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Kill the Hobbit Subsidies to Save Regular Earth

By Joe Karaganis
December 04, 2012 6:47 PM EST
Illustration by Matt Leines
Illustration by Matt Leines

The much-anticipated first film of “The Hobbit” trilogy has its U.S. premiere on Dec. 14. If the series matches the performance of “The Lord of the Rings” trilogy, it will gross about $3 billion.

So how much taxpayer money, would you guess, did Warner Bros. Entertainment Inc. need to produce the films based on the J.R.R. Tolkien book? The answer is zero. The studios are investment companies, and the films are almost certain to be immensely profitable.

But now you aren’t thinking like a studio. The real question is: How much taxpayer money can Warner Bros. demand from the government of New Zealand to keep production there (rather than, say, in Australia or the Czech Republic)? That answer turns out to be about $120 million, plus the revision of New Zealand’s labor laws to forbid collective bargaining among film-production contractors, plus the passage of three-strikes Internet-disconnection laws for online copyright infringement, plus enthusiastic and, it turns out, illegal cooperation in the shutdown of the pirate-friendly digital storage site Megaupload and the arrest of its owner, Kim Dotcom.

For keeping Warner Bros. happy, Prime Minister John Key, a former Merrill Lynch currency trader, got a replica magic Hobbit sword from U.S. President Barack Obama and a chance to hang New Zealand’s fortunes on becoming the tourist destination for Middle Earth enthusiasts. What could go wrong?

Hot Money

Let’s start with the obvious. Film money is the hottest of hot investment money, fast in and fast out. Production is very mobile, and studios have become adept at extracting subsidies from governments for a few trinkets and promises of jobs.

This is true in the U.S., where state and local subsidies rocketed from $2 million in 2003 to about $1.5 billion in 2012. Film subsidies are epidemic in Europe, where countries compete to attract and retain productions. And it has been a major part of New Zealand’s cultural and industrial policy, where more than $400 million has been invested in “The Lord of the Rings,” “Avatar” and a handful of other productions over the past decade.

But competitive subsidies are the quintessential suckers game, in which winning is losing. New York City found this out in 2009, when it decided it had to subsidize productions to keep them from leaving the city. When the three-year subsidy budget was exhausted in one year, the city called it quits.

The U.K. government found this out in 2005, when Warner Bros. threatened to move “Harry Potter” productions to the Czech Republic. The government of Gordon Brown caved in to studio demands and passed new subsidies. In 2009, New Zealand also gave in and now faces demands for more.

The worst part is that, for most of the wannabe Hollywoods, it’s bad economic policy on every level. The productions bring in mostly low-end, temporary jobs, while the high-end jobs remain in Hollywood or New York. Call it the Curse of Harry Potter.

So what to do? One way to break the curse is to route public money through what we might call an Expecto Patronum license -- named after the powerful defensive charm in the Potter series. Under the license, public money takes the form of a conditional loan rather than a grant or tax break. After five years, producers have a choice: Pay back the loan or re-release the film under a Creative Commons attribution license, which would allow it to be shown freely.

If a film is among the few that have longer-term commercial value, its producers can choose the first path. If it isn’t, they lose nothing by taking the second route. The license thus underwrites creative risk-taking without squandering public money on blockbusters. It also ensures that public investment generates public culture -- not works controlled by the studios for the next 95 years.

Trade Agreements

The license, however, doesn’t answer the question of how we end the competitive race to the bottom. Fortunately, there are trade agreements for this sort of collective-action problem, such as the Trans-Pacific Partnership. The pending trade deal is being negotiated this week in New Zealand by its government, the U.S. and nine other Pacific Rim countries.

Unfortunately, the trade pact is widely regarded as yet another sellout to Hollywood. A draft chapter on intellectual property reads like a greatest hits of bad enforcement ideas, including three-strikes Internet disconnection for repeat infringers and content blocking by Internet providers.

Still, the trade framework could be used for good. It could support our increasingly rich, participatory, global audiovisual culture, rather than curtail it. It could also look to the Washington Declaration on Intellectual Property and the Public Interest, released by the American University Washington College of Law, for ways to balance public and private interests, rather than to Warner Bros.

Many New Zealanders aren’t amused by Key’s sellout to Hollywood, even if their country gets a short-term payoff. Warner Bros. and Key shared a local award last year for the Worst Transnational Corporation Operating in New Zealand. The ceremony included a special Quisling Award for Hobbit director Peter Jackson, who was named “the individual who did the most to facilitate foreign control of New Zealand.” And yet this fealty will do them little good if Warner Bros. decides to take the next Middle Earth epic to Bratislava, Slovakia, for an extra 10 percent tax break.

So come on, New Zealand. Roll the TPP agreement into a wand, stick a kiwi feather in it, and cast your Expecto Patronum spell! Help free Regular Earth from the tyranny of Middle Earth.

(Joe Karaganis is vice president of the American Assembly, a public-policy institute based at Columbia University. The opinions are expressed are his own.)

To contact the writer of this article: Joe Karaganis at joe.karaganis@gmail.com.

To contact the editor responsible for this article: Paula Dwyer at pdwyer11@bloomberg.net.

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