May 10, 2011

He went through wild ecstatics when I showed him my lymphatics

I was so busy last week that I missed the cost-disease Internetically rearing its head yet again. Greg Sandow brought it up as Exhibit no. 74-D (or so) in the ongoing hand-wringing over orchestral finances (see Louisville, Honolulu, Detroit, Syracuse, Philadelphia). Alex over at Wellsung took exception, on the eminently reasonable grounds that reports of the impending death of orchestras have been around for an awfully long time, and have invariably proved to be exaggerated.

I love the cost-disease—I love thinking about it, I love doing thought-experiments to test it, I love reading the academic respiration of confirmation and refutation it has inspired for the past 50 years. It's catnip for ruminators: a simple idea that gets less and less simple the more you poke at it. The idea is this: you can divide industries into those in which technology enables a lowering of labor costs over time, and those in which it doesn't. The performing arts tend to fall into the latter category, the standard illustration being that you can't use technology to get the required performers for a string quartet below four. Over time, the argument goes, industries afflicted with the cost-disease are increasingly disadvantaged in comparison with those that aren't.

I wrote a thing about the cost-disease back in 2007—good Lord, that's four years ago now. There are probably orchestras who have formed, had their Golden Age, and run aground on the shoals of a dithering board in that time! I was kind of afraid to read it again, but I think it holds up reasonably well; for all my customary dystopian glee, I did approach both the severity of the cost-disease and its rebuttals with some degree of skepticism.

For example, I still think I was right to draw a line between the performance industry and the recording industry—as much as people like to point to recordings as a technological innovation that increases per-worker productivity for musicians, it struck me then as a fundamentally different business, as it strikes me now. Which is not to say that an organization can't aid its own bottom line by selling recordings on the side, which has been an increasing trend—Boston, Chicago, San Francisco, London, BMOP: all those orchestras have started their own labels. Having spent two days at that Rethink Music conference hearing everybody say that recordings are the promotional giveaways of the future, I'll be curious to see how long it lasts, but, like ticket prices, if you can get people to pay, good on ya. But it's a parallel business, a complementary business, not the performance business itself. Now, streaming concerts, that's more interesting—although, so far, most organizations who are streaming concerts online are doing so for free; whether that can be successfully monetized, to use everyone's favorite vulgar term, is still something of an open question. I, for one, am skeptical that the success of the Met Opera high-def simulcasts is something that can be widely imitated, for instance. But if there's a market there, I think, in a way, that does change the calculus of the cost-disease. (It doesn't cure it, but it resets its progression to a more manageable level.)

But there's some things I wish I had highlighted more—I just didn't see them clearly enough at the time. And they all revolve around how easily the idea can slip into a pejorative, market-centric mindset. I mean, we're calling it a disease, for gosh sakes. We could just as accurately say: there are prominent labor efficiencies in the performing arts that are non-scalable. That it makes it sound like what it is: a value-neutral structural trait of such organizations. The cost-disease is not a crisis—not "the killer part of the long-term rise in expenses," as Sandow puts it—but a given feature of running an orchestra or similar institution. The fact that some orchestras have done a notably poor job at managing that feature should not disguise the fact that many other orchestras have managed it fairly well.

I think that pro-market bent is revealed in the persistent insinuation that the cost-disease has only really been an issue since orchestras went to full-year schedules in the 1960s—a time period apparently chosen to conveniently provide a union scapegoat. Here's Tony Woodcock, the president of NEC, hmm-hmming that one on his blog:
Subsequent contract negotiations transformed the musicians’ jobs into positions governed by Collective Bargaining Agreements that converted compensation packages from a variable to a fixed cost. (The financial model of any orchestra in the country today will show the musicians as the biggest single cost.)
I am having a hard time imagining any orchestra anywhere at any time in history where the musicians weren't the single biggest cost. (Then again, Woodcock was relying on the pro-management bias of the Flanagan report.) Sandow, too, got into this, relating that he "first heard about structural deficits years ago, at a private meeting, from people who ran major orchestras that weren't Philadelphia." Really? Because I could have first heard about structural deficits in, say, 1881, when the Boston Symphony Orchestra ran a structural deficit in its first season of existence, ran a deficit every season after that, and nevertheless still is around. Here's Henry Lee Higginson's original prospectus for the orchestra:
Such was the idea, and the cost presented itself thus: Sixty men at $1500 = $90,000 + $3,000 for conductor and + $7,000 for other men (solo players of orchestra, concert-master, i.e., first violin, etc., etc.) = $100,000. Of this sum, it seemed possible that one half should be earned, leaving a deficit of $50,000, for which $1,000,000 is needed as principal. (M. A. DeWolfe Howe, The Boston Symphony Orchestra 1881-1931, p. 16)
That's still the model: pay the musicians, take in what you can from ticket sales, build up an endowment to cover the deficit. The BSO was lucky enough to have Higginson to make up those deficits himself, but just because the BSO, in its early days, had a development pool that made up for in robustness what it lacked in diversification should not take away from the realization that, even in that good old Gilded Age, the orchestra was relying on a development pool. This has been part of management's job from the get-go: shake the trees to make up the difference. That's not a challenge to the business model, it is the business model.

