The case for film subsidies (and other goodies)

Last week, Michael Kinsley published a jeremiad against film subsidies in the LA Times. Two of my fave Economist-oids, Ryan Avent and Will Wilkinson, follow up, Wilkinson with an endorsement of Kinsley’s piece, Avent with a more nuanced but ultimately very radical comment.

Film subsidies and other state and local programs intended to promote economic and cultural activity are sometimes smart policy and sometimes corrupt boondoggles. I certainly don’t wish to argue that they are always and everywhere good. But Kinsley argues that they are always and everywhere bad, via arguments that are as compelling as they are false. Let’s try to understand the economics a bit.

The most widely quoted, and most plainly wrong, bit of Kinsley’s piece is this:

New Mexico under [former Governor] Richardson was a pioneer in this field. In 2002, it began offering a credit of 15% — later raised to 25% — toward the cost of making a movie in New Mexico… Now, 42 states have followed its lead… In less than a decade, the absurd notion of welfare for movie producers has evolved from the kind of weird thing they do in France to an unshakable American tradition… Richardson says that the film and TV subsidy has brought “nearly $4 billion into our economy over eight years” and has created 10,000 jobs. By “our,” he means New Mexico. He says every state should emulate this success.

But of course every state cannot do that because it essentially is a “beggar thy neighbor” strategy.

Ryan Avent is not ultimately willing to endorse film subsidies. But he is too good an economist to let this go by. He writes

A subsidy allows a business to cut prices and artificially raise demand. Given generous enough subsidies, many more movies would be made, and each state could, potentially, have a thriving film industry.

To put the same point differently, film subsidies reduce the cost of production and thereby increase risk-adjusted expected returns to investors. In a world thick with aspiring directors and clever screenplays, there are always hundreds of potential films getting ranked, accepted, but mostly rejected by investors willing to support film production. At the margin, there are films — perhaps quite a lot of films, it’s an empirical question — that investors would deem almost but not quite worth funding in the absence of subsidies. These films get funded and produced when governments sweeten the pot.

Film subsidies are not entirely or even predominantly a “beggar thy neighbor” strategy. They are certainly not, as Wilkinson asserts, a zero-sum game. In many countries, a large fraction of production depends upon state subsidies, and many films would not have been produced without them. The elasticity of film production to subsidy is far from zero.

Still, this is “welfare for movie producers”, as Kinsley puts it, right? Avent describes the excess demand as “artificial”. To which I say, huh?

Kinsley’s “France” is not nearly communistic enough to discredit this pernicious practice. If we really want to drive home the idea that film subsidies are a booger floating in the soup of red-blooded capitalism, we should associate them with that most Bolshevik of all institutions, the, um, suburban American shopping mall.

The economics of a well-designed film subsidy and the economics of suburban shopping malls are identical. State governments offer film subsidies on the theory that film-making within the state will generate ancillary economic activity that will more than offset the cost of the subsidy. Suburban shopping mall developers offer what are effectively rent subsidies to stores they expect to generate extra traffic and sales for the shopping mall. Many of the “anchor stores” — the big, national-brand department stores — at your local mall pay no rent at all, despite occupying vast territories of prime space for which their specialty store neighbors pay dearly. This phenomenon has been carefully studied. Gould, Pashigian, and Prendergast write

[T]he differential contracts offered to the anchor and nonanchor stores appear to not only offset some of the externalities generated by the anchor, but do so in an efficient fashion, at least on the dimension of total sales and rent in the mall. If this were not the case, the result would likely be a misallocation of space: a failure to internalize the benefits of the anchor stores would imply too little space allocated to anchors, because anchors themselves would not consider the external benefits their presence has on the other stores when deciding how much space to lease.

The arrangement that has evolved among private parties via consensual, contractual negotiation is that shopping mall developers effectively tax non-anchor stores with high rents in order to subsidize anchor stores with mostly free rents. Far from “artificial”, if developers did not do this there would be a deadweight cost. If rents were held homogenous within shopping malls, there would be a lot fewer anchor stores, which would deprive smaller stores of the foot-traffic and sales those anchors generate, which would then deprive shopping malls of a lot of potential rent.

Still, the Macy’s, Sears, and Nieman Marcuses of the world have to live somewhere, right? And it’s got to rankle shopping mall developers — you know it does — that a substantial fraction of their hard-built space is given away for trivial or even zero rent. Suppose that all of America’s shopping mall magnates gathered in a smoke-filled room and decided to ban the practice of subsidizing rent to anchor stores. What would we call that? It turns out we have names: “price fixing”, “cartel”, “conspiracy in restraint of trade”.

If shopping mall developers could pull off such a scheme — or really if they could have pulled off such a scheme years ago — they might narrowly have benefited. There would have been fewer anchor stores and therefore fewer shopping malls, but the loss of scale might have been offset by developers ability to, um, extract rents from anchor chains, leading to increased profitability. But that extra profitability would have been an ordinary monopoly rent, of the sort we typically condemn and even criminalize, wherein higher prices are extracted by virtue of a monopolist’s power to enforce underprovision of goods. We’d have the FTC or the Department of Justice all over their asses if shopping mall developers tried to pull something like that.

Similarly, if it is true that film production generates positive externalities for local and state economies, it still might be true that having local governments band together and refuse to provide film subsidies would lead to greater overall tax receipts. The reduction of taxable economic activity due to cartelized subsidy refusal could be offset by the savings realized from withholding the subsidy. If this is so, then state and local governments (in aggregate) profit only by forcing a reduction of activity below the level economists would ordinarily call “efficient”. By not permitting filmmakers to recover some share of the value of the positive externalities they generate, we force a lot of them to take their ball and go home, leaving us all poorer in aggregate.

I don’t think it’s likely, either with respect to shopping malls or with respect to films, that “local governments” would in fact benefit by forming a cartel. In both industries, I think the externalities are real, and despite some “beggar thy neighbor” competition — between shopping malls as between states — these “governments” come out ahead by rebating some of the external benefit back to those who create it and getting a smaller piece of a bigger pie.

Kinsley, in his column, implicitly recognizes that he is calling for a cartel of state governments. “Government, in order to work, must be a monopoly,” he asserts, without explanation or justification. Governments do maintain certain monopolies within their territories, but must the fifty state governments band together and become an uber-monopoly as well? Isn’t much of the justification for federalism the notion that multiple governments experiment and compete, generating creativity and dynamism that wouldn’t exist in a monopoly public sector? How does the fact that “the landlord” is a government alter the economic logic of efficient contracting within competitive shopping malls, which is precisely the same logic that justifies film subsidy?

Distributional issues arise when subsidizing externalities. The local gag store is more sympathetic than a national chain, but the gag store ends up paying the anchor store’s rent. Local taxpayers are more sympathetic than Hollywood studios, yet local taxpayers end up funding Hollywood studio returns. With respect to private sector shopping malls, there’s little we can do about these distributional concerns. In the local government sector, however, it is perfectly legitimate to discriminate by, for example, offering the subsidies only to local filmmakers, however defined. That choice is full of trade-offs: Restricting subsidies to local filmmakers arguably implies that, from a global perspective, some less valuable films get produced in preference to more valuable films. The restriction also reduces the power of the subsidy to generate activity, both in absolute and bang-for-the-buck terms, as there are fewer films locally than globally. But local films may contribute to local culture in ways that taxpayers value, local subsidies go to people more likely to respend money in state (increasing tax recoveries), and distributional concerns are legitimate and serious. These are tradeoffs for taxpayers and their representatives to make based on particularities.

The most serious case against film subsidies, emphasized both by Kinsley and Wilkinson, is the public choice argument. Wilkinson claims that “the film and TV incentives racket is a hotbed of corruption.” That may or may not be a fair characterization, but the point is well taken. The economic logic behind subsidies is iron-clad, given activities that generate net positive externalities whose value is known to be more than the cost of the subsidy. But the externalities of future projects can only be estimated, and estimates by potential recipients of subsidies are rationally overoptimistic. If politicians, perhaps blinded by “personal friendships” with campaign contributors, fail to form independent and conservative estimates of public benefits, then they may offer excessive subsidies, which destroy value while transferring funds from taxpayers to the subsidized.

This is a very serious issue. But it needn’t be insurmountable. Subsidies can be and sometimes are attached to contractual obligations to generate promised activity. Localities do this routinely, and sometimes sue to recover the subsidies if public benefits fail to appear. There is always a lot of uncertainty surrounding indirect public benefits that may result from various activities. But, as Matt Yglesias reminds us:

Life is full of situations that demand you to make decisions under conditions of uncertainty. In almost all cases, the right thing to do is to try your best, not to simply give up.

It is conceivable that we are simply unable to organize governments capable of resisting corrupt inducements, and therefore our best option in a bad world is simply to forego all subsidies. I’m pretty cynical about government, but I don’t think we’re there yet. If that is your position, however, at least get the economics right. Don’t imagine that a blanket prohibition of subsidies, to film or any other activity with positive externalities, is “efficient”. On the contrary, a blanket prohibition is guaranteed to result in underprovision, and likely to result in lower total tax receipts than an optimal subsidy regime. You can argue that in a third-best world, we’re better off accepting very large deadweight costs than the corruption that attends differential taxation schemes. But there is nothing efficient in either of those choices.

In the real world, all successful governments subsidize activities with putative positive externalities. All unsuccessful governments do so as well. In the history of the world, I doubt there ever was a government which has not differentially taxed or subsidized in order to promote allegedly valuable activity. Under the circumstances, I think we should take Yglesias’ advice and try our best to do subsidy well. If we do it right, both theory and evidence suggest that subsidy can do a lot of good. If we do it poorly, we’ll destroy a lot of value and generate corruption. Not doing it at all, in a practical sense, is not an option. I think the case for positive externalities associated with film production is pretty strong. If so, then the right thing to do is to keep the subsidies but to administer them as wisely and as noncorruptly as we can. Distributional concerns matter a lot to me, so my preference as a taxpayer is to support subsidies that discriminate in favor of local and/or “independent” filmmaking (although that invites its own corruption in the form of “definition arbitrage”). More generally, a world without state subsidy is not a world to strive for. It would be as much a libertarian paradise as a ghost shopping mall.


