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Why Newspaper Closures Lead to Higher Government Costs and Inefficiency

You know how democracy dies in darkness? A new study says bureaucratic effectiveness might, too.

The thin ink line   Photo: Nuccio DiNuzzo/Chicago Tribune

Local newspaper closures can lead to higher borrowing costs and more government inefficiency, according to a working paper made public last month—and the authors say it’s bad news for cities and their taxpayers.

“[The findings] mean the taxpayers are paying higher expenses to finance the same projects,” Chang Lee, an assistant professor of finance at the University of Illinois at Chicago and one of the study’s authors, told Chicago. And when it becomes more expensive to borrow money, public works projects, like the construction of schools, hospitals, and roadways, might never even get off the ground, adds Dermot Murphy, also an assistant professor of finance at University of Illinois-Chicago and an author of the paper.

The idea for the study came from a 2016 Last Week Tonight with John Oliver segment on the implications of the decline of newspaper journalism, in which Oliver likens not having reporters at government meetings to “a teacher leaving her room of seventh graders to supervise themselves.” Oliver’s point was this: When a newspaper closes, the community loses an important watchdog.

The researchers wondered: Without reporters to monitor (and expose) government officials when they use funds irresponsibly—would lenders consider it more risky to loan money to the local government?

They set out to answer this question by surveying the local newspapers operating between 1996 to 2015, and then homing in on the 204 counties where a daily newspaper closure led to two or fewer daily papers. After examining local municipal bond data in these counties, the researchers calculated that municipal borrowing costs increased by as much as 11 basis points following a newspaper closure. In other words, lenders began to see loaning money to the government as more risky—and started asking for higher interest rates accordingly.

That may sound complicated, but it’s arguably a somewhat predictable finding. “If you lend somebody money… and you’re afraid they might not pay you back or they might default on their loans, then you’re going to ask for a higher interest rate,” explains Murphy. And taxpayers, he says, are the ones who bear the burden of that increase.

As for why lenders might become more afraid that governments won’t pay them back post-newspaper closure, the researchers offer an explanation for that, too. After a newspaper closure, they found a higher likelihood of government inefficiency. Specifically, they found that both the number of government employees per capita and government employee wages (as a fraction of total wages) went up. They concluded that “local government uses more resources to provide similar services after a newspaper closure,” says Lee.

Importantly, areas that had more newspapers to begin with were unlikely to experience these effects. “The counties where there weren’t many newspapers in the first place—that’s where you see the big effect,” Murphy explains.

Although Cook County didn’t see daily newspapers shrink to two or fewer during the study’s time frame, the paper does offer an important local takeaway. Past studies have found that “high isolation” states, or states with population centers far away from their political centers (think Chicago and Springfield) are more likely to be corrupt than low isolation states (think Boston and…Boston). That’s probably because the government functions far away from the population, which is more likely to be where the media is.

The researchers decided to test whether the effect of closure on municipal borrowing costs is stronger in the high isolation states, and found that the dynamic did, in fact, play out more aggressively in states like Illinois and other high isolation states. “Meaning newspapers are even more important in those states,” says Chang.

Prior studies have looked at the political outcomes of the decline of local newspapers, finding that closures lead to less-informed voters and lower voter turnout. But this one, on which the UIC professors collaborated with Pengjie Gao, an associate professor of finance at the University of Notre Dame, was the first to investigate what the closures mean from a public finance point of view.

After the paper went live last month, some commenters wondered whether it really demonstrated that newspaper closures cause higher borrowing costs, noting the findings could be chalked up to a correlation. However, Murphy says the researchers incorporated techniques in their study to try to rule out a correlation—like comparing a county that lost its newspaper to a neighboring county (with a comparable population and economic characteristics) whose newspaper didn’t close.

Finally, here’s Murphy’s response to everyone out there thinking, “of course politicians try to get away with stuff when no one’s watching.” Although the results may sound obvious, he says, “we’re very glad to be able to quantify this.”

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