Baumol Explained (with thanks to Scott Walters)(and Diane Ragsdale)

UPDATE: Maybe the relationship of Baumol and the Arena Stage is not so clear-cut as Scott Walter argues. This is a quote from Zelda Fichandler regarding the decision to make the Arena a nonprofit:

"[...] we made all of our expenses at the box office for roughly the first fifteen years of our existence. It was as late as the mid-sixties when we conceded that we couldn't continue to do this, but had to become a deficit-producing organization.  I bring this up simply to point out that, while...indeed, without the nonprofit income tax code, our American theater would simply not exist, being nonprofit does not really define us -- our goals, our aims, our aesthetic, our achievements. What defines us, measures us, is our capacity to produce art."

For more on the discussion of the business model of the Arena and nonprofit theatre, read Diane Ragsdale's post.

ORIGINAL POST
This is a significant reprint from Scott Walters at <100k the full post is here). It explains the background and context of Baumol's Cost Disease, which I have mentioned on this blog a number of times. Scott's post is a real eye-opener. Read on!

I’d like to talk about “Baumol’s Cost Disease,” which had a major impact on the development of the regional theatre movement through William J. Baumol’s and William G. Bowen’s 1966 book Performing Arts, the Economic Dilemma: A Study of Problems Common to Theater, Opera, Music, and Dance. At the time that Baumol and Bowen were writing, a “cultural explosion” was being declared by writers like Alvin Toffler (The Culture Consumers, 1964) and the Rockefeller Brothers Fund panel report The Performing Arts: Problems and Prospects (1965, headed by Nancy Hanks, who would become the frist NEA Chair), both of which helped lead to the passage of the National Foundation on the Arts and Humanities Act of 1965. Baumol and Bowen, and the Twentieth Century Fund who paid for their report however, deflated that bubble.
As Joseph Wesley Ziegler put it in his 1973 book Regional Theatre: The Revolutionary Stage, “the ‘cultural explosion’ had already proved to be largely a myth: the natural increase in population and per capita income had given the appearance in the early 1960s of increased interest in the arts, but the percentage nof people interested in the arts had not grown significantly.” (63) This inconvenient truth, however, was largely ignored in favor of a truth that was more useful to the growth of the regional arts — the “cost disease.”
What Baumol and Bowen said that had the most traction was that the income gap in the performing arts was inevitable because unlike industry, the performing arts did not benefit from increases in productivity — it took the same number of actors to perform Hamlet in 1965 as it did in 1601, and it took the same number of musicians to play Beethoven’s Fifth Symphony now as it did in the 1800s. So while productivity remained flat, wages continued to rise as did other costs, and the result was that either ticket prices would have to rise beyond levels that patrons would be willing to pay, or there will be an income gap. Based on this “cost disease” concept, Baumol and Bowen made a strong case for foundation and governmental support for the arts by pointing out the “inevitability” of this income gap. The effect of this can be most dramatically illustrated by the case of one of the eraly regional theatres, the Arena Stage in Washington DC as led by Zelda and Thomas Fichlander.
Again Ziegler, who in 1962 went to the Arena Stage as an “administrative intern” on a grant from the Ford Foundation to improve his management skills (and who later served as the head of the Theatre Communications Group), provides the perspective:

By the time I arrived, the Fichlanders [Zelda and Thomas] had mastered running their theatre to the point where they could do the job without a budget. They simply never spent more than the box office and grants brought into their coffers. Each year there was either a breakeven situation or a surplus….Since that time, however, the picture has changed. During recent years, Arena Stage has always incurred an “income gap” — commitments to creditors over and above funds brought in as earned income. It is characteristic, I think, that after moving into its new building Arena Stage did not have income gaps until they became acceptable. Income gaps in the performing arts became acceptable with the publication of the Twentieth Century Fund’s The Perfomring Arts: The Economic Dilemma, which proved their inevitability and opened up the possibility of deficit funding for theatres. The other justification for income gaps came from the establishment, at the same time, of the National Endowment for the Arts, the federal government’s first step in accepting support of the arts as a proper function. Arena Stage, with its extraordinary administrative savvy, saw the income gaps could be funded; from then on Zelda instituted additional programs which could be judged suitable for foundation assistance and which assured the Arena Stage would need help. (34-35)

Thus, Baumol’s “cost disease” became a self-fulfilling prophecy, and like a crack dealer introducing the drug at the schoolyard, Baumol quickly had the performing arts addicted to a combination of government and foundation subsidy. The other pusher in this scenario was the Ford Foundation, which pumped millions into the regional theatre, pushing small-scale operations like the Mummers Theatre in Oklahoma to build a huge theatre far beyond their needs, and funding young regional theatres to import actors from NYC to fill its stages instead of building ensembles committed to a community.
The fact is that Baumol and Bowen were right on both counts: there WAS no “cultural explosion,” it still was and would continue to be a pastime aimed at the economic elites, and they were also right that given a business model that emphasized large theatres, large budgets, and a production aesthetic that mimicked NY, an income gap WAS inevitable. But the conclusion that was drawn from those two truths — that what was needed was private and public subsidy — was flawed.
First of all, in the case of theatre there was, in fact, an increase in productivity: it was called film and television. While we choose to see these as different art forms, the amount of crossover that occurs between the artists of all three belies their difference. While it still took the same number of artists to perform Hamlet, film and television multiplied exponentially the size of the audience. In other words, theatre was being mass produced through film and television. What should have happened at that point, and didn’t, was a reconsideration of the business model. Instead, Baumol and Bowen recommended that the government and rich people bail us out.
Theatre might have done the same in 1965, but didn’t. Instead, we learned to beg. According to the most recent Theatre Facts published by TCG, regional theatres now have a whopping 48% of their budget coming from contributions, and only 52% is earned income.

Like the two-income household, subsidized theatre has inflated to fill the space provided, but without embracing a change of paradigm, there really is no going back.

I think somewhere in here is a moral that's tied to the concept of "Buy Local." Maybe - "No theatres, no food!" Or "Plays, not Condos."