FD: My wife is a film student, aspiring to become an aspiring filmmaker. Perhaps that colors my view of film subsidies.

Update History:

  • 5-March-2011, 11:15 a.m. EST: Changed “Kinsey” to “Kinsley” throughout. Thanks to Leigh Caldwell for pointing out the error, and my apologies to Michael Kinsley for making it.
 
 

46 Responses to “The case for film subsidies (and other goodies)”

  1. azmyth writes:

    Subsidies suffer from the seen and unseen problem. The beneficiaries are easy to point to, but the businesses chased out because of the high taxes to pay for the subsidies are not. While it seems fair to say the film industry generates externalities, its not clear that it generates the highest amount of externalities of all possible industries. The government must pick winners of what they think generate the most externalities without clear evidence. Given that the externality must overcome the deadweight loss from taxation, I’d rather have the government just have low taxes and let the market pick the winners. The market can Coasean bargain over the externalities, as in your mall example.

    An argument in favor of art subsidies is that in a world with lots of piracy, the government should subsidize production of all zero marginal cost goods. The question still requires knowledge of which produces should be subsidized, but ex post awards can somewhat resolve that issue.

  2. dirk writes:

    I was hoping someone would amplify on this topic. Good post.

    It’s a shame congress had to outlaw the Hollywood Stock Exchange, otherwise the film industry would have had access to more funds, as investors could diversify more and make small bets on riskier projects instead of relying on a handful of risk-averse studios, who coincidentally happened to lobby against the creation of the exchange.

  3. Rahul writes:

    I think thinking of each state as an independent agent, maximizing welfare of only state-residents makes the subsidies seem more rational. In such scenarios arms races are inevitable. When one car dealership offers a discount it knows others will try and match. But that doesn’t prevent it from offering the discount. So long as the elasticity of demand is good enough the decision should be OK.

    The one thing that is suspicious though is using exceedingly exuberant multipliers in the analysis.

  4. Prakash writes:

    If one looks at it from the point of capacity utilization, the state should seek to raise revenues from any and all avenues open to it. The point seems like one Spencer Heath made in his modification of the georgist doctrine. The landlord does whatever it takes to maximise revenue. It’s only because the state is so large, so full of stangers and so prone to corruption that we generally prefer to deal with standard and written down rules.

    All said, the world would be a lot better with many small jurisidictions. There would be all sorts of experiments with form and rules that will improve the world. A bit like what the seasteading guys have been trying to promote.

    Also, on a slightly different note, have Steve’s recent posts been pointing to a preference for a more intimate world with more context-sensitive information than a world built on clear rules.

  5. Intuitively, I feel the argument is probably right. But here’s the question that currently only my gut can answer: Why film?

    All business activities have some kind of positive externalities (you could look at the Keynesian multiplier this way). So on this argument, we should subsidise them all. Maybe that is correct: no corporate taxes, only income taxes. Some people certainly argue for that.

    But I don’t think that’s what Steve means (correct me if I’m wrong, please). In fact I don’t even know whether reduced corporate taxes are the form that film subsidies take (is it the ability to reclaim sales taxes, pay lower payroll or income taxes?)

    I think Steve is arguing that film is special because it has higher externalities than some other kinds of business. Why would that be?

  6. OK, it appears that the subsidy takes the form of a direct payment of 15-25% of the movie’s production cost (with some exclusions such as the cost of paying stars, who presumably live out of state).

    So as a business owner, I pay salaries to my employees and buy things from my suppliers, both of whom presumably go on to spend and invest the money in the local economy. I’d quite like to have 25% of all my operating costs paid by the government. This would certainly encourage me to expand my business, and take on marginal activities that I wouldn’t otherwise carry out.

    Should that argument apply to all companies? Maybe it should – maybe this is a form of strong Keynesianism and it would work well. Instead of general subsidies or welfare payments, the government should subsidise anything that an entrepreneur is willing to invest (some of) their own money in. Or maybe it would lead to much higher personal taxes and would be a waste of resources. There’s a valid debate there (though I think the right answer is probably fairly clear). Again, why is film special?

    p.s. minor correction – it’s Kinsley not Kinsey.

  7. sceni writes:

    Film is somewhat special in this context because each production is similar to the complete creation and destruction of a business. Furthermore, the employees and services required for the business are largely generic (think carpenters, electricians, cooks, buyers, …), and there is little permanent construction required. Hence, the business you are trying to attract with subsidies is extremely portable and sensitive to service costs.

    A comparable model is the construction and subsidy of convention centers, stadiums, etc. But it’s easier to kill a film subsidy program than a build stadium, and the capital investment on the government’s part is negligible. I think I just produced an argument for why film subsidy is better than sports of convention subsidy.

  8. hhoran writes:

    The film industry/shopping mall subsidy analogy doesn’t hold water.
    The shopping mall owners are a small part of metropolitan commercial real estate market. Neither they nor the anchor stores has clear cut oligopoly or otherwise artificial pricing power. The mall owners need to set rents so that everyone can operate profitably. There’s good information about both rents and positive externalities (i.e. both the anchor and non-anchor stores can judge the “reasonableness” of rents and foot traffic potential against lots of marketplace data). There’s a direct link between the higher non-anchor rents and increased non-anchor foot traffic. If rents are excessive relative to benefits, they can set up shop elsewhere. The anchors won’t get free rent if they stop generating the externalities that makes the equation work for mall owners and non-anchors. These aren’t “subsidies”–the supermarket down the street isn’t being involuntarily taxed, with wealth transferred to businesses within the mall. This is “price discrimination” akin to passengers on a single flight paying different fares in order to create a better revenue mix for the plane as a whole.
    The film producer is getting a classic “subsidy” with an involuntary wealth transfer from many people who derive no direct benefit. Whether the “general public” is getting a favorable tradeoff (spinoff employment and taxes exceed direct subsidy payments) is, as you say, an empirical question. But the lack of developed, competitive markets and market “accountability mechanisms” suggests abuse will become widespread. Sports team/stadium subsidies are a more widely understood example. Once in a blue moon, cities get solid returns from these subsidies (Baltimore, Denver) but the vast majority generate a tiny, tiny fraction of the social benefits claimed. If mall rent schemes fail, mall owners go bankrupt and market rents adjust accordingly. But sports subsidies keep coming–rising into the billions–despite the overwhelming evidence that most of this is naked wealth transfer from taxpayers to rich team owners. If there was a compelling “public benefits” case these subsidies would be structured as loans, not giveaways (perhaps with repayment forgiveness based on future incremental tax/employment increases)
    This is a critical issue to debate given that “business subsidies” is the central to state government finance, and many GOP governors (Wisconsin, New Jersey, Ohio, Indiana) are aggressively working to cut public services and violate existing employee contracts in order that those taxpayer funds can be shifted to a combination of reduced business taxes and greatly increased business subsidies. Some of which may be justified by empirical evidence, but most will be direct wealth transfers from taxpayers to the businesses funding the reelection campaigns of incumbent politicians.

  9. RedSt8r writes:

    @Leigh Cadlwell – As a small business owner I too would really enjoy a 25% refundable tax credit (the value of a film subsidy in my state). I too recently wrote my local paper (a big fan of film subsidy) asking why film? Why not nuclear plants? Why not auto plants? Why not oil drilling (oh, wait they might already get them)? In short why not every business?

    @sceni – film is decidedly NOT different. They do not destroy the studios or kill the workers after every film. They attempt to re-use them in the next film. Attetmpting to differentiate based on the type of industry is absurd. But assume your point is valid? Why subsidize a temporal business? If we must subsidize (and I postulate we do NOT) a business why not subsidize ones that are permanent. My small business hires locally, works locally, spends locally, invests locally and I reside locally. Yet I must subsidize Hollywood stars and producers?

    Cut business regulatory burdens (number and cost of complying), rationalize taxes, reduce the cost of government and let entrepreneurs blossom.

  10. Dan Kervick writes:

    “Again, why is film special?”

    Well, here’s one reason: when a film is made on location in some state, the film then serves upon release as an advertisement for that state. By “subsidizing” the film, the state or city is in effect paying for product placement, a routine Hollywood business practice. Most film scripts can be altered so as to appear in any one of a variety of locations. So states pay Hollywood for keeping the state on the cultural map. If a state has near-zero visibility as a location in our most widely seen cultural products, then it can become a backwater. That effects its ability to attract new business, along with emigrating young people and cultural entrepreneurs.

    To suggest that this is somehow bad because film subsidies reduce the costs of production seems on a par to suggesting that all placed advertisement is somehow bad because it too defrays the costs of production. Should we deplore the practice of newspapers like the LA Times charging for ads?

    But a second point is that film is *not* really so special. Isn’t pot-sweetening a fairly routine practice when large-businesses have a choice about where to locate some facility?

    All that said, it *might* very well be possible that states can achieve for themselves a better overall deal if they form a cartel in the market for film location decisions and refuse as a group to pay these location fees.

  11. Dan Kervick writes:

    “effects” >>> “affects”

  12. ScottB writes:

    What seems to be left out of the discussion is the loss that state incur when they subsidize films that would have been shot in the state anyway.

  13. Doc at the Radar Station writes:

    “…a handful of risk-averse studios…”
    -dirk
    Here’s a prescient (IMO) link that I found on Ritholtz’s site:
    http://www.gq.com/entertainment/movies-and-tv/201102/the-day-the-movies-died-mark-harris?currentPage=all

    “…Film is somewhat special in this context because each production is similar to the complete creation and destruction of a business. Furthermore, the employees and services required for the business are largely generic (think carpenters, electricians, cooks, buyers, …), and there is little permanent construction required. Hence, the business you are trying to attract with subsidies is extremely portable and sensitive to service costs…”
    -sceni

    Interesting point…. Good stimulus spending… The physical sets that you build are unlikely to be reused, so there is no creation of unneeded future production capacity. But, what if the production company uses offshored CGI effects? Does that demand just “leak out” and make the nation poorer as a result?

