The wrong stuff: Why we don’t trust economic policy

In the 1983 movie The Right Stuff, during a test of wills between the Mercury Seven astronauts and the German scientists who designed the spacecraft, the actor playing astronaut Gordon Cooper asks: “Do you boys know what makes this bird fly?” Before the hapless engineer can reply with a long-winded scientific explanation, Cooper answers: “Funding!”

If an economist were asked, “Do you know what makes this economy fly?” the answer, in one word, would be “trust.”

Trust in economic policy—and economic policymakers—has been shattered in recent years: governments have failed to protect citizens from the worst effects of the financial crisis, regulators have failed to guarantee the integrity of the financial system, and governments around the world have straight out lied about the state of their economies. And American presidential candidates violate our trust by promising to be fiscally responsible while at the same time advocating plans that will blow up the debt and deficit.

Yet those candidates with the most outrageous policy proposals are at the very same time topping the polls and drawing huge crowds to their rallies. What’s feeding the public’s enthusiasm for them? In part, a feeling that the public’s trust has been violated. Trust that the economic system will protect the poor and middle class as well as it protects the rich. In the wake of the subprime mortgage crisis, many less well-off people lost homes and jobs, while well-heeled bankers who were responsible for the crash escaped largely unscathed, and certainly unpunished by the law. Shouldn’t the poor and middle class resent a system that is stacked against them?

A loss of trust is not unique to this country. Around the world, trust that regulators will ensure the fairness of financial markets has been lost. The Libor scandal—and, more recently, a foreign exchange scandal—saw a small cadre of London-based bankers manipulate key benchmark rates in order to turn a profit at the expense of non-insiders. Regulators on both sides of the Atlantic knew about Libor manipulation, but did nothing to intervene. Why should anyone trust their savings to a market that they know is rigged—and not in their favor?

And in some parts of the world, trust that the government will be truthful about the state of the economy is gone. China’s GDP figures for the last six quarters have shown virtually no variation and are almost identical to the government’s official target. Argentina’s government statistics office spent an entire decade issuing misleading statistics that supported the agenda of then-president Cristina Fernández de Kirchner. The fraud was so great that the newly elected president declared a “national statistics emergency” and suspended the release of new data for the rest of 2016 while they clean up the mess.

Lest we think that the accuracy of macroeconomic statistics are of interest only to pointy headed economists like me, it is worth recalling that the European sovereign debt crisis erupted in October 2009 when Greece’s new government revealed that the actual budget deficit was twice as large as had been reported by the previous government.

The lack of trust in economic policy and policymakers has brought about the rise of anti-establishment parties in a number of countries. In Greece, the neo-Nazi Golden Dawn party has been elected to Parliament in four successive elections since 2012. It is not inconceivable that this racist and xenophobic party could hold the balance of power if Greece’s next election ends in a hung parliament. Last September Britain’s Labour Party selected Jeremy Corbyn as its leader, one of the party’s the most left-wing members, who is so far outside of the mainstream that he is given virtually no chance of ever becoming Prime Minister.

The electorate in the United States is in a similarly bad mood and has, so far, supported insurgent, anti-establishment candidates in both the Republican and Democratic presidential primaries. What is surprising is that disaffected voters who feel that their trust has been violated are lining up behind candidates who promise to deliver more of the same.

The Brookings Institution-Urban Institute analyses of the tax plans of “fiscal conservatives” Ted Cruz and Donald Trump show that they would triple the federal government deficit to more than $1.5 trillion by the end of their first term in office. Their estimate of the increases under ex-candidates Marco Rubio and Jeb Bush were only slightly less. It may be that the Republicans are dispensing with candidates in reverse order of the sanity of their economic plans.

On the left, Bernie Sanders has been promising…..well, pretty much everything: free college tuition, higher social security and Medicare benefits, and huge infrastructure spending, all to be paid for with higher taxes. Analyses of the Sanders plan by the Committee for a Responsible Federal Budget and the Tax Foundation suggest that it would lead to an explosion of the federal government’s debt and a substantial reduction in economic growth over the next decade.

Much of the electorate has lost trust in our elected leaders, and not without reason. Nominating or, even worse, electing someone who will abuse our trust further is not the right answer.

Featured image credit: chart shares dax dow jones by markusspiske. Public domain via Pixabay.