Mistrust and the Great Recession

Photo:? AgnosticPreachersKid

Four years ago, 75% of Americans said that they had confidence in financial institutions or banks. Following the financial crisis, that number has fallen dramatically, to 45%. This well-earned public mistrust may be yet one more factor retarding the recovery of the financial sector, and possibly the broader economy. Survey data also show that trust in government is also currently at an historic low. The effects of this can be seen every day in our political dialogue. And I fear that this demagoguery has made it more difficult for policymakers to respond aggressively to our current economic malaise.

Betsey Stevenson and I document this decline in trust in our new working paper titled “Trust in Public Institutions Over the Business Cycle.” You can either read the paper here, or Justin Lahart’s splendid write-up in today’s Wall Street Journal, here.

The key fact we document is that those countries hardest hit by the Great Recession also experienced the largest declines in trust. First, here are the data for trust in financial institutions:

The correlation between declining trust in financial institutions and rising unemployment is pretty darn strong. Interestingly, this relationship about as strong for OECD countries (the blue dots) as for others (the green diamonds). The relationship also looks to be pretty linear. (The red line shows a lowess fit.) Even relative to this strong correlation, the decline in the US is particularly large. Interestingly, the Irish experienced an even larger decline in trust.

Turning to trust in government, the pattern is remarkably similar, although this time the mood in the US is closer to what you might expect, given the rise in unemployment:

We have evidence from other Gallup surveys that this recession has wrought a particularly sharp decline in the trust Americans have in banks, big business, and in Congress – although the latter is definitely part of a longer-run trend.

The bigger question here is whether this trust is easily rebuilt. Many economists – myself included – have long been worried that today’s recession can ruin tomorrow’s recovery. Typically, these “hysteresis” stories are based on concerns that the jobless lose skills, and lose hope, and so aren’t ready to work when the jobs return. But perhaps these data suggest we should also be worried that recessions destroy the valuable stock of trust that can sustain a booming economy. And if trust really is essential – still an open question, to be sure – perhaps these data provide one more reason to fear that the current malaise may persist.

Justin Lahart expounds at greater length in the accompanying WSJ video, below:

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  1. Edwin says:

    Absurd! You worry about trust and not the underlying fundamentals at the banks, the Fed, the FDIC, the PBGC, the OCC, or FASB (mark to market). Nice work! Just like an economist to bring a correlation to a causation…

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    • Nosybear says:

      If Humans were Econs I could agree with your analysis; however, we are not. Trust is a major factor in the success of public institutions and public institutions are a major factor in building wealth, both on a personal and a national level. One common thread among the world’s poorest countries is lack of trust in public institutions, mostly due to their corruption. Once we begin to perceive we can’t trust the large institutions, we begin to go our own way: Why invest when the investment brings no return? A major fault of economics as a science has been their failure to view human beings as what we are. If there’s anything that will bring economics from the realm of a philosophy with some math attached into the real sciences, it will be viewing human beings as the flawed things we are. Trust is one of those flaws, easily squandered, built with extreme difficulty.

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  2. John Borneman says:

    I am not sure how confident one can be that a correlation really exists in this data, let alone causation.

    With an “R” value of -.54, one can only claim medium level correlation, correct? It also seems apparent that there are values that have a great amount of leverage on the data and slight variations in value either way would change the predicted fit. The bulk of the data lies in a very randomly appearing ‘ball’ of numbers centered around unemployment = 0 and population confidence= -5.

    It also seems that the population’s confidence in banks, in some of the countries used in your data, may have a lot more to do with factors other than unemployment (governmental stability, other?).

    For fun, I created some data that gave a similar appearance to your charts using randomly generated normal data for “Change in Unemployment” (mean 0, stdev ~ 1.8) and “Change in Population Confidence” (mean -5, stdev ~ 9.5). This gave me the “ball” of data seen to the left “of the chart and this data I added the outliers seen on the right of the chart which I estimated from your chart. I know, crude, but it allowed me to play with the some data using regresison and linear fitting.

