Andrew Leigh

The debt ceiling crisis in the US really is quite extraordinary to behold. For decades, the US Congress has raised the debt ceiling as required. After all, the debt ceiling is just the natural consequence of a set of political tax and spend decisions, so in some sense it's odd that it even requires separate legislation. As recently as late last year, most reasonable observers thought there was no chance that Congress would vote against raising the debt ceiling.

But the US Republican Party no longer does reasonable. Following the Tea Party takeover, House Republicans have now now decided that they would prefer to trash America's credit rating (and thereby push up interest rates for millions of Americans) rather than accept any increase in taxes for high-income Americans.

The question is: how do mainstream commentators react when one party moves sharply to the extreme? As Paul Krugman's column and blog have recently noted, the overwhelming tendency among most political observers has been to maintain a standard he-said, she-said approach. So it's easy for the casual watcher to miss the big story: the US Republicans are fast abandoning any semblance of a market-driven party, and are now willing to do or say just about anything for political gain.

The contrast with parties like the UK Conservatives and New Zealand National Party is palpable. I don't agree with some of what those parties are doing, but at least it's possible to discern a clear ideological compass in their decisions, many of which continue to be pro-market (eg. both countries' adoption of emissions trading schemes).

As for Australia, it's now pretty clear where Tony Abbott takes his lead. Having abandoned his party's belief in using markets to deal with climate change, walked away from a set of fuel tax reforms first put in place by Peter Costello in 2003, and used any chance he gets to attack the scientific consensus over climate change, Abbott is firmly placing himself in the US Republican mould. The question is: will the Coalition's rejection of mainstream economics in favour of populist politics get written up for what it is? Or will commentators miss the critical shift (that one political party has taken a huge leap to the intransigent right) and focus instead on what Krugman describes as 'the centrist cop-out'?

I spoke in parliament recently about the passing of bookseller and social activist Bob Gould. I wouldn't normally use this website to promote a business, but his daughter Natalie Gould wrote to say that she is trying to ensure that Gould's Books survives, and is running a 50% off sale until 14 Aug. So if you're strolling along King St Newtown, do drop in.

A few articles that have caught my fancy lately.

• Nicholas Gruen has a thoughtful paper for the COAG Reform Council on economic reform (read slowly - it's like a freeze-dried meal)


• Hal Varian on the economic value of Google


• Hal Varian on hangover-vodka searches & the four stages of unemployment (highly recommended)


• The Grattan Institute on regional investment


• How teacher turnover harms student achievement


• As from Zzzzs: the benefits to students of starting classes a little later in the morning


• Do politicians discriminate against racial-minority voters?


• Do countries grow faster if their politicians are better-educated?


• Elizabeth Farrelly on Canberra


• How to make people use less water (hint: it's all in the social comparisons)


• Gadi Barlevy & Derek Neal propose teacher 'pay for percentile'


• How hospital competition reduces mortality


• 'Last place aversion' - why the poor sometimes oppose redistribution


• How do badly-rated plumbers find new clients? (Answer: they change their names)


• Shaun Vahey and his team at the ANU Centre for Applied Macroeconomic Analysis have established a Shadow RBA Board. You can see their interest rate preferences here (hey guys, why not add a Taylor Rule interest rate too?)

Tim Soutphommasane's recent philosopher column in The Australian dealt with the underrated issue of social mobility - how far does the apple fall from the tree?

I penned a short letter in response, which the Oz kindly ran on Tuesday.

Dear Editor,

I enjoyed Tim Soutphommasane's article on social mobility. As he correctly points out, it's fundamental to how we think about inequality, since most of us are willing to put up with a bigger gap between rich and poor if the lottery is redrawn each generation than if social position is immutable from birth.

Tim quotes my research as finding that Australia is "among the most socially mobile societies in the world". Not quite. My study found that we are more socially mobile than the US, but less socially mobile than the Scandinavians.

For those who like numbers, a 10 percent rise in a father's income is associated with a 1-2 percent rise in his son's income in Denmark and Sweden, 2-3 percent in the UK and Australia, and 4-6 percent in the US and China.

So it's not as hard to jump from rags to riches in Australia as in some other societies. But we could still do more to ensure that every child - no matter their circumstances - has the opportunities that should be their birthright.

Andrew Leigh
Member for Fraser.

The Australian Government's Tax Forum will be held in Canberra on 4-5 October. Expressions of interest opened today for people in several categories: community, business, academics, superannuation, general public, and students.

More details here, with an expression of interest form here.

A friend emails to draw my attention to the new AIHW statistics on drug use.

Thought you might like to know that the updated population stats on drug use are out today. The media is mostly excited about the illicit side of things but... the following may interest you: smoking is down (to 15% of people aged 14+), preference for 'alcopops' among young people is down, and more than two-thirds of people support increased tax on tobacco products or bans on point of sale advertising.

