20 February 2016

Aside: ACE investment: 2018 and beyond

"In the long-run, we are all dead." - John Maynard Keynes

Keynesian economics asserts that boom and bust cycles are to be expected, markets are not completely efficient (being subject to short term irrational fluctuations) and that public financial institutions can and should intervene to rebalance the economy. The quantitative easing implemented by the Bank of England, the Federal Reserve and the ECB from 2008 onwards is rooted in the work of John Maynard Keynes. Broadly speaking, Keynes argued that when business cycles were in a lull (bust) then governments should spend to stimulate the wider economy, getting into debt if necessary.

There is, of course, another side of the coin: Milton Friedman believed and taught that governments must play a lesser role; never interfering, removing regulation, allowing the market to dictate terms and staying out of the affairs of business.

One of these economists was founding chair of the Arts Council (and on the dark side of that coin, director of the British Eugenics Society).

Keynes' involvement in what became ACE (yes - the Royal Opera House got most of the initial public funding and of course London got the rest) is worth keeping in mind when considering ACE's future plans (read more about Keynes and ACE).

ACE's proposals for 2018 onwards are available here. I don't know enough about funding museums or libraries so what follows is theatre-centric.

Whether we consider it  'subsidy' or 'investment', ACE's various streams are stimuli for the arts. Classical economics dictates that stimulating supply will fuel demand (if you build it, they will come) and prices will thus stabilise. Keynes believed this may be true in the long run but that in the short run prices could be very sticky (the duration of long and short run is debatable: the short run could in fact be several years). For example, an unemployed actor is never going to ask for a pay increase - they will instead take work where they find it. This means that with an abundance of unemployment amongst actors, production costs remain depressed, contrary to Baumol's oft-stated economic dilemma (which was of course that performing arts need to be subsidised because wages go up but productivity gains cannot be made (unless of course you go holographic!)).

 In times of depression, governments can adopt a Keynesian approach by either increasing spending (borrowing to do so) and keeping taxes neutral (the approach favoured by the left) or reducing spending and decrease taxes (the approach favoured by the right). Lowering taxes and increasing spending has been done by both sides, mostly when starting a war.

Momentarily consider ACE as a pseudo-government and 'cultural footprint' the equivalent of 'real GDP' (I acknowledge that ACE cannot borrow more than it has so this is flawed but please stay with me).

Is this theoretical arts economy operating at full potential? I think not.

Is there excess capacity to create more art? I think so.

I struggle to see how continued focus on supply side subsidy will get the ecology where ACE wants it to be. There must surely be stimulus on the demand side as well, not just the supply side?

One way of doing so would be to put absolute faith in the power of the market, cut all subsidy and instead provide each citizen with an annual £11 voucher for the arts. This was a serious proposal from the Adam Smith Institute and absolutely not something I'm in favour of.

Perhaps there's something instead in the 'Cycle to Work' scheme. Introduced to reduce pollution and increase health, the government's scheme allows employees to loan bicycles from their employer as a tax-free benefit. The bike industry as a whole has certainly benefited from this government incentive to get more people riding bikes more often, why couldn't this be the case for the arts? There are some interesting art incentives that sit squarely on the demand side such as Art Pass or Own Art.

There is of course some risk to stimulating demand because it's incredibly hard to remove that stimulus once injected. If you overdo it, prices will soar. We'll then be in a situation where every article in every publications is rightfully about Baumol's visionary dilemma but for the time being though, I think there's more to learn from Keynes.