  14. azmyth — All good points. As you say, subsidies present huge public choice problems, the prototypical concentrated benefits and diffused costs. I think it’s honorable enough and non unreasonable to oppose subsidies on the theory that, under real politics, the likelihood that they will be hijacked and misapplied overwhelms potential benefits. As I say in the piece, I’m not quite there, but I’m pretty close. But before we address the question, we’ve got to acknowledge that in theory, a good subsidy regime is superior to uniform taxation while a nonsubsidy regime imposes significant aggregate costs. Then we can evaluate whether in practice bearing the costs is superior to gambling for a good regime in a world of bad politics.

    The question of what to do about zero-marginal cost, place-independent goods is a deeper problem, because valuing the externalities is so hard. With film subsidies (and stadium subsidies, etc), a local government can argue that the activity presents sufficient positive externalities in purely financial terms, such that the cost of the subsidy will be recouped from ancillary activity. Governments in general should be concerned about nonfinancial externalities as well. Even if playgrounds didn’t contribute to property values, municipalities would buy them. But nonfinancial externalities, things that no one even argues will generate offsetting tax receipts, are even harder to guesstimate — how much is life improved by people having the option to view a film for free? Plus, subsidizing place-independent goods creates a free-rider problem: why should Alabama subsidize film if Alabamans can download great films whose production was subsidized by New York?

    Film subsidies are a mix. Proponents claim that localities will benefit 1) through the direct taxation of an increase in local activity occasioned by a single film’s production; 2) by virtue of taxation of a continuing industry — while individual films are mobile, film production requires skills and amenities and film-makers make use of past connection, so places that have hosted films in the past are much more likely to do so in the future; 3) by virtue of publicity for the locality, films produced on location increase the profile and sometimes the glamour of a locality and contribute to tourism and retention of talent that might otherwise be “brain-drained” to other places; 4) by virtue of contributing to an arts-and-culture scene, again important to retaining a creative class and arguably the commercial dynamism that attends it; and 5) the consumption value of the films themselves, especially if they are films with local themes that otherwise would not have been reduced. Those are a mix of financial and nonfinancial externalities, and the aggregate value is difficult to estimate and easy to inflate.

    Perhaps a reasonable approach by localities would be to try to restrict the degree of subsidy to medium-term recoverable tax receipts, that is to intentionally underestimate the positive externalities and a counterbalance to corrupt incentives to overestimate. However, even financial externalities are difficult to estimate and liable to hype. There is no ultimately substitute for care.

  15. Dirk — I don’t feel like I know enough about it to comment on the proposed Hollywood Stock Exchange, but a film production is exactly the sort of uncertain small business the innovate finance of which our financial system has completely ignored and our regulators have basically criminalized. I think that one of the most important financial problem we have to solve is to develop means whereby individual investors can legally supply capital to and bear risk on behalf of small, risky enterprises without being a $2M+ accredit “angel” investor or relying upon our dysfunctional banking system. That’s not an easy problem — public equity finance was criminalized because it is a real problem that there are people very good at selling false dreams and bad promises and people very poor at resisting their charms. But the world we live in now, where the only “public equity markets” are places where people can put money in large, distant firms with which they have no relationship and about which they have no special information, is desiccated and inadequate. Futures markets at their best do provide capital, in the form of risk-bearing, although they bring with them questions of leverage and liquidity, and because they rely so heavily on liquidity they tend to be centralized and therefore distant (in any sense) from most potential investors. In theory, it’s a technical problem to invent vehicles that find the right balance between information recruitment and risk-bearing on the one hand, and safety and resistance to fraud on the other. In practice it’s a regulatory problem, as creativity in developing publicly accessible investment vehicles has essentially been banned.

  16. Rahul — I want to stay agnostic about the actual extent of “multipliers” or externalities. I don’t think we can generalize about that. My point is that if and when there are substantial positive externalities to film production then subsidizing it is 1) economically efficient; and 2) what would arise out of efficient contracting in the private sector when transaction costs permit. I don’t wish to claim that film subsidies are always a good idea, only that they might sometimes be a good idea, and that banning competition to provide subsidy when they are a good idea is a form of monopoly pricing sure to lead to underprovision.

    As you point out commercial “arms races” are normal, they are good for some parties, bad for others, but usually help maximize overall activity. When it is governments involved in commercial arms races, the losers are sometimes “taxpayers”, but the loss to taxpayers might be recouped via taxation elsewhere. As a matter of public policy, I think it’d probably be best if states behaved like shopping mall developers, and provided at most the level of subsidy they expect to recoup in a financial sense from higher fees paid by others due to the subsidized activity. This is hard in practice, there are deep measurement and corruption problems. But if policymakers took conservative estimate of what can be recouped as the limit of subsidy, then the most they lose from the deepest arms race is taxes they otherwise would have earned from film that would have been produced locally anyway, while all the nonfinancial externalities of film production are pure surplus. This should be the limit, of course. Like shopping mall developers, states and municipalities should try to subsidize as little as possible for the most activity they can get. If the arms race is not so bad, they may generate a financial surplus as well as the gooey stuff. But in a worst-case bitter competition, they still come out ahead. Localities should err on the side of avoiding winner’s curse: overpaying and rewarding corruption.

  17. Prakash — I’m not familiar with Spencer Heath, but I think I agree with the sense of what you are describing. In theory, a state would behave like a landlord and taxes would be like rent, and like a private landlord, all sorts of considerations having to do with how much a tenant positively contributes to or negatively causes trouble for the management of a space would be included in the computation of the rent. However, as you say, governed territories are large (even when they are just cities) and have a great deal of market power (changing cities is a lot more expensive than just having to move). This creates serious information and agency problems, and combines them with the power to harm and exploit. So, wisely, we don’t let governments be as discretionary and context dependent as landlords. But the choice is not so binary as one-size-fits-all pricing or ignorant-corrupt-exploitative total discretion. We can try to develop schemes that permit some differential pricing in favor of beneficial activity while trying to manage informational issues carefully and laying out terms clearly and generally to avoid favoritism. A general tax break for film-makers might satisfy this, while a special break to a particular filmmaker might not (even if in the instance the tax break would be a good idea, ex ante it is too hard to discriminate good projects from corrupt favors if the breaks are one-off).

    I do think we need to find better ways of mobilizing specific context in collective decisionmaking (that was the Hayekian case for markets, right?). But I don’t want to promote pure discretion: I want to develop schemes that pair the use of context-sensitive information with checks on the abuse of arbitrary discretion.

  18. Leigh — First, thanks for the “minor” correction. How embarrassing!

    In the piece, I haven’t as much argued that film production offers higher externalities than other activities as much as I have stipulated it. I think it’s true that, for many localities in many circumstances, film production generates unusually many good externalities net of external costs. But I wouldn’t argue that as a general, always-true proposition, and I’m certainly open to arguments that it isn’t so, that a film made in a city does nothing more for the place than a chain of laundromats operating at similar scale.

    I reacting (badly, as you can tell) to Kinsley’s piece, which did not (I think) dispute the contention that film production is associated with positive externalities. Kinsley’s piece did claim that the degree of those externalities was overstated by corrupt reporting, which I think is almost certainly true. Any interest group that may be able to extract a subsidy is going to overstate the benefits of their activity, and incautious or overfriendly governments will find their own estimates corrupted by their beneficiaries’ enthusiasm. Still, I took Kinsey’s position to be that states should avoid a “beggar thy neighbor” race to the bottom despite the benefits localities enjoy from film production, because (in aggregate) they’d get those benefits anyway if they just said no. That view, I think, is plainly wrong, unless film production is very inelastic to the availability of funding. (It is not.)

    The question of what to subsidize should be determined in the same way a shopping mall developer determines it: Activities that generate net positive externalities relative to their peers should be subsidized (i.e. more lightly taxed). Consider a shopping mall developer with market research we’ll assume to be valid. Her task is to set prices for different classes of tenants. Nearly all tenants generate net positive externalities, from the developer’s perspective. Even specialty stores draw some specialty traffic that will leak sales to neighbors. But outside of Lake Woebegone, not all tenants can be subsidized. Ultimately the average rent-per-square-foot in the facility must be sufficient to cover her risk-adjusted cost of capital if she is to go forward with the project. If she considers a flat-rent policy, in a competitive market, she will find she cannot achieve market returns on her investment, because “anchors” will be underprovided, traffic will be light, and overall sales will be insufficient to support the rent she needs. She reads my piece, and like you, understands that the way to go is to subsidize positive externalities. She realizes that every tenant makes a contribution, and considers a policy that gives everyone a discount from the flat rent she’d previously considered. But that doesn’t work either, as now she cannot meet her ROI hurdle. The only solution is to differentially charge each tenant based on their relative external contribution, so that the average rent meets her revenue needs but positive externalities are subsidized such that net recipients of external benefits (those who receive more traffic than they generate) are willing to pay above average rents.

    The situation is the same for a state. Subsidizing all taxpayers can’t work. The state has revenue needs. It must overcome this hurdle. A flat tax that ignores differential external contributions of different activities will have too little of those activities, and the “fair” tax imposed on everyone will be more burdensome than higher taxes would have been, if only they’d captured those external revenues. So the state should design a differential taxation scheme, that more lightly taxes those who make external contributions, and than recaptures only a share of those external benefits in the form of higher taxes from others. In theory, this can be Pareto superior — those who pay the higher taxes enjoy disproportionately higher income, so their overall burden is lower. In practice, Pareto superiority never happens, but we rank outcomes anyway, and some approximation of the Pareto superior outcome looks a lot better than the flat-rate outcome.

