transaction cost politics and the national endowment for the arts

Transaction cost politics and the NationalEndowment for the Arts§

Michael Rushton*

Department of Public Administration and Urban Studies, Andrew Young School of Policy Studies,

Georgia State University, Atlanta, GA 30303-3083, USA

Abstract

Cultural economists have traditionally justified public funding of the arts through theclaim that there are ‘‘market failures,’’ particularly externalities, in the consumption of thearts. But when we try to explain the wide variation in funding for the United States’ federal

arts funding agency, the National Endowment for the Arts (NEA), we find that somethingmore than the usual economists’ model is required, since it is not evident that fluctuation inthe degree of market failure has been sufficiently large to provide an explanation of theNEA’s history. This paper advocates a transaction cost approach to thinking about the

economics and politics of arts funding. It finds that the transaction cost politics method oflooking at the ‘‘delegation problem’’—the decision by elected legislators to provide bureau-cratic agencies with a certain amount of decision-making discretion—gives a fruitful means

of explaining the declining fortunes of the NEA through the 1990s, as well as changes to itsadministrative structure.# 2003 Elsevier Science B.V. All rights reserved.

1. Introduction

In the United States the federal government-funded National Endowment for theArts (NEA), even though it has an annual budget many times smaller than the com-bined budgets of state arts agencies, generates an extremely high level of politicalinterest and conflict. From the NEA’s founding in 1965 there have been ongoing

Poetics 31 (2003) 133–150

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0304-422X/03/$ - see front matter # 2003 Elsevier Science B.V. All rights reserved.

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§ Earlier versions of this paper were presented at workshops at Chicago and Georgia State, and at the

2002 meetings of the Association for Cultural Economics International in Rotterdam. The author is most

grateful to the workshop and conference participants for their very lively discussion, and to two anony-

mous referees.

* Tel.: +1-404-651-0333; fax: +1-404-651-1378.

E-mail address: [email protected] (M. Rushton).

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debates about the role of peer-review in selecting what to fund, the funding of con-troversial and offensive art, the role of the Chair of the NEA, the relationship tostate arts boards, and the appropriate budget allocation. The so-called ‘‘culturewars’’ of the 1990s in the US brought changes to the administrative structure of theNEA, changes to the kinds of activities it would fund, and sharp reductions in itsbudget. Fig. 1 shows the NEA’s budget in real terms from 1967 through 2001, andone would have to search hard to find another US government agency with suchmarked variation in its annual allocation.

The NEA was established through the National Foundation on the Arts and theHumanities Act, P.L. 89-209 signed by President Johnson on September 29, 1965.This followed the establishment in the preceding year of the National Council on theArts (NCA), an advisory body on means of increasing cultural activity and enjoy-ment. Previously, the major federal initiative in arts funding was through the WorksProgress Administration in the 1930s (see Barber, 1999). However, the appropriaterole of the federal government in support of the arts remained a subject of debatefrom the 1930s through to the establishment of the NEA (Larson, 1983). A themeduring this debate was the resistance to the establishment of any sort of culturalpolicy; this was seen as an inappropriate activity for the federal government,although many state governments have subsequently tried to articulate a policydirection (Kammen, 1996).

The explanation typically given in the popular media for the decline in the NEA’sfortunes through the 1990s (the slow decline in real allocation through the 1980s iscommon to much of US federal government during that decade, with nominalbudgets rising but failing to keep pace with inflation) is that conservative politicianssaw the NEA as an easy target representing everything wrong with liberal govern-ment policies, and the agency could not withstand such a concentrated attack. Butthis begs the question: why was the NEA an easy target? If numerous opinion pollscontinue to indicate that the American public supports at least some degree of gov-ernment funding for the arts (Pettit and DiMaggio, 1998), how can we explain thechanges at the NEA?

The goal of this paper is to provide a positive analysis of the changes at theNEA, using the methods of transaction cost politics. We will draw on recentdevelopments in transaction cost economics and politics in an attempt to providean analytical framework for thinking about government funding of the arts gen-erally, and the experience of the NEA in particular. Because of the tremendouscomplexity of the economic, political and art worlds (indeed this complexity isitself a part of the substantive analysis) our analysis is qualitative rather thanquantitative.

Sections 2–4 of the paper provide background into the issue of public funding forthe arts and the basic frameworks of transaction cost economics and politics,respectively. We will outline the usual cultural economists’ analysis of the rationalefor public funding, although ultimately we hope to show that this analysis alone isnot sufficient to explain variations in the level of public funding. Section 5 provides abrief history of the NEA, and Section 6 provides a tentative explanation of why ithas suffered such reversals of fortune. Section 7 concludes.

