The economics of the Detroit art museum

by on March 30, 2014 at 1:02 pm in Economics, The Arts | Permalink

Fortunately, costs are easier to estimate, and those for displaying a painting derive largely from its market value. Consider “The Wedding Dance,” a 16th-century work by the Flemish painter Pieter Bruegel the Elder. Detroit museum visitors have enjoyed this painting since 1930. How much would it cost to preserve that privilege for future generations?

A tidy sum, as it turns out. According to Christie’s, this canvas alone could fetch up to $200 million. Once interest rates return to normal levels — say, 6 percent — the forgone interest on that amount would be approximately $12 million a year.

If we assume that the museum would be open 2,000 hours a year, and ignore the cost of gallery space and other indirect expenses, the cost of keeping the painting on display would be more than $6,000 an hour. Assuming that an average of five people would view it per hour, all year long, it would still cost more than $1,200 an hour to provide the experience for each visitor.

That is from Robert H. Frank.

farmer March 30, 2014 at 1:12 pm

“Once interest rates return to normal levels — say, 6 percent — – ”

where does he get this from?

prior_approval March 30, 2014 at 1:15 pm

The same source as the one that feels selling public goods to private owners is a desirable societal goal.

See Russia for a concrete example of how that turns out.

US March 30, 2014 at 1:32 pm

‘Public good’ – I think you may want to look up that term, as I do not think it means what you think it means (“In economics, a public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others”).

There may be valid arguments for not selling e.g. such paintings (I really couldn’t care less one way or the other), but including words like ‘public goods’ in such arguments is not helpful.

Dan Weber March 30, 2014 at 6:19 pm

No, once a government buys something, it becomes worthless.

That’s why the government should not run museums. Any works of art they buy become worthless! Q E D

K. March 30, 2014 at 9:01 pm

Care to reference those assertions?

Dan Weber March 31, 2014 at 9:47 am

See p_a’s excellent analysis above. If the government tries to sell something it previously bought, it’s “selling public goods to private owners.” Therefore the government cannot sell it ever!!!11one

Micah March 30, 2014 at 2:18 pm

6 percent isn’t a bad rough estimate for the long run. I’m just surprised he omits the fact that the value of the painting also appreciates. If he used the same period of history to get a long run estimate of appreciation, then holding on to the painting may be a better investment. Detroit paid $38,000 for the painting in 1930. That’s an annual return of 62.64%. Not a bad investment at all, and substantially higher than 6% per year. I have great respect Cowen’s work, but this was likely a quick thought on his part and I doubt he would expect Detroit policy-makers to use this opinion over a more detailed economic analysis.

Micah March 30, 2014 at 3:18 pm

Just thought about this. Way off on the appreciation of the painting. It’s 10.74% per year. Still better than 6%, and as others have noted, completely ignoring it in the analysis is done so in error.

rvman April 1, 2014 at 3:35 pm

Fine, leave it at 1%. It still costs $200/viewer hour. The average viewer might be willing to pay $20 to see the whole museum. Realistically, we could use Detroit’s cost of debt. That probably runs several percent if not more at the moment.

The point of the exercise is that, from a financial perspective, having the City of Detroit default on city workers’ pensions so it can retain ownership of billions of dollars worth of artwork is ludicrous.

anne March 30, 2014 at 1:22 pm

Not selling an item that is owned “costs” money the same way that deciding to spend only $100 rather than $150 on dinner “saves” money. Also, yes, the 6% interest rate assumption is laughably optimistic.

Larry Siegel March 31, 2014 at 2:13 am

That is not correct. The opportunity cost of not selling an item that is owned is the interest or rate of return on the amount of money you could get by selling the item. Assuming there is a market for the item, that amount is relatively objective and easy to calculate. (If you don’t like 6% interest, try 4% interest.)

The opportunity cost of not spending $150 on dinner is just the cost of getting dinner some other way. It could be $10. It could be $100. It could be just about anything you want it to be, or you could skip dinner and call it zero. So, there is nothing objective about that calculation.

Mike March 30, 2014 at 1:23 pm

Uh, shouldn’t the relevant calculation be 6% or whatever rate he pulls out if his pocket minus the rate of appreciation of the art?

Max Factor March 30, 2014 at 1:24 pm

Would the math change if the assets were appreciating faster than the discount rate?