    You could argue that “business” in general generates positive externalities, and that therefore we should subsidize business in preference to households. I guess I’d offer two responses: 1) That seems too course a differentiator. After all, every household with a wage earner is a small business, selling labor services for revenue. Many small businesses (e.g. small consulting firms) are quite similar to ordinary labor-selling. As a practical matter, if we try to subsidize business, we’ll create a lot of incentives for people to recast wage relationships as contract relationships; 2) We do in fact subsidize business in this way. We grant many businesses a huge subsidy in the form of limited liability, a valuable option to default on debt at fixed cost not available to households. In the past, this option was associated with a “double taxation” premium, but in the US at least, we’ve increasingly dispensed with that cost. Businesses have a second major subsidy, the ability to deduct expenses from revenue prior to taxation. Individuals (again in the US) cannot do this, unless they can justify the expenditure as a “business expense”. This is a huge subsidy to business activity over all activities not categorized as business. Of course, some businesses face a variety of fees and taxes that individuals don’t, but overall, the US tax code, Federal, State, and local, does a lot to subsidize and encourage business activity, precisely on the theory that it generates positive social and economic externalities. Film subsidies (and other goodies!) just continue the same logic, drawing distinctions between different sorts of business activity based on relative positive externalities.

    Again, there’s nothing special about film other than the conjecture that film production generates higher positive local externalities than average business activity. If that isn’t true, then it’s something else that ought to be subsidized. But I haven’t encountered many people who argue that film does not offer unusual positive spillovers (though many people reasonably point out that spillovers are overhyped or overstated).

  19. [...] The case for film subsidies (and other goodies) – via Interfluidity -Film subsidies and other state and local programs intended to promote economic and cultural activity are sometimes smart policy and sometimes corrupt boondoggles. I certainly don’t wish to argue that they are always and everywhere good. But Kinsley argues that they are always and everywhere bad, via arguments that are as compelling as they are false. Let’s try to understand the economics a bit. [...]

  20. RedSt8r —

    “Cut business regulatory burdens (number and cost of complying), rationalize taxes, reduce the cost of government and let entrepreneurs blossom.”

    So all of these sound like good things. But I don’t think we have any reason to believe that they are remotely sufficient. The world is a complicated place. Governments do things that are valuable; cutting their costs without weighing those costs against benefits is poor accounting. What does it mean to “rationalize” taxes. To say the least, that’s contested. In this piece, I am arguing that a rational tax is a discriminatory tax, i.e. one that taxes things with positive spillovers much less than those without, or especially those with negative spillovers. I don’t think that this is what you mean by “rationalize” — I think you mean something like flatten.

    I don’t even necessarily think you are wrong as a matter of policy. I hope that my very painful awareness of how liable to failure and corruption governments are, how it just might be true that because we simply cannot trust the governments we have been able to organize, perhaps the best policy is to absent them as much as possible. I’m not there yet, but I’m much closer than I’d like to be.

    But if so, that is not good news. Your “let entrepreneurs blossom” ending is far too hopeful. Because it really is true that externalities are real, that absent government action a lot of really valuable activity will be underprovided (not just relative luxuries like film) while a bad stuff will go unchecked. Court systems will go underprovided, as will police whose services are accessible to guard the property rights of the poor along with the wealthy. If governments are too corrupt to devise discriminatory tax schemes, do we really want to trust them to organize and administer men with guns? Discriminatory taxation is every bit as normal and traditional as policing. We tax cigarettes more than food. We are in very bad shape if we concede we cannot organize governments that will resist corruption at least enough so that their choices are on average net positives.

    Libertarians like to talk about how people can voluntarily coordinate to resolve many of these problems, and indeed they can, but when they do so effectively, that cooperation starts looking a whole lot like governments, brings the attendant problems thereof. Transaction costs are too high and property rights (to things like foot traffic in a shopping mall!) are too difficult to specify, contracts and voluntary organizations have to be defined on a discretionary “principles” basis rather than in terms of automatic objectively verifiable rules in order to be effective. Conflicts arise, as discretionary choices inevitably create winners and losers. Losers claims their contractual rights have been violated. Initially voluntary organizations then are either discredited as having violated their charters, or else winners and bystanders successfully maintain that the organization’s discretion was in fact legitimate and its decisions are enforced, by force if necessary, on the claim that submission is ultimately voluntary because it stems from preagreed contractual arrangements. Like governments, voluntary organizations capable of making choices to which some members deeply object either succeed or fail based on “legitimacy”.

    Of course people can leave voluntary organizations, though they may have made significant investment in matters under an organization’s contractual jurisdiction, so leaving may be painful. Voluntary organizations may have “market power”, but not infinite market power. State and local governments have even more market power, but that is a distinction of quantity more than of kind. Leaving a shopping mall after putting millions into renovating a store is not so much less painful than moving to another city or state.

    Without either government or quasigovernmental voluntary organizations, entrepreneurs do not blossom. There is nowhere in the world where enforcement of only explicitly contracted rights is sufficient to allow for commerce to develop. There are a lot of tradeoffs, and a very difficult overall tradeoff that might be described as liberal vs conservative. Liberals accurately emphasize that good choices by a coordinating authority can lead to dramatic benefits that do not arise when property rights and markets are left alone. Conservatives accurately point out that coordinating authorities in practice often make bad choices, suggesting governments should pursue only the most certain public goods and leave theoretical benefits of greater coordination on the table in deference to the hazards of real life execution. Both of those are legitimate views, and they are not mutually exclusive, we can sit a lot of different places along a continuum. But it is almost certainly true that sitting at the far right of that continuum looks less like lots of entrepreneurs blossoming than like a lot of government failures avoided while people keep too much to themselves.

  21. Dan — I agree with pretty much everything you have to say. My only caveat would be to this:

    “it *might* very well be possible that states can achieve for themselves a better overall deal if they form a cartel in the market for film location decisions and refuse as a group to pay these location fees.”

    I think that’s true in narrow tax terms: States might in aggregate keep more taxes as a cartel than they would bidding away tax receipts to attract and subsidize productions. But, if it is true that film production does generate unusually many positive externalities, that it does create wealth for people in-state that film investors do not capture or take into account when deciding whether to go forward, then states will not “achieve for themselves a better overall deal” in terms of aggregate population wealth. That is, if they succeed in tax terms, it will be by making their populations poorer, increasing the real tax burden via both the numerator and the denominator.

    (Again, all of this is contingent upon the ability of real, unusually large positive spillovers to film production, which I assume throughout, but which could be disputed.)

  22. ScottB — It’s not left out; it’s embedded in the argument. Production that would have occurred anyway still occurs, with or without the subsidy. Aggregate wealth isn’t affected. The subsidy bidding war does, however, affect the distribution of that wealth: more of it is retained by film investors rather than captured by states as taxes. If the “elasticity of production to subsidy” were 0, Kinsley’s argument would be mostly fair: the bidding war doesn’t change aggregate welfare at all, but it shifts winners and losers, and the winners (film investors) are less sympathetic than the losers (taxpayers).

    But the “elasticity of film production to subsidy” is definitely not zero. That bidding war makes films a lot cheaper to make, and many more films are made. So the net effect is both a redistribution of wealth from more sympathetic to less sympathetic actors and an increase in aggregate wealth (again, assuming positive spillovers to filmmaking such that it is underprovided without subsidy).

    The end point is very similar to what is usually claimed for free trade: Overall, we are collectively better off with the subsidy than without, and with a clever enough tax scheme, that excess wealth could be recovered by taxpayers leaving everyone better off. In practice, however, we don’t necessarily have clever enough tax schemes, there are winners and losers, and sometimes the pattern of winners and losers is troubling. With trade, we usually err on the side of increasing aggregate wealth, and fret that we fail to deal with the winners-and-losers issues as well as we should. Why shouldn’t maximizing aggregate wealth then also be the deciding criterion for film subsidies?

  23. Doc at the Radar Station — Good points. There are lots of putative positive spillovers to film production (see my response to azmyth), but to the degree what states are after is direct capture of tax revenue from ancillary business, those spillovers will be smaller to the degree that film-makers outsource geographically. The right level of subsidy would depend in part on how the film would be produced, and states could make subsidy contingent on local sourcing.

    Of course, that would look a lot like protectionism, inefficient government interference in the management of a business. But consider a shopping mall developer negotiating a high-draw anchor store. The store tells the developer that they’re interested, they’ll come if the rent is free, but the store design they have in mind would not have a direct opening into the mall interior. They’d block that usually open wall for a special display, and customers would have to exit the store and re-enter elsewhere to visit other stores. Do you think the shopping mall developer would still offer free rent? There might still be some subsidy, but the level would surely be affected. Is that interference with the anchor store’s business? Of course it is, but many commercial negotiations affect business operations. Why should making subsidy contingent on local sourcing be any different?

    Making subsidy contingent on local sourcing might in fact be illegal in the US. (I don’t know.) That’s a particular form of government discrimination to which the US in general has been pretty averse. But states would undoubtedly estimate the degree of local sourcing vs the degree of outsourcing in setting nondiscriminatory subsidy rates. They’d rationally offer a lower rate of subsidy than they would if they could contractually demand substantial local sourcing.

  24. sceni — Good points.

    Film productions are portable, but a film industry demands skills and amenities. In general, film production does seem to be habit-forming: places where films have been made remain places where films are made.

    As you point out, film subsidies are low commitment for a state or local government. Subsidizing a stadium (the argument for which is exactly the same as the argument for film subsidies, as are the public choice concerns) demands a long-term commitment. Once the government says “go”, if things don’t work out, the cost remains. Long-term tax abatements remain in force, debt incurred by the state needs to be serviced. States’ only remedy is if the subsidy included contractual milestones and a right of recovery from private partners if those milestones are unmet. But I suspect that is not the norm.

    If a film subsidy program seems to be costing a lot in taxes without generating sufficient indirect activity to make the foregone revenue worthwhile, it can be stopped at any time.

