Taking Note: An Economic Study of Symphony Orchestras

It’s been nearly half a century since William J. Baumol and William G. Bowen advanced their theory of “cost disease,” using the performing arts as a case example. The idea remains as potent as ever: industries that do not realize high productivity gains over time will be condemned to suffer wage inflation. In recent years, the theory has been used to explain cost inefficiencies in health care, education, journalism, and other service industries.

Stanford labor economist Robert J. Flanagan has revisited the site of Baumol and Bowen’s discovery. His new book, The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges (Yale University Press, 2011), mirrors the problems, questions, and even the title of the duo’s 1966 classic, The Performing Arts: The Economic Dilemma.

It would not do, of course, merely to bemoan the historic lag between orchestras’ revenues and expenditures. Based on data from sixty-three symphony orchestras representing over 70 percent of US orchestra revenues and expenditures, Flanagan’s study explores solutions to what he diagnoses as “structural deficits” in orchestra budgets. As he shows through statistical models, the malady cannot be attributed — or attributed solely — to changes in business cycles.

Flanagan’s most disarming conclusion is that there is “no undiscovered ‘silver bullet’” that can combat the economic challenges of US orchestras. Rather, orchestras must invoke three broad strategies, in equal measure, to ensure long-term solvency. Those strategies are enhancing performance revenues; reducing the growth of expenses; and raising nonperformance income.

Well, where’s the news in that? Flanagan deflects such impatience with another question: If his findings are so obvious, “then why do many orchestras address their deficits with a single-minded focus on building audiences or finding a new major donor?” His study is ultimately valuable not so much for its overarching conclusions as for its subtle explication (in a book studded with pie charts, tables, line graphs, and scatter-plots) of the strengths and limitations of each strategy listed above.

Regarding the first fiscal strategy — “enhancing performance revenues” — a partial solution can be found in greater ticket-price differentiation. This practice involves, simply put, “charging higher prices for the most preferred seats and lower prices for the least preferred seats.” (Last summer, I attended an “Emerging Practice Seminar,” sponsored by the University of Chicago’s Cultural Policy Center and CultureLab, an informal group of arts consultants, who presented budding models of “dynamic pricing” and “revenue management” that have been adopted by some performing arts organizations. (More information is available at http://culturalpolicy.uchicago.edu/culturelab/eps2011.shtml.)

But wait — don’t get too excited yet, Flanagan tells us. Orchestras that have not adopted ticket-price differentiation have much to gain from this approach, but it will fail to yield lasting benefits by itself. “Once a hall is filled and a new ticket price structure is in place, performance revenues can only grow if ticket prices increase annually,” he reasons. “Since most orchestras would not eliminate their current deficits even if they could fill their halls at current ticket prices, it is unlikely that future price increases would eliminate growing deficits.”

Let’s turn to the second fiscal strategy listed above: “reducing the growth of expenses.” As suggested by Baumol and Bowen’s archetypal example of 1966, “the pay of artistic personnel constitutes the largest element of an orchestra’s costs,” Flanagan notes. He cites data showing that “in most years, the pay of orchestra musicians is not responsive to changes in the financial balance of orchestras — a fact that contributes to the distinct worsening of the performance income ratio in recessions. Instead, musicians’ pay responds to private donations to an orchestra [emphasis mine], making it difficult for orchestras to improve their financial balance through such donations.”

According to Flanagan, this finding has implications for the future of collective bargaining strategies. He recommends that such agreements should give “more weight to the financial condition of orchestras.” In his view, “the large number of orchestra bankruptcies over the past 20 years demonstrates that a wage policy that ignores measures of an orchestra’s economic strength will have serious consequences for both musicians and music-lovers.”

Are we on controversial ground? You bet. But it’s an argument worth having. For example, Flanagan asks: “Does the presence of soloists attract a sufficiently larger audience (or higher) ticket prices to justify the expense? Do orchestras know? Do they even raise the question?”

Another way to keep down expenses — besides adoption of effective bargaining techniques — is to form “coalitions of performing arts groups” as a “productive and cost-reducing approach to competing for the attention of those whose leisure activities and philanthropy do not presently include the performing arts.” There are, furthermore, “opportunities for economies of scale,” Flanagan writes.

Each arts organization in turn can reduce marketing and fundraising costs, since at least some of the costs currently incurred may be directed at enticing patrons or contributions from other arts or defending against such predation. There are also opportunities to expand the demand for the individual arts participating in the coalition as patrons initially attracted to one art form find other forms enjoyable.

Flanagan’s third fiscal strategy, “raising nonperformance income,” is perhaps the most disappointing for its lack of easy solutions. To the contrary, more dilemmas seem to abound in this category than in the other two. Flanagan concedes that “the future of tax incentives in the United States for private contributions to orchestras” is difficult to evaluate, given “pressure for increasing tax revenues at all levels of government.”

Another frequent means of achieving nonperformance income — by drawing earnings on endowment investments — is also unstable. “No US symphony orchestra currently has sufficient endowment earnings to offset its structural deficits,” Flanagan writes. “More important, no orchestra has anywhere near the endowment required to finance growing deficits in the future at prudent rates of endowment draw.”

So there you have it. Sobering views from a labor economist, but they have the virtue of being informed by a large cohort of US orchestras whose financial and attendance data have rarely been assembled for the purpose of analysis. The study also benefits from international data on orchestras, as well as data from the NEA’s Survey of Public Participation in the Arts (www.nea.gov/research/2008-sppa.pdf). Flanagan’s synthesis of this information shows that all three of his recommended fiscal strategies must be sustained throughout the life of an orchestra, just like three different strands of a symphonic theme.