Real Estate Accountant March 30, 2014 at 1:28 pm

I am receiving 7% in monthly dividends on a diversified junk municipal bond fund. Detroit’s borrowing cost is probably higher.

Anon March 30, 2014 at 1:51 pm

What is the ticker?

Larry Siegel March 31, 2014 at 2:15 am

I’m curious about that too, since that is just a *huge* yield. (I’ll overlook the fact that he or she must have meant 7% in annual dividends, paid monthly.)

DanC March 30, 2014 at 1:56 pm

Assume a high rate of interest Detroit pays on debt and a lower rate of return on long term rates. You would get an opportunity rate over 6%.

Still assume that the numbers are off by a factor of 4 and it only comes to $1,500 per hour. Assume that visitors are actually 100 per hour. Could Detroit charge those visitors $15 on average to view the painting?

Can any museum pass this test?

If works of art become a more fluid market, with frequent transactions, would the price of art fall?

Do museums create enough benefits to the community to justify public expenditures (and tax breaks for donors)?

ummm March 30, 2014 at 2:29 pm

that would be 125% gains a year

i’m sure it’s 7% YOY paid out monthly

yo March 30, 2014 at 1:31 pm

6% is of course ridiculous. But on the other hand he fails to mention the full storage cost less admittance charges.

Virginia Postrel March 30, 2014 at 3:38 pm

Historically the big cost issue at the DIA has been salaries. During their many, many financial crises over the decades, galleries were often closed and hours shortened because the museum had no money to pay guards. Its donor base only contributed things they could put their names on. Whenever times got good, they expanded the collection and built buildings instead of building an endowment. (A side point, I realize, but somewhat relevant.)

Rahul March 31, 2014 at 2:20 am

Has a survey been done asking Detroiters what they think? Somehow, most people debating this seem outsiders, with an abstract, ideological axe to grind.

So Much For Subtlety March 31, 2014 at 3:09 am

That’s the problem isn’t it? These art works were paid for by former Detroiters. The present population is not known for going to Art Galleries.

The donors are unlikely to be resident in Detroit either, but rather in the suburbs.

The people who live in Detroit now have a problem. Their main interest in the Art (assuming they are aware of it at all which is unlikely) is probably in those nice well paying jobs doing very little. A lot of urban spending these days is, frankly, make-work programs for low-information Democrat voters. In fact the number of LIDVs is a good measure of the degree to which any government body fails. But the Detroit system needs money from Republican voters.

So the obvious solution is to sell the paintings. No one in Detroit will care. It is not as if the city is safe enough for tourists even. And keep the guards on.

Tracy W March 31, 2014 at 4:38 am

Well as Detroit has been turning to outsiders for money to run the city for years, the views of outsiders are rather relevant. As the old saying goes, “He who pays the piper calls the tune.”

Chris S March 31, 2014 at 1:44 pm

Detroiters (from “Detroit Proper” – the local term to delineate city dwellers vs suburbanites) are aghast and see it as selling their cultural heritage to pay some nameless, faceless banks that not only crashed the economy in 2008 but also want to keep their kids from seeing fine art.

Most of the art was purchased with city funds in the 1920s – 1940s when Detroit was among the top 3 wealthiest cities in the country. So technically it is a asset of the city and needs to be considered such in bankruptcy court. However, complicating the matter, there have been lots of private donors and endowments over the years, so ownership gets (slightly) murkier.

As far as the rest of “Greater Detroit” (including direct suburbs but not Ann Arbor etc) or “Southeast Michigan” (inclusive of Ann Arbor), most people support the DIA.

In fact, the “tri-county area” (wayne, oakland and macomb counties, the core counties of “metro detroit”) a couple of years ago passed a millage to fund the DIA and now get free admission.

The State of Michigan, led by Gov Snyder (R), has floated the idea of giving Detroit’s creditors $100Ms to leave the DIA alone.

Rahul March 31, 2014 at 3:52 pm

Private donors always have the option of a reverter clause, don’t they?

ed March 30, 2014 at 1:44 pm

The 6% rate appears too high.

With the reasonable assumption that the art will appreciate at the rate of inflation you should use a real rate rather than a nominal rate.

On the other hand, since it is a risky asset perhaps you should use the return on risky assets (such as equities) rather than a risk free rate. I think most experts would put the long-run real rate of return on a stock index fund going forward at something like 4-5%. So a bit lower than 6%.

