April 18, 2024

Economix: In Equality We Trust?

Today's Economist

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

Trust in other people greases the wheels of economic development. The management maven Steven Covey argues that high-trust companies are more successful than others. Higher incomes, in turn, seem to carry trust to higher levels.

But as a recent Economix post by Catherine Rampell reports, cross-country surveys show that income inequality is negatively related to trust. Largely as a result, the average level of trust is significantly lower in the United States than in more egalitarian countries, particularly those of Scandinavia.

And we seem to feel less trusting every day. A survey released at a recent World Economic Forum indicated that trust in both business and government had declined more steeply in the United States than in other countries as a result of the recent financial crisis.

Have sharp increases in inequality in the United States since the 1960s made us more cynical and suspicious?

Surveys don’t necessarily provide accurate indicators of how people behave, and they certainly don’t show cause and effect. But some economists (including my fellow Economix blogger Ed Glaeser) use experimental methods to research these issues.

Some find that inequality can exert a strong effect. A working paper by Shaun Heap, Jonathan Tan and Daniel Zizzo reported results of a “trust game” in which players can transfer resources to other players in the hope that additional resources will be transferred back to them. They found that inequality among players had a corrosive effect on trusting behaviors, particularly when players had specific knowledge of one another’s endowments.

Why might inequality reduce trust?

One possibility is that differences in income, including those based on race, ethnicity, gender or age, reduce the tendency of individuals to identify with one another. Greater variation simply leads to less familiarity. By this account, rich people would be as unlikely to trust the poor as vice versa.

But other causal linkages may come into play, including class conflict. In an analysis of individual-level data from the United States General Social Survey, the economists Alberto Alesina and Eliana La Ferrara found that belonging to a group that has historically felt discriminated against or labeled “economically unsuccessful” reduces trust.

As the economist Jack Hirshleifer explained in a classic article, “The Dark Side of the Force,” extreme differences in wealth and power among groups often lead to appropriation or exploitation rather than trade. Not surprisingly, humans have learned to be suspicious of those who have the capacity to do them harm. By this account, the powerless are less likely to trust the powerful than vice versa.

In an effort to explain country-level differences, the political scientists Bo Rothstein and Eric Uslaner argue that public policies play an important role. In particular, means-tested programs – those that make receipt of benefits contingent on an income or asset test – tend to foster mistrust among people. By contrast, universal programs tend to strengthen social solidarity.

Professors Rothstein and Uslaner emphasize that the causality works both ways. Less social solidarity means less support for more egalitarian policies. Countries can get caught in a trust trap in which inequality and mistrust feed on one another.

This observation seems consistent with the American experience, where partisan acrimony makes means-tested programs like Food Stamps and Head Start particularly vulnerable.

The Center for Budget and Policy Priorities estimated that two-thirds of the budget cuts proposed by Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, were directed at low-income Americans. Major cuts in entitlement spending are called for down the road.

Meanwhile, prolonged unemployment is increasing the ranks of the “economically unsuccessful,” even as corporate profits soar.

This increased inequality will further increase cynicism and mistrust in America, making it even more difficult for us to collaborate effectively with one another. You don’t have to trust me. Just wait and see.

Article source: http://feeds.nytimes.com/click.phdo?i=83092fcef2bb7a13c8bc2bf9347e0081

Speak Your Mind