It's the intuitive resistance to viewing that model as "viable" that's at the heart of what I've learned about the cost-disease since that 2007 primer. Alex rightly notes that "the cost disease idea and its predictions of inescapable economic annihilation for the performing arts seem just a bit too convenient for those who indulge in classical music pessimism." I would also add that, in my experience and reading, an eagerness to rebut and dismiss the cost-disease is awfully prevalent among those who indulge in a libertarian or free-market-based worldview. I have a fondness for any idea that bothers triumphalists and pessimists alike, which gets at what I now think about the cost-disease: that it is, in a way, the boundary at which the postulates of capitalist society—all those free-market assumptions that, no matter how reasonable or widely held, are still assumptions—derail. The cost-disease is hardly fatal, not necessarily a source of crisis, but just a fact of life for certain types of endeavors; that we view it as something to be diagnosed and possibly cured just shows how big the disconnect is between the value of performance and the price the market puts on it. The two other industries cited as textbook examples of the cost-disease—education and health care—show the same disconnect, in terms of both underpricing and overpricing. Behind the cost-disease is a set of assumptions about efficiency and progress; but the cost-disease shows up right where those assumptions begin to fray.

10 comments:

Lisa Hirsch said...

I have linked to this, which is great.

Evan Tucker said...

Dearest Soho,

I'm a huge fan and regular reader. Have been for years. So it pains me to say that this argument is straw. Of course there were structural deficits in 1881. That was the first year of the BSO's existence. Many, perhaps most, performing arts organizations can't survive the first few years precisely because of structural deficits. You touch on that in this, but you don't follow that thought to its inevitable conclusion. The argument could be much more compelling if you found similar deficits in the Koussevitsky/Munch years. I doubt one could though, even during World War II.

Yes, the hand wringing has existed from time immemorial. But this time, it's really different. In this economic period, what PR help does it give corporations or rich people to underwrite organizations that are right or wrongly seen as elitist playgrounds? What chance do the 'arts' have when public schools don't have enough money for computers or books?

It is not alarmism to say that this is unsustainable. The burden of proof is on the optimists, not on the hand-wringers. They're the ones who are being cautious enough to not assume that money will consistently materialize from the ether. When organizations subside on private donations, the potential for crisis exists at every moment. But there was always money to bail us out of it. In today's world, we are less certain of where that will come from than in any period of American orchestral history. And how will these organizations keep justifying full-time employment with benefits if the money doesn't keep rolling in.

Your Faithful Reader,

Evan

Matthew said...

Evan: Regular reader as well! You'll be happy to know that at least ten of my twenty favorite movies made your "Movies Everybody Loves But Me" list. (Kubrick and Kurosawa get me into my misanthropic happy place, what can I say.)

There's an argument to be made that the circumstances under which orchestras used to run deficits is sufficiently different to resist comparison (I wouldn't make that argument, but I can imagine it being made), but the BSO, at least, really was still running deficits even after they matured into a stable institution. I should have gone into more depth: according to DeWolfe Howe, "It ought to be recorded that [BSO] deficits, varying in amount, have had to be met every year." (That's up through 1931.) When Higginson died, the trustees called on a "number of anonymous guarantors" to bridge the gap and made moves to shore up the endowment, since the deficits continued. A couple weeks ago, I linked to a Howard Taubman piece from the late-1940s New York Times that found deficits across the board in a survey of orchestras and opera companies. I think it's fair to say that structural deficits have been a part of permanent civic-treasure American orchestras from the start. Maybe it's somewhat camouflaged because of the practice in the old days of relying on a handful of rich patrons to make up the difference (or to provide an adequate endowment from the start), rather than the modern wide-net development practice.

I always try and leave open the possibility of history breaking off from its previous patterns, but if it really is different this time (and I've heard that enough times in my life about enough different things to be cheerfully skeptical about it), I would be more inclined to chalk it up to the combination of the severity of the last downturn and the unprecedented income inequality/middle-class wage stagnation that was already in place. Performing arts organizations feel the squeeze from that because middle-class consumers have less disposable income, while upper-class consumers are fewer in number. Which means that the idea that general rising affluence will transfer over to the arts (Baumol's original out) actually doesn't happen.

