Thursday, January 22, 2009

The Future of News, Part Two-- Solutions

Guest Blogger

C. Edwin Baker
University of Pennsylvania

[Part One, describing the problem, can be found here.]


What is to be done? Essentially, my proposal is a twist on what was done at the beginning of the country’s history and that continued into the twentieth century – provide a meaningful government subsidy. In the first years of the Republic, Congress believed that spreading of news of a far-flung republic was crucial in keeping the nation together. It responded with major postal subsidies (paid by other users of the mail) on which newspapers were heavily dependent. Later, during the first half of the nineteenth century, the U.S. Senate came within a few votes of acting on the proposition that the First Amendment “freedom of the press” requires the government to provide free postal delivery of newspapers. Though that measure did not pass, newspapers continued to depend on the subsidy of low postal rates. Government action was seen not as a basis of censorship (though the subsidy disfavored advertising content) but of a greater freedom.

The wisdom of the country in seeing this need to subsidize the news continued in respect to broadcasting. A popular view is that by not charging for broadcast licenses the government is subsidizing the broadcaster. This view is wrong since most broadcasters receive their license only after paying full market value from an earlier licensee. However, until being largely deregulated during the last twenty years of the twentieth century, the FCC imposed on broadcasters many obligations relating to news and public affairs broadcasting, obligations that decreased the value of the license to the licensee. Although often poorly designed and often inadequately enforced, the difference between the value of license with and without these public service obligations represents the amount by which government tried to subsidize quality news and informational programming.

In total, the subsidies have often been substantial. Early in the twentieth century, the Supreme Court noted with approval that newspapers received roughly a $70 million annual postal subsidy. In today’s dollars, this would represent more than $1.5 billion. Or, since the relevant amount might be better seen as the subsidy per member of the public and since the population today has quadrupled since 1900, this subsidy per American translates into $6 billion in today’s dollars. If this $6 billion were now used to hire journalists, at an average salary of $50,000, it would now provide for an additional 120,000 journalists. This number compares to the ASNE report of a total of about 52,600 newspaper journalist before the huge lay-offs of 2008. In other words, past subsidies were enough to more than pay the salaries of all of the country’s newspaper journalists – although in the past much of this subsidy went to paying for paper, ink, and distribution and providing profits.

The problem of inadequate market support for valuable economic activities that is described here is anything but unusual. People receive benefits from the existence of some economic activity or some use of resources without themselves purchasing the benefit in the market. Though some can doubt and others will try to explain how the public benefits from farm subsidies, the policy argument must be that this support of farming provides for public benefits. Less controversial are benefits people who would not directly purchase the service receive from intelligent expenditures on public highways, national defense, public health, public education, public parks, or fire protection. Though issues exist in all these contexts, the arguments for public expenditures in each area have an underlying similarity. In each, the conclusion is that the “free market” will not produce enough of the “good.” And the reasons for these failures of the market are similar in each case. Underproduction occurs either because people other than any immediate purchaser benefits from the expenditure – consider national defense or fire protection or public health or public education. Or occur because achievable benefits are not obtained due to the selling firm needing to set a high price covering at least the average cost even though the actual cost of providing for many excluded by this price is minimal – consider roads or parks. That is, economic theory justifies government support when selling firms are unable to capture an adequate portion of the gain that production could produce.

A first take might suggest a subsidy provided directly to newspapers (or, maybe, to a broader category including broadcast news) as it did in the past. That response now is clearly misguided – it misdiagnoses the problem. Even now, despite the financial decision to cut back the number of journalists, most daily newspapers are highly profitable on an operating basis. Their current financial woes – as seen in the steep decline in newspaper’s stock prices – largely reflect one or both of two considerations. If their return falls, even if still at traditionally high levels for business enterprises, that profit may not be enough either to pay the debt that adventurous investors generated in buying the “property” or to support constant increases in stock prices as consistently demanded by investors in publicly traded enterprises. The key problem is that direct subsidies (or tax benefits) to these entities provide no reason for these entities not to simply pocket the subsidy rather than spend on journalistic endeavors.

The reason newspapers lay off journalists is not that journalists do not produce value for the paper – or for the public – but that these journalists cost the papers more than the value they produce for the paper. Though public policy requires that journalists be hired to the extent they produce value to the public, this value turns out to be much more than their value to the paper. An obvious solution is to provide a tax credit (or deduction) to newspapers for their expenditures on journalists and editors. If a paper got a tax credit equal to 50% of the amount it pays its journalists and editors, this credit would reduce the cost of hiring, and hence the incentive to hire, a journalist or editor to the paper by 50% – and reduce the incentive for lay-offs. Maybe, to distinguish between support for working journalists on whom the news depends from media “stars,” this credit should be capped to apply only to the first $100,000 of any individual salary.

At present, each journalist produces value for both the paper (or broadcaster – the argument applies in a straight forward manner to any journalistic unit) and for the general public. The problem is that the paper only receives a fraction of this value. Papers make lay-offs not due to a belief that the journalist does not help produce a better paper but due to a calculation that its benefit – greater circulation – is worth less than the journalist’s cost in salary and benefits. The proposed tax credit provides the paper some compensation for the broader societal benefit its journalists produce. More importantly, by reducing the cost of journalists to the paper, this tax credit makes it more profitable to hire and less profitable to fire journalists. The tax credit could stop, maybe reverse, the long decline in journalist employment. The predictable result is better news “products” from which a democratic society receives great benefits – and predictable increases in circulation or readership, whether online or in traditional formats.


Anthony Lewis has offered a view common within the profession that characterizes much of the achievement and romance of the journalist as belonging to a free-booting tradition that asks nothing special of government. Any hope for a proposal such as that offered here depends on strong support within a profession instinctively dubious about any reliance on government. But this instinctive reaction is misguided on two counts.

First, as noted, subsidies to journalism are not new – newspapers have historically received huge public financial support. Today, few seriously argue against a major but more subtle form of subsidy even though it distorts news content (in the government’s favor) much more than either the historical postal subsidy did or the tax credit proposed here would. By providing press releases, press conferences, free or reduced costs for accessing many public files, and press facilities, the government provides the press with huge amounts of “free” content that fills it pages while saving the press money that would otherwise be needed to search out news. These activities of government, of course, are in one sense perfectly proper in the name of transparency. It should not be ignored, however, that these activities amount not only to a government subsidy of the press but also a subsidy of only precisely the content that the government chooses to make available. They “bias” the press toward reporting what the government chooses.

These historical observations lead to the second point. Journalism that receives subsidies can flourish on its own terms, free of government censorship or pressure to conform if – but only if – this government support takes forms carefully designed to serve a robustly free press rather than to make the press beholden in its editorial judgments on the government. Care should be taken in respect to any proposal – both to assure that it not corrupt the press and to assure that it supports precisely what the public needs. Earlier in our history maybe the greater need was the mere existence of newspapers, a need for which the postal subsidy was adequately designed. Today, however, the need is more specifically the work of journalists and journalistic units, whether on or off line. Still, history clearly represents the correct judgment that the value of information generally and journalism more specifically contribute enough to a democratic society to be worthy of substantial public – that is, governmental – financial support.