DRI-293 for week of 3-3-13: The Sequester: A Barack H. Obama Production

An Access Advertising EconBrief:

The Sequester: A Barack H. Obama Production

The appearance of First Lady Michelle Obama as presenter of the climactic Best Picture Academy Award at the recent Oscar ceremony is the latest sign of the symbiosis between American politics and Hollywood. The convergence between the political and entertainment industries is now so close that we can use the same economic model to analyze them.

Since both industries are popular and objects of public scrutiny, this model will have great practical value. Its first application will be to analyze the sequester, the current political-theater production now enjoying its first run on popular media throughout the nation.

The Model

The late Nobel-Prize-winning economist James Buchanan campaigned tirelessly against what he called the “romantic view” of government as the promoter of the “public interest.” Government is composed of particular individuals. In order to be operational, the concept of the “public interest” must be comprehensible to those people. If the activities of government were limited only to those whose net benefits were positive for everybody, it would be a miniscule fraction of its present size. Clearly, the actual purposes of government are redistributive. But what unique redistributive plan could possibly command unanimous support from the bureaucratic minions of government? The only conceivable answer is that bureaucrats serve their own interests, presumably having convinced themselves that their interest and the public interest coincide.

Government bureaucrats thus share a common goal with private business owners. But whereas private businesses produce goods and services in markets under the discipline of market competition, governments provide only executive, legislative and judicial services while contracting out for the production of and needed goods and services. Far from submitting to the discipline of competition, governments claim monopoly privileges for themselves and dispense them to others – often in exchange for political support.

From inception until the gradual disintegration of the studio system of moviemaking, Hollywood operated under the marketplace model of competition. When adverse antitrust decisions in the 1940s killed the long-term viability of the giant studios, movies changed their way of living. This drift away from competitive capitalism accelerated over the last two decades. Today, the approach of government and Hollywood to production is remarkably similar.

Private businesses produce goods and services in order to satisfy the demand of consumers. They satisfy consumer demand in order to earn profits and maximize the profit of their owners. Thus, both sides of the market strive to maximize their real income or utility through the consumption of goods and services. Consumers act directly when purchasing for their own consumption or saving for their future consumption. Producers act indirectly when producing for the consumption of others or directly when producing for themselves. Input suppliers act indirectly by supplying labor and raw materials to producers to facilitate production and consumption for others.

Governments cannot act as private businesses do because their bureaucrats are not spending their own money and taxpayers have no effective leverage over them. Bureaucrats serve their own interests – which are those of the politicians who control their fate. Politicians, in turn, most want to retain their hold on office. For the most part, this is accomplished by redistributing money in favor of those who vote for them. Since government has little or no power to increase the supply of goods and services but considerable power to reduce it, redistribution is accomplished predominantly by harming some people while purporting to help others.

We know that private production is beneficial because consumers voluntarily choose from among many competing products in a free marketplace in which producers can enter and leave at will. The existence of prices allows everybody to incrementally assess the value of every unit of input and output to insure its net benefit before purchase. Profit directs the flow of resources to areas of greatest value to consumers.

None of these safeguards applies to political production. In government, the principle of coercion replaces voluntary choice. No profits exist to tell bureaucrats whether they have succeeded or erred. No prices direct the incremental flow of resources and no competition is allowed to provide an alternative to government provision of goods and services. Sure, voting does take place. But the notion that a one-time choice between a restricted field of two candidates can somehow take the place of millions of everyday choices made under vastly better marketplace circumstances is quaint, if not utterly ridiculous.

How Hollywood Has Come to Resemble Politics

More and more, Hollywood production has come to resemble political production. This evolution has accelerated during the last two decades.

Under the old studio system, motion-picture production often left the confines of Hollywood in favor of distant locations. This was sometimes motivated by concern for production values, as when director John Ford sought the scenic vistas of Monument Valley, Utah for his revival of the Western genre in the 1939 film Stagecoach. Increasingly, however, economics lay behind the decision of producers to abandon Hollywood in favor of locations in the eastern U.S., Canada, Mexico, Spain or elsewhere in Europe. Hollywood production was hamstrung by inefficient work rules established by Hollywood craft unions under the sway of organized crime. It became far cheaper to incur heavy travel costs to foreign locations than to bear the costs of a Hollywood shoot.