So I guess that, while I would not exactly call myself an optimist on the fates of orchestras, my pessimism is far more bound up in my pessimism as to the general oligarchichal tendency of American political economy rather than anything inherent to the set-up of an orchestra. But, like I said, for me, this is part of the fun of thinking about the cost-disease. For instance: Higginson's $50,000 deficit, adjusted for inflation, works out to a contemporary equivalent of just over a million dollars a year. Certainly there are numbers bigger than that floating around—the Philadelphia board, for instance, was tossing around a $14 million figure. How much of that is the cost-disease—and how much of it is board complacency? Shouldn't the overall growth in wealth be enough to offset the cost-disease? If not, why not? And then you're into talking about the really big questions about inequality and corporate influence and regulatory capture and the fates of capitalistic societies.

And I should note that, even by classical-music standards, orchestras are still pretty peculiar institutions, which is a big reason I strongly resist amplifying their situations into any larger statements about the health/relevance/wherewithal of classical music in general.

Dan said...

"Alex over at Wellsung took exception, on the eminently reasonable grounds that reports of the impending death of orchestras have been around for an awfully long time, and have invariably proved to be exaggerated."

It doesn't feel invariable through this lens, since, as a young person, some of our family friends were in the Alabama Symphony Orchestra when it was disbanded, and Birmingham is a city with a relatively deep artistic soul. The orchestra did come back online after a few years.

dolf said...

Great article!

klacknermusic said...

Mr. Guerrieri,
 
I wonder what ypur thoughts are on musician salaries as it relates to this is-it-real-or-is-it-not-so-much crisis.  It is quite common knowledge here in America that sacrifice is not in the vocabulary for most people, from the environment to health care and Social Security. 
 
Of all the points raised on this issue, I think yours about the income gap and continued squeeze on the middle-class is the most salient; speaking for myself, I'm really torn as to whether or not I can swing for tickets (especially in a brand new concert hall).
 
But if the situation is as dire as the folks in Philadelphia, Louisville, Detroit, etc. would like us to believe, is it simply too Draconian to cut salaries?  For everyone?  Over a period of years?
 
I was busy annoying many people during the Detroit strike that even with the massive cut in pay the orchestra agreed to, they are still very well-paid relative to their location.  I understand that people purchase homes, vehicles, have families based on their income levels, but couldn't these cuts happen over periods of a decade or more, plowing through the endowments significantly less quickly?
 
I don't know if it is actually necessary to go down that road...but if these boards keep insisting that it is a problem, it doesn't seem like there will be a choice.  

Lisa Hirsch said...

Regarding salaries, it would be interesting to look at the salaries of comparably-educated professionals in Detroit and see how they're paid.

But I see these problems as largely the fault of the board and the administrators: the musicians are paid to play, the administrators are paid to support the artistic mission of the orchestra. Is anyone complaining about how the musicians did their jobs??

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Matthew said...

Klacknermusic: Salaries are an interesting part of this whole cost-disease thing—and it's certainly one that the musicians are aware of. Browse the ICSOM recent settlements and one can find plenty of freezes and givebacks—some more voluntary than others. (One can also find a number of orchestras whose pay scale seems to be still on a healthy course of nominal but steady raises.) One of the most intriguing little news bits from the Philadelphia situation that I saw was that the musicians reportedly offered $14 million in concessions which the board didn't take. Hmmm. That reinforces my gut feeling that, while drastic cuts do become necessary for some organizations, it tends to reflect more on the competence of board and management than on the level of pay.

The idea of the cost-disease cuts both ways on salaries. On the one hand, salaries are the main costs of running an orchestra, so if the disease seems rabid, it's a common place to look for cuts. But in this model, pay cuts are always only a temporary fix. Sooner or later, even those reduced salaries are going to creep back up to keep up with inflation, &c.. If you buy into the cost-disease, salary cuts are just kicking the can down the road.

I'm really torn as to whether or not I can swing for tickets (especially in a brand new concert hall)

Exactly. It's much easier to run an orchestra when the economy's humming. I still think that is the most important factor in this whole question—and it's one that's cyclical, not structural.

Lisa Hirsch said...

The musicians offered a $14 million give-back? That would take care of a great deal of the orchestra's claimed shortfall - it is truly astounding that management didn't take it. We are clearly into managerial-incompetence territory.