I was recently told a wonderful story about a professional sports franchise in a low-tax state that distributes to its recruitment candidates a pamphlet describing in the most vulgar terms — X number of Rolexes, Y number of Bentleys — how much farther a $10 million contract goes there than in New York, California, or New Jersey. (Because it is unbelievably crass, it seems to me likely to be true.) Therein may be found an important lesson for new Los Angeles mayor Eric Garcetti, who is climbing the walls over the decline of Hollywood.
Mr. Garcetti is the sort of politician who must fill admirers of California—and there is so very much to admire — with a deep sense of hopelessness; he is an L.A. political lifer who is the son of another L.A. political lifer, whose closest encounter with a real job seems to have been a visiting instructorship at the University of Southern California, which is to say he has Mitt Romney’s hereditary insularity and Barack Obama’s curriculum vitae. He has declared a state of emergency over the abandonment of Los Angeles by the film and television industry and proposes to bolster Hollywood’s position with additional financial incentives and — this will surprise nobody — the appointment of a film-and-television czar.
Mr. Garcetti is not the first California politician to be kept up nights by the decline of Hollywood. In 1970, Variety reports, Governor Ronald Reagan hosted a seminar titled “Is Hollywood Through as the Film Capital of the World?” As Variety puts it:
Back then, the industry was coming off a decade of retrenchment following the breakdown of the studio system and revolution in the production process, as corporations sold off backlots, and the realism of the new Hollywood demanded more location shooting not necessarily tied to the Los Angeles region.
But California didn’t lose its dominance. By the late 1990s, however, Canada’s incentives coupled with its favorable exchange rate lured not only feature film shoots but also TV movies and primetime series. The past decade saw a race among states to compete for production dollars and, despite budgets that have often left incentives to the whims of lawmakers, the givebacks have become a regular part of studios’ budget calculations.
Variety gets it slightly wrong here. California did begin to lose its dominance, a process that is continuing, and the most important factor is not the tax incentives offered by the Canadians and others — though those are important — but the original factor that worried Governor Reagan all those years ago: the breakdown of the studio system. The unraveling is simply taking a long time, as these things do.
At the height of the studio system, Hollywood was in essence a collection of factories: Fox Film Corporation, Paramount, RKO, Warner Bros., et al. owned large collections of physical infrastructure in and around Los Angeles and worked with technicians, actors, and creative personnel, who were in large part long-term employees under contract (Mr. Reagan had been an employee of Warner Bros. before being ordered into military service), and, on top of that, they also owned or controlled distributors and chains of movie theaters themselves. They were the cultural equivalent of U.S. Steel: mighty corporate monoliths positioned to stand forever on the commanding heights of industry — just so long as nothing changed. As U.S. Steel and the movie studios found out, things always change. The decline of the studio system is one of the great dramas of American business; it is, in fact, positively cinematic, featuring courtroom drama (antitrust actions against the studios), fascinating characters (Howard Hughes plays an important role), and the picturesque, elegiac setting of an empire in its last days.
What Mr. Garcetti does not quite appreciate is this: We are all RKO Radio Pictures now.
The days of the tightly integrated corporation are largely behind us. Rather than the corporate juggernauts of the 19th and 20th centuries, 21st-century enterprises more closely resemble ad hoc associations of people and capital working on ever-shorter timelines toward ever-more-specific goals. Of the corporations on the Fortune 500 in 1955, fewer than 70 remain today. In the 1960s, the average lifespan of a Fortune 500 company was 75 years, whereas today it is only 15 years, and that number is declining. As I have argued here at NRO and in my most recent book, the idea of the corporation — of the business enterprise as a concrete and permanent thing — is increasingly inadequate to communicate the reality of how business works. This is frustrating for many workers, who crave personal economic stability, and very frustrating for politicians, whose schemes require stable long-term revenue streams. Los Angeles and New York City, our two great national intersections of wealth and creativity, are predictably ahead of the curve on that front. Which is why Los Angeles and New York City, our two great accretions of municipal incompetence, are in trouble.
Thirty years ago, if you were in movies you pretty much had to have an office in Los Angeles, and if you were in money you had to have an office in New York. But even then, that thinking was based on a defunct model of how those businesses operate. If your model is investing in studios or firms — building factories — then it pays to be where the infrastructure is. If your model is investing in specific projects — investing in deals — then not only do you not have to be in New York or Los Angeles, but it might make a great deal of financial sense to be somewhere else. The financing of films is a head-clutchingly complex business that is in many ways similar to structured finance. It is no surprise that filmmakers and hedge funds have discovered one another.
