Calculating a measure of intra-generational equity for art museums Written for Association for Cultural Economics Inter

1. Calculating a measure of intra-generational equity for art museums Written for Association for Cultural Economics International Conference 2010 Cameron M. Weber PhD Student in Economics and Historical Studies New School for Social Research, New York cameron_weber@hotmail.com

2. intra-generational equity for art museums The yearning for new things and ideas is the source of all progress, all civilization; to ignore it as a source of satisfaction is surely wrong – Tibor Scitovsky (1976)

3. intra-generational equity for art museums Motivation: Interest in Austrian School of Econ time-preference theory Debate on global warming (oops I mean ‘climate change’) and discount rate Good excuse to look at scholarship on museums and to see what can add to literature Attempt to apply positive economics to what seems like irresolvable normative issues

4. intra-generational equity for art museumsoutline of presentation • Relevant political economy issues related to our research • The difficulty in measuring performance of art museums • Inter- and intra-generational equity • Consumer theory and art as ‘novelty’ good • Methodology for choosing “Top” museums, and problems with same • Findings • Further Research

5. intra-generational equity for art museums Definition of Equity* used in this research: 1) Given a set-off resources, museums can spend for current or future generations, these spending decisions might be seen as ‘equity’ decisions between current and future generations, or, inter-generational equity trade-off decisions 2) Given a set-off resources for current generation spending, museums can spend on programs for those whose tastes for art are already realized or on education for those whose tastes for art are as of yet realized. These are intra-generational equity trade-off decisions *Note different definition than Paulus 2003 and we treat ‘merit goods’ equity argument positively

6. intra-generational equity for art museumsrelevant political economy issues The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. Taken from http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html, accessed 4 April 2010.

7. intra-generational equity for art museumsrelevant political economy issues O’Hagan (2003) finds order of importance for indirect subsidies to not-for-profits (NFPs): • Deduction for charitable giving • Real estate property tax exemption • Capital gains benefits for donations “Most of the tax measures in the United States have particular relevance for art museums and as a result they appear to be the most favoured arts institutions in this regard” (O’Hagan 2003)

8. intra-generational equity for art museumsrelevant political economy issues Example of ‘market’ incentives created by NFP tax-breaks for museums: Museum Mile on 5th Avenue in New York City along Central Park (prime real estate indeed) where one can find the Museum of Modern Art, the Metropolitan Museum of Art, the Jewish Museum, the Guggenheim Museum, the Museum of the City of New York, the Museum of Arts and Design and the Frick Collection, amongst others, all not-for-profits and all but the Met and the Jewish Museum founded after the permanent introduction of the income tax in the US in 1913.

9. intra-generational equity for art museumsrelevant political economy issues Johnson (2003) finds museums visitors in USA “tend to be drawn disproportionately from higher-income and better educated groups” and that many museums rely on 80 to 90 per cent of their visits as repeat visits. Goetzmann et al (2010) find that historical increases in inequality correlate with increases in at-market prices for museum-quality art, that “indeed it is the wealth of the wealthy that drive art prices.”

10. intra-generational equity for art museumsrelevant political economy issues Findings imply that the tax exemptions for not-for-profit museums are a transfer to the wealthy, and that therefore any educational programs a museum sponsors which reduces this reverse-subsidy is clearly an increase in intra-generational equity. However, this finding has been disputed (albeit just for the taste for abstract art and for consumption in the home, not for consumption at the museum) by Halle (1993).

11. intra-generational equity for art museumsrelevant political economy issues In this paper we avoid the debate as to whether or not museums are for the rich and view art as an experience good, with the exercising of a taste for art being a good into itself. Implies expenditures for taste-formation (education) versus those for the exercising of already-existing tastes (exhibitions) increase equity when we view art as a good, whether or not these tastes are held by any member of any socio-economic category.

