By Dom Serafini
Traditionally, when a country’s economy takes a dive, one of the first things to go are state incentives for the entertainment industry. It’s the same perverse mechanism that makes companies cut their advertising budgets in times when revenues need to be generated the most but sacrifices are required.

This happens because, like advertising for a company that is suffering slowed sales, public officials see city, state and federal funds in the entertainment sector as frivolous rather than essential.

In the case of incentives for the entertainment industry, the city of Los Angeles can offer a good case study for the international film and TV industry.

Last February, Hollywood lost $246 million in tax breaks because California state legislators altered the industry’s economic stimulus. Apparently, the lawmakers thought Hollywood too rich to need this additional money.

A recent report shows that location filming for movies and TV commercials in Los Angeles has fallen to its lowest level on record. As a result, the area’s entertainment sector lost more than 22,000 jobs — about 10 percent of the available workforce — in one month alone. With the government cutting tax credit incentives, film and TV production has started leaving the state, compounding the pre-existing problem of fewer productions.

Almost immediately, U.S. film and TV trade associations began lobbying to convince lawmakers at both the state and federal levels that the entertainment industry is important to both California and the American economy as a whole. They argued that the entertainment industry pumps up to $20 billion a year into the local economy of Los Angeles alone.

Soon after, under pressure from the trade associations, California’s state legislature reversed itself and approved $500 million in tax credits for film and TV productions for five years. Those credits, however, won’t take effect until 2011.

Now, let’s analyze how cutting incentives to the entertainment industry during slumping economic times can have enormous repercussions on a state like California.

During periods of rising unemployment, retail and car sales tend to drop. For many local TV markets, these two sectors represent the bulk of their advertising revenue. With reduced advertising comes a lower number of television commercials being produced, resulting in more unemployment for the TV sector. This is a similar situation to the film industry, in which many workers are out of jobs because of the reduced number of new productions and an increasing number of films going to states offering financial incentives.

And the problems don’t end here. With less marketing power, car and retail sales decline even further, generating more unemployment, which, in turn, causes even further reduced sales, and so on.

The only way to break this vicious circle is to inject financial incentives that bring back production (and thus employment) that restores retail and car sales, which would generate more production…

One could say that the same incentive principle should be valid across all industries, but that’s not the case for a number of reasons.

First, the sector has to be large, and, ever since the loss of the aerospace industry, entertainment represents L.A.’s main employment pool.

Second, entertainment labor is not affected by sales, and thus by poor products, as is the case with cars. If a movie doesn’t do well at the box office, that doesn’t reduce the level of unemployment.

Third, retail volume can be stimulated only by cutting sales taxes, but it’s useless if consumers don’t have purchasing power. Helping banks, as we have seen, only restores bonus benefits to a few top-level executives, without any added values to the labor force. Air transport, another labor-intensive sector, can see an increase in profits with increased general employment; lowering airfares doesn’t mean anything to consumers without income. Real estate and construction are also labor intensive, but incentives can only come in the forms of interest rates and…employment.

I’m sure that some economists would dismiss this analysis as amateurish, but in view of the various problems that these same academics have brought about for the world, I’m hoping that they are savvy enough –– at least for a few years –– to refrain from causing more damage with their theories.

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