A deepening crisis of public dis-trust*
This article is scheduled for print in Mint during the forthcoming week (30th September-2nd October)
Why are most economies- even those relatively successful in containing the spread of the virus-still struggling to revive their growth prospects? Given the amount of expansionary fiscal spending already seen in many nations, will a weak (post) pandemic economic recovery make it difficult for these nations to go back to pre-pandemic performance levels?
These are two critical questions facing policymakers across the globe today.
The answer to why economic recovery seems bad and disproportionate across countries today lies less in its economic explanation, but rather has a more explicit explanation in political economy, that is, in the nature of deepening public distrust and eroding confidence in the state-citizen contract.
The pandemic has already caused one of the worst recessions since the Great Depression in almost the whole of the industrialized world (from the US to Europe). In emerging countries too, from Brazil to India, each of the nations is struggling with negative growth rates due to prolonged shutdowns, weak demand and supply-side disruptions. This is likely to continue for many more quarters. What’s particularly worse for nations like India is the continuous upsurge in coronavirus positive cases which entrenches sentiments of uncertainty, dis-trust against the state.
The rock-bottom (public) confidence in the state’s ability to respond to the public health emergency and its economic pitfalls has made citizenries extremely skeptical, uncertain, and afraid. Such a collective behavior of distrust results in ‘irrational’ responses like a compulsive need to ‘save’ more and spend less amongst households (or buy more gold), reduce investments, or avoid any long-term commitments for firms, and even make financial institutions more wary -in their lending practices.
A breakdown in public trust and confidence, therefore, weakens-what Shiller-Akerlof argue (in Animal Spirits after the 2008 crisis)- the ‘confidence multiplier’ effect. Just as increased marginal consumption, in Keynesian economic thinking, can induce a multiplier effect (animal spirits) to boost economic growth and performance, an increase/decrease in confidence (to spend or not to spend) can similarly propel a ‘multiplier’ effect affecting consumption, investment and production patterns. This affects other macroeconomic aggregates like unemployment levels, export-performance for countries, thereby, making any economic recovery process more and more difficult.
The breakdown in public trust isn’t just a new behavioral normal during the current pandemic times. People’s trust in governments, private and public institutions has been weakening for over a decade now-since the 2008 financial crisis. The volatile nature of commodity prices (oil, gold) across nations, people’s sudden preference for buying more gold -as an asset investment, are all markers underpinning the rise in more uncertain (financial) behavior.
The politics has made the situation worse. Conspiracy theories, an utter disbelief for scientific reason and facts, polarized political rhetoric, fake news etc. have all proliferated to an extent that people (as a whole) find it difficult to trust anything for a sustained period of time. And, if people’s faith in a government, or in a kind of governance system (say, a democracy) keeps going down, this only widens the democratic deficit and deepens populist (majoritarian) tendencies to take root.
Even now, if a vaccine comes out as a projected ‘cure to COVID19’ more than 61% of people across the US are not sure to trust and take the vaccine because of the politics around the issue during an election year. The growing dis-trust in medical experts and regulatory authorities is threatening to reduce the efficacy of vaccination against COVID-19. Not only in the US, but even at a global level, such polarized, hyper-nationalistic political behavior, and reduction in mutual trust to share medical and scientific information between nations, has raised serious questions on the equitable distribution of vaccines and treatment drugs (once found). And, this takes us to the second question.
As compared to any previous financial crisis (2008–09; 1996–97; 1928–29), central banks and governments came to the rescue much earlier during the current economic crisis (induced by the pandemic). Never before has so much of liquidity made available by central banks in such a short span of time. The Federal Reserve, like many others, went all out in its effort to dollarize and stabilize the financial markets and avoid any major panic on the financial streets of emerging (and developed) markets. Many governments too (if not all) resorted to massive fiscal stimulus to keep the economy afloat.
Still, it is because of the growing dis-trust or a lack of public confidence, that hasn’t allowed the economic situation to become any better. This is only going to make it difficult for future generations to repay the money borrowed now to tackle the current crisis.
A serious re-thinking is required to restore public trust and induce the multiplier of confidence amongst people to ensure a more progressive economic action.
For those at leadership positions in science, finance, government, the onus is on them to understand how critical it has become to develop transparent and robust ‘rules of the road’ and make policy-decision making more transparent, evidence-based to all political and economic agents (bureaucrats, households, firms, banks) and the media.
In a biased (and polarized) media environment where 24/7 news cycles continue to spread misinformation and rhetorical lies for vested interests and political goals, serious efforts are needed by those at the bottom (and top) leadership to empower -and not confuse-people.
Trust is in scarce demand and is a volatile (public) good. It takes time and serious effort to make people understand, believe in reason and science. And, if the idea for nations going forward is to kickstart swift economic-and socio-political reforms-in establishing a progressive order and combat forces of climate change, this long-term exercise of building public confidence and trust must start today. A further erosion of trust as being seen now will only result in a catastrophic damage of chilling proportions.
