The past year and a half has been a trying time for the theater industry. Though auditoriums around the country used to host music, dancing, and laughter, they have now grown accustomed to silence, and perhaps even a bit of dust. Productions that were not killed outright have been on life support, clinging to desperate hopes that the pandemic will be over sooner rather than later.
One of the most famous shows caught up in this mess is the musical Hamilton. Though it has been wildly successful since its 2015 opening, the pandemic and ensuing lockdowns have forced it to go into hibernation like nearly every other show. However, as the New York Times recently reported, the musical is set to receive $30 million in federal aid, and could receive up to $50 million in total.
The aid is coming from the Shuttered Venue Operators Grant program, which is designed to help movie theatres and other entertainment venues stay in business until the lockdowns are over. The program was created as part of the $900 billion COVID relief bill passed by Congress in December, and it is just one of the many federal bailout programs that are now propping up businesses and organizations across the country.
Through the program, which commands $16 billion in total, productions can apply for grants of up to $10 million. Currently, Hamilton’s Broadway production and two of its touring shows have each received $10 million grants. Its other two touring shows are still waiting to hear back.
Hamilton and Subsidies Go Way Back
At first glance, the case for these grants almost seems obvious. Here is an industry that is clearly struggling through no fault of its own. It only makes sense to help it weather the storm.
What’s curious about this line of reasoning is that it actually stems directly from Hamilton himself. In many ways, Hamilton was the main champion of subsidies among the founding fathers, and it is largely his arguments which people appeal to when they defend the practice today. And though Hamilton’s original proposals were restricted to subsidizing manufacturers, his arguments have been applied to increasingly wider spheres of business over the years. Indeed, the government he helped to create is now even subsidizing the musical that bears his name. As Mark Twain is credited with saying, “History doesn’t repeat, but it often rhymes.”
So what were his arguments? Essentially, Hamilton believed that the general welfare could be improved if the government gave “pecuniary bounties” (subsidies) to manufacturing industries that were still in their infancy, because the subsidies would help grow a new industry that would otherwise struggle to get off the ground.
“In new undertakings,” Hamilton wrote, “[subsidies] are justifiable, as they are oftentimes necessary.”
Now, a common objection Hamilton faced was that subsidies merely “serve to enrich particular classes at the expense of the community.” But Hamilton didn’t buy this argument.
“There is no purpose,” he wrote, “to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry, no consideration more valuable than a permanent addition to the general stock of productive labour.”
Though Hamilton only made the case for supporting infant industries, a similar line of reasoning has been used to recommend subsidies for industries that are temporarily weak or disadvantaged (like musicals about founding fathers in the wake of a pandemic), with the idea being that the economy would simply be worse off without them. But while it may be tempting to embrace the pro-subsidy argument as a means of “saving” these industries, there are gaping holes in this analysis that deserve scrutiny.
Hamilton, Meet Hazlitt
The main problem with Hamilton’s position is that it ignores trade-offs. Though it’s true that government subsidies can help businesses that are struggling, the question is, at what cost? Every dollar the government gives to a business is a dollar that must be taken from somewhere else. But such redistribution can hardly be said to grow the economy as a whole. It merely helps one part of the economy at the expense of the others. It grows one sector by shrinking the rest.
So how do we determine the best allocation of scarce resources? This is where free markets are pivotal. Whereas government subsidies merely pick winners and losers based on political connections and popularity, free markets systematically funnel resources toward ventures which best meet the demands of consumers.
If a business venture looks promising, investors will shift capital in its direction, and the profitability of the venture will reflect the extent to which it helped consumers. Likewise, if businesses are taking a loss, it is an indication that the resources they use would better serve the interests of consumers in other parts of the economy. Thus, it would actually be in the best interest of consumers to let weak businesses fail, because the capital they employ can then be used for other, more valuable purposes.
Henry Hazlitt explained this well in his classic book Economics In One Lesson.
“The result of [a] subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.”
“The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries…Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second.”
Consumer Demand Will Return: We Just Need to Wait for It
As we can see, the problem with Hamilton’s suggestion to subsidize new manufacturing industries is that resources would be taken away from other industries where they would be put to better use. If the new industry is truly promising, it should have no trouble raising capital from investors eager to make a profit (the flood of capital into the emerging cryptocurrency space is a great example). But if investors are not willing to fuel its growth voluntarily, they are signaling that they do not see enough consumer demand there, so it would be counterproductive to effectively force them to devote resources to that industry.
A similar line of reasoning can be used regarding the grant for the musical. Simply put, the money that went to Hamilton would probably have been better used in a different industry if it had been left up to investors and consumers.
Of course, it’s tempting to try to bring back the structure of production we had before the pandemic, but the reality is that market conditions have changed. Even without the lockdowns, it’s likely that most productions would have shut down, either of their own volition or due to a lack of demand. Thus, trying to artificially restore the pre-pandemic status quo is simply hampering our ability to adjust to the new reality we find ourselves in.
With that said, I’m a big fan of Hamilton, and I’m truly hopeful that it will come back in full strength once this is all over. But the government should let me contribute to that outcome as a willing customer, not as a begrudging taxpayer.
American manufacturing never needed subsidies to thrive, contrary to Hamilton, the man. Neither does Hamilton, the musical.