Lecture Notes: The Economics of Public Policy

For more than a decade, economics professor Sarah West’s teaching load included “Public Finance,” a course focused on taxation. Five years ago, she demolished that syllabus and built a new class. “I was tired of its narrowness,” says West, who graduated from Mac in 1991. “I wanted students to dabble in any element of public policy.” The senior-level course that emerged, “Economics of Public Policy,” requires students to collaborate on a policy brief assignment similar to what you’d find in a master’s-level program: a high-level analysis of a policy question, geared toward the general public.

How does economic analysis shape public policy?
In analyzing public policy, economists develop theories that help us predict a policy’s likely effects, which helps us quantify wellbeing.

For example, an economist approaches the question of whether we should increase the minimum wage by first trying to understand what the effects might be. What are the conditions under which we might expect a lot of people to lose their jobs as a result of a minimum wage increase? We construct “if/then” statements to help understand what we need to look for in markets to see the effects. Can workers, for example, be easily replaced by machines or touch screens? After we understand the conditions under which we might expect effects to go one way or the other, then we attempt to measure the extent to which these conditions exist and what has happened when a policy change has been implemented in the past.

That’s part of what distinguishes economics from other social sciences: our level of comfort with the quantitative. We’re willing to engage in some simplification in order to try to uncover quantitative realities. We desperately need our other social science colleagues to help us fill in the overall picture. But what economists can contribute is a strategy for estimating the effects of a policy change in isolation from all the other complex things that are happening.

What questions have you investigated in your own research?
Several years ago, my former student Needham Hurst ’11 and I looked at the effects of the METRO Blue Line light rail on land use surrounding station areas. If you drive down Highway 55 in Minneapolis, you can see a number of relatively new apartment complexes, and you might think, “Wow, that must be the result of the changes that took place because of the Blue Line.”

When we compared the rate of change along Highway 55 with what’s happening in the rest of the city, though, we found that the Blue Line’s introduction in 2004 had very limited effects. We weren’t able to find much evidence that it was more than just a ripe corridor for redevelopment.

Did that surprise you?
Totally and completely. When we discussed our results with the public, it surprised the public, too. It nagged at me—I grew up in that neighborhood, crossing Highway 55 on my way to high school, and I’ve seen the changes over time. I just couldn’t imagine that the train didn’t have some effect.

What bothered me the most after that initial study was that when we measured the effect of the new Blue Line stations, we did what’s typical in urban economics: we drew circles around
those stations. We figured that developers would be interested in creating new apartment complexes near stations to market to commuters. The problem is, you can’t actually develop some of the parcels within these circles. And furthermore, the real catchment areas—the spaces where commuters pass through en route to the train—aren’t actually circles. The most likely places to build new apartment complexes for commuters may be along existing streets like 38th and 46th, which have the most direct access to Blue Line stations—which means the area that is affected by an active station looks more like a squished oval than a circle.

What did you do next?
Vergi Agustini ’19 and I reexamined the hypothesis that the introduction of rail will induce land use change but instead measured the areas not as circles but as ovals along the arterials. I’ve found very few studies that estimate change along arterials rather than in the traditional circles. We did something very different—and we found substantial evidence that the train mattered.

How has doing qualitative work shifted your research practice?
It’s not that people haven’t had these ideas before. Any urban planner will say, “Of course you shouldn’t just blindly draw a circle around a station.” They think qualitatively all the time about effects on a community.

Economists, on the other hand, have been less likely to use the more complicated qualitative analysis because our expertise is in statistics. When you’re doing statistical analysis, you seek neat and tidy ways of measuring—and circles are simple. I’m learning from urban planners about how cities work, then applying the intensive statistical analysis to try to uncover the Blue Line’s quantitative impact. I’m working now with Clemens Pilgram ’15, who just started a PhD in urban planning, on two other questions: How do a station area’s characteristics affect whether and how people use the light rail? And how do those characteristics affect property values around stations?

Has your perspective as an economist changed?
I entered economics with an interdisciplinary approach—so I don’t know that my views have changed, but I feel more freedom and comfort to explore them. Now, later in my career, I’ve been able to think more broadly about questions, when there’s less pressure to establish a reputation for being a technical wonder as an economist. At Macalester, interdisciplinary work on complex, long-term projects is appreciated and supported. I feel very lucky to be in that environment.

By Rebecca Dejarlais Ortiz ’06 / Illustration by Thom Sevalrud