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"Trust Me on That"

January 26, 2012 3 minute Read by Amity Shlaes

People often talk about how confidence is necessary for strong economic growth. The most well-known measures of confidence include indices like the consumer confidence and sentiment surveys. In other words, they are about consumers and shopping. But another measure, released this week, examines a different kind of confidence – trust.  It treats people not just as shoppers but as decision makers or investors. The Financial Trust Index is the brainchild of scholar Paola Sapienza of Northwestern University’s Kellogg School of Management and Luigi Zingales of Chicago’s Booth School of Business. The Index quantifies the level of trust people place in the country’s financial institutions. In other words, Zingales and Sapienza are not asking “do you want to shop?,” like the traditional indices. They are asking a related, but not identical question, such as “do you trust your bank?” The scholars also asked those polled whether citizens felt they could reliably predict the stock market or had faith in the economic outlook generally. Unfortunately, Americans aren’t feeling very trusting right now. With the results of their most recent survey, Sapienza and Zingales report that overall levels of trust remain low, and that trust in some institutions has even declined in recent months. The percentage of survey respondents reporting that they trust banks fell to 30 percent in December, down from 39 percent in June 2011. Americans, however, are even more suspicious of large corporations and the stock market. Trust for each hovers around only 16%. Overall, 62% of respondents report being “angry” or “very angry” about the current economic situation, up from 52% a year ago. The low trust numbers are at odds with other data. Unemployment has recovered, for example, and the U.S. is no longer, officially in recession.  Sapienza and Zingales’s work may however do something to explain why the recovery has been fragile. As Amity has recently written, in her Bloomberg column, people must trust their financial institutions to be willing to participate in the kinds of activities that fuel economic growth. Savings and investment are important to a robust economy, but when individuals do not have trust that their money is in good hands, they retreat from the system. Restoring this trust may take time, but it is necessary in order to get to stronger growth. This post written by Matthew Denhart, a research associate at the Bush Institute, and Amity Shlaes, senior fellow and director of the FOUR PERCENT GROWTH PROJECT.

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