12. intra-generational equity for art museumsrelevant political economy issues Grampp (1989) states that the museums are by their nature opposed to market forces, “the aversion of museum people to the market shows itself in various ways”, including that the people who staff and run museums are scholars and art experts and wish to pursue their craft as opposed to run programs for the public Implies endogenous incentives for prioritizing future generations over current generations

13. intra-generational equity for art museums relevant political economy issues Towse (2003) finds: “This [direct government subsidy of arts organizations] can easily mitigate against artistic [or in our case bureaucratic] innovation, especially when the organization is publically owned and staffed by state employees who favour old routines. The durability and size of an organization also determine the amount of attention it receives and the political pressure it can deploy when threatened with a reduction in public subsidy”.

14. intra-generational equity for art museums relevant political economy issues To address Paulus (2003), Grampp (1989) and Towse (2003) we propose that NFP museums, with need for on-going voluntary funding and thus requiring a market sensitivity, might provide a better indicator of how society views equity trade-offs decisions for art museums rather than government-run museums with an on-going centralized appropriation

15. intra-generational equity for art museums difficulty in performance measurement Paulus (2003) states, “a museum cannot be reduced to one function; its three basic functions are research, preservation and communication.” There are resource allocation choices to be made between these competing goals. Expenditures for each could be reported, expenditure relative to revenue giving a measure of performance, but what is to determine the right trade-off between them given world of limited resources?

16. intra-generational equity for art museums difficulty in performance measurement Grampp (1989, 1996) known for lamenting that collections costs not capitalized thus not possible to generate a return on equity As noted how can attendance be a measure if most attendance is repeat? (Is a de facto performance measure per the American Association of Museums) Darnell (1998) highlights difficulty (and cost)of price-elasticity of demand market-segmented pricing strategies. If attendance is goal just charge nothing Paulus (2003)recommends ‘equity’ measure of ability to attract funds that don’t offer direct benefit to giver (What does this do for market feedback for museums?)

17. intra-generational equity for art museums difficulty in performance measurement American Association of Museums reports 35 financial ratios in periodic survey of museums, examples: • museum-related activities as percent of total operating expense • $ spent per museum visitor • $ raised per visitor • income from private sources as percent of total operating income • building operations cost per sq. ft of interior space But how to prioritize expenditures?

18. intra-generational equity for art museums difficulty in performance measurement Pignataro (2003) states the dilemma and the ‘problem’ with performance measurement, which includes problems of both comprehensiveness and the distortion of governance incentives. “There is no such thing as ‘the performance’ of cultural institutions, or of the whole sector. There are different aspects of performance that can be evaluated also with the help of numerical indicators, but none that can provide an exhaustive representation of the functioning of arts organizations. Performance indicators need to be used with great caution….Once used, indicators are not merely a computation exercise, since they tend to affect the behavior of institutions according to the incentives arising from the prediction about their possible utilization.”

19. intra-generational equity for art museums difficulty in performance measurement Towse (2010) states that ultimately the measurement of performance is a cost unto itself, “Policies have to be costed directly by the responsible authority or, ultimately by their opportunity costs.”

20. intra-generational equity for art museums difficulty in performance measurement In our paper we take these problems with performance measurement to heart. Not-for-profits in the USA ultimately have to conform to their chartered public purpose under the tax code and our measure of intra-generational equity (of reported ‘performance’ if you will) are stated as is in the Financial Statements for each museum studied under generally-accepted accounting standards. We are not recommending normatively that museums prioritize one type of expenditure over another. We are analyzing what current practices are, by analyzing how these practices are reported under as-is conditions.

21. intra-generational equity for art museumsgenerational trade-offs

22. intra-generational equity for art museumstaste-formation Dutton (2009), following Hume (1757) proposes that all human beings have a predisposition towards art and it is only through lack of experience that this appreciation for art is not prioritized in daily life Scitovsky (1976) states consumption of art (“novel” goods) is de-emphasized for consumption of the known (“comfort” goods)

23. intra-generational equity for art museumstaste-formation Consumption of novelty goods carries a cost (risk through fear of the unknown) Yet consumption of art has potential to increase utility of consumption relative to consumption of comfort goods over a person’s life-time

24. intra-generational equity for art museumstaste-formation Grampp (1989): “The preferences which people have among styles of art depend on what they bring to it: their sensibility, understanding, knowledge, what tolerance they have for the unusual and the novel, how willing they are to risk disappointment, etc. These properties come together to form taste, and they are the product of intentional effort combined with the circumstances in which the effort is made. It is what I have called investment in taste. Taste governs the choices the individual makes, once prices and his income are given. But investment in taste is affected by income and prices, and taste changes when they change.”

