The joke titles write themselves …

… for the announcement that the Commonwealth government is spending $20 million to support the production in Australia of a Disney film of the Jules Verne novel 20000 Leagues Under the Sea. I was interviewed by Gary Maddox who wrote an opinion piece supporting the subsidy, but mentioning my opposition.

For dogmatic free-market advocates, there’s not much need to explain why the subsidy is a bad idea – it follows from the general claim that all subsidies are bad, and for the real dogmatists, that any kind of government expenditure is bad. But I’m happy to support subsidies to film production under some circumstances so I need to explain my position a bit further, and the Maddox piece provides a handy foil

Maddox relies primarily on a straightforward argument applicable to any kind of subsidy, saying

Federal and state subsidies could total more than $50 million, when you add the $21.6 million grant to a tax rebate of 16.5 per cent (the ”location offset” for big-budget foreign movies), plus whatever NSW, Victoria and Queensland offer to get the work.

In round terms, even if the star gets a salary of $20 million, the director, producers and other foreign cast get $15 million and post-production goes overseas, 20,000 Leagues could spend $130 million to $150 million in Australia

Taking the most optimistic view, the government subsidy amounts to one dollar in three spent in Australia, a subsidy rate of more than 30 per cent. By contrast, the much-criticised motor vehicle industry gets less than 10 per cent. It’s fair to say that almost any industry imaginable could find $150 million worth of activity that would be sustainable with a 30 per cent subsidy.

Although it’s not explicit, there may also be an appeal to Keynesian fiscal stimulus here. But, in this stage of the cycle, we need fiscal consolidation not stimulus[1]. Although we are not at full employment in the way this term was understood in the 1950s and 1960s we are at the point where most of the resources used in the production of this film will be attracted from other industries, not drawn from the pool of unemployed workers and capital. So, the actual net economic benefit of the film production (disregarding the subsidy) will be close to zero. Effectively, from an aggregate economic point of view, the $50 million subsidy is money down the drain

Again unstated, but clearly in Maddox mind, is the idea that there is something special about the film industry. Roughly speaking, I’d imagine the argument to run as follows: the film industry is culturally important, and we need continuity of work to keep people in the industry, so it’s good to subsidise films like this one. But this is like the kind of argument for funding space travel that relies on the alleged spinoff of non-stick frypans.

The film industry is important, as Maddox himself notes, because it produces films like The Sapphires that tell us something about ourselves as a culture. So, if we want films like this, we should subsidise them directly. Maddox estimates that the money spent on the Disney subsidy would finance “one or two medium-budget Australian film”. But presumably the government doesn’t have to pay the whole cost. Presumably a 50 per cent subsidy would support 3 or 4 films, and almost as much economic activity as the Disney project. More importantly, we would actually have the films, and some chance that at least one of them would be a good one.

I don’t know whether this would be the best use of our limited budget funds. But there would at least be a genuine benefit to set off against the costs.

fn1. The government’s surplus target was silly, not because the idea of getting back to surplus was wrong, but because it tied itself to a rigid, and ultimately unfeasible timetable for restoring balance.

28 thoughts on “The joke titles write themselves …

  1. “But, in this stage of the cycle, we need fiscal consolidation not stimulus[1]” – J.Q.

    “Although we are not at full employment in the way this term was understood in the 1950s and 1960s we are at the point where most of the resources used in the production of this film will be attracted from other industries, not drawn from the pool of unemployed workers and capital.” – J.Q.

    These are big claims. Does it mean you accept the crowding-out hypothesis? In the current circumstances? In all circumstances?

    Isn’t it lamentable that we cannot get full employment as per the 1950s? Does it not suggest our policy settings are profoundly wrong? Should we not stimulate until we achieve full employment (allowing for frictional unemployment)? You even wrote or co-wrote a book called “Full Employment in the Nineties”. Have you resiled in the 2000s?

    Should we not curb excess bank lending leading to asset bubbles and inflation and thus allow the policy space for targetted deficit spending on infrastructure, health, welfare and education?

    Why accept the current neocon settings of the economy as defining the discourse and agenda?

    On the issue of this particular movie, light Hollywood-ised entertainment does not need subsidies. I agree on that one.

  2. what is an Australian film?

    with so much pre- and post-production as a share of film costs, most of the budget can be spent in australia and yet the story could be about any country or any theme. can a sci-fi film be an Australian film? must star trek be set in the outback to be australian film.

    Must the film sing our own songs and tell our own tales to be an Australian film?

    as I recall, massive tax deductions in the early 1980s led to the production of the worst australian films ever.

  3. Perhaps viability depends upon the small print of the deal. Disney drives the hard deal to maximise their benefit commercially and for brand profile.

