Defending Flanagan

I was dismayed at the response to Robert J. Flanagan's very long, very serious, though very academic report on orchestra finances. (Unavoidably academic, however, because Flanagan is an academic.) Could be that I'll sound impatient in what follows, for which I either apologize or not. I'm not sure.

But here's the background. For many years, the Andrew W. Mellon foundation funded more than a dozen orchestras through a program designed to encourage innovation, called the Orchestra Forum. The strengths and weaknesses of that endeavor aren't something I'm going to discuss here, but I was involved for some of its run, as a "fellow" of the program, going to its biannual retreats and participating in all discussions.

And it was from one of those discussions that the Flanagan report was born. The executive director of one of the Big Five was worried about orchestra finances, and convened a meeting attended by representatives of several orchestras, including at least two other high-powered executive directors, but also musicians, and members of various orchestras' boards and staffs. I was at this meeting. The subject of discussion were what the people there called "structural deficits" - what they saw as a long-term pattern of orchestras' expenses growing faster than their income.

Obviously this problem - if real - was serious. So out of this meeting grew something called the Elephant Task Force, a group of board members, musicians, and staff members from a variety of orchestras, who met under Mellon's auspices to study the problem. The name, of course, comes from the notion of the elephant in the room that no one wants to acknowledge, in this case the serious financial problems that - at least as Task Force members saw it - weren't being faced.

Eventually the Task Force made its report, which was delivered at one of the Orchestra Forum retreats by the board chairman of the orchestra whose executive director had started all this rolling. His report was dramatic. I'm not going to go into any detail about what was said, but it was dire, including projections that showed how a major orchestra (unnamed) could easily go out of business not many years in the future. I don't know that I've ever had such a shock in all my years in this business.

But where should the Task Force - and its dire predictions - go from there? One thought was to have its work repeated by an economist. Enter Flanagan, commissioned by Mellon to study what the Elephant Task force had studied, to see if its conclusions were correct.

What he came up with is milder than the Task Force's presentation - no predictions of demise. But certainly he supported the idea that orchestras have structural deficits, and, though he didn't use the term, that notion was a central part of his report.

Which I why I'm going to seem impatient. One big reaction to the report was people not even remotely understanding what Flanagan said, and thinking instead that he'd only reported something obvious, that orchestras have deficits, that their income from ticket sales can't alone support them. "Duh!" said many people, with scathing derision, most famously here, but also echoed here and here (and probably other places). This stupid guy works all this time, we're told, backed by a major foundation, and all he comes up with is something everybody knows. Orchestras can't earn all the money it takes to run them. Duh!

But that's a complete misunderstanding of what the report actually says. I'll grant that report isn't lively to read, and that Flanagan does repeat, maybe more than he needs to, the statement that orchestras can't pay their expenses with earned income alone. Maybe he does this because he's an outsider to the field, and maybe to the entire non-profit world, so the fact of deficits is more notable to him than it is to people - who'd certainly include everyone making fun of him - who live with this information every day. But then William J. Baumol and William G. Bowen also keep repeating this very basic fact in their seminal 1966 study, Performing Arts: The Economic Dilemma --which was an important starting point for Flanagan, as it should be for anyone looking at performing arts financial issues - and nobody made fun of them.

But what did Flanagan really say? Now we're back to those structural deficits, strongly sensed by people directly involved with them - orchestra people, musicians, board members, and staff members - and strongly stressed in the Elephant Task Force report. Flanagan (though, as I said, without using the term) said that they exist, that for orchestras, the gap between earned income and expenses is constantly increasing. Here's where he summarizes that, on page 28 of his report:

For most orchestras the trend increase in real performance expenses is two to four times as large as the trend increase in real performance income....[T]he majority of orchestras have continued to experience a long-term worsening of the performance income gap, even after controlling for the perturbations introduced by changes in general economic conditions that are beyond the control of the symphony community. Even if orchestras adjust successfully to the cyclical "weather," the long-run economic "climate" of the industry produces ever-increasing performance deficits. [Those are his italics.]

And just to make everything clear: When Flanagan talks about "performance deficits" he doesn't mean bottom-line deficits, the kind that leave orchestras in the red at the end of a fiscal year, and therefore in debt, because they spent more money than they take in. He knows perfectly well that orchestras raise money far beyond what they earn in ticket sales, and that overall their budgets are in balance. A "performance deficit" simply means the difference between the amount of income earned through ticket sales and the amount of income needed. This constantly is growing, and while it doesn't leave orchestras floundering in helpless debt, it certainly puts pressure on them.

