Before the financial crisis, symphony orchestras had considerably more financial support than they do today. We now observe the Philadelphia Orchestra, one of America’s most classic musical institutions, dealing with issues related to bankruptcy. Other orchestras are on the verge on folding or at least scaling back their season’s programs.
The initial negative shock of the crisis, among its other effects, caused donors and potential donors to see that support for these projects was weaker than they thought. Many of these donors are now less than keen to keep pouring money into losing endeavors. An unraveling process has set in. It’s not just the negative wealth effect, but new information has been revealed about popularity and sustainability of the underlying venture. Neither monetary nor fiscal stimulus will prove any kind of easy cure for these institutions or, potentially, for these jobs.
There is a well-known literature in finance about how trading, combined with the possibility of sudden price dips, causes market participants to learn the shape of the market demand curve and thus revalue the appropriate overall level of prices. The mere act of trading can generate market volatility. This kind of insight is not yet sufficiently appreciated in macroeconomics. The financial crisis caused us to see that many market institutions were on shakier ground than we had thought.
You will note, once again, that this structural problem — like so many others — does not imply excess demand for labor in any sector. Why do I keep reading literally hundreds of blog posts which conceive of structural labor market problems only in terms of “‘excess supply of labor in one market, excess demand for labor in another.” That’s a simple, unforced error.
File under: Recalculation arguments for Arnold Kling. In fact, Arnold is thinking along very similar lines:
One way to view the past few years is that the financial crisis of September 2008 sent a signal to firms that had been holding on to old, costly production methods that now would be a good time to try out newer, cheaper approaches. So we had a clustering of this sort of restructuring.
Which made me wonder why the Detroit Symphony went on strike last year.
Hi Tyler,
Thanks for the interesting post. I was wondering if you could please point me in the direction of a good summary article or similar for the finance literature you mentioned about trading helping agents learn the shape of the demand curve? I am keen to learn more about learning in the financial literature, since I’ve only really worked on it from the economics side myself.
Thanks for this post, and all the others, keep up the good work!
I don’t think we can draw too many conclusions from the plight of the Philadelphia Orchestra. It competes for philanthropic dollars against a wide range of charities – both local and national. And in any competitive endeavor, some institutions will falter and fail. It would be unusual for a large, famous and entrenched charity to fail, but not unexpected.
And, though I’m not close to the situation, I gather some of its problems stem from its own fund-raising problems.
Bill Woolsey wrote a good critique of Kling’s contrasting of the recalculation argument with the AS-AD model.
http://monetaryfreedom-billwoolsey.blogspot.com/
The link between symphonies and macroeconomics seems quite tenuous.
Clearly you need to rethink the purpose of economics if you think a symphony has no relationship to macroeconomics.
Perhaps you believe economics has no bearing on people and what they actually do with their lives, how they “spend” their time?
I bet you think the earth has nothing to do with macroeconomics either.
You say “The mere act of trading can generate market volatility.” You seem to imply that this is a new idea from finance. Let me tell you that in agricultural economics had been known for a long time, long enough to have discussed as part of business cycle theories before, during, and after Keynes. And I’m sure also, although I cannot think of any reference, that the income-elasticity of donations has been analyzed in detail long ago and most likely the analysis has concluded that it’s high, greater than one (although largely conditioned by taxation). Finally, and most important, both Arnold Kling and you should pay attention to the huge research on trade policy reform in developing countries in the 1970s and 1980s, where the problems of resource reallocation were extensively discussed.
Let me repeat what I said yesterday in a comment to one of your post. The elephant in the room is regulation –it’s regulation what is conditioning the reallocation of resources in response to one of the greatest changes in the world market economy in the past 10 thousand years –that is, in response to the integration of China, India and several other countries to the world market economy whose size in terms of population has doubled. It’s your country’s regulation what is blocking resource reallocation as was clearly presented in the link to a WP article that I provided yesterday.
Unfortunately your president is already in campaign and willing to say anything to justify his failed policies. He didn’t go as far as calling for killing ATMs but someone else has been trying to find people’s reaction to the idea:
http://www.mrctv.org/blog/petition-ban-job-killing-atm-machines
Yeah, we had some big regulators in the White House for 20 of the last 30 years. Damn those Republicans. And the last one and his crony Alan Greenspan really over regulated.
There has always been regulation– and yet the US has had thirty years of deregulation. Which isn’t to say that we got rid of all the bad regulations (or didn’t get rid of some we should have kept). However there’s nothing new uner the sun here. And no reason why businesses should suddenly long-extant regulations a huge burden when tebn years ago they did not– and indeed the economy of the 50s and 60s we long back on fondly, whether rightly or not, was also a more formly regulated one.
There has always been regulation– and yet the US has had thirty years of deregulation.
