Economics in a Public Policy Environment: An intern’s Perspective

Economics in a Public Policy Environment: An intern’s Perspective

As there are several internship applications currently open (see our opportunities page for more information), I’m deviating from my usual macroeconomic analyses to provide some practical insights into what being an “economic intern” entails. More specifically, this article focuses on how economics can be applied in a public policy environment. Should you expect to spend gruelling hours deducing the saving rate that maximises consumption per worker in steady state? Read on to find out!

Over the past year I’ve interned at both the Department of Treasury and Finance (DTF) and the Grattan Institute. In a public policy environment, the discipline of economics is really a toolkit that is used to aid understanding of complex issues. Issues are initially framed from economic viewpoints, and you may well find that policy analysis draws upon the economic principles we learn in our classes. For instance, analysts may consider whether the policy: attempts to overcome some form of market failure; results in productivity enhancements; contains benefits that exceed costs (cost-benefit analysis anyone?); is more cost effective relative to other alternatives; and so on!

To my surprise, much of this toolkit is in fact composed of microeconomic principles. Let’s consider the typical principal-agent model in the context of school education policies. A policy analyst may be interested in analysing the impacts of introducing market-based mechanisms in school education. In the case of increasing school autonomy, the government agency in charge of the school system (principal) appoints decision-making authority to schools (agents). In the absence of divergent interests or asymmetric information, agents are expected to act in line with system objectives. However where divergent interests and asymmetric information exist, agents have incentives to engage in opportunistic behaviour by pursuing goals other than advancing student achievement. This result has clear implications for policy, suggesting that autonomy-enhancing reforms may only be successful if they are accompanied by measures which increase schools’ accountability.

Alternatively, we can consider how economic principles can help aid understanding of industry policies such as innovation. Innovation results in the production of knowledge, which can be subsumed as a public good owing to non-excludability and non-rivalry properties. Furthermore, innovative activities create positive externalities that are not considered by individual firms when making resource allocation decisions. These factors are the crux of the market failure argument, implying that firms allocate fewer resources toward innovative activities than is socially optimal. The policymaker is thus cast as an optimising social planner, with a distinct goal to change private incentives to invest by using tools such as subsidies, intellectual property rights, and public knowledge production. Ideally, these policies would eliminate the deadweight loss associated with underinvestment in innovation.

The above examples illustrate how economic principles can be used to frame policy issues in order to aid understanding. However we definitely do not finish there! The application of economic principles to policymaking is strengthened through objective, evidence-based analyses. The policymaker may expand upon the initial conceptual framework by studying the results of previous econometric studies and the implications of these results. If possible, studies may be replicated using relevant data. Qualitative case studies of similar policies implemented elsewhere are also of great importance.

So that’s the application of economics, but what might an intern expect to do on a daily basis? Although tedious and occasionally dry, an initial period of background reading is essential for contextualising and understanding the issues at hand. Economic/policy interns are usually given a specific project to work on throughout the duration of the internship, which may culminate in a comprehensive research report and a verbal presentation. Before the internship, read widely and test your ideas – ESSA provides a fantastic environment to engage in such discussions. It also helps to be familiar with data handling and the functions of Excel, and perhaps even regression software.

An environment such as DTF will give you a unique insight into the workings of government, with the opportunity to play an active role in governmental processes such as preparing Ministerial briefs and providing policy advice on budget bids. An intern working in a macroeconomics division will also have the opportunity to monitor and analyse trends in macroeconomic indicators, as well as write briefs on Australian economic data releases. Think tanks such as Grattan provide exposure to a variety of policy areas of fundamental importance to Australia. Depending on the stage of the particular project you’re involved in, you may find yourself working on a myriad of tasks ranging from initial scoping work and literature reviews, to number crunching and final report writing.

Indisputably though, the most valuable learning experiences are obtained from participation in team discussions and general interactions with colleagues. Here you can observe the flow of ideas between experienced professionals, gain exposure to different ways of thinking, and establish important connections. The intrinsic rewards are fantastic too! There is great value in building a career that is centered on achieving positive outcomes for society, and working in policy allows economics to be applied to practical, real-world scenarios.

Finally, a quick disclaimer! These insights have all obviously been gleaned from my own (subjective) experiences and through interactions with the talented people I’ve had the fortune of working with. Also note that I have not discussed economic modelling at all, although theoretical constructs are essential for expressing and analysing complex economic processes.

To all aspiring economists and policy analysts reading this, best of luck with your internship applications!

You can follow me on Twitter @SharonLai_