DRI-444: And the Beat of the Economic Greek Chorus Goes On

Early in 2012, broad indices of income and employment turned upward. Although not dramatic, the upturn raised hopes that at long last the economic recovery was about to shift out of low gear and into overdrive.

Of course, there were nagging problems with this optimistic scenario. For one thing, the transportation sector did not participate in the upturn. Trucking in particular languished. This seemed odd in view of the fact that roughly two-thirds of all freight travels by truck. While puzzled by this seeming anomaly, commentators like Edward Leamer of UCLA voiced optimism that trucking would soon get with the program. And it seemed unlikely that the pace of trucking activity could long lag that of the general economy.

Well, one quarter later, trucking’s rate of growth has lined up with that of the overall economy. But convergence has not been effected by a growth spurt in trucking. Instead, it is the overall economy that has dropped back into line with the dismal growth rate of the trucking sector.

What might account for the seemingly inexplicable pattern of economic fluctuations that have plagued the Great Recession and its stunted offspring, the Little Recovery? Can we identify the keynotes that distinguish this Great Recession from past business cycles?

The Greek Chorus on the Economy

In ancient, classical drama, the Greek chorus served the function of narrator and commentator on the events depicted. Over the last few years, economic commentators have formed their own Greek chorus. This suits the dramatic quality of world economic history ever since the financial crisis of 2008 – crisis following crisis, the major industrial nations bleakly eyeing a wall of worry. No sooner has one fraught moment passed than another pops up.

The Greek Chorus may be theatrically effective, but they are analytically deficient. They lack the experience and assurance needed to ad lib an explanation for this, the least conventional business cycle of them all.

The traditional model of the business cycle posits wave-like movements of economic activity joined by high (peak) and low (trough) points. The falling portion of the wave is the contraction phase. The rising part is the expansion. This roughly corresponds to the experience of living Americans. But the current Great Recession is new and different.

At the outset, the recession began in December 2007, but few would have made book on its existence until the meltdown came in the fall of 2008 – at which point the economy nosedived like a crooked prizefighter. The official end of the recession in June 2009 came and went without notice; unemployment remained sky-high for months afterward.

Eventually, it became apparent that a recovery was underway. Make that an apparent recovery – two or three months of modest growth was succeeded by a backslide in income and employment. This is hardly a classic business cycle scenario and it’s no way to run a railway to economic growth. You can travel between two points by dancing a box step but it’s not an efficient way to traverse the distance.

But the Greek Chorus could only sing its part from a script. It could moralize about the Greeks and their woes, and how those woes would wound the West if we weren’t careful. It could sing about morality – greed and inequality and protest and such. It could narrate a familiar tale about the business cycle. But it couldn’t analyze. It lacked a theoretical framework in which to look beyond history and tradition to ask why this episode differed from all that had gone before.

The Greek Chorus Sings the Same Song, Different Verse

In the fourth quarter of 2011, the U.S. economy achieved annualized growth of 3.0% and unemployment fell to 8.3%. The Greek Chorus raised its voices in hosannas of praise and thanksgiving. In January, employment jumped further. This was an “unmistakable” sign that we had turned the corner.

Alas, first quarter of 2012 simply repeated the same song heard ever since 2009. This verse featured reduced annualized growth of 2.2% and slightly lower unemployment, culminating in an 8.1% rate in April, 2012.

Unfortunately, even a lower unemployment rate became a mixed message. While the number of unemployed persons fell by 175,000 between March and April, 2012, the number of employed persons also fell, by 165,000. The job gain of 115,000 was well below the 200,000 job gain usually considered necessary to absorb increases in population and labor-force growth in a typical month. Of course, this month was anything but typical – the civilian labor force fell by 342,000. Since the unemployment rate is calculated by dividing the number of unemployed (12,500,000) by the total number of people in the labor force (154,365,000), the resulting 8.1% was only a razor-thin improvement over the previous month (12,675,000 divided by 154,707,000 equals 8.2%). The total number of employed people was 141,865,000 – up from 137,968,000 in December 2009 but well behind the 146,595,000 in 2007, before the recession started.

