By Clive Crook
In much of the developed economies, trust in governments is low and is constantly declining. Why is this happening and why does it matter so much? An unusually thorough new study examines these questions and provides some unexpected and, in some ways, more disturbing answers than one might expect.
The fact that trust in the government is declining is not a revelation, at least in countries like the US, where populists who oppose the establishment have subverted politics and the expertise of the elite has become not only unreliable, but also an object of contempt.
Last year, a survey showed that less than one in six Americans expect Washington to do the right thing "almost always" (1%) or "most of the time" (15%). At the turn of the century, the corresponding rates for the US were more than double. Many other Organisation for Economic Co-operation and Development (OECD) countries, such as the United Kingdom, the Netherlands, Spain, New Zealand and Chile, have also seen a decline in confidence. But in other countries, such as Finland, Ireland, Portugal and Mexico, confidence has increased. Confidence levels, in contrast to rates of change, also vary widely. These very different trends make it possible to examine the causes.
At first glance, the collapse of trust resembles a phenomenon of social psychology – a perspective that tends to emphasize the convergence of cultural and technological factors. Social media, misinformation and fake news, "echo chambers" (when people come into contact with beliefs that confirm or reinforce their pre-existing beliefs), "epistemic bubbles" (a social cognitive structure in which other relevant voices are ignored, perhaps accidentally) and other similar phenomena are often held responsible.
This view is wrong, according to a study by Michael Boskin, Alexander Kleiner and Ian Whiton, all from Stanford University. Their study adds to a series of research that argues that it is simple economic factors that count. Looking at 34 countries between 2007 and 2023, they find that GDP per capita, debt, social spending, unemployment, and inflation all have a significant effect on trust in government. In their analysis, the interactions and trade-offs between these metrics largely explain the outcome, with non-economic factors playing "only a supportive role."
Overall, the increase in GDP per capita (in real terms, after taxation) of $1,000 corresponded to a 0.2 percentage point increase in confidence. The effect of higher social spending was even more pronounced: a $1,000 per capita increase is associated with a 1.4 percentage point increase in confidence. Higher inflation and higher unemployment are dampening confidence, as expected. Each increase by one percentage point reduces confidence in the government by 1.6 and 1.0 percentage points, respectively. Half a century ago, economist Arthur Okun coined the "unhappiness index," the sum of inflation and unemployment rates. Obviously, unhappiness means mistrust, and inflation is especially likely to cause it.
The balances between these metrics are more important. As long as all other parameters remain unchanged, confidence increases when social spending increases. If higher spending coincides with a period of high unemployment and overcapacity, it is likely to reduce unemployment without increasing inflation. The net result, thanks to a reduction in unemployment, would then be an even greater improvement in confidence. But if spending coincides with full employment and no overcapacity, it is likely to lead to an increase in inflation – likely to the extent that it will lead to a net decline in confidence. The authors hypothesize that this is what happened in many countries, especially the US, when the recovery from the pandemic was in full swing.
One way to summarize the findings is to say that sound macroeconomic management – which is not the same as "big state" or "small state" – promotes confidence and that the main criterion for sound macroeconomic policy is low unemployment and (especially) low inflation. But there is another, more worrying consequence: the decline in confidence will feed back on if, as it seems, it makes sound macroeconomic policy more difficult.
A vicious circle of macroeconomic mismanagement and declining confidence is then possible. Inflation expectations are based on the credibility of policymakers' commitment to keeping prices under control. If this credibility is undermined, achieving low inflation becomes more difficult. And this risk is not limited to the decisions made by central banks. Fiscal policy is equally involved. The increase in debt in itself causes mistrust. At some point, it also calls into question the government's preference for low inflation (because higher inflation would reduce debt in real terms). Higher inflation means less confidence. Less confidence makes higher inflation more likely. Trust in government requires good governance. Good governance requires trust in the government.
The good news of this study is that restoring trust may be simpler than a cultural revolution and/or a technological stagnation. A simple, traditional, sound financial management – with a particular focus on controlling inflation – may be enough. The bad news for countries like the US, where trust in government has plummeted, is that sound financial management is now much more difficult than it used to be.
Adaptation – Editing: Lydia Roubopoulou
