[Insert obligatory April Fools prank her

[Insert obligatory April Fools prank here.]

Surprise, surprise.

The Supercommittee’s failure is the least surprising news in a long time. Don’t believe me? Check the Treasury bond yields. Interest rates on government debt actually went down a little, which means nobody buying bonds thought this was a big surprise. And said yields are at historical lows, which means that investors around the world still thing U.S. government bonds are the safest investment around.

And yes, I prefer to think of Supercommittee as one word. I like the irony of structuring the word Supercommittee like Superman.

It’s time to bring back http://slowclapforcongress.com/

Move on over, Movember.

Should I do the #Movember thing? I gave up on mustaches back in 1999, after I’d laid the groundwork to bring them back into style.

My personal federal income tax: a true, short story

Does everybody know how progressive federal income taxes work? Married couples filing jointly pay 10% on the first $17,000, and then 15% on the next $52,000, then 25% on the next $70,000, etc… Wherever you stop, that’s your “marginal tax rate,” or the tax rate that applies to the next dollar you could make. There’s a pretty easy to read set of tables here. By the way, if you and your spouse make the $69,000 it takes to get into that third bracket (the first $17,000 plus the next $52,000), then you’re doing better than over 2/3rds of the country, according to Wikipedia.

A couple like Amy and I who are in the third bracket, with a marginal tax rate of 25%, are supposed to pay the federal government 10% of the first $17,000 (=$1,700) plus 15% on the next $52,000 (=$7,800) plus 25% on the rest.

However our effective tax rate, which what we actually paid the U.S. government in 2010 divided by our total income, was less than 10%. Less than 10%, my friends, is not being taxed to death. Of course, this doesn’t include state and local and sales taxes.

How did we go from the formula I gave you above, which would have taxed just our first dollars at 10%, and the rest at higher rates? Exemptions, deductions… AKA, loopholes. Mortgage interest and property tax deductions, charitable deductions, student loan interest deductions, etc, etc, etc…

Next time you hear somebody complaining about being taxed at 35%, you should know that they are spinning the data. AKA, lying.

Rocco, we love you, but you’re bringing us down.

Originally posted at Createquity.com.

If you’ve followed theater blogs even casually over the past several weeks, you will have heard about NEA Chair Rocco Landesman’s comments on oversupply of performing arts in his address to the #newplay convening at Arena Stage in Washington DC. Trisha Mead is a Portland arts marketer who broke the story, got quoted (sloppily, without context) in the New York Times, and has been the only blogger, to my knowledge, to get a direct response from Landesman so far. But if you want a more complete view of Landesman’s thoughts, it may be more useful to start with the NEA blog. In fact, if this concerns you, please do read Landesman’s post on the official blog. It may help you avoid hyperbolic hyperventilation. You can also follow #supplydemand on Twitter and participate in the conversation as it unfolds.

The gauntlet thrown down

Landesman cites the NEA’s 2008 Survey of Public Participation in the Arts in saying that performing arts event attendance has dropped 5 percentage points. More specifically, in 2002, 39.4% of U.S. adults (or 81 million) attended either a jazz event, classical music event, opera, musical play, non-musical play, ballet, or art museum or art gallery. In 2008 that number dropped to 34.6% (or 78 million).¹

This 5% of decrease in attendance share, interpreted as demand, is juxtaposed against a 23% increase in the absolute number of nonprofit performing arts organizations during the same time period, interpreted as supply. The 5% is a decrease in percentage of attendees among the adult population, and the 23% is an increase in number of organizations, without reference to size or whether the additional 23% produce events at the same rate as previously existing organizations.²

It’s not a perfect comparison to put the 5% drop in percent of attendance against a 23% increase in number of organizations, but the opposite direction and the size of both changes is still disconcerting. If fewer people are attending arts events, but more organizations are creating them, then this could be a problem, right? Landesman said that we can’t realistically increase demand, so we ought considerer reducing supply. I.e., we need fewer performing arts organizations, or those organizations need to produce fewer events. This idea, that there is an oversupply of performing arts, has been met with negative reactions among many arts workers, to say the least. That the NEA also wants to fund fewer organizations has ratcheted up the anxiety level.

My problem is not that Landesman wants to further ration the already-rationed cookie jar. And I do not believe he thinks he can or should use the NEA to prune the gnarly tree of performing arts in the USA. My issue is that Rocco (can I call him Rocco?) presented a simplistic view of the economics of performing arts, one that hasn’t been much expanded in the discussion since, by focusing only on event attendance and NEA subsidies. Landesman, along with a passel of concerned bloggers, is ignoring what makes nonprofit economics sustainable, strong performance in multiple markets.