  25. hhoran — You make some good points, but the differences are much more a matter of degree than of kind. Shopping mall owners have a very substantial degree of market power within their areas. Yes, retailers can take their storefronts elsewhere, but often there is no elsewhere to go except for one or two similar malls who adopt substantially identical pricing schemes. Business owners can choose not to be retailers, or can find a business model that would work in a strip mall or on a Main Street, but for many business owners those would be very disruptive changes.

    State and local governments have similar market power. People unhappy with a tax regime can move. That is arguably more perhaps than having to close or reinvent ones business, but arguably not. Both are pretty disruptive. Mall specialty stores can’t for the most part “opt out” of this taxation. If they could — if there were viable competitors capable of offering space and foot-traffic at an “untaxed” rate or if it were possible for specialty stores to mimic the privileged anchor stores when negotiating contacts — the price discrimination scheme would fall apart. But it has proven quite durable.

    (Airlines employ a different sort of price discrimination, but the analogy there is not so close — low paying customers do not create a positive spillover for which business class passengers are willing to “pay up”. Airlines have simply found that some customers are not very price sensitive, and from those customers they can extract high prices in exchange for inexpensive amenities. In both cases, the high-payers subsidize the low payers, but only in the shopping malls — and the film subsidies! — do the higher payers get some value in exchange.)

    You are right that there is better information and a “market test” in the shopping mall case. Again, that’s a matter of degree more than kind: shopping mall owners have to estimate the draw of potential anchors, in deciding whether to offer them free space or even whether to go ahead and build the mall. They have at their disposal a lot of history and research.

    But they get it wrong a fair amount too. Malls do fail, some over time as they age, but some new malls simply never succeed. The developers found anchors, but the foot traffic didn’t appear and the specialty stores can’t generate enough sales to drive reasonable rents.

    You make an important and reasonable distinction when discussing what happens when the “landlord” screws up, though. The shopping mall fails, and becomes a boarded up eyesore or is razed for better uses. In either case, the poorly contrived subsidy scheme is discontinued. When a government arranges a poor subsidy scheme, the government does not fail. It depends upon the quality of governance, whether the subsidy is modified or discontinued, or whether beneficiaries succeed at getting a harmful subsidy extended ad infinitum. There is greater risk that an inefficient subsidy program will continue indefinitely when it is arranged by the government rather than by a shopping mall developer, who will either reorganize her rental scheme or disappear from the market.

  26. Dan Kervick writes:

    Steve,

    I wasn’t just talking about a better overall deal in terms of holding on to tax revenues. What I had in mind was this:

    Yes, location filming certainly generates income for the location in which the filming takes place – in some cases a lot of income. But most films are going to employ location filming in some state or other anyway. So the question is whether paying the credit to the studio pays of for some state in terms of attracting business to that state that would not otherwise be attracted. In a system in which all 50 states act as competing independent buyers for location filming decisions, some states will be winners (attracting more Hollywood filming business to their states than would be the case if they did not pay the credit); some will be losers (paying just to keep a portion of the more lucrative business that would be attracted to the state if no states were paying credits); and some states will break even.

    I assume California is a loser in this system, because California is the default location for many, many films, and so California probably ends paying money just to keep studios from moving their locations to New Mexico and elsewhere. California probably does better when studios make all their decisions based on the usual factors, without any states offering further incentives.

    But my guess is that it makes good business sense for a state like New Mexico to sweeten the pot with credits. Many parts of New Mexico look like parts of California, and the state is relatively close to California. So by sweetening the pot, they can turn themselves into an important auxiliary studio lot, so to speak, and attract significant business away from their nearby western rival.

    The terminology of “subsidies” seems very misleading in this context. That suggests that the point here is simply to subsidize some public artistic good. The model that that needs to be employed in evaluating the practice is the one that already exists where states or communities pay companies incentives to locate an auto factory, power plant or sports team in that state or community community. The whole idea that this is “welfare” seems wrongheaded. It’s a business decision about a public-private partnership. And the only question any individual state needs to ask is whether the price is right.

  27. najdorf writes:

    What is the marginal film that is produced because of film subsidies? Surely not a blockbuster with Matt Damon and a $100m budget that’s a near-guarantee to earn an adequate return on its budget (this movie gets made on its own). Surely not a student’s artistic project using a digital camera, his or her friends, and locations that they’re able to beg or borrow from local owners (this movie also gets made on its own). I think it must be mid-budget pictures with dodgy economics…high level “indie film” (Aronofsky before his recent success) and cheaper studio work (e.g. Family Guy’s invented film “Danger in Cincinnati”, starring Jeff Bridges and Laura Linney).

    Cheaper studio work is something most people could do without – you may watch it when it airs on TBS or your flight, but it’s not something that it seems essential to stimulate. The studios make plenty of money, and if they have to cut down the lineup of films where B-list actors from Los Angeles attempt a Boston accent in order to rationalize the film’s tax-motivated Massachusetts location, I don’t see meaningful societal losses.

    I think a lot of film subsidy is motivated by the notion that it will support high quality independent film, which is nice and all, but independent film has a very natural set of constituencies that are willing to subsidize it: obsessive fans who will pay up for festivals, Hollywood types who made their money on junk and want to regain some sense of artistic integrity, smaller theaters that want to build a more upscale image, etc. Most taxpayers do not want any indie film. Those who do want it have a great time creating it and consuming it. Why do all taxpayers need to subsidize increased production of films they will never watch simply because a small minority thinks there ought to be more of them? In a world where you can make a movie like Frozen River for less than $1m, why would we want the government to pay for film concepts that aren’t even compelling enough to raise their own $1m from the many people who love indie film?

  28. hhoran writes:

    Thanks for your thoughtful replies to everyone.
    1. You’ve argued that theoretically (i.e if administered by a wise technocrat devoted to the “public interest” and immune from regulatory capture or corruption) a good subsidy system for filmmakers is more efficient than uniform taxation without filmmaker subsidies (item 14). But you haven’t defined the specific “market failure” that these carefully designed subsidies are fixing. You’re not arguing the aggregate market underproduces films—simple, universal tax breaks would solve that problem. The problems created by a “dysfunctional banking system” (item 15) need to be a addressed on their own terms, and won’t be fixed if Alabama subsidizes filmmakers. If films create massive external benefits but film output is seriously limited because filmmakers can’t capture a “fair” share of those benefits, you’d need to show huge economic distortions in Southern California and filmmakers desperate to flee to more efficient locations. In fact the benefits filmmakers get from the industry’s geographic centralization seem to massively outweigh the costs, and won’t film elsewhere without those big subsidies. Theoretically, local subsidies could be justified by the seed money to establish a standalone, viable local film industry, since investors in specific films wouldn’t benefit from the longer term gains once the industry reaches efficient scale. But then only large-scale “industrial planning” taxpayer subsidies could be justified. Have film subsidies created large scale local film industries anywhere other than British Columbia? Have BC’s huge film subsidies actually created an industry that can now operate profitably without subsidy?
    2. Afraid you are wrong about airline revenue management, as your argument in item 18 concedes. In a true “joint production” situation, all of the components create “positive externalities” otherwise it would more profitable to split production into smaller units targeted at each segment. The large number of low-fare airline pax make it possible to offer more flights at more times for the smaller number of high-fare pax, with the larger scale lowering costs for everybody. “Subsidy” implies a largely zero-sum, one-way wealth transfer. If discount pax weren’t creating symbiotic benefits for business pax, then someone could offer a “business fares only” service, undercutting the Delta/United business fares inflated by the subsidy costs. I’ve been in aviation 30 years, and have testified before Congress and published journal articles on the economics of airline competition. Airlines have lots of efficiency/competitive problems, but this isn’t one of them. Price discrimination in this type of joint production context—on the plane or at the mall—isn’t a “subsidy” that can be compared to a direct taxpayer subsidy to a private filmmaker.
    3. I meant “artificial market power” in the strict Clayton Act sense of the ability to sustain supra-competitive pricing in non-contestable markets over long time periods, protected by entry barriers. The ability to price discriminate within a symbiotic joint production situation isn’t “market power’ in this antitrust sense. Mall owners don’t have sustainable market power unless they can collude with governments to grant exclusive tax advantages and block zoning permits for any competing commercial developments. If they did have artificial market power, they’d overcharge both anchor and non-anchor tenants, but anchor rates would still be (proportionately) lower than non-anchor rents. If United got monopoly rights to serve the Chicago-Baltimore market and Southwest and others couldn’t compete, everyone’s fares would go up, but United would still charge more for last minute business tickets, and a lot less for advance purchase off-peak tickets.

  29. Funny to even be discussing film subsidies (a good thing IMO in limited doses) which are miniscule when the big subsidies go to the real dirty stuff, coal and oil for example, which generate huge negative externalities (ok, perhaps positive ones too). There’s definitely beggar thy neighbor and choosing winners in that, too, making it harder for alternative energy to gain a foothold. If you can grant that some subsides are bad and others good, what are the categorical differences? Some things seem obvious to me, I’d far rather have more movie studios than fossil extractors in my state (though, I believe it’s the reverse).

  30. [...] The case for film subsidies (and other goodies) Steve Waldman [...]

  31. [...] Upset Because the Government Spends So Much More on Each Rich Person Than on Each Child Dean BakerThe case for film subsidies (and other goodies) Steve WaldmanHouse approves foreclosure fraud measure AJC (hat tip Lisa Epstein)Antidote du jour: [...]

  32. dave writes:

    My god the arrogant assumptions in your post:

    “The economic logic behind subsidies is iron-clad, given activities that generate net positive externalities whose value is known to be more than the cost of the subsidy.”

    Why do you think they generate net positive externalities? Net positive means net positive for everyone, not just the particular community that snags a film.

    “I think the case for positive externalities associated with film production is pretty strong.”

    Why???????