Have we had 30 years of deregulation, or have we had 30 years of claiming we had deregulation?
So, like, FDA is now much less able to stop dangerous food additives, but the cost and delay of approval for new products have if anything gone up. EPA is unable to prevent ecological disasters, but if you want to get the right to clearcut a national forest it takes more time and money and connections than it used to, even if it’s been clearcut every 20 years.
This is not what I mean by deregulation.
I find it odd to question first the amount of legitimate deregulation, when the first question that should come to mind is the amount (or at least quality) of regulation in the first place.
The latest financial meltdown, for example, should have amply proven that the SEC for all of its ‘regulations’ has been a largely toothless – not to mention feckless – organization.
Do you know the name of the previous SEC commissioner and his attitude towards regulation.
I think not. You might want to do a little research and be more informed, because he did not believe in regulation, and in fact, favored the light touch.
Second, it was not SEC so much as the Treasury department in the previous administration as well as the failure of the Fed supervisory powers (aka Greenspan) that was the “regulatory” failure.
The latest financial meltdown, for example, should have amply proven that the SEC for all of its ‘regulations’ has been a largely toothless – not to mention feckless – organization.
I’ve only looked at SEC in the context of stock markets. But in that context, hasn’t it been pretty much toothless from the beginning?
The trading firms didn’t seem to mind “regulation” that added some expense and customer confidence. But whenever a zealous SEC tried to actually do something that mattered, they got squashed pretty quick.
It’s your country’s regulation what is blocking resource reallocation as was clearly presented in the link to a WP article that I provided yesterday.
Could you provide a specific example of particularly bad allocation caused by regulation? And are other (western) countries managing this reallocation any better? I sort of see your point but how do we translate it into specific policy changes?
Gasohol is one obvious example. In theory this should stretch our oil supplies. In practice, when we started it, we used more than 10 gallons of fuel to produce 10 gallons of gasohol.
Energy efficiency has increased to the point that there are credible claims that we may now burn only 4 gallons of gasohol or equivalent (some of it from natural gas) to produce 5 gallons of gasohol. However, some of the energy costs are probably not counted for this estimate. This is still not a particularly good deal.
If we were to eliminate the subsidies for gasohol and allow the sale of gasoline, consumers would be free to choose. Gasohol ought to sell for about 5% less than gasoline, ignoring other preferences, since it gets about 5% less mileage. The gasohol industry is mature enough that it could surely prosper without subsidies by now, if it’s actually economic.
I don’t want to claim that gasohol is bad allocation caused by regulation. But gasohol is definitely caused by regulation, and we won’t find out whether it’s bad unless we quit regulating it.
I don’t understand this statement (or more precisely, I don’t understand the reasoning): “You will note, once again, that this structural problem — like so many others — does not imply excess demand for labor in any sector”. Thanks in advance for any elucidation.
Rahul: Here’s some universally (or so I believe) recognized bad allocations due to regulation:
the ethanol mandates
the effective off shore and Alaskan drilling bans
CAFE standards
Cash for clunkers
Fannie / Freddie
the effective new nuclear plant bans (there’s a similar issue getting permission to mine uranium near where I live)
These are just the ones off the top of my head that lead to misallocations of tens to hundreds of billions of dollars a year.
But what’s the connection to “in response to the integration of China, India and several other countries to the world market “.
Increased demand from China and India for resources and capital
Preventing a nuclear meltdown like Fukushima or Chernobyl is a misallocation of resources?
It easily might be, given the tens of thousands killed by coal in the United States every year.
Mogden, nuclear power accident rates are an example of the statistical problem called “gambler’s ruin”. We don’t know the average cost or fatality of nuclear accidents. We don’t know how bad the rare ones are. We might get a rare accident that makes the cost of Chernobyl look like an afternoon tea party. We don’t know.
We get some data from the nuclear plants we have, but of course the data from 50-year-old nuclear plants won’t really apply to new plants with very different designs. We naturally think the new ones would be better and safer, but they haven’t actually been tested that much. There could be one hidden flaw that results in a terrible accident, a thousand times worse than Chernobyl.
If we could apply the known data to new plants, here’s how it stacks up — say we make 10 times as many new plants as we have old plants. Then in 10 years the new plants will give us as much data as the old plants would have given us in 100 years. In 10 years we will already be in uncharted territory, with lots of room for rare events to show up that have never happened yet.
Needless to say, insurance companies have a whole lot of hesitation about getting involved in this sort of thing. They have no idea how to estimate the odds for an accident that would bankrupt them.
But coal plants aren’t nearly so bad. About the worst that can happen to a single coal mine is it catches fire and a few hundred miners choke to death, and the fire burns out of control for 50+ years so the mine is useless. Coal also releases tiny quantities of radium etc into the air when it’s burned, in amounts that are roughly linear with the amount of coal burned, and any resulting cancers etc cannot be traced back to the coal company and the coal company will never be held responsible for them.
