During the past 15 years, local newspaper circulation numbers dropped by roughly 30 percent, while the number of statehouse reporters covering local government issues dropped by 35 percent. Academic studies suggest that a lack of local media coverage is associated with less informed voters, lower voter turnouts, and less engaged local politicians. My colleagues and I, as finance professors, wondered whether a decline in local journalism would also lead to higher borrowing costs for local governments.
Local governments frequently borrow money to finance public works projects such as schools, hospitals, and roadways. Lenders demand higher interest rates if they think they are lending to a riskier borrower—that is, a borrower who is more likely to default on a loan. We suspected that if local media is not present to keep their government in check, then there would be a greater likelihood of mismanaged public funds and other government inefficiencies. As a result, governments lacking local media coverage would be perceived as riskier borrowers and forced to pay correspondingly higher interest rates on the funds they borrow for public works projects. The costs stemming from higher interest rates would ultimately be borne by local taxpayers.
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We conducted a systematic study of newspaper closures and government borrowing costs in the United States, for the period ranging from 1996 to 2015. We identified newspaper closures using hand-collected newspaper data from the Editor and Publisher yearbooks. Newspaper closures were especially prevalent during that time period because of the rising popularity of online news outlets (which do not focus as strongly on local government issues) and online classified ad sites such as Craigslist (which, as part of the larger effect of the internet on local newspapers, significantly eroded newspaper advertising revenues). We then collected government borrowing cost data from the Mergent Municipal Securities Database and cross-referenced this information with the newspaper closure data.
We found that local government borrowing costs significantly increased for counties that have experienced a newspaper closure compared to geographically adjacent counties with similar demographic and economic characteristics without newspaper closures. Our evidence indicates that a lack of local newspaper coverage has serious financial consequences for local governments, and that alternative news sources are not necessarily filling the gaps.
The day I run into a Huffington Post reporter at a Baltimore Zoning Board hearing is the day that I will be confident that we’ve actually reached some sort of equilibrium.
One challenge in this study was establishing a cause-and-effect relationship between newspaper closures and local government borrowing costs. (For example, depressed local economic conditions could drive both the closures and higher borrowing costs.) To establish a clear, causal relationship between newspaper closures and borrowing costs, we examined the gradual entry of Craigslist into different counties over time. (Craigslist founder Craig Newmark is a member of CJR’s Board of Overseers.) Recent studies show that Craigslist had a strongly negative effect on newspaper revenues. We found that the introduction of Craigslist to a local area significantly increases the likelihood of a newspaper closure, which then has a strong subsequent effect on local government borrowing costs. We also examined government borrowing costs in a county that experienced a newspaper closure and a neighboring county with similar demographic and economic characteristics that still had its own newspaper operation. In this case, we found that borrowing costs only increase in the county that experienced the closure, but not for the neighboring county that did not experience a closure. Both approaches establish that there is a causal connection between newspaper closures and government borrowing costs.
We also found that, following a newspaper closure, local government inefficiencies become more pronounced. County government employee wages (as a percentage of all wages in that county) increase, as does the number of government employees as a percentage of all county employees. (That is, more tax dollars flow to government positions after a newspaper ceases to monitor governmental activities.) Costly financial transactions by local governments, including negotiated municipal bond sales and advance refundings of callable municipal bonds, also appear more likely.
We do not necessarily expect local newspapers to return to those counties where they have shuttered. Alternative news media such as online news outlets are fundamentally changing the way that people consume news, and they are likely to remain the dominant source for news consumption. However, these online outlets do not necessarily provide a good substitute for high-quality, locally-sourced investigative journalism. David Simon, a former Baltimore Sun reporter and the creator of The Wire, remarked during a 2009 Senate hearing about the future of journalism, “The day I run into a Huffington Post reporter at a Baltimore Zoning Board hearing is the day that I will be confident that we’ve actually reached some sort of equilibrium.” In the long-run, perhaps a balance will be struck in which these online-based organizations contract with local reporters and tailor their news to local areas. The evidence suggests that economic growth at the county level will be better off in that equilibrium.
ICYMI: Reframing economic injustice in America’s poorest big cityDermot Murphy is an assistant professor of finance at the University of Illinois at Chicago who specializes in public finance, fixed income, and high-frequency trading. His current research, coauthored with Pengjie Gao from the University of Notre Dame and Chang Lee from the University of Illinois at Chicago, examines the effect of local newspaper closures on public borrowing costs through the government inefficiency channel. His past research has examined how state government policies for assisting financial distressed municipalities affect public borrowing costs.