VIRTUALLY ALL MUSEUMS in the United States, especially art museums, face major problems funding all of their many functions. (1) Many industrialized nations of the world provide high and growing levels of support for museums, but the United States has not followed suit. While subsidies for "national museums'--the National Gallery of Art, the National Portrait Gallery, the Hirshhorn, the National Museum of African Art, and those associated with the Smithsonian Institution--are very much in the tradition of European-style support, there is a clear lack of funding certainty at the federal level for all other museums. U.S. museums, increasingly under "cost crunches" (principally due to increases in operating expenses), must look to corporations, individuals, and income from operations to finance these costs through endowments and direct gifts, as well as to government support at all levels. (2) A multilayered funding strategy can be quite difficult for the museum industry because museum officials are never certain of their expected revenue streams. (3) The state of the economy, the political make-up of Congress, tax incentives, and the charitable nature of museum supporters, along with many other factors, affect donation and contribution levels. In 1998, according to the American Association of Museums (1999), these institutions used private sources (32.3 percent), (4) earned income (28 percent), (5) investment income (11 percent), (6) and governmental sources (27.9 percent) to fund their operations. Although museums have a myriad of funding sources, including endowments, these sources typically do not provide a steady stream of income for the "average museum." The disjoint between revenues and expenses has forced some museums to close, and others have resorted to cannibalization of permanent collections to fund operating and other expenses. Thus, a central problem facing art museum administrators is the variability of funding and the matching of expenditures to often unpredictable receipts.
For their part, economists have analyzed problems relating to museums for several decades, with analyses of funding problems (Clotfelter 1991), pricing principles (O'Hagan 1995; Steiner 1997), federal subsidization, pro and con (Netzer 1978; Frey and Pommerehne 1989; Grampp 1989), cost inflation (Baumol and Bowen 1965, 1966), and other issues. The purpose of this article is to identify a heretofore unrecognized potential problem that besets museum directors and administrators--a problem that results from the fact that museum attendance, at least in the aggregate, could be countercyclical while federal and other subsidies to museums follow the business cycle. While subsidies of the federal government--channeled through the National Endowment for the Arts (NEA) and other agencies--are a small (if not minute) source of funding for museums in the United States, we argue that the pro-cyclical nature of these expenditures is a proxy for the direction of both other public and private sources of museum funding at other levels. (7)
Why does this possibility constitute a potential problem? Efficient support for museums and their patrons requires that museum funding (a factor affecting supply) be positively correlated with attendance (demand). In other words, the quality-adjusted benefits received by demanders of museum services must be matched by costs incurred. (8) It is of course well known that government revenues are pro-cyclical. A potential public funding problem arises if attendance is countercyclical, that is, attendance falls with a rise in aggregate income and, conversely, rises when aggregate income falls. This unfortunate situation--which we label the "attendance disease"--could exacerbate museum funding problems in terms of public funding because it would mean that when attendance figures are high and museums could justify added government support, the government and possibly other agencies, public and private, do not allocate funds. …