Milken Institute Report: California’s Failure to Stem Runaway Production Cost State 36,000 Jobs, Billions in Lost Wages & Output
The Santa Monica-based Milken Institute, an “independent economic think tank”, released an excellent “must read” report on how runaway production is impacting California called “Film Flight: Lost Production and its Economic Impact on California”. The 46-page report has been added to the Report Library HERE. I thought the report was excellent and well worth reading, especially if you view runaway production as a California problem. Indeed, I was struck at how familiar the tone of the report was and felt as though I was reading my recent law review article, “Down the Rabbit Hole: The Madness of State Film Incentives as a ‘Solution’ to Runaway Production”. For example, in my piece, I said:
California, home to Hollywood, is arguably the most significant cultural production center in the world. No other location on earth, past or present, can match the global cultural influence that Hollywood and, by extension, California can lay claim to, if only in terms of the sheer number of people it reaches. In addition to being the Mecca of the motion picture industry, California captures large swaths of the recording industry and is home to Silicon Valley, whose digital and high-tech advancements are employed by the film and television to create groundbreaking special effects and filming techniques that were simply impossible to do 15,perhaps just 10 years ago. California offers unmatched depths of talent. Despite these advantages, continued hegemony is anything but certain.
Thus, it was music to my ears when I read the following in the Milken report:
Whether it’s programming from studios in Burbank or cutting-edge special effects and animation conjured up by digital artists in the San Francisco Bay Area, film and television production is a significant part of the California economy—and a bedrock element of the state’s identity and image. But past and present dominance is no guarantee of future prosperity.
Make no mistake: Motion picture and television production in California remains strong. Hollywood is still the clear leader in terms of economic output and innovation, and California’s industry employment levels dramatically outpace the rest of North America. The state’s robust infrastructure and critical mass of talent in all aspects of the industry, combined with strong allied industries, have contributed to maintaining its supremacy.
But California’s mantle is slipping. Once upon a time, Hollywood’s highly centralized studio system gave rise to such a concentration of infrastructure and talent that the state had a virtual lock on the majority of film production. But that structure is a thing of the past, and today production is highly mobile.
This tone, which conveys a sense of urgency in the face of lingering complacency, has not been typical in much of the literature. Adding to the sense of urgency, the Milken report claims that California’s inability to stem runaway production has cost the state thousands of jobs and billions in lost wages and economic output:
The state’s share of North American employment in the movie and video industry (encompassing production, post production, and independent artists) has declined from 40 percent in 1997 to 37.4 percent in 2008.
If California had managed to retain the 40 percent share of North American employment it once enjoyed, 10,600 jobs would have been preserved in the state—more than 6 percent of the 2008 industry base. (In 2008, the state actually had 166,775 jobs in this industry. In the hypothetical scenario with its share maintained, it would have had 177,380 jobs.)
The 10,600 jobs that would have been retained in this scenario would have in turn generated an additional 25,500 jobs after rippling through other sectors, for a total impact of 36,000 jobs.
Similarly, the preserved wages and output would have totaled $2.4 billion and $4.2 billion, respectively, after rippling through other sectors.
The 10,600 jobs that would have been retained under our hypothetical scenario would have paid nearly $92,000 annually on average, with the additional indirect jobs yielding an average annual wage of $56,000. The output per employee associated with the direct jobs in the industry would have averaged nearly $149,000.
The Milken report also proposes some specific policy options to combat runaway production in California:
Specifically, in order to continue to thrive as a leader of film and television production, California must:
• develop a series of production incentive programs designed to keep all types and sizes of productions in the
state, whether they are network broadcasts, cable television shows, commercials, independent films, or studio
blockbusters
• adopt policies to encourage long-term investments and upgrades in infrastructure and technology at production and post-production facilities. As competing locations continue to improve their facilities, California needs to provide incentives for studios and companies to invest within California, not elsewhere.
• make tax incentive programs permanent, thus creating a stable policy environment and signaling long-term
commitment
• consider implementing a new digital media tax credit to attract and retain developers of digital animation, visual effects, and video games
• empower key ombudsmen positions at the state and local levels to simplify and expedite the permitting
process. This has been done successfully in other states and countries, and needs to be done here.
