Lecture 15 The Arts and Economic Development Criticisms of Economic - - PowerPoint PPT Presentation

Lecture 15

The Arts and Economic Development Criticisms of Economic Impact Analyses

Professor Julia Lowell lowell@econ.ucsb.edu Spring 2012

5/ 23/ 2012 1 Econ 191ac -- Lecture 15

Outline: Lecture 15

• Where we are now in the syllabus
• Discussion of class project

& Homework 13b/ 14

• The arts and economic development
• Criticisms of economic impact

analyses

• Homework 15

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W HERE W E ARE NOW I N THE SYLLABUS

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Where We Are Now

Class 1 6 : TODAY The arts and economic development; doubts about economic impact analyses (EIA) Class 17: MEMORIAL DAY HOLIDAY Class 18: Wednesday, 5/ 30 Doubts about EIA; valuing the arts Class 19: Monday, 6/ 4 Valuing the arts; FINAL EXAM REVIEW Class 20: Wednesday, 6/ 6 CLASS PROJECT PRESENTATIONS & handout of final exam

DI SCUSSI ON OF HOMEW ORK 1 3 B-1 4 : USI NG LEXI S-NEXI S

5/ 23/ 2012 Econ 191ac -- Lecture 15 5

Class Project – HW13b-14 Due Wednesday 5/ 23

Let each of your team members be responsible for one of the following tasks for your 2 cities: 1. I dentify the relevant state and local art councils (may be more than one local council). What kinds of organizations/ activities do they fund? 2. I dentify private foundations that operate there. What do they fund? 3. Find as many artists’ membership organizations as you can 4. Find organizations that are focused on particular ethnicities, cultures and

• neighborhoods. What are the largest ethnic groups in town?

5. What are the primary industries/ biggest companies? 6. Key cultural events/ activities/ places? (What should a visitor do?)

5/ 23/ 2012 Econ 191ac -- Lecture 15 6

Class Project (HW13b) Biggest Industries & Employers

• What are the primary industries/ biggest companies?

– Try Lexis-Nexis – Chamber of Commerce – www.city-data.com – Check to see how variables are calculated; for example, does employment number represent local employment? (ex: Miami employment in cruise ships?)

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Using LexisNexis to Get Information on Companies and Industries

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• See instructions on the class webpage
• In class walk-through

CLASS PROJECT REVI EW : CHARACTERI ZI NG THE CULTURAL ECONOMY OF AN AMERI CAN CI TY ( REPEATED)

5/ 23/ 2012 Econ 191ac -- Lecture 15 9

Project Presentation Details

• ~ 15 minute presentation from each team
• Use Powerpoint slides

– If you want to use another software program, please check with me to see if my machine will run it

• Can do sound effects and video clips

– Plus links to Internet

• May have one presenter or multiple presenters

– Choose people who want to do it/ are good at it

• Can have each team member create own slides

– But I recommend that one team member be in charge of integrating the full presentation

5/ 23/ 2012 Econ 191ac -- Lecture 15 10

What It’s About – Project Overview

• Your team consists of members of the grants committee for the

private, super-wealthy Econ191 Foundation

– The committee’s job is to evaluate proposals from cities seeking cultural program grants – Your team is presenting rival proposals from two cities to the Executive Director of the Foundation, Jae Low – The grant will fund a cultural festival that involves some local cultural insitutions (e.g., art museum, symphony, jazz club)

• Your presentation will

– Provide some background on each city – Describe the organizations involved in each proposal – Explain how each city might benefit from the proposed project, including an mini economic impact study – Recommend which of the proposed projects (which city) should be funded and explain why

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What It’s About – Project Details

• Background section

– Provide information on each city’s size, demographic composition, industry base, & other info relevant to your recommendation – Side-by-side comparison charts & tables may be good here

• Organizations section

– Provide data on revenues & employment of the relevant cutural

• rganizationstheir contributions base, how they spend their money

– Provide information on possible funding partners for the Foundation (local arts council? other private funder in the area?) – Provide info on orgs and groups likely to be featured in festival/ fair -- local amateur artists groups? Culturally-specific groups (eg, Tajik-Americans?)

• Benefits section

– Who will benefit from the grant? How? – As available, provide data on participation and tourism; describe production chain (creator to consumer) to capture economic impact

• Recommendation

– Conclude with your recommendation on which project/ city should be funded & explain why

5/ 23/ 2012 Econ 191ac -- Lecture 15 12

Project Grading

• Project is worth 30% of your grade
• Grading will be mostly on content, but get

style points too

• Slacker policy

– Historical precedent: At least 1 team (and probably more) will get stuck with a slacker – So, each team member will grade the other members’ contributions to team, e-mail to me – My grading will reflect these assessments

5/ 23/ 2012 Econ 191ac -- Lecture 15 13

THE ARTS AND ECONOMI C DEVELOPMENT

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The Most Common Measures of the Economic Impact of the Arts

• Size analyses

– How big is the cultural sector or “industry”?