    If the deal provides for maximum opportunity to “brand” develop Australia Inc this could be a good advertising deal promoting Australia’s aquatic fringe and its “safe” access.

    You could argue that our government deal makers are not sophisticated to pull off such a deal. This would bring up the notion that “Australia” the product needs a good “agent”.

  4. I wonder if feature length films are going the way of opera in that they need regular infusions of taxpayer’s money to survive. This struck me watching actors interviewed on the Graham Norton show last night. Both movie clips were cliches of the 1980s. What the public may want now is infotainment and new media, dare I say such as reading blogs. I’m sure the CGI giant squid in the new movie will be scary; however it can’t have the impact of the original movie because it’s no longer fresh and original. Spend the money on the health system instead.

  5. Good work, John.

    It’s frustrating when a cost, like this subsidy, is compared to some increase in economic activity, like the $150m spending estimate. The $150m isn’t money for nothing, it will require close to $150m worth of resources to get it, leaving a net benefit of close to zero, as you suggest.

    The same argument is trotted all the time. Victoria’s Formula One Grand Prix requires an ANNUAL subsidy of over $50m, but when questioned about it pollies and GP execs point to a study that showed an increase in GSP of $39m, suggesting this is proof of economic net benefit.

    I’ve seen you call for journos to have a basic grasp of statistics – perhaps we could throw economic assessment onto the list too?

  6. but why disney?

    why not local?

    A$20.000.000 would go a long way for local unheralded talent.

  7. @John Quiggin

    Like Ikonoclast, I would like an explaination as to why you would think we are at the stage where fiscal consolidation rather than stimulus is required.

    Our unemployment rate is higher than pre-crisis level (about 1% higher than 07-08 levels) with participation rate lower than 2008 level (higher than years prior to 2008). Labour force underutilisation rate is high than 04-08 period. Both Federal and Total Taxation as a percentage of GDP is at the lowest level since 1994 and 1990 respectively. Real GDP growth is at lowest level since late 1990s (except 2001).

    However, I would disagree providing stimulus in forms of subsidies of this kind (unless the aim is not about getting the biggest bang for the buck).

  8. @Tom (and Ikonoklast)

    I agree this is a tricky question, but I’m assuming that the relevant historical period is the last 20-30 years, and that we want balance over the cycle. On that basis, since the five years before the crisis were the best in the entire period, we should have had fiscal consolidation then – that’s the point that was made by the IMF when it labelled Howard&Costello as profligates. So, if conditions now are broadly comparable to those in the few years prior to the crisis (not quite as good as the 2008 peak, but comparable to the five years or so before that), we should be looking at consolidation now also.

    I’m not sure of your point on GDP. Growth over the last year was 3 per cent, which is pretty much the long term average and well above the crisis year.

  9. @John Quiggin John, how do you define consolidation? If it means cutting public service to achieve a surplus then it could be argued that this is regressive not progressive. Reforming super laws might achieve that end without a reduction in benefits.

  10. J.Q.

    But, in this stage of the cycle, “we” need fiscal consolidation not stimulus[1]

    You are right about that, but who is “we”? Private sector or public sector?

    If you meant private sector that is levered over 400% then you are right about that.
    But if you meant public sector which is 20% in debt then you are soooo wrong.

    Consider a rule that “my spending is your income” and sectoral balance aproach where public and private sectors are in accounting counterposition then you will have to go for private sector will consolidate against public sector. in other words: private sector can consolidate only on the cost of public sector debt if you wish to keep unemployment low. (Or against trade account which is kinda impossible.)

    Only way the consolidation of private sector can avoid being recorded in public accounting is by outright money printing to cover for deficit spending. (Or by high unemployment that will curb imports and thus improve trade ballance.)

    Are you completely ignoring Steve Keen?

    Consider sectoral balance aproach and Paradox of thrift and you will get the conclusion that public consolidation will go against private consolidation (you).
    Please, do not go neoliberal with surplus mantra.

  11. @rog
    What I mean is that the overall balance should move towards surplus. That doesn’t entail support for regressive cuts. It does mean though that, in assessing proposals like the proposed Disney subsidy, the burden of proof ought to be on the proponents to show why net expenditure should be increased at a time when the general trend needs to be the other way.

  12. However the car industry is established and failure could be catastrophic to many allied industries and towns.

  13. @John Quiggin

    I hope this isn’t off topic as your statement “But, in this stage of the cycle, we need fiscal consolidation not stimulus[1]” is used to buttress your whole argument.

    I assume fiscal consolidation = moving towards a balanced budget and paying off any government debt. Why is this an issue at the moment? Why do we need fiscal consolidation?

    Is Australian government debt currently too high? No, IMO, but I would like your view.