Once again, the “unmistakable” signs of recovery had become mistakable.

Why the Greek Chorus Sings Off-Key

In its narrative role, the Greek Chorus is not performing but instead “phoning in” its performance by relying on pre-digested Keynesian platitudes and bromides, as if it had substituted a pre-recorded instrumental for live performance. And that instrumental is like an old phonograph needle stuck in a crack, playing the same notes over and over again.

The Greek Chorus excoriated Wall Street for the failures of its “rocket scientists,” who developed complex derivative securities and relied on statistical databases to develop safety ratings for mortgage-backed securities. Rightly so, for radically changed credit standards had made the databases worthless for evaluating creditworthiness in today’s environment. But now the Chorus fails to recognize that the textbook business-cycle model cannot describe today’s reality, in which policymakers manipulate markets in vain efforts to make miracles or buy time in which to maneuver.

The simple business-cycle model only worked when markets were allowed to work. Today, the economy functions like an automobile whose fuel supply is impaired by some flaw such as a clogged filter. The vehicle lurches forward, stutters, stops, and lunges forward again. Something is obviously wrong, even if the source is not quite clear.

Insofar as they have any economic training at all, most people are trained to look to aggregate demand, or total spending, as the key to all mysteries. But that is not the problem.

In a functioning economy, markets tend to reconcile diverse perspectives of different people by providing objective knowledge about reality. People rely on that. Each of us knows that we don’t know everything, so we rely on what markets tell us and we rely on our ability to get information on the future and in the future. We can’t do that today because we all know that today’s economy is not “real.”

The best example is the “zero interest rate” policy (ZIRP) followed by the Federal Reserve. Everybody knows that interest rates do not reflect the actual saving and investing desires of consumers and businesses. We all know that ZIRP cannot go on forever, and when it ends the interest-rate environment will change drastically. We know that all those drastic changes will have tremendous effects on most of the economic choices we make now and in the immediate future.

In effect, most of the country is living with one ear attuned to daily life and the other one keenly listening for the other shoe to drop – that is, for any sign of the change that we know is coming. Obviously, we can’t live in a state of suspended animation. But just as obviously, it’s in our interest to do the minimum necessary to get by until this state of massive uncertainty clarifies.

And guess what? Everybody “doing the minimum necessary” translates into an economy with minimal growth and confused direction. Long-term investment is attractive only when the circumstances are absolutely ideal – or when political corruption or cronyism tips the scales in favor of action. Hiring is analogous to long-term investment because it entails assumption of so many costs and because firing has become correspondingly difficult. It’s no wonder, then, that we’re in the fix we’re in.

Waiting – But Not for Godot

Some other paralysis-inducing factors are related to ZIRP. Current and future projected spending at the federal level is producing unprecedented peacetime accounting deficits. These require federal borrowing. Interest payments on the necessary bonds threaten to eat up the entire federal-government budget before the decade ends. Everybody knows that this process cannot continue. Everybody knows that its termination will require massive dislocations. Some of these might be large spending cuts, huge tax increases, elimination of federal-government agencies and departments, privatization of government functions, and large-scale reductions in federal employment. Nobody can dispute the stunning impact of these measures. Everybody is waiting to see what will happen.

Many state and local governments are in bad financial shape as well. Included among them are some of our largest and most populous states, such as California, Illinois and New York. Most people realize that the promises made to many public-employee unions regarding retirement pension and health-care benefits have placed government finance in an untenable position. Once again, the necessary remedial actions will have dramatic effects on all the affected parties. Everybody is waiting to see what will happen.

In Europe, Americans can watch a preview of coming distractions. The European welfare state is imploding. Whether the implosion becomes an explosion will depend on where the charges are set and on their strength. Greece is facing default on its public debt and withdrawal from the European Monetary Union. In an unprecedented action, Spain is about to bail out its largest bank. Everybody suspects that the stronger European countries are rapidly running out of time to deal with the depredations of the weaker ones. Deep in our hearts and heads, we know that Germans will not work until age 67 so as to pay higher taxes whose revenues will allow Greeks to retire at age 50.