Successful movie investments can bring very large returns in the short term and a decades-long revenue stream after that as films work their way through various post-theater media and profits from merchandising are realized. But those returns can look significantly less attractive if you work out of a high-tax, high-cost jurisdiction such as California. Like professional athletes — or writers, or game designers, or technology entrepreneurs — filmmakers may realize only one or two big paydays over the course of their careers. Most aspirants never even see one. So those extra California costs aren’t just 5 percent or 7 percent of this year’s income but, in effect, a cut of your lifetime earnings, or a cut of the lifetime earnings of a film or project. If you are going to get most of your lifetime earnings in one paycheck, you’re a lot better off getting that check in Austin than in San Jose or Brooklyn.
Adding to its woes, California is constrained in how much it can compete with other states when it comes to bribing filmmakers to do business there. The production incentives offered by other states can offset as much as a third of a production’s budget, which make the prospect of a project there much more attractive to investors. There is a diseconomy of scale at work: Places without big film and television industries can offer more generous, more or less open-ended, tax incentives to production companies. (If you’re wondering why Iron Man 3 was made in glamorous Wilmington, N.C. . . . ) They can do so because they are not reliant on tax revenue from the film industry and are therefore willing to forgo potential revenue in exchange for the economic activity generated by the project. But California cannot afford to do that. Sacramento expects to be subsidized by Hollywood, not the other way around.
In many cases, competing states are not really giving up any revenue at all — they are simply attracting economic activity in exchange for forgoing tax revenue that they were never going to realize in the first place. Refundable tax credits take things a bit further, in essence repaying producers a percentage of every dollar they spend in the state on a project. In the case of Iron Man 3, North Carolina spent $20 million (its legal cap) subsidizing the project, in exchange for (if we take the Motion Picture Association of America at its word) some $179 million in economic activity related to the film. This rubbed some locals the wrong way: While Iron Man 3 was being subsidized, Continental Tire was considering building a new factory in North Carolina. Iron Man 3 created a few hundred local jobs, most of them temporary. The tire factory would have created some 1,600 long-term jobs. But tires aren’t as sexy as movies, and the tire company wanted a larger incentive package, which North Carolina declined to offer, thereby losing the factory to South Carolina.
(All of the above will of course offend free-market purists; I share your dismay and offer this as an account of how the world works, not of how it should work.)
We should not turn up our noses at tire factories, even if they do not smell as nice as the Frito-Lay factory where I grew up. We should not turn up our noses at any sort of productive enterprise. But we probably should start to account for the fact that the factory town is going to be more and more a thing of the past, and that the tradeoff for the creativity and efficiency of modern business practices is instability and unpredictability. That is really the source of a great deal of modern American economic angst. Even if the men of my generation are in real economic terms better off than our fathers, which is not universally the case, the possibility of going to work for a good company after high school or college and working our way up to a comfortable middle-class life and decent retirement after a lifetime at the same company never was really open to most of us. My father had two employers over the course of his real working life; I’ve had about eleven, and I’m not even halfway through my working years. If that causes anxiety for individuals, it causes even more anxiety for cities and states. California already knows it cannot depend on Hollywood for much of its economic future, and the smart people in Sacramento must surely appreciate that they probably cannot count on Silicon Valley in the long term, either. The most important enterprises increasingly are not geographically fixed. That’s a very hard thing for workers who are geographically fixed and for governments, which are by definition geographically fixed.
If politicians could simply create a set of policies that would bring desired businesses to their jurisdictions, they would do so. Everybody wants movies and high-tech companies, and everybody with good sense wants factories, warehouses, and energy producers, too. But politicians cannot do that. As California has shown, they cannot even design policies to preserve what they already have. From the Reagan years to the present, there has been no progress on that front, even when there was a Hollywood man in the governor’s office.
Economic conditions and markets will always change more quickly than public policy can account for. The question for Mr. Garcetti and for the ladies and gentlemen in Sacramento is not how to keep the movies and television shows in California but how to make California an attractive place to do business of any sort. That begins with admitting to themselves that if Silicon Valley and Hollywood weren’t already in California, nobody in their right mind would move them there. California’s fiscal instability, its rapacious unions, its enterprise-deadening public sector, and its recent experiments with ex post facto taxation all must give pause to investors, as must the plainly unsustainable finances of the state as a whole and the city of Los Angeles in particular. A film czar isn’t going to turn that around, and California doesn’t have enough money to bribe its marquee industry into staying put. Saving California means deep and wide top-to-bottom reform, which means dispatching a whole herd of sacred cows to the slaughterhouse. If Eric Garcetti is the man for that job, he has never given any indication of the fact. The fact that he’s still thinking in terms of czars and chickenfeed incentives suggests that he is miles away from understanding the nature of the problem.
— Kevin D. Williamson is roving correspondent at National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.