In the early and mid 1990s, public funding for the arts declined dramatically across the United States. New York State provides a good case study: the value of grants from the New York State Council on the Arts (NYSCA) fell by almost half, to $31 million, from nearly $60 million, while grants to New York artists and arts organizations by the National Endowment for the Arts (NEA) declined to $10 million, from $33 million (Exhibit 1).¹ Today, funding remains low (see sidebar, "Arts funding in the late ’90s").

This decline may not bother the many people who think of arts funding as charitable giving that might generate vague cultural benefits—the sort of thing better left to private donors—but that narrow point of view is certainly wrong. Economic analysis shows that the arts are an attractive public investment for states, counties, and communities: the yield is high, the risk low, and the opportunity sizable. Strategic investors, who focus on the long-term outlook for an investment, will be impressed by the way that arts institutions can create jobs and serve as the core of economic-revitalization plans. Tactical investors, who are primarily interested in short-term cash returns, will...