That was back in the day when Hollywood still operated under the rules of economics that govern private markets. Today, every state of the Union has a state-level “department of economic development.” These Orwellian entities are distinguished by their lack of adherence to economic principles. In particular, they offer subsidies to private businesses for locating and operating within the state. In the case of motion pictures, this takes the form of subsidies to production companies that shoot movies in-state. The rationale for this activity is almost always a purported “multiplier benefit” to the location’s “economy.”

A subsidy is the opposite number of a tax. Both drive a wedge between the price paid by the buyer and that received by the seller; both are inefficient actions with adverse effects on production and consumption. Whereas a tax causes too little of the taxed good to be produced and consumed, a subsidy causes too much production and consumption of the good affected and too little production and consumption of other things. State agencies justify their actions by ignoring their bad results in favor of the supposed good effects.

The most highly touted benefit of movie-location subsidies is “job creation.” Even under the studio system, it was standard operating procedure for casting directors to scour the rolls of local actors to play subordinate parts, rather than pay travel expenses and higher salaries of Hollywood actors. The principal cast, whose work comprised the guts of the movie, was chosen on the basis of star power and acting ability. This was basic economics at work. Today, however, the pretense that subsidies are necessary to insure work for locals and keep local industry alive is another way in which Hollywood has abandoned economics for politics. Movie subsidies are directly analogous to protective tariffs (taxes) levied on foreign goods to make their prices higher than local prices, thus protecting the jobs of local workers.

There is no economic value in creating or protecting jobs because the end-in-view in all economic activity is consumption, not production. The idea is to provide the best combination of output quantity and quality. The implication behind job creation – rarely stated outright but unmistakable – is that our goal should be to maximize the quantity of human labor employed in producing output, rather than to produce the most and best output. This suggests that the profession of economics should hold up ancient Egypt as its model state. The production of pyramids using slave labor may be the best means ever devised for maximizing the number of human beings doing work and eliminating unemployment. (The slave-labor camps in the old Soviet Union’s Gulag Archipelago are a legitimate contender for the title, but lose out on the grounds that they produced comparatively little tangible output and services.)

Since the general idea is to make people as happy as possible, though, we can rule out “job creation” as our lodestar. The reason it is such a popular political goal despite its economic drawbacks is that it concentrates benefits heavily on a group of easily identifiable people who can readily recognize and gauge their gains. The beneficiaries of a job-creation policy are a good bet to vote for their benefactor.

Another prime example of Hollywood’s shift from economic to political priorities is the re-ordering of the bottom line. The mainstream media still behaves as though the success or failure of a movie depends on its box-office receipts. This was certainly true throughout the 20th century, during the birth and development of the motion picture. But it is no longer true today.

Most movies today are conceived or at least approved by the “talent” – stars, writers, directors and their agents. Studios are coordinating and marketing vehicles. The astronomical fees commanded by the talent, together with high labor and insurance costs, make it prohibitively expensive to make most movies. The only way turn a profit is by marketing ancillary products to young customers. Most movies lose money at the box office and are subsidized by ancillary revenues and (as the studio level) the occasional box-office blockbuster.

The shift in priorities away from the box office has allowed the talent to cater to their own tastes in choosing the subject matter of movies. Under the studio system, the preferences of the audience were worshipped by movie-studio moguls like Louis B. Mayer, Irving Thalberg, Harry Cohn and Darryl Zanuck. Many of the moguls were immigrants and Jews who had strong opinions and might have loved to indulge their own tastes. Instead, they ruthlessly pruned the esoteric and controversial output of their directors, writers and stars because their instincts sensed that public tastes would not embrace it. Now Hollywood’s implicit motto is “the public taste be damned” – an attitude it would condemn unhesitatingly were it struck by a private industry producing hula hoops, automobiles or soap. This allows the talent to freely indulge their political preferences on screen.