On the other hand, you could make a good argument that very famous pieces of art will appreciate faster than inflation, maybe even faster than nominal GDP growth. Especially if Piketty is right. This makes the 6% assumption look even worse.

mulp March 30, 2014 at 3:38 pm

Why should a decaying work of art increase in value?

Don’t economists and businesses understand entropy?

Conservative politicians since Reagan all seem to reject the laws of nature, but can’t economists be objective and rational?

OrenWithAnE March 30, 2014 at 4:23 pm

Shouldn’t all houses then be decreasing in value all the time, since they will eventually fall back to the earth?

Or maybe entropic decay is one factory among many …

Jane the Actuary March 30, 2014 at 4:37 pm

Yes, all other things being equal, a house will decline in value. It’s only continuous reinvestment (new roof, remodeled kitchen, etc.) that avoids this.

Jay March 31, 2014 at 2:30 pm

You don’t just buy a structure with a house, the land appreciates as well.

Roy March 31, 2014 at 6:42 am

Great stuff there. Imagine how valuable this myst have been:

http://en.m.wikipedia.org/wiki/Guennol_Lioness

Bob Knaus March 30, 2014 at 2:17 pm

The quote from the article is correct insofar as calculating the COSTS of displaying a painting. For the public sector, 6% is a reasonable cost of capital, or hurdle rate, for long-range time value of money calculations. If anything, it’s low… I’ve frequently used 7% as the rate for states whose finances are much better shape than Detroit’s.

As other commenters have noted, the primary tangible BENEFIT is asset appreciation. But that needs to have a different rate of return, and a different risk factor, than the cost of capital.

The NYT article is more nuanced that the quote would suggest. The author makes the point, correctly, that the same asset may have different costs and benefits depending on who owns it. It is quite plausible to argue that Detroit’s art collection would have greater value to its citizens if they were not its owners. This could be done in a way which would still leave Detroit with a museum displaying great art.

Michael Smitka March 30, 2014 at 3:05 pm

Capital gains make sense if the DIA is intending to sell the painting at some point, and is trying to decide the timing. So what is the decision being modeled – sell now or not? maximize net present value adjusted for risk, holding costs and all that?
 
More interesting perhaps is to ask what the DIA’s inventory is like – how many items does it hold that are “duplicates” or (or inferior to) something on display and thus have never been shown at the DIA? how many are in areas that the DIA did not actively collect as an area of focus, and so are seldom used by art historians?

TMC March 30, 2014 at 3:46 pm

Wouldn’t the appreciation potential be priced into the $200 mil price tag?

BR March 30, 2014 at 2:38 pm

“Our research, based on the most complete auction database, BASI (Blouin Art Sales Index) shows the true annual return of art as an asset class over 1972 to 2010 was closer to 6.5%…”
So showing the picture instead of selling it, might be still an rational choice, as long as the rate of return is higher, as mentioned before, which seems to be the case.

mulp March 30, 2014 at 2:53 pm

Given the Detroit Museum owns all these works, shouldn’t they first make really high quality reproductions of them, say a few dozen, and then sell the originals while displaying the reproductions that viewers will never see a difference in, while trading other copies with other museums of other works so the Detroit museum offers increased access in Detroit to art as well as access in other museums to its art??

The high price on the works of art is not about cost, but about the artificial scarcity of works of are. In a free market capitalist economy, demand for capital assets which drives prices far above cost is to use labor and technology to produce more capital assets. None of the paintings cost $200 million, or even $1 million; I suppose there might be sculptures that cost a million or more, eg Mount Rushmore, but no paintings. Maybe a “Sun Rise on Mars” painting might cost more than a million, but my guess is when one is painted on Mars the cost will be very low as a marginal cost of being on Mars for other reasons.

My guess is that a free market capitalist solution to the problem faced by the art museum would be attacked viciously by conservatives who will argue that increasing the scarcity of the art in Detroit is mandatory based on conservative economic theory that rejects utility as the justification for price, and seeks only price inflation by increasingly scarcity of assets.

Jane the Actuary March 30, 2014 at 4:32 pm

That’s actually not far from my pet idea for a Museum of Art History — all reproductions, but done to put everything in context, and the way the artworks would have looked when first created. A tour of three thousand years of art history, with all the classics, in a single museum, rather than needing to fly to Paris, Florence, and elsewhere. http://janetheactuary.blogspot.com/2014/03/the-museum-of-art-history-tm.html

Larry Siegel March 31, 2014 at 2:23 am

“Let them see fakes.” Or so said Edward Banfield, no less, in a celebrated Harper’s article about 30 years ago.

