Sunday, October 18, 2009

Let's consider the magnitude of the costs of externalities in journalism – Please.

Part 2 of 2 (Please read part 1 first.)

The media's gross dereliction in informing the public about the truth in response to extreme Republican misleading, outright lies, and just incompetence was a major factor causing the recent generation of Republican dominance. The costs to America and the world have been monumental.

Simple-minded, anti-thinking Republican economics leads to gross societal underinvestment (especially in projects of great social return, like basic science and medicine, infrastructure, alternative energy, education, etc., things that due to well established in economics market problems will be provided by the free market at a level far below that which maximizes social utility). What we get instead is over consumption – predominantly for the rich, i.e. yachts, mansions, and $20,000 watches instead of cancer research, alternative energy, and college student aid so that students can study more and flip burgers less.

Their simple-minded, government is always bad ideology leads to severe problems and inefficiencies, as it is long established in economics that there are many, and often severe, free market problems (externalities, asymmetric information, inability to patent, monopoly power, transactions costs and other frictions, etc., etc.). These will result in great inefficiencies without a substantial government role. Thus, what we get with the Republican dismantling and corrupting of government is low growth, especially long term, and many other horrible things, including acute bubbles that can lead to severe recessions.

Then, with enough Republicans in power to block smart government remedies, we can have Hooverism and depressions. This is something we came very close to recently, after the effects of a generation of Republican damage lead to the worst economic crisis since the Great Depression. Luckily, we had a new Democratic president, and a congress that was pretty Democratic (but not that Democratic, as we've seen from the great worsening of bills that has been necessary to get them through congress). For more on this, including empirical evidence, see here, here, and here, and Nobel Prize winning economist Paul Krugman's books, written for laypeople, "Peddling Prosperity" and "Depression Economics and the Crisis of 2008".

But now let's put this in perspective. Let's quantify it to get some idea of the benefit better journalism could provide in leading to smarter voting, and therefore less of harmful Republican economic policy (Of course, the Democrats are far from perfect economically, but unlike Republican politicians, they believe strongly in thinking beyond dogmatic sound bites, and in science. As a result, their economic policy is far more intelligent and effective, especially over the long run).

According to figures from the Berea of Economic Analysis (BEA), real GDP growth has averaged 3.37% between 1930 and 2009. One might think of this as an average of 1% growth from poor, or Republican, economic management, and 5.8% growth from much better, or very Democratic, economic management (Note, I am using the proper geometric average here, not the common arithmetic average.)

Does it seem like I've included too much variance around the mean?

Take a look at the BEA numbers. You'll see I haven't included enough variance. The standard deviation is 5.06 percentage points. There's a lot of variance in annual growth. For example, -13.1% at the height of the Great Depression in 1932, 16.4% to 18.5% from 1941 to 1943 during the huge fiscal stimulus that was World War II, and more recently 0.4% in 2008 and 4.4% in 1998.

Of course, there are short term and long term issues, but considering all of the evidence and logic I've seen over many years schooling and study, I think it's realistic to think that smart growth economics could lead to at least 5.8% real GDP growth over a generation or two, and very Republican anti-investment, high consumption, high debt, anti-thinking, anti-competence, crony economics could easily lead to 1% growth, or much less – negative real growth.

What is some of that logic and evidence? I've presented a good deal of it in the links above, but consider this: Suppose the entire Bush II tax cuts, 1.8 trillion, which went mostly to the wealthy and super-rich, were instead spent on basic scientific and medical research. This would have increased total government spending on R&D over the decade approximately three fold. It would have increased total R&D spending from all sources, government and non, by approximately 50%.

[Calculations: Bush's big tax cuts occurred in 2001, 2003, and 2004, with the biggest in 2001. Thus, consider R&D figures for 2002. In that year total government R&D spending was $77 billion. Total R&D spending from all sources, government and non, was $266 billion. The data source is the National Science Foundation (see table 1). I use the same categorization and data source as Brandeis economist Adam Jaffe in "Trends and patterns in research and development expenditures in the United States", Proc. Natl. Acad. Sci. USA, Vol. 93, pp. 12658–12663, November 1996. Reasonably extrapolating the R&D numbers out a decade leads to my approximate figures. A quick ballpark way to see: If the $77 billion in government spending on R&D in 2002 were continued for a decade, that would be $770 billion. If the Bush II tax cuts were instead spent on R&D that would add $1.8 trillion to that $770 billion, for a total of $2.57 trillion, which is 3.34 times the size of $770 billion.]

With reasonable, moderate tax increases on the well to do, we could increase government spending on basic scientific and medical research many fold. Certainly that would do far more for long term growth than instead spending on yachts, mansions, $5,000 suits, and $10,000 watches. And this tax level would not have a substantial effect on work effort due to the well established income and substitution effects (please see here and here). The 1950s and 60s was a golden age of scientific and economic growth, and the highest marginal tax rate was always at least 70%.

