This paper was presented at the 2018 Municipal Finance Conference on July 16 & 17,2018. The conference is a collaboration of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, the Brandeis International Business School’s Rosenberg Institute of Public Finance, Washington University in St. Louis’s Olin Business School, and the University of Chicago’s Harris Institute of Public Policy. It aims to bring together academics, practitioners, issuers, and regulators to discuss recent research on municipal capital markets and state and local fiscal issues.
Local newspaper closures increase local government borrowing costs, according to a paper to be presented at the 2018 Municipal Finance Conference at Brookings. The paper, “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance,” also finds that local newspapers are especially important in states with low quality governance, and that online media are not acting as sufficient substitutes for local papers. Pengjie Gao of the University of Notre Dame and Chang Lee and Dermot Murphy of the University of Illinois at Chicago are among the first to examine the effect of reduced local news coverage on local government finance. From 2003 to 2014, the circulation of local newspapers decreased by 27 percent, and statehouse reporters decreased by 35 percent. Using data on local newspapers and municipal bond yields from 1996 to 2015, the authors compare municipal bond yield spreads for counties with three or fewer local papers before and after a closure, to counties where no local papers closed. Three years after a newspaper closure, municipal bond yields in that county increase by 0.05 to 0.11 percentage points, they find. The authors find similar results when comparing the effect of closures on bond yields between counties with few local newspapers and counties with many papers. They argue that this is because closures in counties with high numbers of local newspapers will probably not affect local news coverage, as other newspapers may fill in any potential information gaps. The authors perform various tests to show that economic trends and other unobservable variables do not drive this relationship. For instance, they match neighboring counties with similar populations (and thus similar economic conditions)—one with a closure and one without—and compare borrowing costs before and after a closure. Indeed, counties with closures had significant increases in borrowing costs, whereas the neighboring counties did not.
“[C]losing local newspapers increase government borrowing costs because (1) less information is publicly available, and (2) local officials are no longer monitored as closely, reducing the quality of governance.”
The authors speculate that closing local newspapers increase government borrowing costs because (1) less information is publicly available, and (2) local officials are no longer monitored as closely, reducing the quality of governance. The authors show that newspaper closures are associated with deterioration in many government efficiency metrics, including government wage rates, government employees per capita, and tax dollars per capita. The authors also say that local newspapers are especially important in states that have initially low-quality governance. Previous research suggests that the geographic distance between a state’s economic and political centers is a useful measure of the quality of governance; longer distances are associated with lower quality governance. Building from that finding, the authors find that newspaper closures increase borrowing costs by 0.12 percentage points in states with low quality governance, compared to only 0.06 percentage points in states with high quality governance. Finally, the authors find suggestive evidence that alternative sources of media, such as the internet, are not acting as sufficient substitutes for local papers. Local issues are often not topical enough for the national news media, they say, and many non-traditional news sources tend to disseminate content rather than produce new information. Using state-level data on internet usage, the authors show that the effect of local newspaper closures on public borrowing costs does not differ between states with high and low internet use. If the internet is indeed a good substitute for local papers, they explain, the relationship between closures and borrowing costs should be mitigated in states with high internet use. But that is not the case.