004. Not surprisingly, the effect is largest in the final week of June and the first week of July.

An estimated 700 births were moved by two weeks or less. But some babies were moved further still. According to our results, the baby bonus caused the birthdates of about 300 babies across the country to be moved by more than two weeks.

This appears to be troubling, although it may also indicate the considerable latitude that exists around the scheduling of these procedures.

Regardless, the effect of the 2004 baby bonus was considerable disruption for hospitals and expectant mothers that continued through July.

Thus, maternity wards were placed under considerable stress for essentially a non-medical event. Whether this disruption was worth the Government saving about $100million in payouts is not clear. A comprehensive study on the health effects has yet to be done. But a sudden change in economic incentives from one day to the next is probably not the best way to make policy.

This lesson from history is particularly relevant right now. On July 1 this year, the baby bonus will increase in value from $3166 to $4000. Although there is less reason for parents to react to this change than there was in 2004, our results suggest that an extra $834 will create a fresh incentive to schedule births in July rather than June.

Maternity hospitals should take this into account when planning staffing and other factors in the next few weeks. Expect fewer babies in the last week of June and more in the first week of July (which may have flow-on effects throughout the month).

For parents, consider taking advantage of the quieter time in the last week of June and follow your doctor's advice on scheduling. In a decade, you'll be glad you let medical factors take precedence over the baby bonus.

And for Costello, now that we know the lessons of history, how about changing how things are done for the next scheduled increase in the baby bonus in 2008? Perhaps a gradual rise of $50 a month will deliver better results for all concerned.

Joshua Gans is an economist at Melbourne Business School, University of Melbourne. Andrew Leigh is an economist at the Australian National University. Their economics blogs are at economics.com.au and andrewleigh.com respectively.

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Lies and Statistics, Australian Financial Review, 3 June 2006

Few moments in life are more exciting for a parent than discovering whether their child is a boy or a girl.

Whatever they might have hoped for, most parents will assure their friends that they couldn't be happier with the sex of their child.

But is it really true that a baby's sex has no impact on the strength of their parents' relationship? Could all parents be indifferent about whether it's Daniel or Daniella?

Is it too far-fetched to think that a shred of disappointment at the hospital might fray the delicate fabric of a relationship?

One way to test this theory is to look for an association between children's gender and their parents' marital status.

Since the sex of a baby is random, any significant correlation between the children's gender and parents' marital status must reflect a causal effect.

Pooling 60,000 families from the past five Australian censuses, I analysed the relationship between whether the children were boys or girls and the parents' marital status.

Child gender could affect parents' marital status in two ways: parents who were unmarried at the time of the birth might later marry, while parents who were married at the time of the birth might later divorce.

My results suggest that having both a boy and a girl is better for marital stability than having two same-sex children.

Among two-child families, parents with either two boys or two girls are 1.7 percentage points less likely to be married than parents with a boy and a girl.

In these types of families, about 17 per cent of parents are unmarried - suggesting that the sex of the children can explain about one-tenth of the variation in marriage across two-child families.

In some countries, including Mexico, Colombia, Kenya and the United States, parents of sons are significantly more likely to be married.

Yet in Australia I found no evidence that families with daughters are more likely to divorce.

For Australian parents, what matters is not having more boys or more girls, but the combination - having both a boy and a girl.

Whose preferences are driving this effect?

Analysing surveys of parental attitudes, I found suggestive evidence that fathers' attitudes are more likely to drive the relationship between child gender and divorce than mothers' attitudes.

There is some irony in this, given that it is the father's chromosome that determines the sex of the child.

If it still seems baffling that parents might be happier with a boy and a girl than with two children of the same sex, let me offer one final piece of evidence.

Parents with two boys or two girls are substantially more likely to try for a third child than parents with one child of each sex.

Clearly, there is something about having two same-sex children that makes some parents just a little less satisfied.

In this situation, some parents take a third roll of the genetic dice. A few others, it seems, head to the divorce courts.

Andrew Leigh is an economist at the Australian National University. His paper is available at http://econrsss.anu.edu.au/-aleigh/

 

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Lies and Statistics, Australian Financial Review, 6 May 2006

Australians have traditionally prided themselves on egalitarianism. During a visit to Australia at the end of the 19th century, commentator Francis Adams observed that "in England, the average man feels that he is an inferior; in America he feels that he is superior; in Australia he feels that he is an equal".

