The newsroom of the Philadelphia Inquirer, in 2009, when the owners filed for bankruptcy.
The newsroom of the Philadelphia Inquirer, in 2009, when the owners filed for bankruptcy. Joseph Kaczmarek/AP

Without watchdogs, government costs go up, according to new research.

When local newspapers shut their doors, communities lose out. People and their stories can’t find coverage. Politicos take liberties when it’s nobody’s job to hold them accountable. What the public doesn’t know winds up hurting them. The city feels poorer, politically and culturally.

According to a new working paper, local news deserts lose out financially, too. Cities where newspapers closed up shop saw increases in government costs as a result of the lack of scrutiny over local deals, say researchers who tracked the decline of local news outlets between 1996 and 2015.

Disruptions in local news coverage are soon followed by higher long-term borrowing costs for cities. Costs for bonds can rise as much as 11 basis points after the closure of a local newspaper—a finding that can’t be attributed to other underlying economic conditions, the authors say. Those civic watchdogs make a difference to the bottom line.

Paul Gao, an associate professor of finance at the University of Notre Dame and one of the paper’s authors, was inspired to look into the issue after an episode of “Last Week Tonight with John Oliver” about the news industry. “He was focused on two things: consolidation of national news media and closure of local news media. John Oliver’s show really gave us the prompt for the phenomenon, and we started thinking about it from an economist’s point of view.”

The survey covers some 1,596 English-language newspapers serving 1,266 counties in the U.S. over the study period. This paper excludes counties without any daily local newspaper (1,863 in all). Across the relevant counties, the study finds 296 newspaper “exits”—which refers to a local paper closing down or being absorbed by another outlet, or publishing fewer than four days a week, or merging to form a new newspaper. Depressingly, the paper finds that news shrinkage is a nationwide phenomenon.

(Gao, Lee, Murphy)

Discounting the media-rich counties, which could absorb the hit of a lost daily—as well as the places that added a newspaper (they exist!)—a total of 204 counties saw a decrease in local coverage to two or fewer daily newspapers. By examining local municipal bond data for these counties, the researchers were able to suss out a relationship between local newspaper closures and public finance outcomes. In the three years following a newspaper closure, the costs for municipal bonds and revenue bonds increased for these cities. That’s likely the result of losing the investigative services those ink-stained wretches once provided.

“There are already papers that show that there are political consequences, or political outcomes, when local newspapers close,” says co-author Chang Lee, assistant professor of finance at the University of Illinois at Chicago. “But that’s not really a direct impact on local residents. We wanted to show that, if you look at the municipal bond market, you can actually see the financial consequences that have to be borne by local citizens as a result of newspaper closures.”

Think of a municipal bond’s offering yield as the interest rate that municipalities pay for borrowing money in the bond market, Gao says. High offering yields mean that a city or county has to promise to pay more in coupons (semiannual payments to bondholders) or more principal for whatever the city is borrowing. Secondary yields, on the other hand, are the interest rates for bonds as they trade in the market: more of a proxy or indicated rate of a city’s financial wellbeing.

Without investigative daily reporters around to call bullshit on city hall, three years after a newspaper closes, that city or county’s municipal bond offering yields increased on average by 5.5 basis points, while bond yields in the secondary market increased by 6.4 basis points—statistically significant effects.

Rate hikes are even more pronounced for revenue bonds, and they run higher all around in states with low internet usage and poor governance. Here’s a tidy explanation from the paper for the relationship between hard-nosed local reporters and revenue bonds:

Revenue bonds are commonly issued to finance local projects such as schools and hospitals, and are backed by the revenues generated by those projects. General obligation bonds, on the other hand, are typically used to finance public works projects such as roadways and parks, and are backed by local taxes and fees. Revenue bonds should be subject to greater scrutiny because of the free cash flows that those projects generate, and these bonds are rarely regulated by the state government. A local newspaper provides an ideal monitoring agent for these revenue-generating projects, as mismanaged projects can be exposed by investigative reporters employed by the local newspaper. When a newspaper closes, this monitoring mechanism also ceases to exist, leading to a greater risk that the cash flows generated by these projects will be mismanaged.

The Rocky Mountain News, for example, won four Pulitzer Prizes in the 2000s before it closed at the end of that decade. The paper was known for its investigative reporting, especially with regard to local government deals surrounding the Denver International Airport. Three years after that paper shuttered, the median yield spread for new local municipal bonds increased by 5.3 basis points. In the meantime, the Denver Post has been subject to devastating budget cuts.

One key task for the researchers was to establish that higher bond costs were the result of a decline in local investigative reporting—and not, say, crumbling economic conditions. They addressed this concern in a number of ways. First, to keep things local, they excluded state bonds from their analysis. Second, in order to compare apples with apples, they looked at the difference in borrowing costs between a county that lost its fishwrap with a similarly sized and scaled neighboring county—a control—that didn’t.

“There could be an underlying economic state that drives both variables, the newspaper closure and borrowing costs,” says Dermot Murphy, the paper’s third author, also at the University of Illinois at Chicago. “That’s where we have to get a little bit more sophisticated with our tests, to establish the causal connection from newspaper closures to borrowing costs.”

Gao, Lee, and Murphy also looked at Craigslist as an indicator. A harbinger of doom for newsprint media, Craigslist’s arrival in a city could spell disaster for smaller regional newspapers, as residents moved from selling their junk or searching for roommates in paid classifieds to online (and other advertisers left with them). For counties within 30 miles of a city where Craigslist opened up shop, the probability of newspaper closure increased by 9.6 percent. Similarly, outside the central Craigslist hubs (think Boston or San Francisco), municipal bond costs rose, too.

The team presented its findings at the Society for Financial Studies Cavalcade at Yale University earlier in May, and it’s the subject of a discussion at the Brookings Institution in July. (The paper has yet to be published.) It joins a growing body of research examining the wide-ranging impacts of local-news desertification, from heightened susceptibility to post-truth politics to alarming gaps in our national surveillance of infectious diseases.

>For fans of local newspapers, the outlook isn’t rosy. As important as local investigative reporting may be to local capital markets, the researchers don’t expect local newspapers to rebound on their own—even though it might cost taxpayers a lot more in the long run to lose a local daily than it would to subscribe to one.

“Our analysis suggests that newspaper companies, or the information they provide, is a public good and it’s worth providing,” Lee says. “But if we don’t finance it, no one will produce it.”

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