• Multiplier and input-output analyses

– How does spending on or by individuals and

• rganizations in the cultural sector impact the

rest of the economy?

Econ 191ac -- Lecture 15 15 5/ 23/ 2012

What to Include in a Size Analysis? Defining A Cultural Sector

• Educators
• Suppliers
• Creators/ Performers
• Brokers (market makers)
• “Live” Presenters
• Reproducers
• Distributors
• Consumers/ Funders

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Multiplier Analysis: Measuring the Impact of an NEA Grant

Econ 191ac -- Lecture 15

• 1. The NEA gives a theatre company a $1000

grant to buy materials for sets from a hardware store

• 2. The hardware store spends $600 on fixing its

roof

• 3. The roofing company spends $360 on its

holiday office party, catered locally

• 4. The caterer pays a gardener $216 for

landscaping

• 5. Etc.

17 5/ 23/ 2012

Direct versus Indirect Spending: Multiplying an NEA Grant (1)

Econ 191ac -- Lecture 15

1. The theatre company buys $1000 worth of materials from a hardware store

– This is direct spending

2. $600 on roof repairs 3. $360 at the caterers 4. $216 to SoCal Edison 5. etc.

– This is indirect spending Total so far: $1000+ $600+ $360+ $216= $2176 In this example, what is the marginal propensity to spend?

18 5/ 23/ 2012

Direct versus Indirect Spending: Multiplying an NEA Grant (3)

Econ 191ac -- Lecture 15

$1000 + $600 + $360 + $216 + … = $1000 + $1000* (0.6) + $1000* (0.6)(0.6) + $1000* (0.6)(0.6)(0.6) + $1000* (0.6) 4 + $1000* (0.6) 5 + $1000* (0.6) 6 + … = $1000* [ 1/ (1-0.6)] = $1000* [ 1/ (0.4)] = $1000* 2.5 = $2500 With a marginal propensity to spend of 0.6, the multiplier is 2.5. The total impact on the local community of a $1000 NEA grant is $2500.

19 5/ 23/ 2012

Note on Multiplier Math

Why is $1000 + $1000* (0.6) + $1000* (0.6)(0.6) + $1000* (0.6)(0.6)(0.6) + $1000* (0.6) 4 + $1000* (0.6) 5 + $1000* (0.6) 6 + … = $1000* [ 1/ (1-0.6)] ? Because for 0 < x < 1, ∑ 𝑦𝑙

∞ 𝑙=0

=

1 1 −𝑦

This is a power series.

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In-Class Exercise: Simple Spending Multiplier

Econ 191ac -- Lecture 15

The Santa Teresa City Council gave $6,000 to the ST Arts Council to put on a cultural festival (direct spending). Economists at UCST calculated that the spending multiplier for Santa Teresa is 0.8. Can you calculate the economic impact of the festival

• n Santa Teresa with just this information?

Is there anything else you need to know?

21 5/ 23/ 2012

Simple Multiplier Analysis Doesn’t Require Much Information …

Econ 191ac -- Lecture 15 22 5/ 23/ 2012

Only need

• Amount injected into economy from
• utside (e.g., grant from external source

= direct spending)

• A multiplier

So it is relatively inexpensive to construct estimates based on this analysis

But It Isn’t Very Accurate

Econ 191ac -- Lecture 15 23 5/ 23/ 2012

How is multiplier estimated? Why assume one multiplier is applicable to transactions between

– Different types of local businesses – Businesses and individuals – Businesses and government – Individuals and government

Indirect spending will vary considerably depending on which actors (business, individual, government) and which sectors are involved

A Better Measure of Economic Impact: Input-Output Analysis

Econ 191ac -- Lecture 15

To determine how the an injection of money (from an NEA grant, for example) impacts the other businesses and individuals within different sectors

• f the local economy interact:
• Sectors buy from and sell to other local sectors
• Sectors buy from and sell to businesses and

individuals outside the local economy

• Sectors pay their employees, who spend and save
• Sectors pay taxes

24 5/ 23/ 2012

Input-Output Models

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• Quantify the transactions between sectors

in an economy

• Provide “snap-shots” of the economy for a
• ne-year period
• Help predict how a change in one sector

will affect the other sectors

• Can be used to estimate multipliers

But are hugely data-intensive and often very expensive

Constructing a Simple Input-Output Model for the Visual Arts Economy

Core Visual Arts Sector Other Sectors Artist Consumers Suppliers of arts-related inputs Government Art museums Benefactors and patrons Commercial galleries Other domestic industries Other retail outlets (auction houses, arts fairs & festivals, etc.) External sector (exports and imports) Education & training institutions Infrastructure orgs (professional artists’ service organization, brokers, etc.)

