Lack of trust is one reason why macro policy is underperforming

From my latest NYT column, here is one excerpt:

During the financial crisis, the prices of stocks, homes and other assets all fell, leaving the American public feeling less wealthy. In fact, the Federal Reserve reported last week that the crisis had erased almost two decades of accumulated prosperity for a typical family. The American economy and its financial system failed a giant stress test, at least when compared with previous expectations. Feeding the fears today are the crisis in the euro zone, the slowdown in China and political polarization at home.

In short, there is a prevailing sense that we are simply not as safe, financially speaking, as we used to be. The productive capacity of the economy may appear largely intact, but the perceived risk is significantly higher.

Think of hiring as a business investment, and that investment often requires:

1. A not too high risk premium

2. Consensus within organizations, and thus trust within organizations

3. Commitments from banks that they will provide liquidity when needed and not flinch in light of pressures to cut their balance sheets

4. Ability to afford concomitant capital costs

5. Ability to scale up rapidly if the new projects “hit paydirt”

6. Consumers perceive they have enough wealth to (potentially) become captive customers of a new and successful product

7. Affordable real wages

Inflating away the real wage helps with #7 — and that can be a big help indeed — but it is far from the entire picture.  When trust is low, both monetary and fiscal policy will underperform, relative to textbook predictions.

Here is another bit:

In response, some people have moralized about this shift — sometimes by telling voters they’re stupid to let government shrink. But that kind of talk can lower public trust even further.

If your blogging or writing doesn’t increase the degree of trust among people who do not agree with each other, probably you are lowering the chance for better policy, not increasing it, no matter what you perceive yourself as saying.  I also wrote:

Although Sweden and Switzerland have had effective monetary policies recently, both of those countries have especially high rates of trust in government.

And high trust in each other.  I could have added Iceland to that list.


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