The demand function in nonprofit performing arts

Performing arts nonprofit organizations operate in at least three markets: markets for what people will pay to see them perform, the financial markets for debt, investments and endowments (do not apply to all organizations, and are not further discussed here), and the markets for private philanthropy and status. Markets for philanthropy and status are almost entirely missing from the demand side of Rocco’s equation (and the demand side of this traditional economic analysis by Devon Smith).

Rocco speaks of contributed revenue as if it is just a policy-driven subsidy, like a subsidy to the agribusiness industry. Or, as Trisha Mead later put it on 2amtheatre.com, a subsidy for scientific research and development, which is not a bad analogy when describing NEA funding. Frequently, a subsidy is the result of political influence, but when it is a well-intentioned policy instrument, a subsidy makes it possible to get things that we or the government think we need, but just aren’t willing or are unable to pay for on our own. It’s inherently paternalistic–making us eat our spinach (or at least pay for the spinach with a wee miniscule share of our taxes).

For now, I will use the word subsidy for policy-driven funding that somebody, like the government or a foundation, thinks is good for us. A subsidy pays for the spinach. But the vast majority of contributed revenue to arts organization comes from individuals (as the NEA knows; see page 1 of this report), out of sheer appreciation for the work that is generated. When a small business owner contributes $1000 every year to the symphony in her town, she is clearly stating that they music she enjoyed that year was worth at least $1000 more to her, and her community, than what she paid in tickets.³ That is a reflection of demand. Not only that, but she’s signaling to this organization that she likes what they’re doing. If they’re paying attention, and subsequently doing more of what they think she will like, then they are responding to market forces, just in a subtler fashion, and in a market with fewer participants.

Consider how demand differs from person to person. Conceptually it’s not complex. For any given thing that people buy, some people like it more, and are willing to pay more, than others. That’s why the iPhone cost so much when first introduced. Apple knew that some people would want one so badly that they’d happily pay a premium price, and when all their fanboys had one, it would be time to cut prices to reach the next group. If you can get everybody to pay the maximum they’d be willing to pay, then you’ll bring in the most money. Economists and marketers call it price discrimination. When you’re selling tickets you can do this, to a limited extent, with differences in price for seats in the front verses seats in the back (not exactly price discrimination), or through dynamic pricing (Trisha Mead is a big advocate of dynamic pricing). But to really get the most money, you’d like a way for somebody who adores your product to pay you even more than the highest price you’re charging. That’s exactly what you can do as a nonprofit organization when you accept contributions. If you have a good development & fundraising staff, you will get as much revenue as possible given the demand that exists. It will not be reflected, however, in the event attendance figures extrapolated from NEA surveys.

Some contributors aren’t so purely motivated. Corporations may donate for the PR or advertising. Sometimes donors want to sit on committees with other donors to make business contacts or find golf partners. Sometimes, they just want to be associated with a highly respected arts organization, because it impresses their neighbors or clients. This is the market for association and status. Don’t tell the donors that you know this, because such status may be more valuable when not explicitly acknowledged. But truly, there is demand for this. Naturally, this status is more likely to be supplied by larger, longer-lived institutions than by smaller upstarts.

Further, if you want nonprofit arts organizations to conduct R&D for the art world, donors (including foundations) often want to fund exactly that. They demand artistic R&D by funding it.

The demand to supply, and the benefits of competition to suppliers

The market for association and status is not limited to donors, sponsors and underwriters. It extends to the labor market, as well. Rocco is admirably concerned that if performing arts organizations oversupply, against lower demand, then they will have to share what he sees as a shrinking revenue pie with more organizations, which will eventually force organizations to pay their artists less, or at least will make it harder to pay artists a living wage. I think he’s generally right, if the industry structure remains fixed. When, on Twitter, a theater artist suggests that the “model is broken” if he or she doesn’t receive a living wage, I often reply that if they want to be paid more, then less theater should be produced.

Of course, each individual can’t alter the fact that artists supply their own talents for less than what the market will monetarily compensate. And, they really shouldn’t try. First, artists do get some intangible compensation. Anybody working for free, or almost free, creating art gets the intangible benefit of doing something that he or she loves or is driven to do. The artist may also receive respect and admiration from friends. Moreover, many artists are working to build recognition and reputation (or status), so that they have better opportunities to secure paid work in the future. There is a value to intangible compensation. And while we can’t perfectly measure that value, we know it’s there. If it weren’t there, people would stop creating art for free.