Or, to put this differently: As time goes on, a smaller portion of orchestras' budget comes from ticket sales, and therefore a larger portion of their budget has to be raised from private and institutional donors. So, as the decades pass, orchestras have to work harder and harder to raise the money they need.

Did the people who laughed at Flanagan know that he was saying this? Do they themselves know that, over time, the gap between earned income and expenses has constantly grown larger?

And about what Flanagan concluded:

First, Baumol and Bowen came to exactly the same conclusion in 1966, after a similarly serious academic study.

Second, the conclusion is supported by data. As Flanagan points out (and as I wrote long ago right here in my blog), orchestras used to get much more of their income from ticket sales than they do now. In fact, there's been a constant decline in this for 70 years (and maybe even longer, if we only had earlier data to show us what was happening). In the 1930s, orchestras earned, on the average, 85% of their budgets from ticket sales. In 1962 the figure was 58% and in 1972 it had fallen to 47%. It's a lot lower now. So it's hard to dispute Flanagan's conclusion. What he did was put the data on firmer ground, adjusting it to eliminate bumps and dips created by the economic ups and downs, so we can see the data in its purest form.

Third, there's an economic principle that predicts that this will happen, called, variously, "Baumol's dilemma" or "Baumol's disease" or "Baumol's curse." Baumol, who's been called the most distinguished economist who's never won the Nobel Prize, came up with this principle in his 1960s study. Basically it says that enterprises not engaged in manufacturing - and especially service industries - don't show gains in productivity equal to the productivity gains in the rest of the economy. Thus they're always lagging behind financially, always looking for more and more cash to pay the rising expenses that everybody has, but which they have trouble meeting, because their productivity doesn't rise.

Or, more specifically: If I run a car company, over the long run I spend less and less money to make more and more cars. This is because, thanks to productivity increases, I can make more cars with the same number of employees. (Or, unfortunately, even fewer, which is one reason why Michigan is a wasteland of unemployment.) Thanks to this , I can pay my employees more, and I have money to set aside for research and innovation.

But if I'm an orchestra, I'm playing masterworks with the same number of musicians I used in 1937. And my staff is bigger - I'm now paying many people to raise money for the orchestra, while in 1937 I had no fundraising staff at all. (And no marketing staff, either - both funding and ticket sales more or less took care of themselves, or at least were vastly easier than they are today.) So, roughly speaking, putting on concerts costs me the same amount it did in 1937. Purely in fiscal terms, I haven't gotten more productive. But meanwhile salaries have risen, across the board, throughout the economy, and I have to pay those salaries. So I'm in an economic bind. I'm always squeezed - I always have to find more money than I needed a decade ago.

Or, more simply, my ticket sales just don't pay as large a part of my expenses as they used to - which is exactly what in fact has happened.

So there's no doubt that Flanagan is right. And if anything, he understates how serious the situation is. Yes, orchestras have found ways to raise the money that they need. But there's always the potential for a serious crisis, and one in fact arose late in the 1960s, when the largest orchestras expanded their seasons and raised musicians' salaries - and when the costs of that collided with the long-term trend of getting less and less income from ticket sales.

And so the largest orchestras, back in 1969, really thought that they were going out of business. I have to laugh a little here (however grimly), because classical music optimists keep saying, "Oh, all this talk of gloom and doom is ridiculous. People are always saying classical music will die!" And, then, often enough, they'll cite newspaper stories from the late '60s and early '70s, predicting orchestras' demise. Ha! they say. It never happened! See how silly these predictions are?

But what really happened? The crisis was very real. And so the Big Five hired McKinsey, the big consulting firm, to study what was going on. McKinsey did a preliminary study, and then a bigger one in 1972, working now for a consortium of 28 large orchestras. (See my blog posts about this, here and here.) The conclusions? Orchestras were in really big trouble, and the only solution was for the federal government to fund 25% of every orchestra's budget.

We know that didn't happen. So how did orchestras survive? It's simple - they developed the funding structure we take for granted now, in which they work feverishly to get donations from individuals, corporations, and foundations. And they staff large development departments to do that work. This all evolved during the 1970s, in response to the late '60s financial crisis that orchestras quite genuinely had.

