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The best and worst of the U.S. and how Australia compares - Part 1

By Andrew Leigh and Justin Wolfers - posted Friday, 16 January 2004


One way in which America encourages innovation is by lessening the cost of failure. Bankruptcy in America does not carry the same social stigma as in Australia. Indeed, it can even be a positive attribute in some contexts. Journalist John Mickelthwaite argues that in Silicon Valley, bankruptcy “is treated like a duelling scar in a Prussian officer’s mess”. And America’s more benign insolvency laws allow companies to continue trading in receivership – part of the reason why United is still in the skies, while Ansett has long since departed.

This spirit of restless innovation spills over from the business sector to the world of government. The American policy process – for all its flaws – fosters a fiercely competitive market for ideas. A vibrant think-tank sector is supported by philanthropists of both political persuasions, ensuring real scrutiny of policy proposals. In turn, this encourages U.S. politicians to insist on randomised trials of policy innovations, while their Australian counterparts too often regard policy analysis as a political tool to be used by the government (the Federal Government’s 1999 decision not to publicly release Treasury’s analysis of the effects of the GST is a particularly egregious example). With policy ideas the centre of political discourse, it is not surprising to see our colleagues readily pass between teaching at leading universities and plum policy posts in Washington D.C.

In the early decades of the twentieth century, Australia earned itself a reputation as “the social laboratory of the world”, as the first country to use the secret ballot, the second (after New Zealand) to give women the vote, and one of the earliest to implement minimum wages and pensions. Yet today, the mantle for social policy experimentation is on the other side of the Pacific.

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An education culture

Received wisdom caricaturing the under-educated American is a lot like the stereotype of the Ugly Australian; while each has a grain of truth, neither is particularly accurate. Nine in ten Americans finish year twelve, compared to only seven in ten of Australians (or eight in ten if we include equivalent vocational training). Indeed, Americans have always had higher school completion rates than Australians. In the 1930s, the average young American in most parts of the country had completed year ten – a standard not attained in Australia until the 1960s.

Critics of America’s school system rightly point to international achievements tests, showing that U.S. high schools tend to lag behind those in other countries (Australian schools do comparatively well on these tests). Yet it is also worth noting that the education debate is more robust in America than anywhere else in the world. In an innovation-driven culture, experimental education interventions are at the top of the policy agenda, and it is a sure bet that the 2004 Presidential election will feature a livelier debate about the future of education than candidates Howard and Crean will offer.

Another critical issue is access to tertiary education. About one-third of both young Americans and Australians are in university, and average annual tuition is only a little pricier in America (about one-seventh of median family income ) than HECS in Australia (about one-tenth of median family income). Although the U.S. has a variety of needs-based scholarships and low-interest loans, HECS is clearly superior – and the latest research indicates that its introduction did not reduce the participation rates of poor students.

But in our view, the biggest difference in access to universities is in their entry criteria. Institutions like Harvard and Stanford actively seek young students from disadvantaged backgrounds, interpreting their test scores in light of their disadvantage when making admissions decisions. To take just one example, young Native Americans are about fifty percent more likely to attend university than young indigenous Australian, despite arguably comparable levels of disadvantage. Having ourselves attended Ivy League universities in the U.S. and their “sandstone” counterparts in Australia, we believe that there is a risk that the simplistic test score-based admissions criteria used in Australia effectively lock out those from disadvantaged backgrounds. Egalitarianism requires more of our university admissions offices than merely ranking students on their UAI, ENTER or TER.

Beyond teaching, U.S. universities are currently producing much of the world’s cutting edge research. In our field, for example, a recent study suggested that close to two-thirds of the world’s leading 1000 economics researchers were working in American universities. Yet beyond culture, resources matter. While Australian and American universities have roughly comparable tuition bases, the large differences in resources reflect both greater government support (a natural outcome for a large country), and massive charitable donations received by leading universities, a topic to which we now turn.

Charitable donations

Touring America in 1831, French writer Alexis de Tocqueville observed that it gives Americans “great pleasure to point out how an enlightened self-love continually leads them to help one another and disposes them freely to give part of their time and wealth for the good of the state.” Today, while Americans give two percent of their income to charity, Australians give less than half of one percent. America’s philanthropic spirit has created some of the world’s best medical research foundations, policy think-tanks, arts organisations, and universities. One in thirty Americans continue to give a tithe - one tenth of their income - to their church.

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At the top, the contrast is at its most stark. America’s richest man, Bill Gates, has given away one-third of his wealth – a cool $33 billion – primarily towards addressing global health challenges. Moreover he plans to give most of the rest away, in short order. By comparison, while Australia’s richest man, Kerry Packer, is coy about his donations, we estimate that he has given away less than one-twentieth of his money – with the largest donations going to Australian hospitals. Frank Lowy’s bold decision to fund a new think-tank is sadly atypical of the Australian super-rich. Enlightened self-interest for affluent Americans means leaving a better society. Australian silvertails generally prefer to leave behind rich children instead.

Low rates of long-term unemployment

Most Australian labour economists thought that they would never see our unemployment rates approach those in the U.S. The purported trade-off was that America’s labour market yielded unacceptable inequality, while our higher unemployment rate reflected a gentler, fairer society. The purported trade-off was that America’s labour market yielded unacceptable inequality, while our higher unemployment rate reflected a gentler, fairer society. Yet today our unemployment rates are exactly equal, at 6.2 percent.

But while the headline rates are similar, the burden of unemployment is shared much less equitably in Australia. The average duration of unemployment in Australia is ten months, with one in five of the unemployed having been out of a job for more than a year, and one in eight for more than two years. As anyone who has spent time looking for work knows, spells like this can be a bitter, dispiriting experience, destroying families, communities, hope, and creating further scars on the children of the unemployed. Yet this is not the only way. In the U.S. the burden of unemployment is shared more widely, and the typical unemployment spell is around three months. Less than one in sixteen of the American jobless have been searching for more than a year.

These two facts - similar jobless rates and shorter unemployment spells - means that in total, Americans are spending as many days out of work, but that this burden is being shared around more equally. Partly this is because America has more carrots to encourage low-wage workers to find work - a program called the Earned Income Tax Credit provides up to a 40 percent top-up for some low-wage families, which can amount to as much as $6300 per year. The U.S. system also has more sticks - unemployment benefits typically expire after six months, and family assistance expires after three years. And finally, low firing costs ensure much more turnover in the American job market.

As we will argue, this policy is not without its costs - which have come largely in the form of growing inequality. But it should not be forgotten that work is shared more equally in the U.S. than Australia. Beyond the social and equity issues, there are macroeconomic implications: having only been unemployed for a few months, the American jobless are more “job ready”, and our research suggests that this is a key factor explaining the resilience of the U.S. economy. While Australian policymakers show signs of hubris, we should remember that it has taken well over a decade for the unemployment rate to return to levels last seen prior to the 1991 recession.

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This is part one of an article first published in AQ. Part two discusses some of the problems of life in the States.



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About the Authors

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

Dr Justin Wolfers is an Assistant Professor of Economics at Business and Public Policy Department of the Wharton School, University of Pennsylvania.

Other articles by these Authors

All articles by Andrew Leigh
All articles by Justin Wolfers
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