Two weeks ago, I suggested a treaty ending international film subsidies. Government funding for local cultural content can be defensible. But when countries use subsidies to compete to attract Hollywood productions, Hollywood is the main winner.

It’s hard for any country to end these subsidies on its own. If New Zealand stopped subsidising its film industry but Australia did not, productions would shift across the Tasman. New Zealand’s film sector would shrink. Some people employed in the sector would follow jobs overseas rather than find work in other areas.

Film subsidies are a longstanding problem. But the Trump administration’s threat to set tariffs on international films to offset foreign film subsidies could have been the spark for change.

Since then, two things have happened.

The American debate shifted from film tariffs, which seem unworkable, to a proposal of federal film subsidies complementing existing state-level subsidies.

And Finance Minister Nicola Willis promised an additional $577 million for the International Screen Production Rebate, lifting the allocation to $1.09 billion over the five-year forecast period. By comparison, urgent and after-hours healthcare receives an additional $164 million over four years, while the Social Investment Fund get $190 million over an unspecified period.

The case for international agreement is at least as strong as it was two weeks ago.

New Zealand seems to need substantial subsidies to attract production away from the United States and other countries. If the US complements existing state-level film production subsidies with a broader set of subsidies for film production nation-wide, there will quickly be calls to increase New Zealand’s subsidies to compete.

It is like an arms race.

But another thing is also clear. There is widespread misunderstanding of the effects of these kinds of rebates.

Film subsidies clearly bring investment in films, jobs in films, and income in the film sector. That is easily seen. But the costs are harder to see.

Here is a simple example that might help.

Imagine that you are the mayor of a town of 10,000 people.

Fifty locals already work in film. A producer comes to town offering a deal. He promises that employment in films will double, if council pays him up to $25 for every $100 that he spends in town – a ‘rebate’ on his production costs.

You agree.

The local Polytechnic starts offering courses in the professions needed for filmmaking. Kids who otherwise would have studied different things and gone into employment in other industries start training for work in films.

Builders, game-studio artists, and apprentices also drift to the set for higher pay. Cafés near the studios are busier.

The successes of the film sector are easily seen. It is harder to see the costs. Good economics counts what’s seen – and what isn’t.

Film jobs double but unemployment barely moves.

Most workers have shifted from other sectors. Companies in those sectors shrink and investors in those sectors visit less frequently. You get more in tax from the film sector – but remember that you still must pay them that rebate – and less in tax from the businesses that downsized.

It is also harder to see the things that the town might have spent money on instead, like roads and libraries, if it wasn’t providing rebates to film productions.

You have also found yourself on the hook for rebates to the town’s videogame maker – in part so it can compete with the movie industry for staff, in part because it learned that rebate-seeking is a worthwhile activity when other towns offer rebates.

Other industries might also learn to seek rebates on their local spending.

When the movie is completed, the investor offers you the chance to do it all over again for another movie.

He reminds you that a hundred jobs in your town now depend on the film sector, and that hundreds more jobs are ‘indirectly’ linked to the sector – all the places where film workers spend money. And that rebates in other towns have increased. All of that is easily seen.

If you end the rebates, the investor will move on. The film industry will shrink back to the fifty workers it had before he came to town. And you will have fifty workers who have gained specialised skills in filmmaking who will blame you when they go back to their old jobs.

The rebate regime overall has not really helped overall employment. But a hundred workers now see their futures as depending on rebates that continue forever.

This is obviously an invented example. But it lines up with the academic work examining the effects of film subsidies.

As economist John Charles Bradbury put it in his analysis of film subsidies in American states, “it appears that [movie production incentives] divert tax revenue to the film industry from other economic sectors (public and private) without generating corresponding economic growth, which calls into question the popular use of film incentives to promote economic development.”

And remember that positive evaluations of film subsidies in New Zealand, like Sapere’s, are relative to a world where, if New Zealand stopped subsidising, other countries’ subsidies would continue.

If America implements a new set of film subsidies, New Zealand and everyone else will be faced with a choice. The arms race in film subsidies will become more expensive. With every country aging and every budget strained, doubling down on subsidies is folly.

Disarmament is the only sane option.

To read the full article on the Newsroom website, click here.