See the difference?
CAFE standards have been around for most of my life– and the GREs are older than me by a considerable amount of time. Cash for Clunkers was a very brief-lived program, now gone.
None of this points to anything that could be hamstringing the economy.
Back to the drawing board, I’m afriad.
Cash for Clunkers devastated the used car market, which is still driving up prices of used cars above what they would’ve otherwise have been. See, e.g., http://news.preownedcar.com/2009/08/24/effect-of-cash-for-clunkers-on-used-car-price/
“Over 690,000 vehicles are off the used car market (headed to sh[r]eader instead).”
That’s a textbook negative supply shock which we’ve not worked out of the economy yet. While bad at any time, I think it’s a relatively easy case to make that CFC was implemented at the worst possible time too (in a down economy, people tend to drive cars longer, which was already lowering supply in the used car market, lengthening the time for the shock to work its way out of the economy)
Also, it appears you’ve not looked very hard at CAFE if you don’t think it has a negative impact on the economy. See http://www.automotive-fleet.com/Blog/Market-Trends/Story/2011/05/The-Impact-of-CAFE-on-Fleet-Procurement.aspx
“In 2016, CAFE standards will increase to an average of 35.5 miles per gallon. It is estimated it will cost the OEMs $52 billion cumulatively to be in compliance and add an average of $1,000 to the cost of manufacturing a new vehicle…
Witness what happened to the diesel truck market in 2007 and 2010. EPA regulations dramatically decreased tailpipe emissions, but they also increased diesel truck acquisition costs by $6,000 to $9,000, introduced all-new operating cost expenditures for diesel exhaust fluid (DEF) and diesel particulate filters (DPF), and forced users to buy more expensive ULSD and CJ-4 motor oil.”
Note the EPA agrees that CAFE costs billions of dollars annually (they typically estimate about half the costs of consumer groups). The only argument is over how many billions of dollars.
As a general rule, anything which forces a consumers to take a less preferable option forces the economy to operate at less than peak efficiency. While 10 billion on its own is not that much in a 14 trillion economy, there are millions of regulations and they add up.
An argument can be made that a regulation’s economic costs are outweighed by other benefits (e.g., the argument in favor of CAFE is that the environmental benefits outweigh the economic costs), but to believe that regulations don’t have economic costs is foolhardy.
It’s not just symphony orchestras but opera companies as well. Over the past four years, a number of companies have gone out of business or had to seek alternative financing to stay in business. The basic problem is that for 99% of these companies (both opera and symphony) is that they have little opportunity to raise revenue outside of ticket sales and hence the fixed costs must be addressed through donations or grants. It is only the rare bird such as the Metropolitan Opera that can move productions into movie theaters and raise additional revenues that way. By all measurements this has been hugely successful as the Met in the Theater program generally sells out all the seats in the theaters.
Is this a bad thing?
I’m getting a lot of utility from watching orchestras, and the stuck up punks who play in and watch them, crash and burn.
You mean the “punks” who have ten times the skill and education that you do but are paid less than 10% what you get?
Tens times the skill at what they do – easily. But at what I do? Nope. Where I went to college, the non-academic talent admits were unevenly divided between the conservatory and athletic scholarships — with the weight going to the conservatory. A lot of them were very nice, though.
Way to respond to something allan didn’t say in the first place.
Pound for pound, any member of an internationally-renowned symphony orchestra is leagues ahead of you in terms of skill and talent at his or her job than you are at your job.
Sorry to burst your wittle bubble.
All skills may not be equally useful. I had a friend who could touch his nose with his tongue.
Musical talent is great; but can sometimes be over-hyped.
“Musical talent is great; but can sometimes be over-hyped.”
Please impart more of your deep wisdom.
“….the stuck up punks who play in and watch them, crash and burn”: is that simple ignorance and resentment, or is it a fully formed inferiority complex?
Why shouldn’t “cultural goods” be subject to the same market forces as the widget maker down the street? Smith’s Widgets (Philadelphia, PA) are forced to re-engineer to be competitive with Fong’s Widgets (Beijing, PRC). Local orchestras/operas actually have a competitive advantage. I can import low cost Fong widgets and sell them to Target. It’s several orders of magnitude more difficult for me to import the Beijing Philharmonic Orchestra for a season. Even if the labor costs are 50% less.
I appreciate the high culture/civic pride etc arguments for supporting “the arts”. We would as a society be “poorer” if many of these organizations disappeared. That said, government can’t and shouldn’t do everything. If philanthropic efforts fail, then they must adapt or fade away.