134 M. Rushton / Poetics 31 (2003) 133–150

M. Rushton / Poetics 31 (2003) 133–150 135

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2. Market failure and public funding of the arts

Cultural economists have for the most part developed a consensus that publicfunding of the arts is justified, based on the existence of market failures, where theprivate sector alone will allocate insufficient resources to the arts. Consider one suchmarket failure, that there might be externalities in consumption. Suppose the cost ofattending an arts event is $10 per person, but the maximum Smith is willing to payto attend is $8. In addition, suppose Jones would be willing to pay $3 to get Smith toattend – this amount is what would be identified in traditional welfare economics asthe amount of the externality. In welfare economics terms, it would be efficient to getSmith to attend, since the total benefit of her doing so, $8 plus $3, exceeds the cost ofher attending. The net benefit to society (i.e. Smith and Jones) of Smith’s attendancewould be $1. In economists’ language, the marginal social benefit of arts attendanceexceeds the marginal private benefit, and so left to the market alone there would beunder-attendance at arts events (see Heilbrun and Gray, 2001: 224, for a diagram-matic presentation of the ‘‘market failure’’).

On this basis cultural economists have justified state funding; think of Jones as anaggregate of the taxpaying population, who in return for paying the necessary $2subsidy to get Smith to the arts event will receive $3 in benefit. The case is put suc-cinctly in a recent text on public funding of the arts:

The essence of the non-private benefit (i.e. externality) argument is that the artscreate not just a benefit for the people who attend, for which they can be charged,but also a benefit that accrues to everyone, both those who do and those who do notattend. This benefit, the non-private benefit, cannot be charged to people and mustbe paid for, or ‘captured’, by the state (O’Hagan, 1998: 21).

The other primary texts in the field rely on the same argument (Heilbrun andGray, 2001: 219; Throsby, 2001: 140–141; Frey, 2000: 101–114) and in a recent sur-vey Blaug (2001: 132) asserted that the matter was now beyond debate: ‘‘the realissue is not whether to subsidize but how much and in what form to subsidize’’(Blaug finds the consensus so strong that only a ‘‘radical right’’ is in favour of rely-ing entirely on markets for the provision of art).

The list of reasons for the existence of externalities is generally the same acrosseconomists working in the welfare economics tradition:

� people may feel national or local pride from artistic activities even if asindividuals they do not directly take part;

� they may benefit from the innovation in non-artistic fields that results fromartistic creation—this may include changes in social life more generally thatare partly spurred by art with political dimensions;

� individuals may feel an increased sense of well-being simply because a vibrantarts community provides them with the option of one day enjoying its output; and

� there may be a desire to leave an artistic heritage for future generations.

In addition, there may be public good aspects to artistic activities, such as publicsculpture. Finally, there are important educational aspects in artistic production.


Individuals lead better lives when they have cultivated an appreciation and under-standing of art, and this requires exposure to art. Smolensky (1986) claims this wasthe primary rationale for the municipal financing of art museums in the US since the19th century, and Scitovsky goes so far as to claim that ‘‘the only valid argument forgovernment aid to the arts is that it is a means of educating the public’s tastes, andthat the public would benefit from a more educated taste’’ (Scitovsky, 1972: 68).

As useful as the welfare economics approach is in clarifying why public funding ofthe arts is a good thing, it has some significant limitations, even if we accept thegeneral framework as valid. It is going to be very difficult to determine how muchpublic support is optimal. This is for a number of reasons. The values of theexternalities are not obvious, very difficult to measure, and will vary across art formsand genres. Contingent valuation methods, where opinion polling is used to ascer-tain the public’s willingness-to-pay for goods not usually bought and sold in themarket, have been applied to the preservation of heritage sites, but that is for cul-tural goods that already exist, not for the funding of new works. Even regarding artseducation for children, over which there seems to be less controversy than for otherpublic funding for the arts, it will be challenging to determine what is the bestamount of spending when it is set beside all of the other valuable areas of educationfrom which children benefit.

Still, the welfare economics approach dominates. Even when the economist findsthe evidence for the existence of the supposed externalities to be rather weak, ‘‘wel-fare economics forms a convenient framework for presenting such statements andfor summarizing an important element in professional economics discussion of artsquestions’’ (Peacock, 2000: 172).

Note that economists working in the welfare economics tradition are not so naı̈veas to believe that government involvement in the arts is not accompanied by its ownpotential for failures. So in the more sophisticated discussions of the subject it isnoted that demonstration of the market failure is necessary but not sufficient justi-fication for the involvement of the state; the gains from correcting the market failuremust exceed whatever costs are involved with subsidy or direct provision by thegovernment.

3. Transaction cost economics

Since it is his influential essays that gave rise to the transaction cost approach toeconomics, we will use Coase’s definition of transaction costs: ‘‘In order to carry outa market transaction it is necessary to discover who it is that one wishes to deal with,to inform people that one wishes to deal and on what terms, to conduct negotiationsleading up to a bargain, to draw up the contract, to undertake the inspection neededto make sure that the terms of the contract are being observed, and so on’’ (Coase,1988: 6).