Further, the assumption that oversupply will lead to lower revenue per artist is one of those ceteris paribus arguments common in economic theory. If all else is held constant, then more theater and fewer theater-goers leads to less and less money for each theater. In real life, however, ceteris never stays paribus. If you want your city to gain a critical mass of creative, talented theater artists, it helps to have more production. Higher competition within a market will naturally give more options to your theater-goers, making it more likely that they’ll be able to find something they like. This might even increase demand, though there’s no guarantee this will happen, or happen quickly.

However, this is not a recommendation to form more theater companies or chamber orchestra groups. According to the National Arts Index, the vitality of the arts tracks fairly closely with the economy. Recessions impact all areas of demand discussed here. Since 2008, we’ve seen several orchestras fold or come close. Worse, the NAI research indicates that even during prosperous years this last decade, approximately 1/3 of nonprofit arts organizations ran at a deficit. This is a more serious concern, worthy of further analysis, but we still can’t leap to the judgment that this is driven by oversupply.

Conclusion

Demand is a function of more than just ticket sales and attendance. You have to include demand to provide funding, demand to contribute, demand for status, association, and even demand for truth and beauty. Further, the root of oversupply, if it exists, is in artists insisting on supplying more of their generative work to their communities. Rocco can’t stop this even if he wants to, and I doubt he really wants to. If it were to stop, our arts ecosystem would be less vibrant, would hold less potential, and would be less motivating.

Notes:

1. If you analyze the attendance decrease in absolute number terms rather than change in percent, the decrease is 3.7%. But the decrease in percentage of U.S. adults attending is 4.8%, which Landesman has rounded to 5%. The attendance number includes attendance at for-profit events (it’s based on a survey of attendees, many of whom will not know or care if they are at a for-profit or nonprofit event), and the organizations number includes fairs, festivals, and media.
2. The 23% increase in number of nonprofit organizations is taken from the Americans for the Arts National Arts Index. It is the increase from 2002 to 2008 in number of 501(c)(3) arts organizations in the above categories, plus nonprofit media organizations and fairs & festivals. It does not include for-profit arts organizations such as for-profit art galleries. If you convert this to the number of organizations per one million people, for more apt comparison to the change in attendees as percent of the population, then the number of organizations increased from 294 per million to 341 per million, a 16% increase. This isn’t a breakdown by organization size. We can’t assume that the total output of events increased 23% just because the number of organizations did. The additional organizations could be tiny, with low production capacity. If we look at both changes in terms of absolute numbers, you can see that attendance dropped 3.7% and number of organizations (not necessarily number of events) increased 23%. If we look at both changes in terms of percentage of the population, then attendance dropped 4.8 percentage points, and number of organizations per million increased 16.3%.
3. On the value of the $1000 from the small business owner: sure, there is a tax deduction, too. But even if she’s a rich business owner, in which case she might give a lot more than $1000, the tax deduction will only be worth $350 at most (less if a large share of her income is from dividends or capital gains), which means she still wants to give away at least $650 to the symphony.

Advocacy is not a zero-sum game

Here’s an interesting article in The Economist about how environmentalists and logging companies in Canada have found a way to cooperate. The most interesting quote is from Avram Lazar, head of a logging trade group:

“There was a general feeling”, he recalls, “that our differences in reality were smaller than the differences we presented in the public debates. We had fallen into cultural role-playing that wasn’t getting either side the outcomes we were looking for.”

Interesting, no?  The article notes that we in the States are a little less mature about negotiating on behalf of our differing interests. Conflicts tend to take on a knock-down drag-out tone here. Why? Is it because we are soaking in a 24 hour news cycle that will put us on television more if we are nastier? Maybe. Phrasemongers get more airtime, but they accomplish little.

The enemy is… human?

There is not much I can add to this very useful post by conservative blogger, Caleb Howe, entitled “I don’t like Roger Ebert.” Personally, I do like Roger Ebert, most of the time, but I can see why conservatives find him to be almost as maddening as I find Glenn Beck to be. Now, perhaps I can try to see the humanity in Glenn Beck. Might be tough…

The Hearty Boys: competing with a big ol’ phrasemonger

If I gave awards for competing with phrasemongers, the inaugural winners would be the Chicago caterers, one-time Food Network stars, and gay fathers Dan Smith and Steve McDonagh, professionally known as the Hearty Boys.

I’ll recap very quickly: Mike Huckabee gave an interview to The College of New Jersey’s student newspaper, The Perspective. In the interview, he compared homosexuality to drug use, incest, and polygamy. He also suggested that gays and lesbian couples should not be allowed to adopt, because, “Children are not puppies.” He clearly implies that giving rights to LGBTQ people, whether to serve openly in the military, to marry, or to adopt children is just social experimentation, not an issue of human rights.