We are waiting to see what happens.

The Federal Reserve has created astounding amounts of money by purchasing both new and existing federal debt. Instead of entering the flow of income and expenditure via the loan process, most of this created money has sat on bank balance sheets in the form of excess reserves, drawing interest paid by the Treasury. This policy was deliberately contrived by the Fed and Chairman Bernanke, presumably because of fears that many banks required bolstering to forestall insolvency and couldn’t be expected to bear the risks of normal operations. Everybody knows that this situation cannot continue indefinitely. Everybody knows that if this flood of money is injected via the usual loan process, hyperinflation will result. Everybody knows that hyperinflation would throw the U.S. economy into chaos. We are waiting to see what happens.

Tune Out the Greek Chorus

All this “waiting to see what happens” is frighteningly real. It cannot be quantified into a simple model like the Keynesian multiplier of income and expenditure, so it is beyond the ken of the Greek Chorus. It requires economic analysis of a kind that went out of fashion at the point when economics became “scientific” by relying exclusively on mathematics and statistics. We are beset by radical uncertainty, a term that is qualitative rather than quantitative. We cannot meaningfully assign probability values to possible outcomes, so the so-called economic theory of uncertainty is mostly useless here.

The solution, counterintuitive though it may be to so many of us, is to step back and allow markets to work. Every single source of radical uncertainty listed above is caused by policymakers either trying to overwhelm the market or trying to buy time to decide what to do next. Only time and markets can lift the fog of uncertainty, because only markets can generate and collate the objective information necessary to dispel the uncertainty that currently paralyzes us. In the meantime, we should ignore the Greek Chorus. If necessary, use earplugs.

DRI-424: Why the Number of Seats in a Theater is So Important

The law of unintended consequences is that intentions alone do not define results; our intended actions have consequences that we neither intend nor foresee. This law applies with special force to the actions of government. Labor unions enjoy special privileges and immunities given them by government, so they too are subject to the law.

The Formation of Actor’s Equity Association

Actor’s Equity Association (Actor’s Equity or just Equity for short) is a labor union formed in 1912 to improve the lot of actors and stage personnel working in the realm of live performance. It establishes wage minima and rules governing working conditions and compensation. One Equity provision of particular importance is its bond requirement. No later than the first rehearsal, the producer of a play employing Equity members is required to put up a bond for the contractually-guaranteed provisions of member contracts – typically two weeks worth of salary, pension and health benefits.

Most Americans are conditioned to regard regulations governing wages and working conditions as good things. Economists take a more jaundiced view of these matters. They know, for example, that merely requiring payment of a wage does not guarantee that the worker’s productivity will vindicate its payment. If the wage exceeds the value of the worker’s production, then the worker will be unemployed at that minimum wage.

In the case of Equity, this is a datum of more than theoretical interest. Equity is widely thought to be the only union in the world with a membership unemployment rate exceeding 90%. It is clear that the gains of union membership flow disproportionately to the small fraction of members who are fortunate enough to be working on the stage. These people are heavily concentrated in the Broadway theater district of New York City.

According to the Oxford Companion to American Theatre, “In recent years, the minimums and bonds demanded by this and other unions have been a factor in stifling production, shrinking the road and forcing musicals to perform in auditoriums that are really too large for live performances… .” The reference to the size of the performing venue suggests that the unintended consequences of Equity have spilled over the boundaries set down by economic textbooks.

The Equity Waiver Movement

In 1972, Los Angeles trailed only New York City in U.S. population. Yet the theater scene in Los Angeles, quite unlike that in New York, was sparse and stagnant. The city held only 45 theaters, ranging from huge (the Ahmanson in downtown LA) to middle-size (the Mark Taper Forum) to small (scattered neighborhood theaters).

