Ann Hollingshead is a recent graduate of the Goldman School of Public Policy at the University of California, Berkeley. While at the Goldman School, she wrote her master’s thesis entitled, When and How Cities Should Implement Inclusionary Housing Policies?, with support and funding from the Cornerstone Partnership.
Berkeley’s Goldman School of Public Policy teaches us to use the “Eight Fold Path” to analyze policy options. Not to be confused with the Buddhist teachings—although it also aspires to the cessation of suffering—the Eight Fold Path is a method for structuring policy analysis. This was the method that I used, with advice and support from the Cornerstone Partnership, to write my master’s thesis on the economic and policy dimensions of inclusionary housing policies. Of its eight steps, there are three that are relevant to this discussion. Step 3 instructs us to construct policy alternatives and Step 4 asks us to define the criteria we use to judge the merits of a policy alternative. In short, Step 4 tells us to clearly define the meaning of “success.” It is not until Step 7 that we “decide” by choosing between the policy alternatives.
As you might imagine, reserving judgement until the end is tremendously difficult. Humans like to know how things wind up: we skip to the last page of our mystery book, we read spoilers of our favorite TV shows, and we guess at the ending of the movie as we watch it.
Here is where I must admit that I did not wait until Step 7 to start judging the alternatives. I had an idea about the “right” answer before I finished the analysis. And, I’m thrilled to admit, actually doing the analysis proved my snap judgement wrong.
In my analysis, I defined three policy alternatives: (1) a program that involves only on-site units, (2) a program that involves only fees, and (3) a blended program that involves both. Economic theory suggests that Alternative 3 is the best. In any program, choice nearly always leads to the more efficient outcome. In this case, the reason for this is clear: a developer with the choice between paying a fee and building a unit will build if units are relatively cheap and will pay if units are expensive. Developers with high and low building expenses, alike, will be better off.
To my dismay as an economist, it was not economic theory that proved to be the critical insight in this choice. Rather, through conversations with program managers and administrators, I learned that the pivotal issue in this tradeoff exists in the political realities of these policies. Namely, my interviews led me to one strong, unexpected message: fees are difficult to set. For political, administrative, or other reasons, many communities struggle—and ultimately fail—to set fees as high as they should be. Simple economics fills in the rest: a low fee undermines the effectiveness of a program and the efficiency of choice.
And so, in the end, I concluded that while the ideal policy design is a blended policy that makes significant use of both units and fees, it is not the most realistic, nor should it be a community’s default position. If properly structured, a blended policy can be the most effective for minimizing unintended market consequences and generating affordable housing. However, in general, a units-focused policy is the most reliable alternative.
In the end, I the Eight Fold Path of policy analysis did not lead to the cessation of suffering, at least for the analyst. However, my analysis did show that inclusionary housing policies are flexible, effective tools for cities to achieve better housing affordability, with few costs to developers and consumers. And that conclusion only took eight [noble] steps in the path toward better policy.