Hollywood’s bias has long been to the Left. The Obama administration is now busily engaged in centralizing as much production as possible under the aegis of government – executive, legislative, judicial and regulatory. The case of Solyndra is a representative example of the results. Large subsidies were given for the production of an alternative energy facility. Market demand was unfavorably disposed toward the company’s output and it lost money hand over fist. But ancillary considerations – in this case, the ostensible necessity for the gestation of alternative energy production – outweighed the losses in the disposition of funds.

Losses, subsidies and the substitution of personal priorities for those of consumes has long characterized political production. But now it describes Hollywood, too.

How Politics Has Come to Resemble Hollywood

In the early 1950s, veteran actor and movie star Robert Montgomery was asked to tutor President Dwight D. Eisenhower on the fundamentals of spoken communication to improve Eisenhower’s performance in televised speeches and news conferences. Much was made of this intrusion of Hollywood into the pristine, public-spirited world of politics. The election of Ronald Reagan as Governor of California and U.S. President led to his subsequent anointing as the “Great Communicator” – a title that was given a pejorative cast by his critics on the Left. While these episodes may have painted the Oval Office with a show-business veneer, they hardly tell a story of Faustian corruption.

Today, however, candidates are chosen on the basis of qualities associated with movie stars rather than statesmen. Would a candidate as homely as Lyndon Johnson or with the profile of William Howard Taft even bother to register for the Presidential primaries? Journalists have expressed a public longing to sleep with Bill Clinton and Barack Obama, even though political scientists have never ranked amatory skill among the vital attributes of a Chief Executive. The candidacy of Mitt Romney was widely felt to be fatally handicapped by his biography, as if a Presidency were a movie that needed suitable first and second acts to set the stage for a dramatic finish.

Movies are an emotional medium rather than an intellectual one. Their narrative form is highly stylized, based on that of the theater. Movie scripts can be divided into first, second and third acts. There is a (preferably heroic) protagonist, who wages a conflict with one or more villains during the course of the movie. The protagonist undergoes a transformative experience and emerges better for it. There is a climactic resolution of the conflict.

Today, politicians structure campaigns and issues in this manner. They cast themselves as the hero. They demonize their political opponents as villains. And, most importantly, they appeal to the emotions of voters rather than to their intellect.

The timing of announcements, and sometimes even the substance of policies, is determined by “optics” – the snap judgments and emotive reactions of the public. The weight of issues is measured by their standing in opinion polls rather than by their impact on the real incomes of citizens. Like motion pictures, politics has become a purely emotional business in which objective truth is completely overshadowed by subjective perception.

The Sequester: A Barack H. Obama Production

Now we are engaged in a great civil debate on the issue government spending. It will ultimately determine whether our nation – or any nation so constituted – can long endure. The opening volley in that debate has been fired by President Obama himself. But it has not been launched in the rhetorical tradition of intellectual inquiry and contention. Instead, it has been presented as a production of political theater – a Barack H. Obama production. Its title is: “The Sequester.”

In 2011, the Obama administration and Congressional Republicans fought a symbolic struggle over the raising of the debt limit. In order to orchestrate a victory over Republicans, the President crafted the sequester. The word “sequester” means “to set apart, segregate, or hand over (as to a trustee).” That refers to funds in the budget that were removed from consideration for spending purposes. In return for agreement to raise the debt limit, the President met Republicans halfway by agreeing to spending reductions in the form of sequestration.

Now, in 2013, when the time to follow up on his promise has come, President Obama has rewritten the script. He has recast himself as the hero and Republicans as villains in a melodrama in which spending reductions threaten hardship and economic setback. The original terms of the sequester called for $1.2 trillion in spending reductions spread over 10 years, averaging out to around $120 billion per year in reductions.