5/ 23/ 2012 Econ 191ac -- Lecture 15 26 Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

Input-Output Matrix for the Australian Visual Arts Industry

5/ 23/ 2012 Econ 191ac -- Lecture 15 27 Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

(Art Museums ) (Art Museums )

Gross Flow-of-Funds Matrix for the Australian Visual Arts Industry

5/ 23/ 2012 Econ 191ac -- Lecture 15 28 Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

in A$ millions

Interpreting Flow-of-Funds Matrices

• Rows represent expenditures by one sector on

goods and services provided by other sectors

• Columns represent revenues to one sector from

sales of goods and services to other sectors

• Sectors consist of core sector (which may be

further subdivided into components), local non- core sector, and external sector

– E.g., subcomponents of visual arts core sector include artists, art galleries, museums, etc.

• Total revenues and expenditures for each sector
• r sectoral component must be equal

5/ 23/ 2012 Econ 191ac -- Lecture 15 29

Converting Gross Flow-of-Funds Matrices to Net Flow-of-Funds

• Gross flow-of-funds matrices depict two-way

flows between sectors

– E.g., artist purchases of art works from galleries – plus – Gallery purchases of art works from artists

• Net flow-of-funds matrices depict net flows

between sectors (always positive)

– If galleries buy more from artists than vice versa, then net flow is – Gallery purchases of art works from artists less artist purchases from galleries

5/ 23/ 2012 Econ 191ac -- Lecture 15 30

Net Flow-of-Funds Matrix for the Australian Visual Arts Industry

5/ 23/ 2012 Econ 191ac -- Lecture 15 31 Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

Net Flows (A$ millions) To: From Suppliers Artists Museum Gallery Retail Art Educ Infrastruc Consumr Govt Benefactr Other External TOTAL Suppliers 1.4 78 79.4 Artists 49 1 16.3 102.8 169.1 Art Museums 3.6 18.3 7.3 73.4 3.7 106.3 Galleries 3.5 29.2 26.7 59.4 Retail Arts 16.9 2.3 69.8 89 Education 3.3 23 36.2 62.5 Infrastructure 22.7 22.7 Consumers 20 69.6 24.6 51.4 68.8 9.9 5.4 18.5 268.2 Govt 72.9 0.7 52.6 15 141.2 Benefactors 3.4 8.8 1.3 13.5 Other industries 268.2 121.2 13.5 6.7 409.6 External 8.7 20.2 28.9 TOTAL 79.4 169.1 106.3 59.4 89 62.5 22.7 268.2 141.2 13.5 409.6 28.9

Net Flows Graphic for the Australian Visual Arts Industry

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Art Museums

Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

7 Other Domestic Industries 269 121 Benefactors 3 9 78 100 External Sector 9 70 20 7 3

5/ 23/ 2012 Econ 191ac -- Lecture 15 33

Percentage Expenditure Matrix for the Australian Visual Arts Industry

Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

Expenditure Percentages To: From Suppliers Artists Museum Gallery Retail Art Educ Infrastruc Consumr Govt Benefactr Other External TOTAL Suppliers 2% 98% 100% Artists 29% 1% 10% 61% 100% Art Museums 3% 17% 7% 69% 3% 100% Galleries 6% 49% 45% 100% Retail Arts 19% 3% 78% 100% Education 5% 37% 58% 100% Infrastructure 100% 100% Consumers 7% 26% 9% 19% 26% 4% 2% 7% 100% Govt 52% 37% 11% 100% Benefactors 25% 65% 10% 100% Other industries 65% 30% 3% 2% 100% External 30% 70% 100%

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Percentage Revenue Matrix for the Australian Visual Arts Industry

Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004

Revenue Percentages To: From Suppliers Artists Museums Galleries Retail Art Educ Infrastruc Consumr Govt Benefactr Other External Suppliers 1% 19% Artists 62% 4% 12% 25% Art Museums 5% 11% 12% 18% 13% Galleries 4% 17% 7% Retail Arts 10% 2% 17% Education 4% 14% 9% Infrastructure 6% Consumers 25% 41% 23% 87% 77% 16% 24% 64% Govt 69% 1% 84% 66% Benefactors 2% 8% 6% Other industries 100% 86% 100% 23% External 5% 23% TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Percentage Expenditure and Percentage Revenue Matrices