The transaction cost method turns away from the neoclassical economics tech-nique of focusing on utility-maximizing consumers and profit-maximizing firms andthe prices that will, in theory, clear markets, and looks instead to the exchanges that


we actually observe between agents, and to situations where transaction costs are thedeciding factor in why an exchange does not take place. The main predictive contentof the transaction cost method is that individuals will adopt those institutions –forms of organizations and contractual relations—that economize on transactioncosts (North, 1990b).

The transaction cost approach bases its models on some aspects of human natureoften missed in traditional welfare economics. As Immanuel Kant put it, ‘‘Out oftimber so crooked as that from which man is made nothing entirely straight can bebuilt’’ (quoted by Berlin, 1991: v). Oliver Williamson (1975, 1996) highlights the keyhuman factors that drive the transaction cost approach as bounded rationality andour capacity to act opportunistically. When combined with the fact that our econ-omy is highly uncertain and complex, as well as the fact that even in markets whichbegin by looking competitive, irreversible investments by parties to an exchangequickly reduce the relevant market to a very small number of players, we have asituation where there will be substantial costs to relying on the price system andmarket exchange to govern all transactions.

However, that these costs of using the price system exist does not necessarily leadto a justification for action by the government. First, we note that organizationalstructures (in for-profit and not-for-profit firms), and contracts between organiza-tions, will evolve to economize on transaction costs in the face of all the factorsidentified by Williamson.

Second, as first set out by Coase (1988) in his essay ‘‘The Problem of Social Cost’’,the existence of apparent externalities is generally the result of transaction costsbeing sufficiently high that the parties to the externality do not have the incentive toorganize themselves to eliminate it. Recall our earlier example where the cost ofattending an arts event is $10, the most Smith is willing to pay to attend is $8, andJones would be willing to pay $3 to get Smith to attend. Smith and Jones willorganize some mutually beneficial arrangement (say Jones gives Smith $2.50 on thepromise that Smith will attend the event) as long as the cost of making and enfor-cing such an arrangement is less than $1. Otherwise, it will not be in their interest todeal. The danger inherent in government intervention to ‘‘solve’’ the externalityproblem is that if the individuals in the market have already found some way ontheir own of solving the externality problem, government intervention might actu-ally take us away from the optimum rather than towards it. A vivid illustration ofthe danger of assuming too much market failure was provided by Cheung (1973). Inresponse to a theoretical essay in the welfare economics tradition that used bee-keepers and apple growers as an example of a positive externality, in an effort todemonstrate the optimal subsidy that would be required to correct the ‘‘problem’’,Cheung noted that in his home state of Washington a glance at the yellow pages of thetelephone directory revealed a vibrant market between beekeepers and the applegrowers willing to pay beekeepers to locate for a spell in their orchards. Subsidy toparticipants in the market would quite possibly have been a departure from a moreefficient status quo. A third lesson from Coase is that even public goods, where manycan enjoy a good simultaneously, present a market failure only to the extent thatindividuals are unable to overcome the transaction costs inherent in organization.


Coase (1988: 187–213) takes as his illustration the archetypical public good—thelighthouse—and finds from the 17th century in Britain privately built lighthouses,financed through tolls collected from those shippers who passed by. Shippers agreedto the system because the benefits of having the lighthouses exceeded the tolls theywould be required to pay. Of course this does not mean that there is never a role forgovernment in the financing and provision of public goods. What is implied is thatthe rationale for government provision rests not on whether a particular good ispublic by its nature but rather on whether there is some factor preventing indivi-duals from organizing themselves to provide the good.

Does transaction cost analysis generate different policy results than welfare eco-nomics does, or is it simply a different way of expressing the same basic ideas? It isimportant to note that the recognition in welfare economics that government inter-vention in the economy comes with its own ‘‘failures’’ that might turn out to beworse than ‘‘market failure’’ is important, but it is not the same insight that is pro-vided by the transaction cost approach (Zerbe and McCurdy, 1999: 559–560).Returning again to our ‘‘externality’’ example, if it is the case that Jones and Smithhave worked out some arrangements regarding Smith’s attendance at arts events, andthe economist concerned that externalities represent a market failure has not recog-nized what Smith and Jones have done, then when that economist looks to whetherthe magnitude of the (falsely perceived) market failure is large enough to justify stateintervention, the economist is making an error even if the economist is careful to take‘‘government failure’’ into account in preparing a policy recommendation.