Which shows that the funding pressure, growing over time, can get quite serious. It can lead orchestras to completely reinvent the way they fund themselves. So what happens if they have another crisis like the one in 1969? What happens if the percentage of income from ticket sales keeps falling - which we have no reason to believe won't happen - and other funding, under stronger pressure now, falls short? (Which could happen, for many reasons, one of which is the decline in concert attendance that Flanagan cites, and which I've noted in my blog before, here, for instance. One important source of donors, for orchestras, is the people who go to concerts. So if the number of people going to concerts falls, the number of donors ought to fall, too, at least in the future. Flanagan doesn't note this danger, and also doesn't mention the late-'60s crisis.)

There's more to say about Flanagan, of course. The study has its flaws, and some details of it have been strongly challenged, privately, to me, by a consultant who's worked with major orchestras. He thinks, for instance, that Flanagan is wrong in one of his other notable conclusions, which is that money spent on marketing and fund-raising may not do much good. (He also thinks orchestras will have a major financial crisis in the next few years.)

And I can understand, at least a little, the anger of the musicians in ICSOM. Flanagan does say that musicians' salaries, during the period he studied, rose faster than the consumer price index. I find his other comments on salaries very mild - he's hardly saying that salaries should be cut back. But musicians are sensitive. And - as Flanagan, for whatever reason, doesn't note - some orchestras have negotiated pay cuts in recent years, sometimes temporary ones, sometimes longer lasting. So no wonder musicians fly up in anger when the subject seems to come up, as maybe it seemed to in Flanagan's report. (The consultant I mentioned says, by the way, that musicians' pay hasn't risen any faster than the pay of other highly trained professions, a comparison that Flanagan might have made, but didn't.)

But what I can't understand - or at least don't have much sympathy for - is the hysteria (there's no other word) in the musicians' response. When they start talking about "our great art form," as they do toward the end of their statement, it's clear that their emotions have surged way beyond overdrive. It's as if they're afraid of bad news. "Bankruptcy used as a fund raising tool," they scream. "Ridiculous." But Flanagan never talks about bankruptcy. Nor does he think that orchestras are going bankrupt.

And if the financial news is bad, should orchestras hide it? Are they even able to hide it? This actually is a subject discussed behind the scenes in the orchestra world, and with my own ears I've heard at least one powerful orchestra manager say the public should never be told how bad things are, because that would scare off donors. The answer of course would be that donors would be more than scared if they find out they've been lied to. They'll be furious.

But there's an additional problem with hiding bad news - you might go into denial, and hide the bad news (or at least the extent of its badness) even from yourself. At least if you admit your problems it publicly, you're forced to do something about them. (Or at least to say you are.) The ICSOM musicians, I fear, sound like they're in the denial zone, since one reading of their statement might be something like this: Bad news is bad for us! So there isn't any!

And one final point. Some critics of the report seem to have anointed themselves as economists, and go around disputing any economic analysis that they decide they don't like. I found this happening when I e-mailed privately with one published critic of the report, someone I'm friendly with, and I'll admit I called him on it. There's also a notable music blogger whom I won't name, someone I otherwise greatly respect, who - though he probably wouldn't tell physicists what's wrong with the theory of relativity - runs out to tell the world why Baumol was wrong, why Baumol's dilemma shouldn't be taken seriously.

Which isn't to say that economists, even distinguished ones, can't be wrong. (And Baumol, often cited as a top candidate for the Nobel Prize, is certainly distinguished. I won't offer any single link here. Just Google "Baumol Nobel Prize" and see what you get.) And of course economists can disagree with each other. But I had a cognitive psychologist pester me, via e-mail, with total nonsense about Pierre Boulez. And at one of the Mellon meetings, an arrogant consultant told some of us that professional conductors aren't needed, that orchestral musicians should just take turns conducting their orchestras. When we tried to tell him why he was wrong, he smugly told us that we were standing in the way of innovation.

So how would an impartial panel of economists react to this blogger's post? Choose one:

This man is right. And he's taught us something! None of us ever thought of anything he said.

Or:

Yes, he has a point. We've disputed these things among ourselves, and some of us say pretty much what he does.

Or:

Sorry. Some of us might disagree with Baumol, but this man doesn't understand the principles involved. What he says doesn't make sense to any of us, even those who come to the same conclusion he does.

Though from what I've gathered - and I, as a non-economist, could of course be wrong - there's no serious disagreement with Baumol's theory. Well, at least I covered myself by saying that I could be wrong. I am wrong. Some economists do argue with Baumol, and you can find these arguments in a standard text, The Economics of Art and Culture, by James Heilbrun and Charles M. Gray. I've ordered that book, and will find out what sense I can make of the debate. But I'd urge you take this as en example not only of me making a mistake, but of how tricky it can be for non-experts to venture into expert territory.