    The bar for government subsidy is very high because it is non-voluntary. Voluntary transactions add information to the decision making process. You don’t have to assume that every time a government makes bad decisions it is corrupt. Making decisions with limited information is a very difficult thing to do. When people have to seek out other parties to voluntarily organize their production and consumption to make something happen information about the value of that project is being added.

    If you are going to engage in government subsidy, you need to make a strong case that a market failure is causing a certain good to be under produced. You really think that case can be made for film making? To me such a subsidy fails all of the basic tests:
    1) It is an item consumers purchase directly, so there is no principle/agent problem.
    2) Information about the item is widely available and easy to understand. You can view trailers, reviews both professional and amateur, and consumers have a lot of experience with the product. There is no asymmetric information problem.
    3) Purchases are small and often, shifting purchases or increasing and decreasing them is easy.
    4) The “externalities” of the product are very difficult to quantify and likely to fall to a small group.
    5) The product itself is of a purely consumption nature and far away from a necessity (like a road or bridge might be).

    I mean could you pick a worse example of something to subsidize.

    This is why people are afraid of liberals and government do-gooders. You’ve got this wonderful blog about reforming banking and Wall Street because of easily identifiable market failures. Yet as soon as you make the case for market failures existing, you start to find them everywhere! Now if we think regulating banks make sense well why not fund movie projects. After all, markets are stupid, you can’t trust them, they fail all the time. We should sit down and have some dorm room bull session where we come up with some dreadfully complicated movie funding mechanism for the government to run.

    Ugh. You are really losing me with these last two posts. Don’t mistake praise for some good ideas with an endorsement that your some kind of philosopher king.

  33. Dan — I don’t think that we’re disagreeing at all. In responding to you before, I was just trying to point out that, assuming positive externalities to film production and assuming the rate of subsidy doesn’t exceed the value of those externalities, states in aggregate can’t lose in overall activity terms, although states in aggregate can lose in terms of overall tax revenues. But as you say, tax revenues reflect only a fraction of potential positive externalities to filmmaking. And certainly, whether we are considering narrow tax revenues or broader measures of welfare, differential subsidies will change the pattern of winners and losers among states.

    I also agree that the “subsidy” is basically a simple business decision, analogous to the decision that shopping mall landlords make in setting rents. That said, I think we appropriately refer to this kind of business decision by states as “subsidies”, which carries negative connotations, because there are a lots of pressures and inducements on policymakers to overestimate benefits and make poor decisions. So, even though in a world with perfect information this would be a perfectly ordinary sort of business decision, differential rent for use of state public goods, in the real world we should treat them as guilty until proven innocent by a strong preponderance of evidence. I suspect that film production frequently qualifies, although certainly not always and certainly the degree of subsidy should be limited to conservative estimates of the spillovers.

  34. hhoran —

    1) The “market failure” or “distortion” is the presence of externalities. The first welfare theorem — the conventional economic basis for the conjecture that trade alone leads to Pareto efficient outcomes — requires goods without externalities. If there are externalities associated with the production, trade, or use of a good, trade alone will not in general lead to Pareto efficient outcomes.

    I don’t get your argument that filmmakers would flee California if there are positive externalities to their work that they cannot capture. There would be positive be positive externalities to their work that they cannot capture anywhere, unless somewhere pays for those externalities with a subsidy. Positive externalities are not pollution, on the contrary.

    The tendency of an industry to cluster is prima facie evidence of a positive externality, in the form of increasing returns to industry scale. It also can be used to make an argument against film subsidies though — if there are increasing returns to industry scale, then drawing production away from California studios may reduce overall film productivity.

    Localities that pay subsidies, though, are usually trying to create high productivity local clusters. The questions of cost and benefit become very specific, then. The expected marginal benefit to a locality from trying to start a significant cluster may exceed the cost in production efficiency associated with diverting production from an existing cluster. This would commonly be true if there are increasing absolute returns to scale but diminishing marginal returns to scale, so that taking from a very large cluster to augment a nascent cluster would be efficient. And note that the productivity we are measuring must be incorporate the value of the externalities. (State subsidy would be indicated when the marginal benefit of augmenting a young cluster is very large when externalities are incorporated but not so large when they are excluded.)

    Profitable-standalone operations aren’t a reasonable criterion for success. If there are positive externalities to a state from film production, than the state “profits” from subsidizing the industry in perpetuity at a level beneath the value of those externalities. The state profits in financial terms as long as the level of its permanent subsidy is beneath the value of tax generated by activities ancillary to film production, which is a subset of putative positive externalities to film-making. As I’ve said a bunch of times, I think reasonable policy rule-of-thumb is to try to subsidize film no more than the level of estimated ancillary tax receipts the subsidized production will generate. This imparts a conservative bias to the scope of subsidy, and makes it very likely that the locality will benefit on net. Loosey goosey positive externalities stemming from developing the arts & culture scene etc are then all gravy.

    2) I’ll defer to your expertise on the airline industry, and concede that coach passengers offer prerequisites to scale and frequency that business and first class passengers value. I’d never thought of the arrangement that way; it’s an interesting view. In that case, price discrimination by airlines resembles both price discrimination in shopping malls and tax discrimination in film subsidies. That resemblance doesn’t detract from the case for tax discrimination in film subsidies, though. As Dan in the comment above you reminds us, the “subsidy” in flim subsidy isn’t a subsidy at all once the full economics of the arrangement are accounted, just as in shopping malls and, per your argument, airplanes. We call it subsidy only to remind ourselves to be careful and skeptical before endorsing this sort of business choice by states, because we understand that states are for institutional reasons liable to making this sort of business decision poorly and to fail to correct those poor decisions. So we use an unpleasant word. That’s healthy. But when the case for film subsidies is strong, when policymakers are not being oversold or corrupted, the economics are precisely the same as that of shopping malls and your airplane story.

    3) The ability to price discriminate depends only on market power in a generic sense, not on exercise of market power of the sort that would be barred by antitrust laws. Neither shopping malls, airlines, nor film-subsidizing states are illegal monopolists when they price discriminate between clienteles. On the contrary, if shopping mall developers were to bad together to set a floor on anchor rents, or if airlines were to coordinate coach rates, or if states were to agree to collectively bar subsidy, then they would be acting as illegal monopolists. Price discrimination, including tax discrimination, requires pricing power — the ability of a provider to choose prices and still do some business. If providers are price-takers — if there is a uniform market price for their commodity that no customer would ever pay more than — than price discrimination is impossible. Price discrimination is impossible also if there is no way of distinguishing target clienteles, that is if customers in the high price clientele can mimic the low price clientele at a cost lower than the value of the price differential. Neither problem applies to shopping malls (who know the anchors they value) or film subsidies (we can distinguish film production from other businesses, and fine those who try to mimic). With airlines, it is interesting that the high cost customers do have the option of mimicking the low cost customers, but the value to them of extra amenities that are not costly to the airline is sufficient to offset the value of mimicry. This continually surprises me as I pass them on my way to coach.

  35. Charles — Unfortunately there are no categorical differences. I think that’s a lot of what frustrates people. Pundits and those who cheer them like to be able to say “this policy is good” and “this policy is bad”. With subsidy / differential taxation, the right answer is “it depends”.

    Like you, I generally detest subsidies to extractive industries, whose negative externalities in my calculus far outweigh their positive. But, there may be specific cases where subsidies to extractive industries make sense. For example, the US is now subsidizing in a variety of ways the reopening of US rare earths production, having ceded this industry to China in the 1990s. I think that is a wise subsidy, despite the terrible negative externalities associated with rare earths production. Those are, in this case, offset by the positive value of the option to domestically produce very critical commodities in the case China were to exercise its market or political power in a way that disadvantaged us. The option to produce our own rare earths is very valuable, so we are paying a lot to restore capacity even though that capacity may not economical given the pricing currently offered by the Chinese.

    I’m more positively disposed to film, but there are plenty of times and places where a film subsidy would not be appropriate. You cannot say that “subsidy” is good or bad policy in a general sense. You have to look to the specifics. I wrote this piece because Kinsley wants a blanket ban on film subsidy. I’d have been happy to take the opposite side had he argued that every locality should offer film subsidies. The answer is “it depends”.

  36. fresno dan writes:

    It strikes me that the other public subsidy that I read about in blogs is of sports stadiums. I haven’t read deeply enough about it, but superficially it seems that most believe that subsidizing sport stadiums is a bad deal for the taxpayer. There is the permanent and transient nature of making a movie versus a sports stadium, but they are at bottom both entertainments.
    When I consider all the crappy movies I have seen, maybe I don’t need a bigger selection of movies, and maybe I don’t need to while away more hours on a couch watching sports and eating bad food and drink…externalities? (How many young boys want to grow up to be Charlie Sheen????)

  37. dave — I explicitly do not argue that film production generates net positive externalities, because I don’t think it is always true. As I wrote to Charles in the comment above, “it depends”. In the introduction to the piece I am careful to state that film subsidies aren’t always and everywhere a good idea and they are sometimes boondongles. The closest I ever come to “arguing” for positive externalities the the statement you pull out, which I should have qualified: That is, I should have written: “I think the case for positive externalities associated with film production is sometimes pretty strong.” There are times and places — for example cities that are trying to promote tourism and incubate creative industries — where I think the case for subsidy is strong. There are plenty of times and places where film subsidies make no sense at all.

    The form of my argument, as you also have highlighted, is that “The economic logic behind subsidies is iron-clad, given” net positive spillovers. The argument is conditioned on an assumption that may not always hold. It is not my intention in a blog post about no place in particular to argue that subsidies are good or bad. It is my intention to argue that when there are net positive externalities (really net in two senses — net of negative externalities, and net of “average” positive externalities associated with other business activities), subsidy (i.e. differential tax schemes) is called for. When there are no net positive externalities, there is no case. But Kinsley’s piece argued for a blanket ban on film subsidies, regardless of any calculation of local spillovers. That’s just bad economics. No apology there.