4. Transaction cost politics and the delegation problem

Exchange occurs in the political sphere as well as the economic. Politicians makepromises to voters, engage in logrolling amongst themselves, and deal with thebureaucracy. As in the economic sphere, political exchanges are subject to transac-tion costs, and for similar reasons as in the economy: individuals have boundedrationality in a complex and uncertain world, they can behave opportunistically, andonce relationships are established will engage in bargaining over the wealth that hasbeen generated by the relationship-specific investments. In politics, more so than ineconomics, it is often difficult to pin down exactly what is being promised orexchanged. A further transaction cost encountered in a significant way in politics isthat legislators are only temporary holders of office, and so cannot easily makecommitments to others with any sort of guarantee that a subsequent office-holderwill not vote for changes.

At the core of the positive analysis of politics through the lens of transaction costsis that participants in the political process have the incentive to create institutionsthat will economize on transaction costs and thereby facilitate mutually beneficialexchange (North, 1990a). Political institutions change through time just as con-tractual forms in the private economy will evolve, and for the same sorts of reasons.Of course institutions do not evolve on their own, but because decision-makers findit worthwhile to implement change. In politics the legislators are the key to making


changes at the institutional level: ‘‘The legislators who are most likely to remain inpower are those who are most successful at overcoming . . . transaction problems,such as those who are best able to reassure their supporters that benefits of legisla-tion will not be lost to administrators in the implementation, or undone by sub-sequent legislatures’’ (Horn, 1995: 14).

There are many sorts of exchanges in politics. Politicians make promises to votersin exchange for their votes and campaign finance contributions (see Mueller, 1989,for an extensive survey of the literature on the nature of these exchanges). Politiciansalso make exchanges with each other in the legislature, or between the legislative andexecutive branches (Weingast and Marshall, 1988; Dixit, 1996). In the context of theNEA, DiMaggio and Pettit (1999) provide an analysis of the voter-politician rela-tionship, noting that voter support for the NEA is ‘‘broad but shallow’’, and Rush-ton (2002) considers the impact on federal arts funding arising from the Americangovernmental system of divided powers relative to the more concentrated powers ofWestminster-style parliamentary systems.

Here the focus will be directed to another exchange relationship, that betweenpoliticians and the bureaucracy, and in particular to the question of the optimaldelegation of decision-making authority. The remainder of this section of the essayprovides an overview of the transaction cost politics literature dealing with thedelegation problem.

In both government and firms, delegation of authority by the principal (whowants some task to be carried out) to the agent (who is hired by the principal toperform the task) comes with benefits and costs. The benefits are the freeing up ofthe valuable time of the principal, the ability to better exploit the specializedknowledge and efforts of the agent, and the savings from not having to constructelaborate systems of rules that would direct the subordinate’s actions in every pos-sible contingency. The primary cost of delegation arises from the likelihood that theagent has different interests from those of the principal, and the agent might use herdiscretionary powers to further her own goals rather than the principal’s, thepotential for which increases to the degree that the agent has specific knowledge noteasily obtained by the principal. Applied to public funding of the arts, the questionis how legislators will set the parameters of the funding agency—its stated goals,administrative procedures, method of selecting the chair, reporting procedures, andso on—and what will be the ability of the agency to employ discretion, where agency‘‘discretion’’ can be defined as ‘‘the departure of agency decisions from positionsagreed upon by the executive and legislature at the time of delegation and appoint-ment’’ (Calvert, McCubbins and Weingast, 1989: 589).

The early literature on the delegation problem focused on ex post oversight of thebureaucracy: once the rules governing an agency were established how would poli-ticians ensure that the government agency was abiding by those rules? McCubbinsand Schwartz (1984) noted that there were few rewards for politicians to spend theirscarce time on regular oversight committee meetings, since voters wouldn’t reallytake notice, and there were still bound to be occasions when the oversight committeewould overlook an improper agency action. Better, especially in cases where someprivate group has an interest in the agency staying close to its political mandate, to


leave the oversight to private interests, and get involved only to take action when thealarm is raised. Hence, legislators when possible will prefer ‘‘fire alarm’’ oversight to‘‘police patrol’’ oversight.

While ex post oversight remains an important consideration, the more recentliterature on the delegation problem looks to ex ante arrangements: how can therules governing an agency by their very structure attain an optimal balance betweenpreventing ‘‘agency drift’’, where the actions of the agency start to diverge fromwhat the creators of the agency intended, and yet still encouraging the search forand use of specialized knowledge in the agency’s operations. Even ‘‘fire alarm’’oversight will be ineffective if politicians cannot credibly threaten punishment to theagency that has deviated from its mandate, and so the choice at the outset of rule-making procedures for government agencies is very important (McCubbins et al.,1989).

The key problem in the delegation decision is to encourage and allow the agencyto pursue and use its technical expertise in decision-making while not allowing it todeviate from the broad thrust of policy chosen by the elected politicians: ‘‘Theproblem is that the administrative procedures designed to prevent bureaucratic driftalso limit the agency’s ability to research policy consequences or to make decisionsthat reflect its expertise’’ (Bawn, 1995: 63). The expected result of such a situation isthat the principal will grant the agency more discretion in decision-making (1) themore the agency is dealing with specialized, technical knowledge, and (2) the lessthat agency drift in policy direction would be costly to politicians (Bawn, 1995: 70;Epstein and O’Halloran, 1999: 48–49).

