By Joe Jarvis

Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance. This study, published in May, shows what happens to local politics when local newspapers close their doors.

In short, it’s not good. But that doesn’t mean we need to preserve the relics of a bygone era. When a changing market unearths negative results, that is a golden opportunity for an innovative entrepreneur to fill the void.

And actually, the story starts when online job listings and classifieds became popular. This innovation provided locals with a better alternative to the print versions. But in the process, it took a big chunk of local newspapers’ revenue.

Craigslist was the catalyst to newspapers’ decline. But I’ll explain at the end about a tool I think could help replace local newspapers.

1. Craigslist is the Harbinger of the Local News Apocalypse.

The study found that when Craigslist was introduced to a new location, local newspapers were 10% more likely to fail.

The growing popularity of Craigslist in the 2000s came at a cost to traditional newspaper outlets, which largely rely on revenue from advertisement sales. Kroft and Pope (2014), for example, show that Craigslist had a large impact on job advertising in local newspapers, as employers were increasingly using online forums like Craigslist to advertise their job openings. Gurun and Butler (2012) provide evidence that Craigslist entry in Pittsburgh and St. Louis significantly eroded advertisement sales for the Pittsburgh Post-Gazette and St. Louis-Post Dispatch, causing those papers to provide more favorably slanted coverage to local corporations that purchased advertisements in those newspapers.

2. When Newspapers Close, Local Government Efficiency Deteriorates.

After local papers shut down, town and county workers’ wages increased compared to local private sector employees. On average this led to a 1.3% increase in the government wage ratio to other county employees.

The median county studied increased wages by a total of $1.4 million overall and hired an average of four more government employees per 1,000 residents.

The burden on taxpayers increased accordingly. Each taxpayer paid an average of $85 more per year. This might not sound like a lot, but it actually amounted to .25% of the median wage–$33,700–in the counties studied.

These are averages, but certain towns showed much more shocking results.

Bell California’s only local paper closed in the early 1990s. In 1993 Bell hired a town manager at a starting salary of about $70,000.

By 2010, the same town manager was making over $785,000 per year, owned a waterfront mansion in town, and a ten-acre horse ranch outside Seattle.

The Bell Police Chief was earning more than $450,000 per year in the town of 37,000 residents. He earned 50% more than the Police Chief of Los Angeles, the closest major city to Bell, with a 2010 population of 3.8 million residents.

The study found that newspaper closures led to a decrease in local government efficiency even where overall economic conditions improved. The economic conditions of the area had nothing to do with the newspaper closures.

Closures were distributed relatively evenly from 1996-2015 as well as across economic recessions and expansions, geographic regions, and red versus blue states.

3. Political Engagement Dies With the Newspapers.

The study found that having more than two local papers was important for good government. It kept politics competitive by ensuring ideological diversity in the views expressed by the local news.

Similar results were observed whenever an area with three or fewer newspapers had one close down. The government got worse in towns reduced to two, one or, zero local newspapers.

This seems to be because people participated less in local elections. As a result, politicians spent less money campaigning which carried over to less engaged town officials in general. This also correlated to less federal money being brought back to the municipality by local politicians active in lobbying the feds for handouts.

You could debate whether these effects are net positive or negative… As an outsider, I am happy to see less of my federal tax dollars go to random little towns. Lower spending on campaigns also seems like a good thing.

But when it comes to less civic engagement, this likely only exacerbates the problem with less efficient government. It makes it that much easier for politicians to hire more friends, pay them more, and raise taxes.

4. The Further You Live From Your Government, The Worse It Is. Newspaper Closures Compound This Problem.

[T]he relative distance between a state’s economic and political centers is a useful measure of the quality of public governance in that state, with longer distances being associated with lower quality governance. The marginal effect of external monitoring on governance quality is likely to be stronger in states with low quality governance.

Translation: if you have a really crappy government, local newspapers will improve it more than they could improve a decent government.

The study calls states where the seat of government is far removed from the seat of economics “high isolation states.”

In contrast, in “low isolation states”–where most of the population lives in economic hotspots close to the seat of government–governments improve.

[T]he distance between a state’s economic and political centers is a useful measure of the quality of public governance and accountability in the state. Governments face less scrutiny by citizens and the media when the distance between these centers is large, and Campante and Do (2014) show that the quality of governance is worse as a result.

Newspaper closures negatively affect both high isolation and low isolation states. But they affect the high isolation states worse. “This indicates that local newspapers are especially important in states that already have low quality governance.”

Newspapers can help people keep control of a government from which they are isolated. Living close to your government officials also seems to help keep them in check, but the best scenario is living close by and having a local newspaper vet the politicians.

5. Local Bond Yields Increase, Costing More To Finance Government Debt.

The major focus of the study was on the borrowing costs to local government. The study found that the interest rate towns and counties pay on their debt increased as local newspapers died. This means that debt costs towns, and therefore taxpayers, more when there is no local newspaper to scrutinize the public finances. This is because purchasers of those bonds–the people financing the debt–have less information about the stability of the local government, and are therefore taking on more risk when they lend them money.

Specifically, we find that the average offering yield for bonds issued in Closure counties during the pre-closure period is 4.047%, which is 1.5 basis points lower than the average offering yield from the matched control group (4.062%). In the post-closure period, we find that the average offering yield for bonds issued in Closure counties is 3.556%, which is 3.0 basis points higher than the average offering yield for the matched control group (3.526%).

Translation: towns where newspapers would close–but had not yet shut down–were actually paying a better rate compared the control group. After the closures, those same towns paid a higher rate than the control group.

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 study also concludes that the cost of debt increases even more in “high isolation states”–where people live further from the seat of government power. So what we see is that a high isolation state starts with a worse government, which gets even crappier when the local newspaper shuts down, which makes the interest rates increase even more than in “low isolation states,” with a closer, better government.

While newspaper closures increase the cost of debt for both types of local governments:

the effect is much stronger in high isolation states. In particular, following a newspaper closure, yields in low isolation states increase by 5.5 basis points, while those in high isolation states increase by 12.3 basis points, for a difference of 6.8 basis points that is significant at the 5% level. This evidence supports our hypothesis that newspaper closures lead to worse public finance outcomes in states with low quality governance. We also find evidence that yields are slightly higher in high isolation states (2.2 basis points), suggesting that states with low quality governance generally have higher borrowing costs, even without accounting for newspaper closures… [emphasis added]

6. Online News Sources Have Not Effectively Replaced Print Sources of Local News

The study indicated that these negative effects of local newspapers closing were not inevitable. If a replacement to the local newspaper is better at investigating the government, it could have a positive effect on local government efficiency and bond prices.

Clearly, Craigslist was a better alternative for job listings and classified ads. But what can replace the political vetting which newspapers do?

Unfortunately, it seems that an effective replacement for regulating local government has not yet arrived.

The study compared high versus low Internet usage in areas where a print paper closed. They used this as a general indicator of whether or not residents were more likely to replace print news sources with online news sources.

[T]he closure of a local newspaper creates a local information vacuum. Moreover, it is unlikely that such a vacuum can be easily filled by other sources of media. First, local issues are not topical enough for the national news media, which faces a much broader audience. Second, non-traditional media outlets, which are primarily online, have not sufficiently filled the investigative journalism gap that has resulted from newspaper closures (Waldman (2011)). Instead, these non-traditional outlets have primarily been in the business of content dissemination rate.