Lots of positive changes there.

By coincidence, two of my favourite economics commentators today have written up papers that I wrote while an economics professor at the Australian National University.

• Ross Gittins discusses my paper with Francesca Cornaglia, which finds that crime lowers the mental wellbeing of non-victims (and suggests that the fear effect of crime may even be larger than the direct impact).


• Peter Martin discusses my study with Joshua Gans, which looked at Australian media slant in the period 1996-2004, and found that the press was mostly pretty centrist until 2004.

The academic publication process being what it is, both are still wending their way through refereeing and revisions.

My AFR article today is on the mining boom and inequality. A big thanks to Parliamentary Library researcher Alan Payne, who painstakingly compiled several of the statistics below (but of course bears no responsibility for any policy conclusions).

Boom Times for the Few, Australian Financial Review, 26 July 2011

In 1978, US economist Henry Aaron described the study of inequality as being like ‘watching the grass grow’. After becoming more equal in the immediate post-war era, inequality in most English-speaking countries had flatlined for decades.

But alas for Aarons, the grass started shooting up as soon as he spoke. Inequality in developed nations has surged over the past generation, with computerisation and deunionisation among the key drivers.

Today, something new is going on. With commodity prices nearly 4 times higher than they were a decade ago, the proverbial pet-shop galah can recite the positive impact of the mining boom on the overall economy. Yet few have stopped to consider the impact of the mining boom on Australian inequality.

Simple economic theory tells us that the mining boom is likely to have concentrated impacts. Few industries are as capital-intensive as mining, so the share of the boom that accrues to workers is significantly smaller than if the boom had been in a labour-intensive sector like education or retail. And with substantial lead-times, a run-up in prices is likely to benefit existing players more than it would in an industry that is easier to enter, like construction or cafes. Given these factors, we should expect that the splash in mining cash will go to the few, not the many.

In the sharemarket, mining stocks now comprise one-fifth of the All Ordinaries index, up from one-tenth a decade ago. In turn, shareholders have rewarded mining bosses generously. From 2003 to 2010, the pay of BHP’s CEO tripled, while CEO pay increased sixfold at both Rio Tinto and Newcrest.

Indeed, what’s happening at the top of the income distribution really is the big story of Australian inequality. According to taxation data, 1849 people had annual incomes over $1 million in 2001-02. In the most recent figures (for 2008-09), there were 6395 people in that income range (indeed, there were 7905 in 2007-08). Not surprisingly, Western Australians now make up a larger share of this group of annual millionaires than they did a decade ago.

The same pattern shows up in figures from the Australian Bureau of Statistics, which divides households into five income groups, and calculates the share of disposable income that each receives. By the end of the noughties, each of the bottom four quintiles had a smaller share than at the start of the decade, while the richest fifth of households had gained about two percentage points. For the first time, the top fifth of Australian households now have twice their share of national income (41 percent), while the poorest fifth of households have about one-third of their proportionate share.

Is the recent rise in inequality due to the mining boom? While it’s hard to be sure, much of the objective evidence points that way. We’re not seeing a growing gap between the poor and the middle – instead, modern Australian inequality is a rising gulf between the middle and the top. This is likely to manifest itself in skyrocketing prices for beachside real estate, escalating fees at elite private schools, and growing attempts to use money to influence political outcomes.

As an academic economist, one of the projects that I found most exciting was a coauthored study with Oxford University’s Tony Atkinson, which looked at long-run trends in incomes of top income groups, such as the richest 1 percent. As a politician, I’m naturally drawn towards thinking about policies that provide greater equity without reducing economic growth. One such policy is to shift Australian mining from royalty taxes to a profits-based tax. When prices rise, miners will pay more tax. When prices fall, miners will pay less tax. Due to be legislated later this year, a Minerals Resource Rent Tax will raise more revenue, more efficiently. MRRT monies will be spent on regional infrastructure, boosting retirement savings (particularly for low-income Australians) and cutting company tax rates.

We can see the positive impact of the mining boom in many indicators – from capital investment to GDP growth. So it shouldn’t be too surprising that the boom has probably also affected inequality. The challenge for policymakers is not to stop the boom, but to find policies that are both efficient and equitable, and help create opportunities across the society. As any sailor knows, it’s the rising tide – not the tidal wave – that lifts all boats.

Andrew Leigh is the federal member for Fraser. At the recent Australian Conference of Economists, he received the biennial award for the best Australian economist under 40.

The ANU has recently posted on their website the video of Lindsay Tanner speaking about his new book, Sideshow (introduced by Gia Metherell and thanked by yours truly). It's just on an hour long, but well worth watching.

Andrew Leigh and Andrew Southcott debate the price on pollution on ABC News 24 Capital Hill, hosted by Lyndal Curtis.http://www.youtube.com/embed/Rdmc0gtatkI