Good idea. By the way, there is no such thing as conservative economic theory. There is only economics. “Conservatives” may use non-economic justifications for thus-and-such, but they are not engaging in economics nor are they theorizing.

OrenWithAnE March 30, 2014 at 4:25 pm

There’s also a game-theoretic aspect — a lot of art is donated to museums by wealthy individuals seeking to raise their social status through charity.

If the museums start acting like rational economic agents instead, the social benefit to donating art (and money) to them will be reduced and the museums will get less in the long run.

Peter March 30, 2014 at 4:51 pm

Just be sure to keep Carmen Tisch away from the painting.

Hopaulius March 30, 2014 at 5:30 pm

The context here is that Detroit is going through bankruptcy, and a judge has determined that these assets might be made available for sale. If a formerly rich person whose assets had collapsed tried to protect her arts collection from creditors, most here would justifiably express outrage. How is it different if the owner is a bankrupt city? Do not the creditors have a justifiable claim to the assets of the museum?

Thehova83 March 30, 2014 at 6:17 pm

This is all fun to speculate, but for various reasons, the DIA will not sell a single piece of art.

Anthony March 30, 2014 at 10:03 pm

At the Art Institute of Chicago, even on a weekday morning many more than 5 people per hour view even a pedestrian painting, not to mention
those which make the museum a destination. On weekends the museum is mobbed, and we know that people linger over certain paintings because their audio-thingies direct them to do so.

Ted Craig March 31, 2014 at 6:27 am

The DIA isn’t the tourist destination the Art Institute is. The DIA gets a couple of thousand visitors in a good week,

Roy March 31, 2014 at 6:46 am

How about renting the collection out for a few years, that will reduce costs and generate some revenue. And it would help out large younger cities that haven’t had time to accumulate cultural patrimony.

Ben March 31, 2014 at 11:24 am

Five viewers an hour is a minuscule estimate. I am a gallery volunteer at the DIA. I monitor patrons in a different gallery (Modern, Contemporary, Greek, etc.) each time I volunteer for a 4-hour shift and regularly see dozens of museum-goers per hour. The museum is constantly flooded with people. Taking into account the 6% interest rate that many others in this thread have mentioned, Mr. Frank’s calculation loses all meaning.

Ted Craig March 31, 2014 at 12:02 pm

Frank is calculating viewers for one painting.

Ben March 31, 2014 at 12:26 pm

And I’m saying that I personally and physically watch dozens of people walk through each gallery every hour. No one walks into the museum, takes a look at the Medieval armor in the Great Hall, and calls it a day. I moved back to Detroit from Chicago just last year, where I visited the Art Institute of Chicago often (free admission for LUC Law students). Sure, the AIC has more people. However, the number of people Franks uses makes it look like he read a doom-and-gloom Yahoo! Finance article about Detroit and just made something up.

FE March 31, 2014 at 3:44 pm

Ben, please don’t use empirical data gathered firsthand to refute numbers an economist assumed out of thin air. You’ll never get anywhere in economics that way.

Dimensional Analyst March 30, 2014 at 10:24 pm

I’m perplexed by the units associated with Frank’s last number: 1,200 dollars/hour-visitor, in the third of the three paragraphs quoted by Cowen.

Everything appears OK through the penultimate figure: 6,000 dollars/hour. Then he divides by 5 visitors/hour, and mysteriously gets 1,200 dollars/hour per visitor, or $1200/visitor-hr. Shouldn’t that be $1200/visitor, with the hours in the dividend and the divisor cancelling?

Chris S March 31, 2014 at 1:54 pm

Shhhhhhh, be wery wery quiet, we’re hunting straw men.

Benjamin Cole March 31, 2014 at 3:37 am

This is a good post, and raises the question of using tax money for the arts—whose arts?
The sad reality is that many cities would have no museums, ballet, orchestras w/o tax money. No football teams either, judging from L.A. although that’s a maybe…and in a free society, we would have casino-brothels lining the Grand Canyon and inside airports…
so…can you live with that?

paul March 31, 2014 at 8:13 am

Ideology masquerading as analysis.

