Institutions such as the Museum of Modern Art are part of the dazzling constellation of public culture that makes New York such a special place. MoMA provides a valuable public service by making it possible for New Yorkers to view some of the world's iconic art, like Vincent Van Gogh's "The Starry Night," or "Dada," the critically acclaimed current exhibition.

Resident Scholar Kevin A. Hassett

Resident Scholar Phillip L. Swagel

What is MoMA's value to society? It may seem a callous inquiry. Artists view MoMA as a priceless collection. But economists, being an unsentimental lot, frequently occupy themselves with such diversions. Indeed, MoMA itself entered the fray with a June study by the firm of Audience Research and Analysis claiming that from late-2004, when it reopened, through mid-2007, the museum's economic impact on the city will total $2 billion. The study comes to this figure by including the spending of the museum in the city and an estimate of the "ripple effect" of subsequent spending by museum visitors, workers and vendors.

MoMA has not explained why it commissioned this work, but one can conjecture that it represents an effort to build support for the substantial public subsidies the museum receives, including both direct financial support from the city and state and indirect support through tax breaks given to MoMA and its donors. The direct support includes most recently the $75 million in public money given to MoMA at the front end of its current $858 million fund-raising effort. Tax subsidies are less direct but just as real, and this financial support comes out of the pockets of all Americans.

As a nonprofit, MoMA is subsidized by American taxpayers because it is exempt from paying tax itself and because MoMA donors get a tax deduction on their contributions and this, in turn, stimulates giving to the museum. The tax break includes a potentially massive subsidy on donated artwork, for which donors can deduct the appreciated market value of their artwork without paying capital gains tax. A painting purchased decades ago for thousands of dollars in principle could give a tax benefit in the millions.

While people from all walks of life enjoy MoMA's artwork, it seems safe to assume that aside from the $75 million in public funds, most of the more than $650 million raised in the current campaign has come from upper-income donors. With a top combined federal, state and city marginal tax rate of just more than 42%, this implies a potential subsidy of $270 million to the wealthiest Americans in order to support the Museum of Modern Art.

Should that money go to MoMA, or would it be better used to feed the homeless or provide education to New York's schoolchildren? It depends at the margin on the value that the alternative uses of funds provide.

Figuring out how much MoMA is worth to the city requires calculating the amount that New Yorkers would be willing to pay to create MoMA if it didn't exist or to bring it to the city from somewhere else. The Yankees paid Johnny Damon $52 million to switch from the Red Sox. Would New Yorkers open their wallets to get MoMA to relocate if it were up in Boston? A tried-and-true method for evaluating this worth would be to ask a random sample of New Yorkers how much they would pay each year to guarantee that MoMA exists. Dividing the approximately $90 million annual subsidy from the city in cash and tax breaks among eight million citizens, the museum justifies itself so long as the average city dweller values the existence of MoMA at about $11.25. Counting the federal and state subsidies would add a dollar or two.

This is a proper tradeoff: MoMA gets a public subsidy in exchange for bringing people joy and making New York a special place.

According to the MoMA study, however, MoMA also adds $600 million to $700 million to New York City incomes each year for the $2 billion total, while boosting tax revenues and creating more than 4,000 jobs. If you believe the museum, it provides its cultural wonders and adds to the economy. That is better than a free lunch. It's like getting paid to eat a nice steak.

Such analysis is sadly common in the public arena. MoMA is doing the same thing that the baseball owners do when they lobby a city for funds to build a stadium. But the museum's analysis misses the mark. Indeed, flaws in the methodology lead to a vast overstatement of MoMA's financial impact. The problem is that MoMA seems to think that spending associated with the museum is new money.

A correct approach would recognize that if MoMA did not exist, the activities associated with it would take place somewhere else. Most of MoMA's talented employees would find employment somewhere else, and the city-based vendors who supply MoMA with everything from catering to construction would make up much if not all of the lost business with other clients. If a corporate reception could not be held at MoMA, for example, presumably it would take place somewhere else and the flowers and food would still be purchased. Even visitors who came to the city just to go to MoMA--the ones whose spending is tallied in MoMA's report--would still probably go to another cultural attraction in the city.

But MoMA's study takes the opposite tack in assuming that this spending would not take place without MoMA. The study then compounds the error by scaling the spending up by more than an additional 150% to account for subsequent purchases by employees and vendors. How big a stretch is this? It's one the Dadaists would appreciate.

Even to hard-boiled economists like us, the museum's contribution is best considered not in terms of jobs or tax revenues, but rather in the softer light of its addition to culture and enlightenment. Sure, we could put a dollar figure on this with a well-designed survey, but we're satisfied that it's large and recognize that Americans are willing to provide about the current amount of tax subsidies.

And culturally speaking, we are delighted that MoMA's management invested a chunk of its funds in an economic study, and urge the museum not to throw the report in the trash, despite our harsh evaluation.

After all, Dada works embrace the illogical, seeking not to be art but to be "anti-art." The claim that MoMA provides all of its wonders at no net cost is not economic in origin, but "anti-economic."

One of Dada's founders, artist Tristan Tzara, once said that "God and my toothbrush are Dada." So too is MoMA's study. Quick, frame the study and add it to the exhibition before it closes in September.

Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI.  Phillip L Swagel is a resident scholar at AEI.