The problem of specialized knowledge held by the agency is particularly acutein the public sector relative to the for-profit private sector (and is also somewhatof a problem in the non-profit sector) because public sector agencies tend to havemultiple goals (while private firms have the single over-arching goal of profit-maximization), and the performance of the public agency in pursuit of the goalstends to be hard to measure. Even though there are attempts to implement per-formance measures in public organizations, they remain very imperfect, perhapsespecially so in the arts (Gilhespy, 2001; Schuster, 1997). This leads to a greaterreliance placed on trust in public organizations, and less reliance on monetaryperformance incentives for public sector managers (Tirole, 1994; Williamson,1999).

Although most theorists have come to agree on the central predictions of themodels of the delegation decision, we still must note that transaction cost politics isstill a rapidly developing field, where the difficulty in quantifying results leads todifferences in emphasis. Moe (1997) believes that much of the analysis discussedabove does not appreciate the extremely high transaction costs between members ofthe legislature, and uses the questionable simplification of treating the legislature asa single decision-maker. Spence (1997) contests that ex ante control by politicianswill be hampered by the inability to foresee what policy issues will arise in the future.Still, we would maintain that the result is robust that at the margin, greater need fortechnical expertise and less cost to politicians from agency drift will lead to greateragency discretion.


5. The national endowment for the arts

George Stigler (1992) made what for many economists must have been a shockingclaim when he described US government policy towards the sugar industry, with anestimated loss at the time of about $3 billion to the economy as a whole, as ‘‘efficient’’:

The economist’s conventional concept of efficiency turns on the maximizationof the output of. . .the economy. That definition, however, accepts the privatemarket judgments on the values of goods and services, and, in policy analysis,one may legitimately employ an alternative definition of efficiency that rests onthe goals adopted by society through its government. When a society wishes,for example, to give more income to a group than the market provides, we maysurely analyze the efficiency with which this is done. . .

Lacking a cheaper way of achieving this domestic subsidy, our sugar program isefficient. This program is more than fifty years old – it has met the test of time(458–459).

If Stigler was right, and we should judge the efficiency of government programs bywhether they manage to last over a long period of time, then we could only concludethat the grants to individual artists through the NEA, which ended in the mid-1990s,were not efficient. From a transaction cost politics perspective, we could say that thetransaction costs of funding some forms of art through the NEA turned out to bemuch higher than anticipated at the formation of the agency.

What was it about the early 1960s that provided for the first time sufficient poli-tical support for the creation of an arts council at the federal government level in theUS?

First, an increased appetite for the arts, created by an expansion of highereducation and by the revolution in communications, which brought the artsinto every household; second, an increased ambition among artists to providenew services and to reach wider audiences; third, an expanding economy whichproduced a disposable surplus in our federal budgets; fourth, an expansionistattitude toward government, which sanctioned a new role for government inadvancing the arts (Straight, 1988: 95).

Speeches by Members of Congress and by President Johnson at the time alsomake frequent reference to America’s place in the world and in history: how wouldits civilization be judged if there were no great artistic legacy?

When the NEA was founded the National Council on the Arts (NCA) wasretained as an advisory body to the Chairman of the NEA, although there wereconcerns that a weak NCA would give the Chairman too much power, allowing himto become a ‘‘cultural czar’’. The NCA was made up of 26 citizens, serving terms ofsix years, with eight or nine appointed every two years. We could see this as anexample of an ex ante means of preventing agency drift, on the assumption that a


large committee would be less likely to steer the agency away from its originalmandate than a single individual. The Chairman of the NEA would make recom-mendations to the President for appointments to the NCA, but the choice remainedwith the President.

The goals of the NEA included the encouragement of excellence, support forstate and local agencies, access and education in the arts, and freedom of expressionand cultural diversity, although a later report on the NEA noted that ‘‘Congress andthe President provided only a few administrative signposts for the Chairman inseeking to implement these goals’’ (Independent Commission, 1990: 16). In itsearly years the NEA was, in the words of one commentator, ‘‘bold, self-confident,innovative and opinionated. They intended to stamp their own imprint upon thearts rather than to support actions taken by others’’ (Straight, 1988: 97). Grantswere made for projects that raised some eyebrows, including $500 to Aram Saroyanfor his poem, which read, in its entirety, ‘‘LIGHGHT’’, and funding for artists’housing in New York City, a place whose rents are far beyond the means of mostAmericans.