John Mansfield March 31, 2014 at 8:40 am

If there are so few people interested in spending several minutes with a painting, is it realistic to think it could be sold for $200 million?

Slocum March 31, 2014 at 11:11 am

Nobody seems to quite get the situation with the DIA. It is owned by the city of Detroit, but it’s patrons (and donors) are predominantly suburbanites (the same suburbanites who voted in the multi-county tax millage that provides operating funds for the museum). The deal currently in the offing is that private donors, foundations, and the State of Michigan all kick in cash in lieu of an art sale and in the process the artworks become protected from future exposure to Detroit’s finances. What remains to be seen is whether both the Republican-majority legislature and the bankruptcy court will sign off.

Ben March 31, 2014 at 11:23 am

Five viewers an hour is a minuscule estimate. I am a gallery volunteer at the DIA. I monitor patrons in a different gallery (Modern, Contemporary, Greek, etc.) each time I volunteer for a 4-hour shift and regularly see dozens of museum-goers per hour. The museum is constantly flooded with people. Taking into account the 6% interest rate that many others in this thread have mentioned, Mr. Frank’s calculation loses all meaning.

Foolish Jordan March 31, 2014 at 11:36 am

This assumes the value of the painting doesn’t change with interest rates.

Glenn Schafer March 31, 2014 at 12:18 pm

I suspect the marginal utility of spending the money on police, fire, schools, debt repayment, infrastructure etc. are all greater in most Detroiters minds than keeping the painting. Think about your personal finances. Would you keep a painting worth millions when you cant feed the family or put housing over your head or educate your children.

vaux March 31, 2014 at 12:15 pm

6% nominal interest rates is possible, but 6% real interest rates?

Real interest rates is what should be used, and nobody makes a 6% real return. Also, if nominal interest rates are 6% then the painting will likely appreciate due to inflationary gains.

Glenn Schafer March 31, 2014 at 12:25 pm

How many of you really think that that painting will appreciate by $18 million dollars a year compounded forever? Lets see $18 million is enough to hire 300 teachers. There is not even a choice to be made here in my opinion.

Chris S March 31, 2014 at 1:52 pm

The author totally neglects probably the primary “value stream” of this art – just knowing it is there. He considers only somebody actually standing in front of it as “benefitting”.

Detroiters currently live in a city that has a “world class” art institute (is it? I don’t know. They think it is.) That informs their attitudes about the city and their willingness to invest in it. Even if they never go there. Thousands of people (a few million if you draw the circle wider) can hold the esteem of their city higher because it has this museum. Stop a random Detroit native on the street and ask what’s good about Detroit: Oh, the sports venues, Greektown, the Detroit Institute of Art… Its near the top of the list! They would say this even if they have never set foot in the museum and never will!

Gutting the museum would be a huge psychic blow. A kick in the kidney while Detroit is down and bleeding.

I know this is hyperbolic, especially for this blog, but that is genuinely how people are thinking and it will make them make different choices, especially on the margin.

Right now there are young singles moving into the city because they feel it is a city worth saving. Kill the DIA, and some of them, at the margin (where have I heard this before?) will not?

Everyone also knows that if the DIA goes, it will never, ever be replaced by anything similar.

Ed March 31, 2014 at 9:07 pm

The federal government should buy the art and house the works at the Smithsonian. Problem solved.

Anthony Tran March 31, 2014 at 9:27 pm

With Cowel’s assumption calculation, the upkeep on holding on to the painting is greatly above an average painting level. With the high price and assuming 5 views per hour everyday would equal to 1200 per hour in reality would be inelastic. Unless they can accommodate for the painting with other lower price paintings and sell the tickets to view all the paintings as a bundle, To attract not just viewers of “The Wedding Dance” but attract others also.

mg April 1, 2014 at 6:14 am

In addition to all the other observations made by other posters here: I’m not here to argue with Christie’s on valuing museum-quality artwork, but in all of Wikipedia-recorded history [1] apparently only one painting ever has sold for an inflation-adjusted price greater than $200m. The second place painting sold for ~$160m. There is no painting by Peter Bruegel the Elder on the list, which goes all the way down to paintings sold for a mere ~$60m. So color me a little skeptical of that estimate, drawn up on unrequested speculation by a commission-earning auction house that plainly does not expect to be asked to sell this particular artwork.

[1] http://en.wikipedia.org/wiki/List_of_most_expensive_paintings

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