    Your point is well taken that governments can err and oversubsidize without being corrupt. I define corrupt pretty broadly, in the sense that I treat a persuaded mistake in the interest of the persuader as a form of corruption, but it’s certainly not a form of corruption one would ban or criminalize. The politician needn’t be corrupt, but there is a lobbyist who overstates benefits, and a system vulnerable to undercritical persuasion. Those are forms of corruption that we explicitly tolerate and that the lobbyist may not even be aware of. (Lots of persuaders make themselves sincere.) But these corruptions are still bad (and are sometimes associated more more explicit corruptions, campaign contributions etc). I’d be glad to pick a better word. I think “mistake” is too soft though — this is a systematic and incentivized kind of error.

    Your point is also well taken that political decisionmaking may be more prone to error, or more compellingly, less prone to self-correction, than private decisionmaking, and that it is less voluntary than private investment. The question of “voluntariness” is much trickier than many libertarians portray it, but that’s beyond the scope of this reply. Overall, I agree. The bar should be fairly high for state subsidy, and subsidies should be offered conservatively and designed if possible in ways that allow for correction if positive spillovers fail to appear, whether by mere discontinuation (perhaps sunsets requiring explicit renewals are a good idea) or by contract (i.e. the right to clawback subsidies if promised goodies fail to appear). But that the bar should be high and that subsidies should be conservative and carefully designed doesn’t justify a blanket ban on subsidy, which again was the argument to which I was responding.

    Your case against market failures in film mostly fails to make contact with the better arguments in favor of film subsidies. In particular, it is not films that are claimed to be underprovided, but film production itself. Sometimes the case is made that certain kinds of film are underprovided — films of local interest, or “less commercial” films, but that’s a more contentious argument. Please see my comment to azmyth (#14 above, third paragraph) for an outline of the usual case. Your comments only address the fifth element of that list. If it bugs you that the externalities are associated with production, and you want to rejoin that “there are positive spillovers associated with lots of business activities, so why single out film activity?”, I’ll respond that in principle you should not single out anything a priori, but should evaluate differential spillovers associated with every business activity. Film subsidies only make sense if film production offers unusually many positive spillovers, which I think is sometimes true and sometimes not. In any case, please see my response to Leigh (#18 above) for a more detailed review.

    Finally, on a more personal note, I’m flattered that you’ve sometimes liked the blog and found its insights useful. I’m not at all surprised (and make no apologies) if sometimes you disagree vehemently with what I have to say. I flatter myself that my own worldview is a complicated mix that encompasses bits from Austrian to Marxist to libertarian to liberal. Perhaps I am just incoherent. But I try very hard to think things through and put these various pieces together in a way that makes sense to me. I’m not trying to be a philosopher king: I’m trying to generate ideas, argue them, and let others evaluate them. It’s nice when you like them, it’s also great when you argue against them.

    I think that some of the strength of your reaction came from a misreading of my view. Undoubtedly this is my fault, not yours. (Others shared this misreading.) Again, I’m not trying to say that film subsidies are always or even usually a good idea, just that they sometimes are, or that at least in principle they might be, and that promoting a blanket ban on a false theory of the virtues of cartel is a very bad idea. I put some caveats to this effect in the piece. I should have put more.

  38. fresno dan — The case for subsidizing sports stadiums and that for subsidizing film is identical, yet I look at sports stadium subsidies unfavorably in general and film favorably. Again, the case for subsidy is a cost / benefit question, and not (at least for me) a matter of principle. Subsidizing sports stadiums can in principle be a good idea, and there’ve been some success (arguably in my own hometown of Baltimore, for example), But stadiums are one-shot expensive things; once agreed costs are locked in and subsidies usually can’t be modified or rescinded, so it’s a very high-stakes kind of policy. When localities negotiate subsidy deal with sports franchises, I suspect that sometimes they negotiate good deals and sometimes they negotiate bad deals, but there’ve been enough well-known bad deals that a lot of caution is in order. I wouldn’t support a blanket ban on subsidizing sports stadiums, but I would advocate conservatism and caution, given the history, high stakes, and lock-in involved,

    Your point is well taken re crappy movies and couch potatoes. Film production, like most other activities, has negative as well as positive externalities associated with it. If you think the negatives of entertainment saturation outweigh positive externalities of the production process, you would generally oppose film subsidies (and perhaps even support extra taxes on film production) based on precisely the same arguments I have marshaled in support of film subsidies.

    For a related point, see Angus.

  39. dave writes:

    Steve,

    I don’t find your post offensive, I think I am just carrying over an greater argument I’m having somewhere else. Allow me to explain, and I apologize but I think I may ramble a bit before getting to the point. I’m reading through this just now and wish I had time to edit, but they aren’t paying me to post here all day.

    I’m basically a pragmatic utilitarian. If I had to pick out governments I think do a pretty good job out there I would probably point to Singapore and Hong Kong. There are substantial things I don’t like about them, and there are things I like about other countries. I wish I could combine things I see in them with aspects of countries from other continents. But generally I think they do an alright job, and I bet if you asked your average non-religious center right person they would trade our current governance in America for something like that.

    In debating with someone they wondered why we can’t just be like them. To me, the answer is that sort of thing only works in tiny city states, often with benevolent dictators, or at least with unique political institutions and history (Switzerland). Large democracies don’t lend themselves to pragmatic wonkish utilitarianism. Voters rationally know their vote doesn’t matter, so when they vote and think about politics they mainly choose ideologies that make them feel good about themselves, usually by justifying decisions they have already made. The kind of things that appeal to voters are grand moral statements and direct action, because these things can make the voter feel like they are more moral. This is why wonks don’t become leading politicians and don’t affect the debate as much as they think they should.

    So if politics mostly takes place in the moral sphere, not the wonkish sphere, then relying complicated programs and wonkish bills is tough. You stated:
    “Again, I’m not trying to say that film subsidies are always or even usually a good idea, just that they sometimes are, or that at least in principle they might be, and that promoting a blanket ban on a false theory of the virtues of cartel is a very bad idea. I put some caveats to this effect in the piece. I should have put more.”
    That’s a lot of words, it ain’t going to fit on a bumper sticker. The question you ought to be asking yourself is, “once I have established the moral justification for film subsidies in the public mind, is it more or less likely to be a net positive in aggregate in practice.” You aren’t going to have the kind of minute control you think you’ll have with all these caveats, and even if you had the control you are not likely to be able to foresee all the difficulties. When legislation starts getting complicated, it starts getting unworkable. Once you’ve established the moral imperative for the government to subsidize something, be prepared for it to go in ways you don’t envision. This is why there needs to be a high bar on government action, because democracy is inherently un-wonkish.

    That doesn’t mean the government can’t do things. As I mentioned earlier, if taking a shotgun approach to a certain program is more likely to lead to positive then negative effects in aggregate, then you’ve got to go for it. I can argue for Wall Street reform because the potential payoff is obvious. I can argue for health care reform, even pretty inadequate health care reform like we got, because the performance of other examples abroad shows massive waste in our current system. So even a wonkish corrupt ACA is better then nothing. I can be ok with using eminent domain for public goods like highways but still be against using it for private enterprise via the Kelo case. But that’s where it stops. Perhaps I’m center right rather then center left because I need pretty overwhelming proof that a policy will work even when its implemented poorly. I’m ok with leaving theoretical value on the table in the form of movies that don’t get produced but should because I don’t believe the government capable of, on average, figuring out what they are. In other words, I need good pot odds on any investment the government makes.

    The thing I have always liked about your blog is that you take the complicated arguments being put out by ideologues and lobbyist and simplify them, breaking down the essential elements and proposing solutions that are simple and elegant. In the last two posts you’ve gone and taken simple things and tried to make them more complicated, chasing after things of elusive value. It strikes me of “mission creep”. Having established the ideological free marketism is false via the banking crises, you now branch out into whole new fields. Its what I fear the most politically. Just as 9/11 was used to push all sorts of conservative agendas, the Wall Street crisis is used to push all sorts of crazy wonkish agendas on the left.

  40. dave writes:

    P.S. I think a Krugmen post you talked about recently touched on this, but perhaps not in the way he intended.

  41. Phil Koop writes:

    “The economic logic behind subsidies is iron-clad, given activities that generate net positive externalities whose value is known to be more than the cost of the subsidy.”

    Sure it is; and so is the case for Pigovian taxes on activities known to have net negative externalities. These are two aspects of the same thing. You are quite right that that movie making is not necessarily a zero-sum game: perhaps it is negative sum! None of this is controversial economics, as your remark about Avent implies.

    It all comes down to the specifics of the case, as you yourself concede. Yet this is the one thing you have not done. Your title “A case for film subsidies” is a misnomer, because your post is nothing of the sort. Although you have taken a more ambiguous line in the comments, in the post you simply assume the conclusion. In my opinion, that is what has raised hackles.

  42. Steve Randy Waldman writes:

    dave,

    In a broad, general sense, I don’t think I’ve much disagreement with what you’ve said. I do want to say that I mean to do lots of different things with the blog. Sometimes I try to do what I think you’d like me to do more of, which is to take what I hope is a pretty solid understanding of finance and economics to explain and simplify issues, usually in a way that calls attention to aspects that I consider important and troubling. If you agree about what I consider important and troubling, putting the case in what are simplified (but hopefully still accurate) terms might be a service to your political cause. Sometimes I become an active partisan in some matter of political controversy, and when I do, I try to find rhetorically effective (but again, still honest and accurate) ways of making my case.