While the first Chairman of the NEA, Roger Stevens, had a great desire to beinnovative, his successor Nancy Hanks, who served as Chair from 1969 to 1977,thought the central purpose was to use the NEA to generate more private supportfor the arts. This was consistent with the goals of Presidents Nixon and Ford, as wellas explicit provisions in the Act (Straight, 1979: 75–76). A tremendous increase infunding levels for the NEA occurred during Hanks’ tenure as Chair. ‘‘When Hankstook office. . . the NEA was a small, young agency teetering on the brink of its‘initial survival threshold’. By the time she resigned . . . the NEA had become amature, institutionalized, successful federal agency’’ (Wyszomirski, 1987: 207). Fur-thermore, it was during Hanks’ time as Chair that the amount of arts activity inAmerica boomed, consistent with Hanks’ goals. Wyszomirski credits Hanks’ successto her ability to create a climate of trust between artists and legislators, to use theendowment to foster an influential political constituency, and to institutionalize theagency, creating defined routines for its procedures and policies. In other words, shetook a number of steps to attempt to reduce the levels of political transaction costs.

In 1981 President Reagan created a Task Force on the Arts and Humanities,directed to consider ways of stimulating private support for cultural activities,especially during a period of high inflation. Although the NEA might have feltthreatened by such a commission, its recommendations were very supportive of theNEA:

Basically, the National Endowments are sound and should remain as originallyconceived. The Task Force does not recommend fundamental change in theroles of Chairmen or of the National Councils, but rather reaffirms andencourages their partnership in formulation of policy as well as grant-making.Furthermore, we endorse the professional panel review system, which putsjudgments in the hands of those outside the Federal government, as a means ofensuring competence and integrity in grant decisions (Presidential Task Forceon the Arts and Humanities, 1981: 2).


During the 1980s the NEA’s budget was reduced as a part of government-widedeficit-reduction policies, and also in real terms through inflation.

In 1990 a second major report was commissioned, in response to long-standingconcerns about the peer-review panel system, in particular that it was a systemunreceptive to newer art genres, that there was a perception among some artists thatthe peer-review system was subject to cronyism, and that NEA staff were influencingthe panels by assisting in the preparation of grant proposals (Galligan, 1993). TheReport stressed the public nature of the NEA:

Among the major reforms the Commission believes necessary are: (1) strength-ening the authority of the Chairperson; (2) making the National Council moreactive; (3) eliminating real or perceived conflicts of interest; (4) assuring thatevaluation of grant applications be fair, accountable and thorough; (5) clarify-ing the function of advisory panels and broadening their membership to makethem more representative; and (6) making clear that the National Endowmentfor the Arts belongs not solely to those who receive its grants but to all thepeople of the United States (Independent Commission, 1990: 62).

At the same time as the investigation into NEA procedures were the widelydebated exhibitions of art by Robert Mapplethorpe and Andres Serrano, and pro-posals that there should be prohibitions against federal funding for offensive art,which resulted in a case involving performance artist Karen Finley making its wayto the US Supreme Court. While the Independent Commission was opposed to anyrequirement that grant recipients swear under oath that their work would not be‘‘obscene’’, the Act governing the NEA was amended requiring the Chairperson toensure that judges of grant applications should take into consideration ‘‘generalstandards of decency and respect for the diverse beliefs and values of the Americanpublic’’ (see Rushton, 2000).

The budget of the NEA took its biggest hit in 1996, with a cut from $162 millionin fiscal 1995 to $99.5 million in fiscal 1996. Further, all individual artists’ grants,except in literature, were ended. The NEA’s budget allocation has been relativelystable since the 1996 cut. At that time the NEA also restructured its grant-makingsystem from 17 discipline-based programs to four categories: (1) creation and pre-sentation; (2) heritage and preservation; (3) education and access; and (4) planningand stabilization.

The last legislative changes were in 1998: mandated NEA grants to state artsagencies were increased from 35 to 40% of program funds, and the composition ofthe NCA changed from 26 to 20 persons, with six being Members of Congress whoserve in a non-voting, ex officio capacity.

6. Analysis of the changes at the NEA

What caused the cuts to the NEA’s budget and the increased restrictions on itsactivities?


Welfare economics provides a rationale for government support of the arts, interms of various market failures, yet there is no evidence that the value placed by thepublic on art changed so drastically during the period in question. There is not evi-dence that the American public values any less education in the arts, or making thearts more accessible to all, or leaving a rich cultural heritage for future generations.Explanations based on economic models of lobbying in politics similarly leave thequestion unanswered; once established, the arts lobby should have had no problemssecuring its entitlement (Grampp, 1989). Recalling Straight’s (1988) four reasons forwhy the NEA came into being when it did, three of them—a more educated popu-lation, artists seeking to reach wide audiences, and a strong economy—were all asprevalent in the mid-1990s as in the mid-1960s.