    Is the economy including employment already running at full capacity? No, unemployment is still higher than the optimal of about 2% frictional . We don’t have “Full Employment in the 2000s”.

    Is inflation too high? No, it is currently in the target bandwidth.

    Are there still many recessionary clouds on the international horizon? Yes! The EU is tanking and the US is sluggish.

    Why would you not still run a stimulatory budget (deficits) in this current situation? You yourself have admitted in the past (at my questioning) that “running balanced budgets over the cycle” actually means a net deficit that allows money supply to grow in a way commensurate with economic growth.

    Precisely what danger(s) would you fear if we did not “consolidate” the budget at this “stage” in the cycle? What stage precisely do you think we are at? Surely our economy is still soft if it cannot achieve Full Employment?

    Do you accept the NAIRU theory? Is that what underpins your thinking now? Are you now a Monetarist?

  14. Wouldn’t the Full Employment achieve a balanced budget, on its own, without any additional effort to force it directly via spending cuts or increased taxation?

    Spending cuts or increased taxation which is usually acros the board increase will cause higher unemployment. Higher marginal tax will not increase unemployment since it will only affect nominal GDP that comes from dead capital invested into financial assets.

    There is another way to reduce private sector deficit without affecting employment or public debt. By reducing inequality / by reducing huge rich and corporate surpluses to cover poor’s and low wage earner’s huge deficits / by reducing poor’s subsector deficit against rich subsector surpluses. Those are all counterparties in subsector accounting. Either by high marginal tax rates of 95% and reducing low income taxes. That will reduce subsector imbalances / inequality and improve employment so that public sector can achieve balanced budget.

    That might even cause inflation which will eat up the debt burden of private sector and consolidate it / reduce inequality / put the economy on a sustainable path / kill poverty / allow for green technology developement / get us off of fosil fuels ……..

  15. Where is production of the Disney film going to take place? Is it in deficit or surplus state? If it is in deficit region then it has sense since that will redirect from surplus to deficit region in support of Nominal Surplus Circulation.

  16. @John Quiggin

    Thanks for your response Professor Quiggin. With regards to the real GDP growth figure, I’ve gotten it from the World Bank.

    I agree that the 4-5 years prior to the crisis had the best economic performance in the past 20-30 years. However there are also several things which I consider important.

    1. Inflation was well within RBA’s target despite unemployment rate being the lowest (and falling until the GFC starting impacting Australia) in the past 20-30 years until the large depreciation of AUD began at late 2008. Which should at least indicate the maximum production capacity has not been reached.

    2. The past 20-30 years may not be a good indicator of a long term cycle. There seemed to be an confused period in the early to mid 80s as a result of the stagflation and the RBA targeting monetary aggregate. Then there’s the RBA induced recession to disinflate the economy which accounted for the economic woes of the early to mid 90s.

    3. The taxation revenue as a % of GDP is at the lowest level since the 90s as stated in my previous comment which makes it difficult to classify that we are at potential output.

    From the above, my personal opinion is that the budget stance should at least be neutral if not slightly expansionary, rather than trying to consolidate.

  17. Giving money to an American entertainment company is all well and good, but I hope that at the same time we’re also sending free coal to China. It wouldn’t do to play favourites now, would it?

  18. @Ikonoclast Nor are we at full employment according to Quiggin’s work in the Fin Review of the early 90s – 3%

    @Jordan Yes, true full employment would see budget balanced or returned to surplus – as Keynes said take care of the jobs deficit and the budget will take care of itself.

  19. For dogmatic free-market advocates, there’s not much need to explain why the subsidy is a bad idea

    Correct. Once you have established that subsidies are in general a bad idea, which they are, then the burden of proof falls on those that favour a particular subsidy.

  20. Ronald Brak @20: I was rather hoping that as investors in the project all Australians would get free entry to the finished film.

  21. @zoot

    Yep, capitalism makes us all pay at least thrice or more for everything. We get underpaid as workers, we pay the subsidies to the corporates and we pay for all the tripe the system serves up. Oh and we pay by having our environment trashed as well.

  22. The figure of $150M spent here is ridiculous. Almost all the money goes to the talent, director, producer and the marketing of the ‘movie’ once its made. Dispense!

  23. @Jordan
    The Portuguese government proposal is actually brilliant even if they don’t realize it.

    T-bills are basically money, except that they’re hard to trade. Make them easy enough to trade and give them to enough people, *and you’re printing money*. And money printing is what Portugal needs right now. So…. brilliant.

  24. @Nathanael
    Of course, I don’t think paying workers with newly issued bonds will meet the Troika’s insane requirements for “reducing government debt” or “balancing the budget”. But it’s fairly brilliant. I suggest making them look almost exactly like Euro notes. 🙂

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