    But that’s not all of what I want to do. My previous post, which you disliked, was not political at all, or at least not via any direct channel. I was proposing a set of private financial arrangements between consenting parties, as an experiment. That is experiment is perhaps “politically motivated” in a very broad sense — I think a system that rewarded trust and equity based commerce rather than caveat emptor and debt would have positive social spillovers, and I am actively scheming about how we could get to such a place. But I’m not pushing for some crazy policy agenda that would, say, try to force people to trust, or reveal information they don’t want to reveal, or whatever. You might argue that my experiment could succeed catastrophically a la facebook, and that’s a danger, but at the moment it seems far-fetched. I’d agree that “the overpayer’s club” is wonkish — I was at pains just to explain it, to make the case for why I might want such a thing and what the larger goal is. But I think it’s unfair to characterize proposing a private experiment among willing participants as “push[ing] all sorts of crazy wonkish agendas on the left”. Much of what I do is speculate; I pursue a kind of social science fiction and I want to write about it. I’ll continue to do so, but playing with ideas does not imply playing hardball to force them upon people. I consider the overpayers’ club to be a twin to small business equity investing. Did you find that post troubling? (The proposal in that post does imply a policy change, not in terms of forcing anything on anybody, but in terms of deregulating public equity issuance. People think I’m very pro-regulation. It’s fairer to say I’m anti status quo banks. I’d rather we deregulate “thin” finance, investments where there is very little intermediation or certification between investor and real-economy projects about which they can become personally informed.)

    The piece that inspired this dialog was not intended to be a full-throated advocacy piece for film subsidies, and rereading it, I still think I’m a bit unfairly accused. But it’s not just you — lots of people misread me, so obviously my own artlessness must be to blame. The context was that a well-known columnist wrote a full-throated, zero nuance attack piece on a matter that I think deserves a great deal of nuance in thinking about. In doing so, he made an argument that was economically absurd but compelling on face, and which was widely and approvingly echoed in the blogosphere. This may seem subtle, but it was not my goal to make a bumper-stickerable case for film subsidies, but to address and neutralize somebody else’s bumper-stickerable case. That is, to the degree that I had an agenda, it was to ask the public to keep an open mind in the face of shoddy propaganda intended to close it. I didn’t want to persuade anyone that film subsidies are always great, only that they might sometimes be a good idea. I wanted to neutralize a terrible and potentially destructive argument, not to make an equally blunt and categorical counterargument.

    Perhaps that much nuance is too much to ask of a public with Tourette’s syndrome, but I’m not writing for the least common denominator. I’m writing to express what I want to express, for a self-selected audience I consider to be of very high quality. I do sometimes work to simplify complex issues and boil them to essentials, and sometimes I even try to develop cases that could be passed along and digested by a less attentive public. But when I write for my readers, I really don’t feel like I have to dumb things down at all. I may dabble, but I am not solely or primarily a pamphleteer.

    Anyway, thanks for putting up with the confessional. I hope it’s not entirely useless.

    p.s. I don’t quite get the Krugman reference.

  43. Steve Randy Waldman writes:

    Phil — So you should read what I just wrote dave above.

    Obviously, people took what I intended to be a counteroffensive against a false and overcategorical argument to be an equally categorical piece in the other direction. As I said to dave, rereading the piece, I feel unfairly accused, but I must have been artless. Still, I feel compelled now to argue in my own defense.

    The first substantive sentences of the piece state “Film subsidies and other state and local programs intended to promote economic and cultural activity are sometimes smart policy and sometimes corrupt boondoggles. I certainly don’t wish to argue that they are always and everywhere good.” The last third of the piece acknowledges the seriousness of the public choice critique, and points out that it would not be unreasonable, though it is not my preference and it is almost certainly impractical, to ban Pigouvian subsidy entirely on the grounds that the corruption it engenders makes smart subsidy unlikely and ultimately outweighs the benefits. The sentence that both you and dave didn’t like — “The economic logic behind subsidies is iron-clad, given activities that generate net positive externalities whose value is known to be more than the cost of the subsidy.” — italicized the word “given”, which was expressly intended to emphasize the syllogistic nature of the statement, that it should be interpreted as if… then… rather than suggest that what followed in the given clause could be unproblematically assumed. My strongest assertion with respect to film subsidies is “I think the case for positive externalities associated with film production is pretty strong. If so…”. Note the “think” and “if so” — I don’t claim to have established the point, and indeed in the article I never do try to establish the point, because it’s overgeneral. (I wish now that I had written “sometimes pretty strong”.) Sometimes (I think) the case for positive externalities to film production is strong, and I don’t want Kinsley’s policy dogmatism to foreclose a debate on the merits.

    I agree that the title was too strong. I should have shaded it down somehow, something like “a conditional defense of film subsidies”, but cleverer. Still, I was responding to a frontal attack; the defense could not be too tepid.

    You write, re the strength of argument for Pigouvian taxes and subsidies:

    “Sure it is; and so is the case for Pigovian taxes on activities known to have net negative externalities. These are two aspects of the same thing. You are quite right that that movie making is not necessarily a zero-sum game: perhaps it is negative sum! None of this is controversial economics, as your remark about Avent implies.”

    Note that Avent got this. But Kinsley did not and Wilkinson did not, and they were not alone. It is quite right that the very argument I use in favor of film subsidies cuts the other way if you think the net externalities of film production are negative (in a specific case or generally). Several commenters, and Angus over at Kids Prefer Cheese, make this case. I’m happy to acknowledge that, and we can argue about which way the externalities go (again, specifically or generally).

    But Kinsley’s core case was wrong, and catered to a lot of destructive prejudices about the perfection of anything in which the government doesn’t intervene. I wanted to make a case, but not too strong or categorical a case, for film subsidies. It seems I failed at that. I also wanted to slap Kinsley’s argument down hard. I do hope that I at least succeeded at that.

  44. dave writes:

    Steve,

    I’m aware your last post wasn’t an advocacy of government policy and I was in no way offended by it. I simply read it and thought, “that doesn’t sound like a good business proposition.” When it takes that long to explain an idea you are already starting with strike one. I would have nothing against you trying to start such a business, the more small scale finance start ups the better. But it just stuck me as overly complicated. Combined with your second overly complicated post that did advocate government policy it just struck me that you were falling into a bit of a trap. I’ve got no problem with you venturing out of the realm of banking, macroeconomics, and monetary policy. I found you an expert on those topics and IMO the best website on the net. Just don’t be surprised if once you venture outside you area of expertise the output ends up being subject to more questioning, at least in part because its more questionable. That in no way means you should stop. I’ve posted many times in the comments section of this blog, sometimes what I have to say was stupid. People point out errors and you learn from them. It should be no different for the blog owner, and I think you fully appreciate this.

    I think we are both guilty of bringing other people’s arguments into our discussion. I did not read the piece you are responding to, I had some downtime at work and didn’t have the time, so I no doubt missed on of the context of your post. It seems you were making such a strong point in response to his piece, rather then in a vacuum, and I think it made you use stronger language then you really believe. Me, I just see a lot of strong statements without a lot of backup.

    I already talked about my bringing in another argument. To that I would add that my statement has a lot to do with a general disgust lately with weak association (maybe that is the wrong word) arguments. For instance, I should support unions in Wisconsin being overpaid because Wall Street got bailed out. That’s absurd, I don’t support either. I’ll support or demonize Wall Street based on its merits, same with the union. I just feel like once a lot of people on the left prove that the market can fail that start seeing market failures everywhere. And so what happened on wall street becomes and excuse to engage in activist government. I think I overreacted to your post a bit. Internet blogs are a place to read lots of wonky bull session solutions to various real or imagined social problems, and when I read yours it just felt like the 200th one.

    Another thing I would say is I don’t think your need to make a case is the following:
    “Under the circumstances, I think we should take Yglesias’ advice and try our best to do subsidy well. If we do it right, both theory and evidence suggest that subsidy can do a lot of good. If we do it poorly, we’ll destroy a lot of value and generate corruption…”

    This is a non-controversial statement. Anyone on here, at least anyone you want to talk to, already agrees with this. You average person on the street does too, even if unconsciously. Proving this case when you were discussing macro policy and relating how it applies to debt and money was very enlightening, thank you again for that, but if the point of your reply was to show this I think its pretty much trivial at this point.

    Moving on I think my whole problem with the effort was the following two statements:
    “…Not doing it at all, in a practical sense, is not an option…”
    Of course its a practical option. You don’t have to sit around subsidizing or penalizing every single economic activity. I found this statement incredibly odd.

    “…I think the case for positive externalities associated with film production is pretty strong.”

    This baffled me. As you go on to say, if the case is strong you’d be a fool not to, which once again is trivial. The only contentious part of the whole post if your statement that the positive externalities were so obvious, which I questioned.

    Lastly, I want to touch on one of your comments because its emblematic of why reformers continually lose to scoundrels and lobbyists:
    “Perhaps that much nuance is too much to ask of a public with Tourette’s syndrome, but I’m not writing for the least common denominator.”
    I think the problem here is that your coming at this from the perspective of having a theoretical policy debate on the internet, which is all well and good considering that’s what it is. I’m a bit more closer to the ground floor, I’m working to get changes implemented in the real world. Wonkish debates are useful, and they help us wonks implement and design policies sometimes. But wonkish arguments divorced of political realism are worthless. In this I don’t mean having X # of votes or whatever the current polls show, but weather its built to work in a democracy. To me a policy needs to A) have a good pot odds payoff (like reducing HC costs from ours to the rest of the world) & B) it needs to be able to work reasonably well even if implemented badly.

    The public isn’t stupid, they simply respond to incentives. They have no incentive to be informed or understand nuance, so they don’t. When you design a policy it needs to be reasonably simple and explainable, or it will not survive. Lamenting the situation and why your well designed plans won’t work politically doesn’t do anything, and its not because the good old days are gone or we can just wait for people to come around. ACA, for instance, would be popular if it weren’t so damn complicated and done with so much backroom garbage. Wall Street reform should have been the most popular legislation of the century, but instead its reception was luke warm at best. Why, because wonkish types patting themselves on the back spent more time thinking how smart they were then how their policies would work in the real world. We managed to get two bills that are less effective and political losers out of things that should have been obvious wins.

    I an tired, I’m going to stop here, I have a feeling this is a rambling incoherent mess.

  45. [...] Michael Kinsley says no. Interfluidity says yes. [...]

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