Tuesday, June 18, 2013

Rock Music, Technology, and the Top 1%

I'm always on the lookout for real-world applications about how technology is altering the distribution of income. Applications that have intuitive appeal for students are even better! Thus, I enjoyed on several levels Alan Krueger's recent talk at the Rock and Roll Hall of Fame, "Rock and Roll, Economics, and Rebuilding the Middle Class." Krueger uses the music industry as a microcosm for technological trends that have led to greater inequality in recent decades. I'll start here with some facts and exhibits.

Prices for concert tickets have been rising quickly. Since the early 1980s, overall price inflation is up about 150%, but the price of concert tickets is up about 400%.

 The share of concert revenue received by the top 1% of performers has more than doubled in the last 30 years or so. 

How has technology contributed to this change? Krueger explains: 

"Technological changes through the centuries have long made the music industry a super star industry. Advances over time including amplification, radio, records, 8-tracks, music videos, CDs, iPods, etc., have made it possible for the best performers to reach an ever wider audience with high fidelity. And the increasing globalization of the world economy has vastly increased the reach and notoriety of the most popular performers. They literally can be heard on a worldwide stage. But advances in technology have also had an unexpected effect. Recorded music has become cheap to replicate and distribute, and it is difficult to police unauthorized reproductions. This has cut into the revenue stream of the best performers, and caused them to raise their prices for live performances. My research suggests that this is the primary reason why concert prices have risen so much since the late 1990s. In this spirit, David Bowie once predicted that “music itself is going to become like running water or electricity,” and, that as a result, artists should “be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left.” While concerts used to be a loss leader to sell albums, today concerts are a profit center."
Krueger also points out that which bands become popular is to some extent a matter of luck, and once a band has become popular, that popularity can then be to some extent self-sustaining.

Much of the rest of the talk is given over to applying these lessons to the broader economic picture. Technology has altered many industries so that some ways of earning money have been decimated, while others have been encouraged. The share of income going to the top 1% for the U.S. economy as a whole has been rising. In many cases, who ends up in this top 1% has an element of luck in the sense that very large economic returns are a matter of fortunate timing, not just skill. Those who run the first company to invent a certain product may end up very rich, while those who were just a few weeks or months behind end up with much less. Certainly the current top executives of big companies are lucky in the sense that instead of earning 25 times as much as the pay of an average worker, as CEOs did back in the 1970s, the timing of their career now allows them earn 200 times the pay of an average worker.

Krueger is not a newcomer to the economics of rock 'n roll. For one of his earlier efforts, see "Rockonomics: The Economics of Popular Music,” by Marie Connolly and Alan B. Krueger. They quote  the  well-known noneconomist Paul Simon: “The fact of the matter is that popular music is one of the industries of the country. It’s allcompletely tied up with capitalism. It’s stupid to separate it.” It's available as a 2005 working paper from the Princeton UJniversity Industrial Relations Section.

Full disclosure: Alan Krueger was editor of the Journal of Economic Perspectives, and thus was my boss, from 1996-2002.