In New York City, large theaters and large numbers of people were crammed together in a relatively small area in the theater district. Moreover, the subway system provided relatively cheap transport from outlying boroughs into the city. Los Angeles comprised the largest geographic metropolitan area of any major U.S. city and – at that time – lacked a subway system. Thus, there were fewer large theaters to contain plays and fewer economic ways for theatergoers to reach their destinations. Both the supply of, and the demand for, theater correspondingly suffered in LA compared to that in New York.

This wasn’t for lack of local actors. The motion-picture industry continually refreshed the supply of labor with infusions of new talent – or would-be talent, anyway. During the old days of the studio system, community theater had thrived. Venues like the legendary Pasadena Playhouse acted as minor-leagues for the movie studios. They allowed raw recruits to learn their craft from experienced directors and practice it before audiences that included movie talent scouts and a public hungry for reasonably priced entertainment. Graduates of the theater’s drama school made up a veritable Who’s Who of Hollywood: Raymond Burr, Ernest Borgnine, Charles Bronson, Jamie Farr, Gene Hackman, Dustin Hoffman, Lloyd Nolan, Tyrone Power, Robert Preston, George Reeves, Randolph Scott, Gloria Stuart, Robert Taylor, Gig Young and Robert Young.

By the 1960s, Equity wages and work rules became onerous enough to drive community theater into the ground. The nadir was reached when Pasadena’s drama school closed and the Playhouse went bankrupt. This led a hardy band of actor-producers to approach the union with a daring suggestion – waive Equity rules for small theaters, those with fewer than 100 seats. They hoped this would allow struggling actors to work instead of languishing, unemployed, or – just as bad – spending their lives in tasks unrelated to their chosen life’s work.

The waiver provision did just that – it waived Equity provisions completely for theaters with fewer than 100 seats. As long as the theater met the size limitation, actors and producers were free of Equity’s burdensome restrictions on wages and working capital. Actors could work for free, if they chose. And some of them – mostly chose who were also producers of the plays in which they appeared – did, indeed, so choose.

The waiver provision was capped at 100 seats because it was just those small theaters that had been disproportionately wounded by Equity, whose increased minima and work rules increased theater costs. A theater offers a fixed physical potential for income; anything that increases costs threatens to overwhelm that fixed income potential. As the Oxford Companion to American Theatre observed, bond costs and increased minimum compensation forced producers to seek larger venues in order to enhance their revenue potential. If the particular production – such as a musical – did not lend itself to presentation in that venue, the result can be aesthetically unsatisfactory.

Poles of Opinion

Predictions of disaster for the Equity Waiver movement were loud and frequent. The quality of theater was bound to suffer, according to Waiver opponents, because lower pay for actors would call forth lower-quality actors. Any success the Waiver movement had in stimulating play production and employment of actors would be offset by fewer plays and less employment within big theaters.

No, maintained Waiver proponents, the Waiver would showcase actors who would otherwise find it hard to secure auditions or get work. Actors could practice their craft and avoid going stale and maybe pick up a few bucks in the process. Meanwhile, producers could actually revamp theaters and put on productions for a change.

In the event, it was the Waiver supporters who were proved right. Community theater flourished. The number of theaters and theatrical companies tripled. It became possible to go to the theater in Los Angeles for about the price of attendance at a sporting event. This was a far cry from the hundreds of dollars that theater tickets cost on Broadway – although, to be sure, the quality of 99-seat theater in LA was not uniformly equal to that of the Great White Way.

The Equity Wars

In the mid-1980s, Equity withdrew its waiver and tried to reimpose control over the small-theater market in Los Angeles. This led to the Waiver Wars from 1986-1988, fought mostly in courtrooms. Equity refused to negotiate with the insurgents – the very tactic it had always publicly deplored when employed against it by theater owners or producers.

The eventual compromise left LA community-theater intact but set up an Equity contract for small theaters, one which was subsequently modified several times. The odd thing about this outcome is the fatalistic reaction it has triggered from all participants. Waiver proponents seem to believe that the return to Equity hegemony was inevitable, that there was something inherently wrong, or at least suspect, about a completely free market for labor in live theatrical performance.