• educate politicians and the general public alike about the economic importance of the film industry, focusing the message on job creation and investment, not just the appeal of the end products
The report acknowledges the massive deficit crisis facing California and offers a fairly pragmatic response, which I appreciated:
Unfortunately, the current economic picture for California is not pretty. Given its gaping budget deficit, there’s no denying this is a tough time to afford any additional tax breaks—but in this case, California can’t afford not to. The state can’t squander any opportunities to retain and add significant numbers of high-paying jobs. Given the trends we have seen over the last decade, the long-term payoff that would be realized by shoring up a major industry far outweighs the short-term cost to revenues.
The state should not attempt to match incentives from other locations that provide large upfront cash advances and unsustainably large film credits. Given California’s current fiscal state, this approach is infeasible. However, by providing somewhat expanded and more effectively targeted credits that lower the cost of production to a reasonably competitive level, California will position itself to win over producers based on its strengths in human capital and facilities as well as its reputation for excellence.
Even if tradition keeps the headquarters of the main studios and production houses in the state, it will mean very little if all of the actual production work is done elsewhere. Over the past few decades, California has watched a number of its major industries pack up and move to greener pastures. Los Angeles County, in particular, was once a leading center in financial services, aerospace, and the garment manufacturing industry—but these have all eroded sharply. Especially in the current climate, California cannot allow another key industry to slip away.
Again, the Milken report reminded me my own writings, such as my exchange with LA Times Columnist Micheal Hiltzik (available HERE) and an earlier opinion piece I wrote HERE.
I did have some problems with the Milken report. There was no mention, much less a discussion, of the actual cost of state film incentives to their respective state treasuries. That said, the report, in not arguing film incentives actually create revenue or, conversely, drain it, it could be seen as neutral and, therefore, objective.
The bigger problem I had with the report was the multiplier it employed to arrive at the numbers of lost jobs, wages and output. The report claimed “California’s film industry employment multiplier is nearly 3.5—that is, for every job created in California’s film sector, another 2.5 jobs are created in other sectors.” This is on the very high end of multipliers used in the majority of film/runaway production reports/studies. And, therefore, the multiplier used in the Milken report will be criticized as overblown immediately. In her 2002 report prepared for the California Legislature, Dr. Martha Jones offered a sampling of multipliers employed by various sources:
Economists calculating the multiplier to apply to the film industry come up with vastly different numbers; most range from 1.724 to 3.6.
· The lowest of these multipliers is 1.724, which the Department of Commerce’s Bureau of Economic Analysis computed for “amusements and recreationalservices” in the National Income and Product Accounts. This number representsthe 1998 output produced by all industries in order to provide one dollar ofamusements services to GDP. In 1996, the amusements multiplier was 1.798.
· The Monitor Group used a multiplier of 3.1 for wages and a multiplier of 3.6 for goods and services in its report on runaway production. These numbers are taken from RIMS II model, created by the Bureau of Economic Analysis. RIMS II stands for Regional Input-Output Modeling System II.
· Ernst & Young questioned Monitor’s use of the RIMS II multiplier, asserting that more appropriate multipliers are 1.99 for California and 3.02 for the U.S.
· Arthur Anderson Economic Consulting used a multiplier of 2.12 for income and labor effects in its study of independent filmmaking, done for the American Film Marketing Association.
· Economics Research Associates used multipliers of 2.33 for output and 2.61 for earnings effects in its study of television commercials in Chicago.
· The Boston Consulting Group’s June 2000 study of traditional media business in New York City surveyed all aspects of media spending, from pre- to post production and all types of media. The study showed that traditional media direct spending was about $5 billion per year and total direct and indirect spending was
about $10 billion. This assumed a multiplier of 2.0.· The Center for Entertainment Data and Research (CEIDR) estimated that a $610 million increase in Canadian film production in the year following the enactment of their tax incentives would produce over $2 billion in economic activity. CEIDR used a multiplier of 3.3.
That said, I am not an economist. I have no idea if the multiplier used in the Milken report is too high or not. It is, however, higher than most.
