From Diane Ragsdale in her Jumper blog:
Direct grants to artists may make it possible for an artist, at a particular point in his or her career, to make (better or more ambitious) work (by removing the necessity to maintain a day job). Funds may be used to help an artist acquire a critical resource or asset that has longer term returns (a marketable artistic output, knowledge and skills, marketing and promotion, staff, representation, a piece of equipment, a studio, a car, etc.). And often direct grants (particularly if competitve or associated with awards) send a signal to other gatekeepers (funders, donors, producers, press, intermediaries, curators, etc.) that a particular artist is worthy of time and support and may result in more resources and attention flowing to that artist.