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/

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.