The actual reduction for 2013 would be about $85 billion. But there is more to the story. First, the cuts come only from so-called discretionary spending; entitlement programs like Social Security and Medicaid are unaffected. Second, the $85 billion figure reflects a reduction in budgetary authority – the statutory authorization to spend. Actual reduction in government outlays is projected to be only half the $85 billion total, or about $42 billion. The difference is accounted for by “baseline budgeting,” the notorious government budgetary practice that automatically increases expenditures every year. When the budget is ruled by the implicit logic that government spending is always good and a growing country will always need more of it from year to year, it is easy to grasp why the federal government is swimming in a sea of debt.

The biggest chunk of sequestration (about half of the authorized total) is slated to come from military expenditures. The remainder is sprinkled more or less equally throughout the federal discretionary budget, with the proviso that it should be distributed to cause the most pain to the populace. Does that sound like a pejorative characterization? No, The Wall Street Journal cited a memo to precisely that effect. Perhaps the most telling index of the melodramatic nature of this Barack H. Obama production came from a White House memo announcing that free tours of the White House would be cancelled until further notice due to “staffing reductions” caused by the sequester. As various bloggers hastened to point out, the tours are conducted by volunteers.

The President’s exercise in political theater contained many other dramatic high points. A White House fact (!) sheet stated that federal programs like Meals On Wheels would serve 4 million fewer meals thanks to the sequester. The document also claimed that 70,000 youngsters “would be kicked off Head Start,” the subsidy program for pre-school education, thanks to the sequester – a claim backed up by Health and Human Service Secretary Kathleen Sebelius. White House Press Secretary Jay Carney expressed grave concern for federal-government janitors who would receive less overtime pay because of the sequester. Department of Education Secretary Arne Duncan made headlines by declaring that there are “literally now teachers who are getting pink slips,” a whopper so outrageous that he was forced to retract it within 24 hours. Not to be upstaged by his supporting cast, the President himself gravely warned that federal prosecutors “will have to let criminals go” if the sequester is allowed to proceed.

The public is accustomed to seeing movies tell lies in the service of dramatic effect. That is exactly what this Barack H. Obama production does. Like many popular movies, it has borrowed its storyline from other successes. For over three decades, state government legislatures have faced laws – such as Missouri’s Hancock Amendment – limiting state-government spending. The standard legislative tactic of opponents is to concoct a fantasy wish-list of worst-case spending reductions designed to terrify voters into repealing the laws. In fact, the laws say nothing about specific spending cuts. They allow the legislators themselves the flexibility to choose which spending to cut. The legislators are supposed to cut the most wasteful, redundant spending and retain only vital programs – assuming there are any. Yet in practice, the legislators do just the opposite – they pick the most painful cuts in order to blackmail voters into spending ad infinitum.

That tactic, straight from the playbook of radical activist Saul Alinsky, is the plotline of “The Sequester.” It makes no sense. When air-traffic controllers went on strike in 1981, President Ronald Reagan protected consumers, who were otherwise helpless against the threat posed by a government monopoly. He fired the striking controllers and hired replacements. Are we confronted by angry restaurant owners who threaten to close up unless we spend more money dining out? Of course not; the restaurant industry is competitive. Strikers would simply lose business to competitors who would step up to serve consumers. But government monopoly employees can successfully hold taxpayers hostage unless the Executive branch fulfills its duty to protect the public. Instead, the Obama administration is siding with the blackmailers.

The Administration’s economic rationale for its actions is transparently absurd. Unofficial Administration economic advisor Paul Krugman hints darkly of 700,000 lost jobs and the CBO forecasts a loss of one-half point’s worth of economic growth – all due to a net reduction in discretionary spending of $42 billion. Yet the Administration absolutely demanded that the Bush tax cuts end on schedule, producing a much larger effect on “aggregate demand” by Keynesian economic lights. Krugman has consistently maintained that the 2009 stimulus of nearly $800 billion was not nearly large enough to produce marked effects, so how can he now bemoan this piddling spending reduction?

Movie plots are not supposed to make sense. They are structured for emotional impact only. Producers, directors and screenwriters are granted dramatic license to lie in order to manipulate our emotions. Their actors and actresses are expected to speak lines from a script in order to enact the drama.

This is what politics has become. It is political theater, dedicated to the proposition that government of itself, by itself and for itself, shall not perish from the Earth.