So far, we have known little about whether early Australia lived up to this idealistic view. Because income surveys were rare during the first part of the 20th century, inequality researchers have found themselves looking through a glass, darkly.

To paint a better picture of long-run inequality, Tony Atkinson (from Oxford University) and I estimated the income share of the richest groups, using data from taxation statistics. While these have their shortcomings, they allow us to better understand the distribution of incomes than ever before.

In 1921, the richest 1 per cent of Australian adults earned 12 per cent of personal income, a high point for the super rich. Over the next 60 years, the trend in top-income shares headed downwards and fell sharply during the Great Depression and again during World War II (although top-income shares rose somewhat after the war).

By 1980, the top 1 per cent received only 5 per cent of personal income. Under the prime ministership of Malcolm Fraser, Australian top-income shares were at their nadir.

Over the past quarter-century, the decline has reversed itself - the shares of the richest groups grew steadily during the 1980s and 1990s. By 2002, the richest 1 per cent of Australians pocketed 9 per cent of all personal income.

The income share of the richest groups in 2002 was higher than it had been at any point since the Korean War in the early 1950s.

These trends accord with what we can glean from other sources. Relative to average earnings, the salaries of top public servants and High Court justices declined from the 1920s to the 1980s, and have since risen.

In 1992, the earnings of a typical executive in one of Australia's top 50 companies were 27 times the wage of an average worker. By 2002, a top CEO earned 98 times the wage of an average worker.

The path of top-income shares in Australia has much in common with four other Anglo-Saxon countries: Britain, Canada, New Zealand and the United States.

Each nation experienced a decline in top-income shares in the three decades after World War II, followed by a sharp rise beginning in the late 1970s or early 1980s.

What might explain the changes? Discussing changes in top-income shares in the US, Thomas Piketty and Emmanuel Saez speculate that the internationalisation of the market for chief executives and changing norms about inequality may explain part of the increase.

Taxes seem to matter too.

Over the past three decades, Australia's top marginal tax rates have steadily fallen: from 69 per cent in 1970 to just 47 per cent today. In the Anglo-Saxon countries, the evidence suggests that cutting the top marginal rate increases the income share of the very richest.

Andrew Leigh is an economist at the Australian National University.

 

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Paying indigenous teens to stay at school could break poverty cycle, Sydney Morning Herald, 7 April 2006

 

Three years ago, Tania Major, a young Indigenous leader in the Cape York community, delivered a speech before the Prime Minister. Ms Major told the audience that she was the only one of her class of 15 who had finished high school, and the only girl in her class who was not a teenage mother. Of the boys in the class, seven had been incarcerated. Only three of the 15 were not alcoholics. And four had already committed suicide.

 

Completing school provides a building block to success later in life. Yet just 38 percent of Indigenous children finish year 12 – half the rate among non-Indigenous children. With higher levels of sickness and poverty, worse housing, less stable family structures and racial harassment at school, an Indigenous child who finishes high school has probably cleared more hurdles than many of us will face in our lives. As a nation, we have a strong interest in keeping Indigenous children in school. It’s time we were willing to put cash on the table to make it happen.

 

The most direct way to improve the incentives for Indigenous children to stay in school would be to pay a daily attendance allowance. Beyond the age of 13, all Indigenous children would receive $10 for every full day that they attend school. Over the course of the year, perfect attendance would be worth about $2000. The payment would complement the current ABSTUDY scheme, but would be contingent on daily attendance. The child would be free to spend the money as he or she wished.

 

While it may sound radical in the Australian context, educational authorities in many parts of the United States have been doing something similar, aiming to boost attendance rates for all students. With attendance rates a key indicator under the No Child Left Behind legislation, US school districts have been giving away cash, laptops, and even the chance to win a car. Asked about the scheme, one school principal in a high-poverty Boston neighbourhood, Morton Orlov II, told the New York Times: “I was at first taken a little aback by the idea: we're going to pay kids to come to school? But then I thought perfect attendance is not such a bad behaviour to reward. We are sort of putting our money where our mouth is.”

 

In Australia, a state or federal government that implemented a similar scheme could expect to face plenty of criticisms.