Other reasons for the NEA’s decline have been put forward. Brenson (2001) sug-gests that the battle to preserve the NEA’s budget and grants to individual artistswas lost as a result of the growing belief that the only value of the arts is what ismeasured in the marketplace. But no evidence is provided for a shift in the public’svalues and attitudes to artists.

Jane Alexander (2000), Chair of the NEA from 1993 to 1997, blames the strengthof the Christian right in the 1990s in spreading the word against the NEA. But whileit is certainly true that conservative groups were active in the battles over the NEA,and with enough strength that it nearly succeeding in killing the NEA, we still wishto understand why their criticisms of the NEA gained such salience in the 1990s.This is where theories of the delegation decision may shed some light.

A crucial input into Congress’s decision about the delegation of policymakingauthority is the gap in expertise between legislators and the staff of the executiveagency. The evidence suggests that a major change in the artworlds of 1965 and 1995was the decline in the credibility of experts.

As Galligan (1993) notes, there were tensions in the peer-review panels right fromthe start. The mandate of the panels was not precise: they were to promote artisticexcellence, but also to promote access to the arts. Indeed Nancy Hanks’ success atachieving such growth in the NEA budget has been attributed to her ability to per-suade Presidents Nixon and Ford of the importance of bringing art to all the Amer-ican people. In addition, there were fears that the panels would be dominated bymainstream views of artistic excellence, rewarding those who were already estab-lished. And so the pressure was on to include representatives from relatively margin-alized genres or approaches. Finally, as Munson (2000) notes the peer review panelscame to be less and less composed of peers, i.e. artists. Instead, curators and art criticscame to take a larger role. This led to claims of an increasing level of attention to thestyle represented by a particular applicant over the actual quality of the work.

The panel system is crucial in the decision of Congress to be willing to delegatepolicy making in the arts. A loss of faith in the value of the panels should lead to achange in the willingness to delegate. Brooks’ (2001) valuable study of who supportsor opposes the public funding of the arts in the United States uses polling resultsfrom the General Social Survey (Davis, Smith and Marsden, 1999). But an interest-ing variable not included in his analysis is the response to the statement ‘‘Only a fewpeople have the knowledge and ability to judge excellence in the arts’ (question


475-A). In 1993 of those who answered the question 46% strongly agreed or agreed,47% disagreed or strongly disagreed, and 7% did not know. In 1998, after 5 years ofwhat the Americans referred to as the ‘‘culture wars’’, only 37% strongly agreed oragreed, 52% disagreed or strongly disagreed, and 11% did not know.

There is not an exactly equivalent question asking the public about whetherexperts are required to judge excellence in science. But there are other questionsfrom the General Social Survey that suggest Americans have trust in the sciencecommunity that did not diminish through the period when faith in art expertsdiminished. Consider three questions. From 1988 to 1991 (the only period where thisquestion appeared) people were asked to respond to the statement ‘‘Scientists alwaysseem to be prying into things they ought to stay out of’’ (question 357-C). Inagreement were 34%, while 64% disagreed and 2% either did not know or had noanswer. In the second question, which was asked in 1993 and 1998, the same years asthe art expertise question, people were asked to respond to the statement ‘‘Overall,modern science has done more harm than good’’ (question 932-B). In 1993 16%either strongly agreed or agreed, 58% either disagreed or strongly disagreed, and26% neither agreed nor disagreed (the balance of the sample either could not chooseor had no answer). In 1998 only 14% strongly agreed or agreed, 55% either dis-agreed or strongly disagreed, and 32% neither agreed nor disagreed. The changefrom 1993 to 1998 is a mixed result, but not the same as the swing in opinion againstthe need for expertise in the arts. Finally, people were asked ‘‘As far as people run-ning science institutions are concerned, would you say you have a great deal ofconfidence, only some confidence, or hardly any confidence at all in them’’ (question165-K). We have results from 1987 as well as 1993 and 1998. For those three sam-ples, those reporting a great deal of confidence rose from 27% in 1987 to 37% in1993 to 40% in 1998. Those reporting only some confidence fell from 49% in 1987to 47% in 1993 to 45% in 1998. Those reporting hardly any confidence went from12% in 1987 to 7% in 1993 to 8% in 1998 (the rest of the respondents either did notknow or had no response). Again, there is not evidence of a swing against theexperts in science as there is in the arts.

A weakening of the public faith in the expertise needed to make artistic judgmentsis bound to impact the support for public funding. The low and diminishing publicfaith in art experts is not without foundation. Hughes (1992) and Steiner (1995) notehow those experts called upon to testify in the defense of the exhibition of Map-plethorpe photographs, when the exhibitors were charged with obscenity, were par-ticularly inept at explaining the aesthetic merit of the work. Joseph Epstein (1995), amember of the NCA and so someone with first-hand knowledge, wrote in a widely-read publication that the problem with NEA-funded art was not so much its offen-sive nature as how much of it was of mediocre-to-bad quality.

