Budget Shortfall, Writers’ Strike Linked by Uncertainty

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By DANIEL J.B. MITCHELL

Two seemingly unrelated events have dominated the news in California. The entertainment industry is experiencing a writers’ strike. And the state is moving into one of its periodic budget crises. Is there any parallel between these two situations?


There is a parallel. At the root of both the unfolding Sacramento fiscal crisis and the Hollywood labor-management impasse are uncertainty and lack of control.


Consider the state’s budget situation. The source of budgetary uncertainty facing Sacramento is obvious. In the short term we have the bursting of the real estate bubble and a related meltdown in mortgage markets, which have spilled over into other financial sectors. In the longer-term we have worries about vast U.S. borrowings from abroad and an overextended American consumer. These circumstances threaten the California economy and therefore threaten state tax revenues and the revenues of local governments, which are partially dependent on the state.


Sadly, no one can say for sure what the magnitude of the fiscal problem will be because no one can say for sure what the underlying causes mean for the economy in specific terms. The macro decision makers who must deal with the broad economic dilemma are in Washington, Beijing, and elsewhere. The micro decision makers are the myriad players in world financial markets and the countless American consumers who must make their own budget decisions. In any case, the shape of the California economy over the next year or so is not within the control of Sacramento.


The writers’ strike seemingly involves the traditional union-management dividing the pie. But there is a difference. No one is sure what the size of the pie may be over the next few years, or what the sources of the pie may be, or how to make money from whatever form those sources take. Determinants of the entertainment pie are rapidly changing technology, national and international policies that affect intellectual property rights, and how consumers will respond to whatever new entertainment platforms are coming. Hollywood can’t control the outcome.



Hollywood, Sacramento

When there is lots of uncertainty, long-range planning is difficult. Even if long-range plans are drawn up as in a budget bill or a labor agreement they are likely to be worth no more than the paper on which they are written. Sacramento cannot legislate away uncertainty about the future. And Hollywood labor and management cannot negotiate it away. But given uncertainty, what can they do?


What is needed in Sacramento and in Hollywood are a short-term fix and a longer-term shift toward risk sharing and contingency. For the state, that means reopening the current budget, making cuts where feasible, and for the longer term shifting toward contingent budgeting wherever possible.


As an example, programs might be allocated percentage shares of incoming revenue rather than fixed-dollar appropriations. There needs to be more pay-as-you-go, even for infrastructure, and less fixed obligation. In particular, reliance on bond financing with its fixed debt service needs to be reduced.


In the labor-management case, what is needed is a short-term contract, perhaps a year in duration, and a move toward sharing the revenue of the overall returns to projects. The current reliance on formulas linked to particular platforms on which projects may or may not be delivered is a recipe for endless conflict. Of course, such a move would entail putting in place appropriate accounting and revenue distribution mechanisms. A short-term labor-management agreement could put in place a process to design and establish such mechanisms.


It will be hard for the movers and shakers in Sacramento and Hollywood to acknowledge that they can’t predict or control the future. But it will be tougher for both if they don’t.



Daniel J.B. Mitchell is the Ho-su Wu Professor of Management and Public Policy at UCLA.

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