Feb 7, 2009

Who's gonna rebuild trust?

A while ago we claimed very boldly and blatantly that the reason behind the current financial crisis was erosion of trust in the US, combined with financial deregulation. Surprisingly or not, from then on, the world trust is appearing repeatedly in the speach of economists, be they commentators, bloggers, academics. One of our favourite Economist, Willem Buiter, makes the clear case here that thinking about the effectiveness of fiscal stimulus is not that relevant if we forget in what state of the world are governments acting today. Making a parallel of UK and US today, with emerging market economies, he thinks a fiscal expansion may not work because people today have lost trust in governments. The US, with a new administration, is on this regard surely better prepared, but still, Obama has to keep up his promises. Buiter's point is an awesome one, because it reminds us as economists that we still live in a system where is not by shifting the magnitude of some key parameters that you achieve a new equilibrium. The effects of policy goes through the channel of people's beliefs and trust in the actions of governments.

So where is trust in governments today standing?I found an interesting study conducted every year on a sample composed only of college-educated people. So it's not representative of the entire population, but mainly of the elites across the globe. It shows that in the major Western European economies three out of four people believe that the governments have to step in to prevent future financial crisis. In the United States, not even half (49%) agrees with that.
This nothwitstanding the evidence that governments have had a share of responsibility for the current mess. As Buiter says, history tells us that:
There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.
I wonder how well "educated" and "informed" are the elites in Europe then...

1 comment:

Katya said...

i dont know. i would say this reflects the general belief in the proper role of government in EU versus US more than anything else...