Does the NEA crowd out private charitable contributions to the arts?(National Endowment for the Arts)

INTRODUCTION

This paper investigates the mechanism by which the federal government s funding of the arts through the National Endowment for the Arts (NEA) displaces private charitable contributions to non-profit arts organizations. Government funding of the arts has incited contentious political debates since the creation of the NEA in 1965. This particular policy debate is one instance of the debate over the government's ability to increase the supply of a public good. It has been of interest to economists because of the crowding-out hypothesis, whereby a dollar spent by the government crowds out a dollar of private spending on the public good. Embedded in the framework of the crowding-out hypothesis are conjectures about the role that the government should play in providing public goods, be it through lump-sum taxes, proportional taxation, or subsidies to private giving. Gauging the efficacy of the government in affecting the supply of a public good through these distributive functions is an important policy question.

The arts provide an important setting to study crowding out because their production coincides with that of both private and public goods. With a few textbook exceptions, most goods provided by the government confer both public and private benefits. The activity of arts organizations constitutes a public good because they are the conduits through which the NEA seeks its goal of "enrich[ing] our Nation and its diverse cultural heritage [through] supporting works of artistic excellence, advancing learning in the arts, and strengthening the arts in communities throughout the country" (National Endowment for the Arts, 2003). To the extent that arts organizations contribute to the national cultural ethos, their activities comprise a public good. On the other hand, many arts activities are excludable and rival.

Another reason why the arts provide an important setting is that arts organizations are not the passive recipients of private and government contributions. Rather, they willfully and actively raise funds, the intensity of which can be influenced by their receipt of government grants. The response of private donors is, thus, a composite of a direct crowding-out effect and an effect attributable to fund-raising. With larger government grants, individuals may decrease their contributions because government funding is substitutable (to varying degrees) for their own. They may also indirectly decrease if larger government grants crowd out fund-raising expenditures. For both economic theory and public policy, estimating the total effect of government grants on private contributions, inclusive of the effect of fund-raising, as well as the direct crowding-out effect is informative.

This paper exploits the variation in government grants induced by the surprise Republican victory during 1994 mid-term Congressional election in order to obtain estimates of the effect of government grants on both fund-raising and private contributions to arts non-profits. The Republican-controlled Congress reduced the appropriation to the NEA by 40 percent subsequent to their victory. To preview the results, I find that private charitable contributions to arts organizations increased by 50 to 60 cents for every dollar decrease in government grants. There was also a concomitant 25 cent increase in fund-raising expenses when the NEA experienced its budget cuts.

The remainder of the paper is organized as follows. The second section outlines the views on crowding out and the theoretical foundations for relating private donations, government contributions, fund-raising, and the equilibrium supply of a public good. The third through fifth sections present the econometric model, data, and findings, respectively. Finally, the sixth section concludes, draws the implications for policy, and suggests possible avenues for further research.

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