Public trust has economic consequences, by Howard Davies, Commentary, Project Syndicate: Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. … But … if this loss of trust persists, it could be costly for us all.
As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. Without mutual trust, economic activity is severely constrained. …
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust. …
In the United States,… a … systematic, independent survey promoted by economists at the University of Chicago Booth School of Business … did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.
That fall in confidence affected banks, the stock market, and the government and its regulators. Furthermore, the survey showed that … if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.
So falling trust had real economic consequences. Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply. This has been positive for the stock market.
There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year. The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate.
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground. …
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals’ income. …
The data show, intriguingly, that … if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused. …
Maybe we should trust each other more – but not too much.
Stimulating Failure
The Job Report: Another month, another drop in payrolls. Will it ever occur to our leaders in Washington that what they’re doing isn’t working – and may actually be damaging our economy?
News that the unemployment rate jumped to 10.2% in October, its highest level since 1983, as the economy shed 190,000 nonfarm jobs, underscores the spectacular failure of the so-called fiscal stimulus to stimulate anything other than economic misery.
Since the $787 billion stimulus was passed in February, the economy has lost 2.9 million jobs – for a total of 4.3 million since the end of 2008. The silver lining, some say, is the number of jobs lost each month is shrinking. But they lose sight of this: There’s no guarantee the economy’s 3.5% growth in the third quarter will continue.
Indeed, some worry the economy is on a slow-growth path that will lead to permanently high joblessness, weaker income growth and fewer opportunities. The Blue Chip consensus of more than 50 economists nationwide expects unemployment to remain above 8% at least into 2012.
Why should this be? Well, start with the fact that virtually all job growth comes from companies with fewer than 500 employees, and that startups and very small businesses are responsible for more than half of all new jobs.
Today, these entrepreneurial job creators are running scared. That the White House vows to jack up taxes on those with “high incomes” (that is, entrepreneurs) is one reason why. Next year’s scheduled expiration of the Bush tax cuts that pulled the economy out of the 2001 recession is another.
Higher income taxes, a flood of stiff new regulations and the possibility of at least $2 trillion in new taxes related to cap-and-trade and a health care overhaul over the next decade have created a climate of uncertainty – for small and large businesses alike.
Businesses are hunkered down. They have $1 trillion in cash stashed away, but they won’t invest out of fear it’ll be taxed away or some government czar will tell them how to run their business.
At the same time, banks have a record $800 billion in reserves but can’t seem to find any worthy borrowers.
The White House claims its stimulus “saved or created” 640,000 to 1 million jobs. But no evidence shows that’s true. Stimulus has failed. If anything, borrowing hundreds of billions of dollars to fund such feckless initiatives is destroying private-sector jobs. Time has come for a dramatic change of course.
The Stimulus Plan Has Failed – Editorial, Investor’s Business Daily