So, this was published, and then Huckabee claimed his statements in the interview were grossly distorted, and asked the paper to release the tapes to prove it. So they did. No distortion is apparent.

So, here Mike Huckabee has become the phrasemonger of the week, with egg all over his face that he refuses to acknowledge. This is where the Hearty Boys step in. Basically, in an effort to repay an insult with a blessing, they’ve invited Huckabee to come to dinner at their home, and meet them and their son, to see for himself that they are a stable, loving family. Is there a better way to compete with phrasemongers? Inviting somebody to your home for what is sure to be a fantastic dinner sure beats the arguing I engage in, here!

Smith and McDonagh, I salute you for being ready to sit down with and serve and feed and share with somebody who wishes you could not enjoy the family you enjoy. That is the most Christian response I can imagine.

This story is getting some traction in the news. You can follow the story as it unfolds via their Facebook site, Twitter, and McDonagh’s new blog.

Robert M. Solow’s review of How Markets Fail, by John Cassidy

Robert M. Solow famously worked out model of how labor and capital are combined with technological advances and other factors for productive output, which demonstrates that a huge part of economic growth comes from those technological advances or other factors exogenous to an individual or firm’s control. The model is a staple of macroeconomics and international comparative economics. He won the Nobel Prize in Economics in 1987. The guy about as famous as economists get without publishing pop-econ books.

Solow has now reviewed a new pop-econ book by New Yorker staff writer John Cassidy, entitled How Markets Fail: The Logic of Economic Calamities. I don’t know if How Markets Fail is going to make my reading list very soon; Cassidy is a smart journalist, and I’ve recommended his work before, but I’m pretty time-constrained. However, Solow is a legend, and his review is extremely cogent, balanced, and educating. You should read it.

Most writing on economics found in the mainstream and business press is ideologically motivated and intentionally pugilistic…

IN THIS CORNER, weighing in at a lean 1 trillion dollars market capitalization*, counting on a knock-out from the Invisible Hand, the defending champion, lately spending a lot of time on the ropes: Neo-Classical Free Market Economics!

IN THE OPPOSITE CORNER, riding on a wave of populist outrage and checking their hair in the reflection of Paul Krugman’s shiny new Nobel medal: Keynesian/Interventionist Economics!

Unfortunately and predictably, nothing gets solved this way. Journalists and pundits and bloggers and think tanks just provide fuel to their respective power brokers, whether politicians or business leaders. While there are plenty of highly respected economists, testing theory against empirical observation, writing excellent academic papers and blog entries, and teaching insightful courses, they are rarely found making comprehensible observations in an arena of high visibility to the general public.

This makes me very gratified to read Solow’s review of Cassidy’s book, in the New Republic. Forget about the book for a second; Solow provides a very sensible set of observations on the limitations of free market economics, but doesn’t throw the baby out with the bathwater. This levelheadedness won’t be found in the bitter mudslinging between Paul Krugman and John Cochrane (NOTE: don’t read those links unless you have a lot of time on your hands and find it entertaining to see respected professors take pot shots at eachother).

While Solow is condensing an awful lot of information into a few pages, requiring a slow and careful read, it is all apprehensible. And, best of all, his focus is not on proving a theory wrong or right. He doesn’t talk at all about the Solow growth model, labor vs. capital, or total factor productivity. He just wants to discuss how markets fail, without taking an ideological stand on it. He does, however, bring up questions that he thinks Cassidy missed, for example:

Why, in the marketplace (sic!) of ideas, have the evangelists for the unrestricted market attracted so much attention and the “realists” so little? [Cassidy] argues, fairly convincingly, that the truth does not lie predominantly on that side of the issue. So is it that believers always make more effective advocates than skeptics do? Are we for some reason more receptive to simple answers than to complex ones?

That’s a really, really good question. Let’s ask ourselves why we believe what we believe, even in the face of contrary evidence. We all do this, but we can still try to intentionally question our assumptions.

Then he mildly echoes Paul Volcker, who recently told finance execs that the only valuable financial innovation of the last 25 years has been the ATM. Solow’s approach to this issue is less entertaining, and more Socratic:

It is nice that Cassidy is able to use the story of the financial crisis to exemplify some of the systematic sources of egregious market failure. But there is a deeper, or at least prior, question that he does not take up. Is all this financial activity socially useful, even in the absence of breakdown? It is worth a moment’s thought.

So, here in one book review, you get more balanced economic wisdom than you are likely to find in any other mainstream media source. Read it.

FOOTNOTES

*It’s a joke. Don’t take it too seriously.

Analysis of the 47 percenters

This is a very useful analytical article, unpacking the statistic that says 47% of Americans pay no federal income tax.