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Does increasing local arts and culture production have a positive impact on the local economy? In some sense the answer to that question is obvious. When arts and culture production occurs, inputs are purchased, artists and support staff are paid, and that activity, like other types of production activity, is part of the local economy. Increased arts and culture production adds to the local economy in the short run, but what is less obvious is whether its impact persists in the long run. The economy is a dynamic and complex system that responds to change. An increase in live performing arts programming may lead eventually to reduced attendance at carnivals or sporting events. More museums might eventually crowd out amusement parks or even shopping centers. Whether arts and culture production can generate a permanent increase in economic activity, or economic growth, is a question that is more subtle than the question of whether such production has a positive impact on the local economy. Is there a relationship between local arts and culture production and local prosperity that is not transitory, but permanent? Given the thousands of pages that have been written on the economic impact of the arts or the creative economy, it might seem that finding a satisfactory answer to that question would be a matter of sorting through a bibliographic database to select the best of several analyses. However, we argue that despite the obvious public policy interest in the subject and the importance with which the question appears to be regarded, there has been no fully satisfactory empirical analysis of this question. In this chapter, we endeavor to provide a model that allows us to think systematically about the problem and we present an empirical methodology capable of testing hypotheses relevant to possible answers to the 9 The Economic Consequences of Cultural Spending peter pedroni and stephen sheppard 166 09-2473-5 09 Pedroni_Rushton 978-0-08157-2473-5 3/13/13 9:44 AM Page 166 question. We identify data to which these methods can be applied and carry out the analysis using data for U.S. urban areas. The idea of developing and supporting cultural sites and cultural organizations to promote economic prosperity is certainly not novel. Owen argues that the construction of cathedrals is an explanation for growth of the European economy during the thirteenth century.1 Alternatively, Bercea, Ekelund, and Tollison see such activities as a device for limiting competition in culture markets and religion.2 During the 1930s and early 1940s, the Works Progress Administration included public support for the work of artists and writers along with support for constructing roads, bridges, and public buildings as activities worthy of funding. All of those activities were viewed as having a stimulative effect on the economy. While the artworks created through this program are highly prized today, there is little evidence concerning the contribution that their creation made to economic recovery. More recently, the United Nations Conference on Trade and Development prepared a comprehensive report describing what the authors called a “new paradigm”in which culture and creativity are“powerful engines driving economic growth and promoting development in a globalizing world.” 3 The report includes extensive data on international trade in cultural goods ranging from carpets to paintings and discusses the mechanisms for channeling public resources and investment into the cultural economy. The writers for the UN report assert that culture“drives”economic growth, but the report itself offers scant evidence. The data provided demonstrate that arts and culture production is a significant economic sector that employs large numbers of workers and generates large amounts of economic output and export earnings; in that respect the report is similar to many studies of communities and regions in the United States. For example, Lawton and Colgan survey the size, growth, and distribution of arts and culture nonprofits and employment in the New England states in a report4 that is part of a series of similar studies, sponsored by the New England Foundation for the Arts, beginning with Wassall.5 These and other studies show that arts and culture production is a significant sector of the economy and that in many areas the size of this sector is growing. They do not, however, demonstrate that increasing the size of this sector leads to an increase in economic prosperity or per capita GDP in the urban area. Much of the interest in the topic during the past decade has been encouraged and actively promoted by the work of...

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