In effect, both sides seem to believe that actors should be protected from themselves. If left alone, they will be driven by their free will to act for a zero wage – and that this is clearly intolerable. While they lasted, though, the Equity Waiver free market in stage labor and the subsequent Equity Wars proved the imperishable value of freedom. They also proved the applicability of the Law of Unintended Consequences.

What Happened to Movie Theaters?

Older readers may recall the single-screen movie theaters that covered the United States in the first half of the 20th century. The best of these were marvels of construction and design that ranked among the most beautiful works of architecture in America. Today, only a tiny handful remains standing, let alone operating. Most owe their survival to historic-preservation efforts.

What happened? How did the principal hangout and communal gathering place in big cities and small towns alike lose its status? The full story cannot be told without recounting the rise and fall of motion pictures in America – in itself an economic object lesson – but it will suffice to reveal the history behind the successor to the movie palace.

From Cineplex to Multiplex

The modern cineplex was born in the Ward Parkway Shopping Center in Kansas City, MO, in 1963. Stanley Durwood, head of American Multi Cinema, opened the first two-screen movie theater there. He was capitalizing the new technology of automatic movie projection, which allowed one projectionist to simultaneously operate two projectors showing two different films in adjacent theaters. Formerly, one skilled union member was needed to show a film. Now one non-union projectionist could do the job for a fraction of the cost.

The demise of the old studio system of movie making brought an end to vertical integration of the movie business. This meant that costs of producing, distributing, marketing and exhibiting movies spiraled higher – so much so that eventually few movies were profitable when all costs were accounted for. The profit in the movie business came from ancillary activities. In production, these were sales and licensing of products spun off from movies, mostly to children and young adults. In exhibition, the profitable activity was not the showing of the movie but instead sales of food and drink at the concession stand.

In order to squeeze the most profit from concessions, exhibitors had to book heavily-advertised films into multiple theaters in order to draw large crowds and schedule those films at staggered half-hour to one-hour intervals, so as to create a constant parade of customers past the refreshments.

Why is 299 the Magic Number for Movie-Theater Seating?

Just as 99 became a magic number for live-theater seating capacity in Los Angeles in the 1970s, movie multiplexes acquired their own magic seating number in 1990. The Americans with Disabilities Act (ADA) required theaters with 300 or more seats to provide ramps for wheelchairs to all rows. The ramps took up roughly one-third of the space that would otherwise be allocated to seats.

Movie theaters were already a declining breed – by 1990 there were about one-third as many theater sites as in 1929. To cut potential revenue in existing sites by one-third by simply refitting all theaters would have been business suicide for theater owners. Instead, they cut up their existing space into smaller theaters – each with 299 seats. New theaters were multiplexes with screens each serving 299 or fewer seats. Between 1990 and 2005, the number of movie screens increased from 23,000 to 38,000 – despite the relatively small number of theater sites previously noted.

The Implications of Multiplex Movie Exhibition

The unintended consequences of the ADA on the movie business do not stop there. Smaller screens and cramped seating areas make for poorer viewing; there is less room for the viewer and more chance of a view being obscured. Ambient noise is more intrusive and annoying. The aspect ratio of the picture is less favorable, which is less pleasingto the eye. Older movies were shot for wider screens and cannot be shown comfortably on today’s screens.

In order to serve an exhibition market with more screens, distribution companies must make more prints of the movies. This is so costly that movies are now subsidizing the cost of converting theaters to digital projection. But replacing film with digital technology is revolutionary – it changes the texture of film and presents new and vexing problems in film preservation.

The Law of Unintended Consequences

Over the centuries, economists have come to appreciate the law of unintended consequences. Every time we pass a law or regulation – or otherwise impede the workings of a free market – we invite consequences whose nature and magnitude we cannot begin to understand. The wild disproportion between 99 and 100 seats in live theater and between 299 and 300 seats in movie theaters are good examples of this.

Somehow, it seems that these consequences are seldom favorable. This is because we have a solid understanding of the consequences of free markets, which are predominantly favorable. When we deliberately set out to thwart those outcomes, we cannot always confidently predict the result, but we shouldn’t be surprised if it turns out to be bad.