• For each sector or sectoral component, present

share of expenditure (or revenue) represented by another sector or sectoral component

• Example: Art gallery expenditures on artists

(purchases of art works from artists) as percentage of total art gallery expenditures

– Note: This is a “within core sector” breakdown

• Example: Percentage of total revenues of local

“other industries” represented by art museums

– Note: This is a “core sector component” to “local non- core sector” breakdown

5/ 23/ 2012 Econ 191ac -- Lecture 15 35

Category Principal Revenue Source Principal Expenditure Recipient I nput suppliers Artists (62% ) Other industries (98% ) Artists Other industries (49% ) Other industries (76% ) Art museums Government (62% ) Other industries (72% ) Commercial galleries Consumers (65% ) Other industries (50% ) Other retail Consumers (53% ) Other industries (83% ) Education Government (80% ) Other industries (55% ) I nfrastructure orgs Government (55% ) Other industries (84% )

5/ 23/ 2012 Econ 191ac -- Lecture 15 36

A Simplified Input-Output Model for the Visual Arts Economy

Source: D. Throsby, “Assessing the Impacts of the Cultural Industry,” May 2004. Calculations are for Australia.

CRI TI CI SMS OF ECONOMI C I MPACT ANALYSES

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Common Technical Problems with Economic Impact Analyses

1. “Leakage” problem: Not subtracting non-local uses of funds from budget (target organizations spending outside region) If it isn’t spent in the local economy, it won’t contribute to local jobs and growth This includes funds that are saved

Econ 191ac -- Lecture 15 38 5/ 23/ 2012

Common Technical Problems with Economic Impact Analyses

1. “Leakage” problem: Not subtracting non-local uses of funds from budget (target organizations spending outside region) 2. Substitution problem: Not accounting for substitution among activities (consumers would have spent money on other local activities) Want to distinguish between “new spending” and regular spending. If money spent at a festival simply replaces money that would have been spent at the movies, there is no net gain to the local economy.

Econ 191ac -- Lecture 15 39 5/ 23/ 2012

Common Technical Problems with Economic Impact Analyses

1. “Leakage” problem: Not subtracting non-local uses of funds from budget (target organizations spending outside region) 2. Substitution problem: Not accounting for substitution among activities (consumers would have spent money on other local activities) 3. Attribution problem: Assigning credit for all visitor spending (on hotels, restaurants, retail etc.) to target institution or event If Miami is holding a festival on the same weekend as it hosts the Super Bowl, can’t attribute all visitor spending to the festival!

Econ 191ac -- Lecture 15 40 5/ 23/ 2012

Common Technical Problems with Economic Impact Analyses

1. “Leakage” problem: Not subtracting non-local uses of funds from budget (target organizations spending outside region) 2. Substitution problem: Not accounting for substitution among activities (consumers would have spent money on other local activities) 3. Attribution problem: Assigning credit for all visitor spending (on hotels, restaurants, retail etc.) to target institution or event 4. Modelling problem: Input-output relationships derived from expenditure data are static, may not apply to particular event/ organizations The constructed expenditure percentages typically come from a single year—which may have been an outlier. No reason to believe that these percentages will hold in every year, or even every month.

Econ 191ac -- Lecture 15 41 5/ 23/ 2012

Common Technical Problems with Economic Impact Analyses

1. “Leakage” problem: Not subtracting non-local uses of funds from budget (target organizations spending outside region) 2. Substitution problem: Not accounting for substitution among activities (consumers would have spent money on other local activities) 3. Attribution problem: Assigning credit for all visitor spending (on hotels, restaurants, retail etc.) to target institution or event 4. Modelling problem: I nput-output relationships derived from expenditure data are static, may not apply to particular event/ organizations 5. Aggregation problem: Extrapolating derived local impact to regional, state or national level results in derived “gross domestic product that is much greater than actual I f all of the economic impacts for the organizations in a city were added up, they would be much larger than the city’s actual economy. Also, can’t extrapolate local results to larger geographic area because of leakage and substitution problems (“external” sector no longer external when geographic area is increased)

Econ 191ac -- Lecture 15 42 5/ 23/ 2012

Common Technical Problems with Economic Impact Analyses

1. “Leakage” problem: Not subtracting non-local uses of funds from budget (target organizations spending outside region) 2. Substitution problem: Not accounting for substitution among activities (consumers would have spent money on other local activities) 3. Attribution problem: Assigning credit for all visitor spending (on hotels, restaurants, retail etc.) to target institution or event 4. Modelling problem: Input-output relationships derived from expenditure data are static, may not apply to particular event/ organizations 5. Aggregation problem: Extrapolating derived local impact to

• ther organizations results in derived “gross domestic product”

that is much greater than actual 6. Verification problem: Not verifying results ex post (what happens when funds go away?) If these organizations/ events are really contributing so much to the local economy, there should be equivalent negative effects when they are gone or over. No one ever looks at this.