 

Some would argue against special treatment for Indigenous Australians, pointing out that many non-Aboriginal people are also disadvantaged, and that not every Indigenous person lives on Struggle Street. While this is true, the simple answer is that the gulf between black and white Australians is dauntingly wide. With life expectancy of Indigenous Australians today similar to that of non-Indigenous Australians at federation, bridging that gap should be a top priority for social policy. Providing a positive incentive to attend can complement penalties, such as the “No School, No Pool” rules that currently operate in some communities.

 

Others will argue that putting a few extra dollars in the pockets of Indigenous children will contribute to other problems (“what if they spend it on drugs and alcohol?”). On this score, we can rest easy. Fears about kids with too much disposable income are better directed at the three-figure sums of pocket money doled out on a weekly basis to the boys and girls of Toorak and Vaucluse.

 

Another possible criticism is that children who attend school merely in order to get the cash will not learn anything useful. While this may sound plausible, research by Dr Chris Ryan and myself seems to debunk it. Analysing states with different compulsory leaving ages, we found that people who were “forced” to stay in school for an additional year earned about 10 percent more as adults. In the words of Woody Allen, “Eighty percent of success is showing up.”

 

Lastly, critics might argue that paying Indigenous youth to attend school will is insufficient to redress the educational and social gaps that exist. This is doubtless true. But rather than hoping for a magic bullet, we should implement a spate of rigorous randomised trials of innovative solutions. At the same time as trialling a daily attendance allowance, we might also experiment with providing more support to new Aboriginal mothers, offering better after-school programs, and paying more to attract the best teachers to Indigenous communities.

 

With Australia now richer than ever, the living standard of the nation’s original inhabitants should be our greatest source of shame. We know from the research that schooling can help to break the cycle of poverty. Let’s open our wallets and do something about it.

 

Dr Andrew Leigh is an economist at the Australian National University.

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Only rich people want to lower the top tax rate, The Age, 3 March 2006

With Treasurer Peter Costello last Sunday announcing a review of how Australia's tax system compares with those of other countries, the door to further tax cuts has been cracked open. As Costello pores over reform options, it is easy to forget that just last year, the Government announced tax cuts amounting to $22 billion over four years, with a larger share going to the richest 5 per cent of households than to the poorest 50 per cent. With the ink on the 2005 budget barely dry, the tax-cutting brigade began asking for more.

Yet survey evidence shows that those who want the top tax rate lowered still further are out of touch with popular opinion. For many years, Australian surveys have been asking the question: "If the government had a choice between reducing taxes or spending more on social services, which do you think it should do?" In the late 1980s, Australians clearly supported the tax-cutters, with those who wanted lower tax rates outnumbering those who wanted more social spending by four to one. But in the 2004 survey, social spending was more popular than tax cuts. Although I have been unable to find a recent survey of the attitudes of the Australian economics profession towards tax cuts, I would surmise that most academic economists would also oppose further reductions in top tax rates.

Why are those who want to cut top tax rates so out of step with public opinion? One possible reason is that the rates applying to most politicians, journalists, executives and think-tank staffers (and indeed, to academic economists) are not those that apply to the average voter. Only 4 per cent of Australian adults have a six-figure salary, and even fewer will be in the top tax bracket once the threshold rises to $125,000 in 2006-07. According to data from the Household, Income and Labour Dynamics in Australia survey (HILDA), the income of the median Australian adult is just $26,000 per year, placing them near the bottom of the 30 per cent tax bracket.

Erroneous views about what the typical person earns can only lead to bad policymaking. The first error is to use the mean income instead of the median income.

Mean income is the total income in society divided by the number of adults. If the incomes of highly paid corporate lawyers rise, mean incomes go up too. But median income is the income of the person at the 50th percentile - a measure of what the typical person has in their pocket. To find out what the average person earns, we should look at median income. Just as the median house price represents what the typical house costs (and is not sensitive to the sale of a waterfront mansion), so median incomes tell us what the typical voter has in their pocket.

The second error is to omit those not working. For policymaking purposes, those out of employment should matter as much (if not more) than those in employment. Yet commentators frequently ignore the unemployed when making statements about what a typical person earns. Average wages are not the same thing as average incomes.

The third error is to exclude those who work part-time. Since Australia has a high rate of part-time employment, this again inflates the estimate. Combining all three errors produces a fallacious estima