Scott Sumner reckons the cost to the City of Detroit in owning (or giving away to a nonprofit) the collection at the Detroit Institute of Arts is about $185 million per year. He obtains this number not through looking at the cost of maintaining the collection, and paying the necessary personnel and building costs, but simply through foregone interest, assuming that cash invested in financial instruments could yield 5% return per year, and that the art could be sold for $3.7 billion. If we lower the assumed 5% and/or $3.7 billion, then the $185 million per year figure also falls – the math is simple.
But the concept isn’t. Let me give an example. A couple I know just recently sold their home in Vancouver, Canada. They had become ’empty-nesters’, and considered moving to an apartment. They owned the house outright, having paid off over time a 30-year mortgage, bought for a low price in 1970. The average house price in metro Vancouver is now $670 thousand. They had become used to the pleasure of having no mortgage payments to make, but were now facing the prospect of paying rent to a landlord. Could they afford the expense? After all, except for property taxes and maintenance, they could live ‘for free’ in the house.
But that’s a mistake. Living in a house in Vancouver, even with no mortgage, is very expensive. That’s because you have, on average, $670 thousand dollars of capital tied up that could otherwise be earning a return elsewhere. There is an opportunity cost to having your capital invested in home-ownership, even when you have no mortgage. And that must be taken into account when comparing renting vs owning (as this handy calculator from the New York Times does).
And so, in thinking about the ownership of a significant collection of art by Detroit (or any city), the opportunity cost of the capital should be taken into account, along with all the other costs and benefits of preserving the collection in that place.
Does that mean they ought to sell the art? I’m not saying – I don’t have special insight into how people of that city value having the collection. Should they consider all the costs and benefits in making the decision? Absolutely.
From the pure economics standpoint — which is the point of your blog, I think — this makes sense. But it’s a little bit like one of those arguments like:”don’t go to college — instead invest the entire four year cost as a lump sum (even if you had it) in junk bonds and live off the return, and you’ll do better financially.” Technically true, but you end up with no education and no profession.
We could apply this idea not only to art collections, but to all arts, or even public facilities. Surely there is a higher, better, more profitable use (student apartments?) for the space now occupied by, say, the downtown theater, the art center, the campus auditorium…the rate of return on a skyscraper in the spots now occupied by the Guggenheim or Central Park must be staggering. Is this how we should calculate assets? I think it leads to the forfeiture of practically everything of public value, to be replaced by whatever private development might generate the quickest short term gain. Which is why museum directors are right to argue that the value of art collections is functionally zero. The DIA case has opened a door that over time is going to look more like the lid to Pandora’s box.
Thanks for the note…
The point of the post is that there is an opportunity cost to holding any asset, in that the capital could be invested elsewhere. That doesn’t mean we should never have investments – owning your own home often makes a lot of sense, and an investment in a college degree on average pays a much higher rate of return than other financial assets (in other words, your analogy to junk bonds is *not* ‘technically true).
And it does not lead to forfeiture of assets of public value. It is just part of the cost to be considered, along with maintenance and repair. If the benefits to the population are greater than cost, then the asset is worth it, and this will be true of many public assets. But for some it will not, and when the costs, including opportunity costs, are greater than public benefit, the question ought to be raised about keeping capital tied up in that particular asset rather than the best available alternatives.
If this is how you consider all the costs and benefits in making your decisions,
you probably don’t even own a dog, let alone a piece of silver or a painting!
You are quite correct. Two cats, but no dog.
We are all attached to different things in ways that are subjective, and where the attachment means a lot to us. We gain joy and pleasure from owning a dog, a painting, a car, a house. Nothing in this post suggests otherwise. These are real benefits, and I do not think they should be ignored.
My one point was that the capital cost of owning things is a real cost, even when there is no outstanding debt. If your city owns an office building, it ought to occasionally weigh the costs of ownership, including the capital cost, against the benefits received from owning it, and if the costs outweigh the benefits should consider a sale, so that the funds can be invested in more useful ways. If the benefits outweigh the costs, fair enough – hold onto the asset.
This is a reminder of how an unmitigated capitalism sees the worth of everything and the value of very little. And of course, the arts are especially singled out for these sorts of financial observations. Interesting to compare this to military spending. Last year’s military budget was 640 billion. That’s 1.7 billion per day. 72 million per hour. And 1.2 million per minute. Talk about a loss of investment potential.
What would 1.2 million dollar bills look like blurring by every minute?
In one hour the military spends more than the entire yearly budget of the Chicago Lyric Opera. In two days it spends the entire 3.4 billion that is the highest estimate of the DIA’s holdings. In two hours it spends the entire yearly budget of the NEA.
Never mind, let’s talk about the lost investment potential in buying art. In the time you read this, another million dollars just vanished into the military.
Nothing in the post suggests that the arts ought to be singled out. The expense of the military is immense, and, by the logic of my post, is even bigger than commonly reported, since we would have to consider the capital cost of the land and structures of military bases in addition to current spending.
The point of the post is that there is a capital cost to owning assets.
The point of mine is that the capital costs of the arts are often met with a double standard so extreme it borders on absurdity. Compared to obvious excesses in the military, the amount spent on the arts in the USA is ridiculously minuscule. We have to remind ourselves about this from time to time, or we simply succumb to a system of absurdity.
I agree with Mr. Osborne. The culture wars of the 80s and 90s have left us with a legacy of over-scrutiny of the arts. That’s in no way Michael Rushton’s fault, but it seems a common focus: Brandeis tried to sell its art museum’s collection to get through the recession. Now it seems Detroit owns nothing of value, aside from a few garbage trucks and mop buckets, except its art collection? There seems to have been little or no public discussion — certainly none making national news — of liquidating any other assets that belong to Detroit. Aren’t there golf courses, swimming pools, buildings, etc.? On the one hand, I applaud Michael Rushton’s logic in suggesting that every now and then individuals and institutions should review their holdings and see if these are still valid; on the other hand, I would guess that we would see a lot of liquidated art, closed swimming pools and emptied public libraries if this became common practice.