A broad crisis of public distrust that we need to resolve4 min read . Updated: 28 Sep 2020, 08:58 PM IST
Declining trust in the state and its ability to handle crises could yield behaviours that delay a recovery
Why are most economies, even those relatively successful in containing covid, still struggling to revive their growth prospects? Given the amount of expansionary fiscal spending, will a weak post-pandemic economic recovery make it difficult for these nations to go back to their pre-pandemic performance levels?
These are the two critical questions facing policymakers across the globe.
Why an economic recovery seems so bad and disproportionate across countries may have less of an economic explanation than one derived from a reading of the political economy, the specific problem being a deepening public distrust and an erosion of confidence in the state-citizen contract.
The pandemic has caused one of the worst recessions since the Great Depression in almost all of the industrialized world. In emerging countries too, nations are struggling with contracting growth due to prolonged shutdowns, weak demand, and supply-side disruptions. This is likely to continue for many quarters. What’s particularly damaging for countries like India is the continuing upsurge in coronavirus cases. This evokes and heightens uncertainty.
Low public confidence in the state’s ability to respond to the ongoing health emergency and its economic pitfalls appears to have made citizens extremely sceptical and afraid. Such collective distrust results in “irrational" responses like a compulsive need to save more and spend less (or buy more gold) among households, a reduction of investment by firms (or avoidance of long-term commitments), and a credit wariness exercised by financial institutions.
A breakdown of public trust and confidence, therefore, weakens the “confidence multiplier" effect, as Robert Shiller and George Akerlof argue in Animal Spirits, published after the 2008 financial crisis. Just as increased marginal consumption, in Keynesian thinking, can induce a multiplier effect (“animal spirits") to boost economic growth, a decrease in consumer confidence could have a negative multiplier effect that hurts consumption, investment and production. This affects other macroeconomic aggregates like unemployment and export performance, thereby making an economic recovery that much more difficult.
The breakdown in public trust isn’t a new behavioural circumstance that arose after the pandemic. People’s trust in governments, as also private and public institutions, has been weakening since the 2008 financial crisis. The volatile nature of commodity prices (oil and gold) and people’s increased preference for gold as an investment are markers that underpin the rise of uncertain financial behaviour.
Politics has worsened the situation. Conspiracy theories, a disregard of scientific reason and facts, polarized political rhetoric and fake news have proliferated to an extent that people at large find it difficult to trust anything for a sustained period. And if their faith in a government or an entire system of governance (say, democracy) keeps declining, it will only deepen populist majoritarian tendencies and widen democratic deficits.
Even if a vaccine emerges as a projected way out of the covid crisis, more than 60% of people across the US may not trust and take the vaccine because of the politics around it in an election year. The growing distrust in medical experts and regulatory authorities is thus threatening to reduce the efficacy of a vaccination programme. Even at the global level, polarized, hyper-nationalistic political behaviour, and a fall in mutual trust among nations on the sharing of medical and scientific information, has raised serious questions on the equitable distribution of a vaccine once it is found. This takes us to the second question.
Compared to previous financial crises (2008-09; 1996-97; 1928-29), central banks and governments launched rescue missions much earlier this time round. Never before has so much liquidity been made available in such a short span of time. The US Federal Reserve went all out to dollarize and stabilize financial markets and prevent panic on the streets of emerging and developed markets. Many governments, if not all, also injected massive doses of fiscal stimulus to keep their economies afloat.
Still, it is a growing distrust that hasn’t allowed the economic situation to get better. This is only going to make it difficult for future generations to repay the money borrowed now to tackle this crisis.
A serious rethink is required to restore public trust and induce the multiplier of confidence among people.
The onus is on those in leadership positions of science, finance and government to understand how critical it has become to develop transparent and robust “rules of the road" and take decisions based on evidence that can be examined by others.
In a biased (and polarized) media environment, where 24/7 news cycles spread misinformation and rhetorical lies for vested interests and political aims, concerted efforts are needed by leaders to empower—and not confuse—people with information.
Trust is a scarce and volatile public good. It takes time and effort to make people understand and adopt reason and science. If nations hope to institute economic and socio-political reforms to establish a progressive order and combat climate change, this long-term exercise of building public confidence must start today. A further erosion of trust could have consequences of chilling proportions.
Deepanshu Mohan is associate professor of economics at OP Jindal Global University