Arts subsidies and economics
There’s been some discussion lately of federal funding for the arts, especially in light of the debate about cuts in the next budget. As someone who planned on a career in the arts until I realized how utterly unlucrative that would be, I have a particular interest in this. By unlucrative, I don’t mean that being a theatre director (my erstwhile dream) wouldn’t make me a millionaire. I mean that, according to the Bureau of Labor Statistics, in May 2008, about 150,000 people were employed as actors, directors or producers in all fields. That includes film, television, theatre and radio. Assuming that all of these breakdowns are equal,* 12,500 people were employed as theatre directors that month in the entire country. As a comparison, there were about 750,000 lawyers employed that month. Even someone who is very good at directing theatre (which, frankly, I wasn’t) is unlikely to be employed in their chosen profession at any given time. So, instead, I decided to be a policy analyst, a profession about which the BLS is curiously silent.
For the purposes of this discussion, I’m going to look at theatre specifically, since that’s my wheelhouse, but I think a lot of the basic principles will be applicable to other forms that are heavily subsidized with federal dollars, like jazz music and dance.
The first point that I think is really important is that theatre isn’t really a pure public good. Economists would categorize it as a club good, which means it’s excludable and non-rivalrous. Excludable goods are goods that it’s technically easy to get people to pay for – theatre is excludable because you can prevent people who haven’t paid for a ticket from seeing a show. Theatre is also non-rivalrous, that is, if I go to see a show, that doesn’t impact how much show is available for you to see. Of course, there comes a point when there are no more seats in the house, but, well, we’re talking about theatre here. Congestion isn’t really a problem.
The biggest problem with club goods is that the fixed costs of getting them running are usually high, even though the marginal costs are very low. Basic economics tells us that a market is functioning when the price of a good is equal to its marginal cost. In theatre, the marginal cost is close to nothing – wear and tear on the seats, programs. Private providers are rarely incentivized to provide club goods because it’s very difficult for them to cover those fixed costs.
Historically, we have tried to correct this market failure by subsidizing the supply. Essentially, government subsidies to theatre producers are paying for a portion of the fixed costs so that the producers can sell fewer tickets than they would if there was market equilibrium and still (ideally) make some kind of profit. The problem, though, is that the fixed costs of producing theatre are so high and the marginal costs are so low that most producers can’t ever make enough profit to be able to fund their next production without that government subsidy. Government subsidies aren’t a one-time stimulus to bring the market to sustainability, they’re an essential part of the market.
That’s not necessarily a bad thing. We could decide that theatre is important enough that we’re willing to accept government subsidization as simply part of the system. Other countries do this and we do this for other things – agricultural subsidies for corn, for example. However, corn comes from Iowa, which is important in Presidential elections and theatre…well, let’s just say there isn’t a lot of political will to endlessly subsidize the production of theatre.
What if we looked at a different kind of arts subsidy, though? What if we tried a demand-side subsidy instead of a supply-side one? This is a genuine question – I’m not particularly familiar with demand-side subsidies so I’m not sure about what kind of things have been done before to incentivize demand and how successful they’ve been. Tax credits work, sometimes, to change behavior, but I’m not sure exactly how we could make those work. We could offer a credit equal to a certain percentage of dollars spent on the arts – theatre tickets, museum admissions, etc. This would be pretty complicated, though, and could easily end up being a tax break for people who are already consumers of the arts instead of incentivizing demand from new consumers.
Guess I’ll be spending the weekend researching the effectiveness of demand-side subsidies…
*Which is unlikely to be true, since most productions require more actors than directors and there’s a lot more television out there than theatre.