So, I hope I've convinced you that good, highly Democratic, economic policy and governance could lead to long term growth of 5.8%, and bad Republican economic policy and governance could lead to long term growth of 1%. The table below then shows what that would lead to over a generation or so – 30 years. And it shows how much would be gained if efforts to address the externalities in journalism, lead to improved journalism, which lead to smarter voting, better governance, and better economic policy, which caused 10% or 20% movements toward the better growth. All dollar numbers are in trillions.

Click table to enlarge.

So, I hope this suggests that the gains from addressing the externalities of journalism effectively may be in the order of magnitude of tens of trillions of dollars per generation, and that is, of course, just the GDP gains. It does not include gains regarding war and peace, social issues, crime, and more. It also is just gains in dollars, not utils. If inequality were decreased along with the increase in GDP, the util percentage gain could be many times the dollar percentage gain. Finally, the many goods not counted in GDP, or undercounted, could also be increased greatly from addressing journalism's externalities effectively.

So how might we then address journalism's externalities effectively?

Here are some ideas:

1) A large tax credit for the costs of serious investigative journalism – This tax credit could be very large, 50% or more, to really change positively the quality and mix of what we see in newspapers, cable news, etc. In addition to reporters' investigation time and expenses, the credit could also cover the costs of fact checkers and research assistants, and the costs of consulting with experts, on-staff and outside, so that journalists could be sure, and will have the courage and confidence to state lies as lies, and not write "he said, she said".

Serious investigation and research is very expensive. That's a big reason why, in profit maximizing,circus, horse race, personality stuff so often wins out. Cut the costs of serious investigation by 50% – or 80%, with an 80% tax credit – and you're going to see far more serious investigative factual pieces. The profit maximizing equation changes. You won't have Paul Krugman complaining, "Back in 2004 I looked at TV reports on health care plans, and found not a single segment actually explaining the candidates’ plans. This time the WaPo ombud looks at his own paper’s reporting, and it’s not much better."

The tax credit could be done based on objective accounting expenses in a very clinical way, to allay fears of the government favoring/influencing media outlets.

2) Incentives/Favoritism for non-profit owned media outlets – This very directly gets at the problem of for-profit externalities. And it's a problem that's gotten a lot worse over the last generation. In the 2009 Handbook of Journalism Studies, John H. McManus writes:
Commercialism ebbed over much of the 20th century as codes of ethics were adopted and education levels and professional aspirations of journalists rose. But during the last two decades, and particularly during the last several years, as competition for readers and advertisers on the internet has intensified, commercial interference appears to be rising, at least in American news media.

Since the mid-1980s the corporations that produce news in the United States have begun to treat it less as a public trust and more as a commodity, simply a product for sale...(page 219)
A large part of this is that the Republicans have constantly, and with a powerful machine, drilled into this country over the last generation the message that greed is always good. This has done great harm to our country in so many areas because, of course, greed is not always good, and extreme greed is almost never good. Aside from externalities and a long list of other well established in economics market problems, there is the fact that this destroys the ability of people to trust each other and therefore to work together well, and at low cost, in the ever larger and more complicated groups and situations necessary for high-tech modern production.

With regard to non-profit media, current law has restrictions on their activities that discourage them, and discourage for-profit media from becoming non-profit. At least some of these restrictions should be removed, although this is an issue I'd like to study further before being more specific.

And I think we should do more, like adding subsidies for non-profit newspapers, cable news stations, and other media outlets, perhaps equal to 20% of news revenues, or more if necessary to create a strong and vibrant non-profit media sector.

The subsidies to non-profits could be provided in a very transparent, and clinical, accounting way to make sure the government is not favoring any outlets or points of view.

Of course, I'm just one guy, who amongst other responsibilities just started thinking about this. What in-depth, detailed, and well studied ideas might we have come up with if, in coordination with other fields like law and political science, even a small branch of economics had been working on this for the last few decades.

Update (day after initial posting): In today's news, "The New York Times plans to eliminate 100 newsroom jobs — about 8 percent of the total...The newsroom already has lowered its budgets for freelancers and trimmed other expenses, and employees took a 5 percent pay cut for most of this year...Nearly all papers in the metropolitan region have been cutting their news operations for years, and some have fewer than half as many people in their newsrooms as they did in 2000."

With a 50% or 80% tax credit for the costs of serious investigative journalism, there would clearly be a great deal of hiring, and expanding of newsroom capabilities, rather than the opposite. This would result in much more, and much higher quality, serious, substantive, factual, and investigative news, which, as I said, is a lot more expensive than horse race, circus, personality news.

Please see also: My next post on this, "Why economists should not leave the externalities of journalism to other fields alone"