The State and the Arts: An Analysis of Key Economic Policy Issues in Europe and the United States.

By John W. O'Hagan. Cheltenham, UK: Edward Elgar, 1998; Pp. xiii, 232. $80.00.

The field of cultural economics may be the smallest of the specializations that have a Journal of Economic Literature (JEL) number all to their own. There are probably fewer than 300 economists worldwide who devote a significant share of their professional efforts to the field. But many economists, as citizens and consumers of the arts, are interested at least casually in public policy and the arts, as are many people in and around the arts. This book is aimed mainly at economists, although most of its chapters are reasonably accessible to anyone who has had a single microeconomics course.

It is organized in three parts. Part I deals with the rationale for government involvement in this sphere, which, at least in this country, is overwhelmingly commercial, as two new books by well-known economists celebrate (Cowen 1998; Caves in press). The economic rationale is plausible but not especially robust, at least to American economists. Part II deals with the instruments of state intervention, regulation, tax preferences, and direct cash subsidies. Part III looks at the effects of state intervention on the two major sectors of the not-for-profit high arts, art museums and performing arts organizations.

It is successful in applying explicitly to the policy issues what economists in the field have done and in comparing Europe, where public policy largely means cash subsidy (and some constraints on international trade in intellectual property), and the U.S., where there is little state involvement, except indirectly via tax preferences (a big "except"). Indeed, it is the best and most systematic book on the economics of cultural policy yet. It is short and readable and eminently sensible in its organization, among and especially within chapters. A small example of this is in the following of each chapter with its endnotes and references, rather than immuring both at the end of the book, making the act of reading the book as physically awkward as the publisher can manage. The chapter on art museums is especially well organized and is a model for the organization of books written for ordinary people, rather than for committed professional economists.

Now for the downside. I find it surprisingly lacking in the skepticism with which most of us approach public policy, skepticism about the professed aims of actual and proposed policy measures and about how sensible the policy instruments are in achieving the ostensible goals. In part, this is because although the author (who teaches at Trinity College, Dublin) tries hard to be evenhanded, he tends to find in the literature good reasons for European practice and bad reasons for American practice. This is most obvious in the chapter on tax preferences.

An example is his bland treatment of the UK's complicated tax incentives "to assist the retention in Britain of important works of art," which seem infrequently used (perhaps because of their complexity), lacking in generosity to donors, and subject to severe budgetary constraints. As in other aspects of policy in Britain, Treasury officials ultimately determine how policies work: The advocates have their laws, but the Treasury keeps its money. In contrast, O'Hagan finds many, and often unreal, objections to American tax preferences, like property tax exemptions for arts institutions, mainly museums, on the grounds that such exemptions encourage undue capital intensity, which could be the case but seldom is, in reality. Another case is his concern for the use of gifts of works of art to museums as an opportunity for tax evasion by grossly exaggerating the market value of the gifts, which surely happens (taxpayers generally give themselves the benefit of any doubts) but does not seem to be important quantitatively and which can be dealt with readily by the Internal Revenue Service.

The tax chapter seems infused with the ancient European notion that all income and property rightly belong to the crown, which in its infinite benevolence may allow income earners and wealth holders to keep a bit of it, but at the price of degrading the tax system. It's an extreme form of what is found in the 1970s literature of "tax expenditures" in the U.S., which did not admit that the notion of just what should be taxed can have, legitimately, quite different starting points for both ethical and prudential reasons. O'Hagan notes that "in (one) case, the notion of a tax expenditure is debatable," the case being the exemption of state museums from net wealth taxation. The notion is debatable in nearly all cases.

The contrast between the European and American slants on public policy is perhaps shown by O'Hagan's complaint that reduced rates of value-added tax in some E.U. countries "make this tax concession a very unfocused funding device for the government" because it applies to all arts organizations. The lack of "focus" is why Americans like tax concessions: Decisionmaking remains decentralized if all arts organizations are exempt from this or any other type of tax.

Another instance of lack of skepticism is the author's reliance on bad data in some cases. In Chapter 8, on performing arts organizations, he relies for all his American information on a 1988 report of the National Endowment for the Arts, which in turns relies on a motley assembly of incomplete and inconsistent data (the Endowment never in its history has been willing to spend any money for data collection and analysis, even for data from its own grant application files). In that report, the Endowment does intense special pleading for higher appropriations: The arts in this country are in such trouble that more federal money is desperately needed. The examples of bad tidings that are cited contrast sharply with treatment of similar aspects of the arts in the Cowen and Caves books. It's a pity that O'Hagan wrote this book before publication of those books, which provide wholly different, and far more upbeat, views of the arts in both Europe and the U.S.

References

Caves, Richard. In press. Getting our act together: The economic organization of creative activities. Cambridge, MA: Harvard University Press.

Cowen, Tyler. 1998. In praise of commercial culture. Cambridge, MA: Harvard University Press.

Dick Netzer New York University