    Running a regression analysis on this data (admittedly, not your data) showed that while some correlation exists, the R-sqd was only 10% and the Variance Inflation Factor was 1 (indicating that the predictor is not correlated)

    So, *maybe* some correlation, but definitely one shouldn’t try to predict anything.

    (I am not a statistician and realize that my little knowledge can be a dangerous thing )

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    • Nosybear says:

      I’d have to agree: It looks like if you were to take the outliers out, there’d be no correlation in the second graph and a markedly greater downward slope in the first. The low r-squared bear that out.

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  3. Eric M. Jones says:

    Thus survey employs the Great Fallacy that there is such a thing as public opinion. When I hear commentators asking about “Public Opinion” I have to ask where the supposed “Public” is getting together to peaceably resolve our public issues–on the lawn in the town square in tri-cornered hats? In taverns? Where exactly?

    The truth is that there is only “Public Opinion” invented by “media” to sell ink (or electrons). Public Opinion is what remains in the brains of viewers of Fox News, after the sports and weather.

    This is why Mid-East dictators and Presidents alike can say that the protesters in the street are cheering for the status quo.

    There is hardly a better study of this total lack of a thing called “Public Opinion” than the tale of the US entry into WWI ( on 6 April 1917). Up until the day the US declared war on Germany–because if Britain or France had lost, they would have reneged on their debt of BILLIONS they owed US industrialists and bankers). They were friends of our neutral country. We liked Germans. By THAT SUMMER German books were being burned and Germany was The Hun.

    This was not a result of “Public Opinion”, but a back-room ploy by the government to enlist soldiers and industry in a war to save bankers’ investments. By the end of the war Germany was so hated, that German goods were being funneled through JAPAN, and being rebranded “Made in Japan” for import to the US.

    So he who has the Bully Pulpit…Fox News and the Koch Brothers…decide what public opinion is.

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  4. Nosybear says:

    Strange, distrust in public institutions due to corruption is one of the leading causes of poor nations remaining poor. Isn’t it interesting being in an experiment where a country’s once-trusted institutions are now eyed with distrust, if not outright disgust? Shouldn’t something in economic theory predict what will happen when the people lose faith in institutions and the wealth gap becomes unsustainable?

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  5. Caleb Baucom says:

    Another great example of public mistrust having consequences is a ROTH IRA, where investments are made after-tax, but withdrawals are tax-free. I work in the investment industry and speak to investment professionals everyday. Not one I know recommends a ROTH IRA for young investors because everyone assumes that the government will change the rules in future and tax the withdrawals, whereby the investor is forced to pay taxes twice. The government would raise more current revenue by encouraging ROTH IRAs, but a lack of trust from the investing public prevents them from doing so.

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  6. Mary K says:

    The charts are difficult to make out, but I get it. I was trying to make out which nations are not experiencing the decline in trust, because I am trying to decide what country I want to move to. It isn’t as if our government and corporations are doing anything to gain our trust. I understand the need for trust to rebuild, but they just flat don’t deserve it. Fool the American people once, shame on them. Fool us twice, shame on us. But we will not be fooled again.

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  7. William says:

    Well, I frankly believe we have to trust in our government because if not, then you might as well move out of the country and go live in Canada or something. I guess the loss in faith of the bank is because people don’t have enough money in it to be FDIC insured and i’m not too solid on the amount. The recession does bring down trust in the government, but only by believe in it can we actually get back out.

    Perhaps it’s because I’m still young and haven’t had job experience that I haven’t felt the true fangs of the recession, but I get the idea of the hard times because my parents had been jobless because of it.

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  8. Annes Kim says:

    I had been aware that the recession was causing some mistrust in our government, but I did not know that it was having such a drastic effect on how much Americans don’t feel safe in our economy. 75% to 45% is a very big change. Since I personally feel unaffected by it, I did not know that it was making such a difference, to the point where it is at a historical low. This mistrust and conflict is going to be difficult to remedy, but it will have to be done after all the Americans have come out of this deficit.

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