25. intra-generational equity for art museumstaste-formation Educational programs by art museums can reduce the price (lower the risk) of consuming novelty goods In a consumer sovereignty framework for the current generation, museum spending for education programs as opposed to programs for those whose tastes for art are already exercised can increase intra-generational equity by increasing the utility of those yet consuming art

26. intra-generational equity for art museumstaste-formation Consumer sovereignty theorizing about equity differs from Gray (1989) who focuses on art lessons and art classes as creating taste for museum visits, both for children and adults. Our research is concerned with creating demand for art whether of not proxied by museum visits and is not concerned with adults teaching children about art as is study of intra-generational equity about changing preferences toward ‘novelty goods’ in consumption bundles.

27. intra-generational equity for art museumstaste-formation Adapted from Lévy-Garbona and Montmarquette 2003

28. intra-generational equity for art museumsempirical analysis “Top” art museums are those listed in either Art Newspaper (2008),“Exhibition Attendance Figures 2007” or Foundation Center (2008), “Top 50 Recipients of Foundation Grants for Museums, circa 2006” or both Museum must feature modern or contemporary art (excludes museums of history, science museums, children’s museums, collections of antiquity and libraries) Have excluded government-owned museums under the assumption that NFPs are more sensitive to market demand

29. intra-generational equity for art museumsempirical analysis Problems with selection criteria: Is it large museums in expensive tourist-oriented areas that really reflect the day-to-day art experiences of ‘average’ Americans? Isn’t it the smaller local museums which would better reflect the market for museum services and the cultivation of art-tastes in daily lives? Excludes three of the most visited museums in the USA: National Gallery of Art, the Freer and Sackler Galleries and the Hirshorn Museum

30. intra-generational equity for art museumsempirical analysis Given difficulty of asset (collections) measurement for museums revenues are used to derive intra-general equity measure Data from audited financial reports FY2007 “Combined Statement of Activities and Change in Net Assets” Revenues include both restricted and unrestricted funds, sales of deaccessioned artwork and foundation income when reported as current income Educational expenditures are net of fees and only included when listed as part of museum operations (not when separate educational business accounting entity) Combined education and library line item counted as educational expenditures

32. intra-generational equity for art museumsempirical analysis 19 of 27 (70%) museums report educational expenditures LACMA is outlier with almost 30% of revenues from government sources Leaves 18 museums to evaluate intra-generational trade-offs between educational and exhibition expenditures

34. intra-generational equity for art museumsempirical analysis Chicago Art Institute is outlier with $11 million in revenues from educational programs classified in Financial Statements as ‘normal’ museum operations, this lowers weighted average (Total Education Expenditures for the 18 museums/Total Revenues for 18 museums) to 3.71% whereas as a straight average percentage (Total education percentages/18) is 7.62%

35. intra-generational equity for art museumssummary of findings Not-for-profit status of museums might mean that a focus of museum spending should be education Education spending might be seen as equity transfer from those whose tastes for art are yet to be realized from those who are already consuming art Art (novelty) consumption might bring greater lifetime utility than consumption for comfort Due to competing goals, measuring performance of art museums is difficult Research has shown that 70% of the USA’s top museums report spending on education in 2007 These museums reported $1.492 billion in revenues and $56 million spent on education for an average 3.71% of revenues on education The average pay-out for education was 7.62% of revenues

36. intra-generational equity for art museumsfurther research Evaluate spending priorities in equity framework for smaller, more local museums Evaluate spending priorities of ‘top’ museums post-financial crisis (e.g., under liquidity constraints) and compare spending priorities with 2007 pre-crash data