In particular we would expect that this combination of events would lower theperceived benefits to politicians of relying on agency (the NEA) expertise, and aswas noted above this is an important factor in the willingness to grant an agencysignificant decision-making authority. When combined with the added attention tocontroversial art (the early 1990s at the NEA brought frequent ‘‘fire alarms’’), thecost to politicians from agency drift increased. If we look to the founding of the


agency and the hopes by politicians that the NEA would contribute to an increase innational pride, whatever the artistic merits of some of the controversial projects theywere clearly not directed at widely-shared national goals, and intentional or not thisserved to create a sense of agency drift from its original mandate.

The restructuring of the NEA begins to make sense in this context. With no moregrants to individual artists, the NEA now restricts itself to grants to organizations,the contribution of which to public policy goals are more easily, although stillimperfectly, monitored. Increased monitoring of the agency also comes throughensuring that at least one lay person is included in the grant proposal review process,and in having elected members of the legislature guaranteed positions on the NCAex officio (although there is the potential for agency ‘‘capture’’ of any politicianappointed to the NCA, even if he or she began with some skepticism regarding thevalue of the agency).

We could also argue that transaction cost politics provides at least some rationalefor the increased level of transfers to state arts agencies. In a federal system, decen-tralization of publicly-funded programs to sub-national levels of government is ameans of bringing into closer alignment the wants of the citizen-voters and the pro-jects that receive funding; it is more likely that agency decision-makers and the peer-review panels that advise them will have similar cultural values to the local citizensof a more narrowly defined jurisdiction. Given the cultural diversity of the US it isnot surprising that state and local arts councils in aggregate have much larger bud-gets than the NEA.

For an organization that has perhaps the highest political heat-to-budget ratio inthe United States government one needs to be modest in making too bold a claimfor any single explanation of why the NEA had the experiences it did. The rise ofmulticulturalism is a factor, as public goods are that much more difficult to organizethrough the public sector as the variance in individual tastes widens (Rushton,2003). The rise through the 1980s and 1990s in representational art increased thechance that funded art could prove to be offensive to segments of the population.Schuster (2001) has noted that the rearrangement of the panel system in 1996 helpedbetter coordinate the institutional structure with the public policy goals of theorganization, another transaction cost economizing measure (although perhaps onethat draws attention to the fact that the public policy rationale for grants to indivi-dual artists is hard to discern), and that in the end any public program must bedefended on its outcomes, or at least its outputs, and not on the artistic integrity ofits procedures. But it does seem to be the case that the transaction cost aspects ofarts funding have much more explanatory power, as well as normative strength,than the market failure approach so prevalent in cultural economics.

7. Conclusion

In his survey of the state of the discipline Blaug (2001) suggests that futureresearch on public funding should look to the actual mechanisms of decision-mak-ing and funding, rather than the ‘‘hoary’’ old debate about the role of government,


which he treats as settled except for a few on the ‘‘radical right’’. But one doesn’tneed to be a card-carrying member of the radical right to suggest that the role ofpublic funding is not yet settled. Complex institutions have evolved in the privatesector, in for-profit (Caves, 2000; Cowen, 1998) and nonprofit (DiMaggio, 1986;Hansmann, 1980, 1981; Glaeser, 2002, Glaeser and Shleifer, 2001; Kuan, 2001)firms, to coordinate the production and consumption of the arts. It is easy to theo-rize endlessly about possible externalities and market failures in the arts, butrecommendations for public policy are misguided if they do not account for howindividuals have in practice tried to capture the surplus that welfare economicsinsists should potentially exist when externalities are present. Transaction cost ana-lysis ‘‘provides insights into the accumulation of institutional arrangements thatexist in practice and it avoids the endless quest for ‘failures’ either in the private orthe public sector that provide a basis for government intervention’’ (Zerbe andMcCurdy, 1999: 571). This does not mean that in the end we would conclude thatpublic funding of the arts should not take place. But if public funding were to berecommended it would be informed by an understanding of the institutions thathave evolved.

In addition, we have tried to suggest that public funding of the arts, like the var-ious means of private funding, carries with it a set of transaction costs, hamperingthe ability for those who wish to pay for art and those who would supply it to dealwith one-another. If it is difficult in the private economy for Coasian-style bargainsto take place, where Jones contributes to the cost of Smith’s cultural consumption,so it is also difficult to design an effective way of taxing Jones, allocating the funds toan arts agency, and subsequently providing grants to institutions that Smith can as aresult more easily attend. The public-sector solution becomes increasingly difficult asthe gap on policy goals widens between the elected politicians and the agency taskedwith executing the programs that are meant to advance the policy. Consideration oftransaction costs makes the debate about the role of government in arts fundinganything but hoary.

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transaction cost politics and the national endowment for the arts

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