Your reasoning is a good example of how, in a market dominated society, all human and cultural relations become things to be bought and sold. Society is not just “poorer.” At some point it ceases to exist. Margaret Thatcher revealed more than she knew when she said that there is no such thing anymore as society, only individuals and families.
Culture has an opportunity cost so why not let people decide whether they find the benefits to be more or less than its costs? It costs money to run an orchestra, but do individuals find the money used to finance it worth using it in that fashion? Is there any reason that cultural good should be exempted from the process of market-caclulation?
On another note, the Philadelphia Orchestra may be bankrupt, but the Hyrule Symphony Orchestra is going on tour this year.
From Haydn to Hyrule.
Assuming Tyler’s argument that “support was weaker than they thought” is true, I can see a parallel to financial markets witnessing an information shock. The paradigm shifts from accepted risk to Knightian uncertainty at some point and there is a flight to quality (AAA rated securities or financially sound charities, depending on your example).
I was listening to Bargaining With the Devil (we have an “open plan office” which is noisy enough that everyone uses headphones and listens to music or books) and one of the situations that the author was involved in was a labor dispute with a symphony orchestra. Part of the problems mentioned in the book were that the players could not believe that the symphony was having financial problems, while donors were disgusted (and stopping contributing further) over the perception of spoiled brats.
http://www.amazon.com/Bargaining-Devil-When-Negotiate-Fight/dp/1416583327
Legal changes in copyright laws made it so that many orchestral pieces went back to being covered by copyright. So what used to cost maybe $150-200 (one time) for a work, now are “rented” which costs about $600 per performance.
>”For big-city orchestras like the New York Philharmonic, that change is like a “mosquito bite,” Mr. Golan says. But Mr. Golan’s university ensemble gets only about $4,000 to rent and buy music each year. That means it can perform some copyrighted works but must rely on the public domain for about 80 percent of its repertoire. And $4,000 is relatively generous. Other colleges might have only $500 to spend on music. When the Conductors Guild surveyed its 1,600 members, 70 percent of respondents said they were now priced out of performing pieces previously in the public domain.”
http://chronicle.com/article/A-Professors-Fight-Over/127700/
“[the financial crisis] caused donors and potential donors to see that support for these projects was weaker than they thought. ”
“[the financial crisis] sent a signal to firms that had been holding on to old, costly production methods that now would be a good time to try out newer, cheaper approaches”
I have a hard time seeing macroeconomic indicators or a financial crisis signaling complex information like this. It seems more likely to signal a Frankenstein bit: ECONOMY GOOD or ECONOMY BAD.
… people then make plans accordingly. Philanthropists hold onto their cash, businesses lay off workers and reduce risky R&D investments. People don’t buy a new house. You stop going out as much.
Taking this market signal seriously, it also would seem that the economy would be better modeled with a pure AD approach as a complex relationship between AD and AS with a macroeconomic explanation of pure lowered AD + structural unemployment is hard to derive from just knowing ECONOMY BAD.
This has been a long time coming. When the music stays the same (the crowds aren’t interested in the new music, generally), the recordings get better and better, and the expenses are so great, there is going to be a problem. Philanthropy needs a sense of mission; providing the crowds with an entertainment they generally don’t want is hardly satisfying.
Or one could simply argue that both donations to “the arts” and attendance at the symphony are a kind of luxury good, and thus likely to be highly pro-cyclical regardless of the underlying trend.
Granted, classical music seems like a good bet not to recover. But are unemployed classical musicians necessarily ZMP? What about the administrators, technicians, ushers? Their skills probably translate. If you can “ush” for a symphony orchestra, you can probably “ush” for just about anybody else, given the chance. This could still easily be cast as an idle capacity problem.
Why pay a ton of money to hear a live performance with careless mistakes when one can purchase a CD of a thrilling, live performance made decades ago?
We shouldn’t forget the labor union factor, and how it contributes to orchestras delivering not only a crap product, but the same crappy product. How many times do we have to listen to Brahms 4, Pictures at an Exhibition, Also Sprach Zarathustra, etc? Unions have turned orchestras into museums unable to innovate because it might violate someone’s contract. Plus performers don’t give the full effort anymore on a day-to-day basis because there is little threat of being dismissed, thanks to tenure. Plus there is a growing personnel problem — thanks to the lack of sexism, women grow up to be old grannies who don’t perform with any fire in the belly. Bah.
I love the music of the western tradition. But as it exists today, enough is enough. Classical music only functions as a worthless status-symbol for clueless SWPLs. And the performers themselves have contempt for their audiences. If all the orchestras disappeared tomorrow, it would not make much difference, to, well, anything.
There is one good thing about dying orchestras: liberals teach that diversity is good, it is bad to enforce cultural norms on others, it is elitist and racist to promote euro-centric cultural standards in school, blah blah blah — well, you fools made your bed. Now lie in it.
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