Econ 191ac -- Lecture 15 43 5/ 23/ 2012

Conceptual Issues For Economic Impact Studies

• Is bigger necessarily better?

– Can’t measure importance by economic size alone

• Market-derived data is only partial measure of benefit

– Does not include non-economic externalities

• Multipliers designed to measure impact of exogenous

spending shifts

– Public spending on arts may mean less public spending on other things – Public spending may displace private spending

• Economy may already be at full capacity

– Increased spending simply leads to higher prices

• Positive economic benefit not sufficient condition to justify

tax-financed government subsidy—need to make sure that social benefits are generated (that is, that the funded activity

• r organization benefits non-participants)

Econ 191ac -- Lecture 15 44 Econ 191ac -- Lecture 15 44 5/ 23/ 2012

HOMEW ORK FOR W EDNESDAY, MAY 3 0

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Homework for Wednesday 5/ 30--HW15a Santa Teresa Input-Output Analysis

Core Visual Arts Sector Com ponents Other Sectors Artists Consumers Suppliers of arts-related inputs Government Art museums Benefactors Commercial galleries Other domestic industries

Your job is to construct an input-output table for Santa Teresa’s visual arts

• sector. Here are the relevant sectors:

The steps are: (1) From the aggregate flow-of-funds table, construct a net flow-of-funds table (2) From the net flow-of-funds table construct two percentages tables (3) From the percentages tables, tell me the:

• Principal revenue sources for each of the core visual arts sector

components

• Principal expenditure recipients from each of the core visual arts

sector components

HW15a—Gross Flows Across Sectors, Santa Teresa Visual Arts I-O Analysis

US $ thousands

To From Artists Suppliers Museums Galleries Consumers Govt Benefactrs Local Ind TOTAL Artists 300 100 100 50 300 850 Suppliers of arts inputs 150 200 350 Art museums 300 150 75 75 600 Commercial galleries 250 250 Consumers 100 100 500 700 Government 50 300 310 660 Benefactors 100 200 300 Local Industries 50 50 700 285 300 1385 TOTAL 850 350 600 250 700 660 300 1385

5/ 23/ 2012 Econ 191ac -- Lecture 15 47

I will put an Excel file with this information on the class website. Wait for it.

Class Project (HW15b) Homework for Wednesday 5/ 30

5/ 23/ 2012 Econ 191ac -- Lecture 15 48

The task is for team members to create some (2-3?) stylish Powerpoint slides covering the following: (1) Population and demographics of your two cities (2) General industrial composition of your cities (tourism? agriculture? entertainment? education? manufacturing?) plus biggest employers (3) Proposed festival/ fair featuring prominent artists, arts

• rganizations and neighborhood and cultural groups

(4) Possible funding partners for the Econ191 Foundation– where are they, what do they fund?

The slides should be sent to your team coordinator, not to me, by Wednesday am. I will contact him/ her about them.

Class Project (HW15b) Homework for Wednesday 5/ 30

5/ 23/ 2012 Econ 191ac -- Lecture 15 49

The task is for team members to create stylish Powerpoint slides covering the following: (1) Population and demographics (2) General industrial composition plus biggest employers (3) Festival featuring artists orgs, neighborhood & cultural groups (4) Possible funding partners for the Econ191 Foundation

You should be w orking together w ith your team m ates to create these slides – share your inform ation and ideas, because you w ill probably also be sharing your grade w ith these people! I f one person has taken responsibility for a particular task, have at least one other person take a look at his

• r her w ork, just to confirm that it seem s right

Class Project (HW15b) Homework for Wednesday 5/ 30

5/ 23/ 2012 Econ 191ac -- Lecture 15 50

The task is for team members to create stylish Powerpoint slides covering the following: (1) Population and demographics (2) General industrial composition plus biggest employers (3) Information on museum and orchestra (4) Festival featuring artists orgs, neighborhood & cultural groups (5) Possible funding partners for the Econ191 Foundation

Rem em ber that your goal is to m ake each city look as good as possible for the com m ittee. This is partly a m arketing pitch. So you w ant som e nice im ages. And w hile your inform ation about the m useum , sym phony, artists and cultural groups should include statistics, it should not consist solely of statistics.