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NRO’s domestic-policy blog, by Reihan Salam.

The Trust Trade-off



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Matt Yglesias discusses the fact that the percentage of Americans who express a high level of trust in others is low relative to other OECD countries:

Trust correlates with a lot of other important economic variables, including the fact that high-trust countries tend to be richer countries and that more egalitarian countries tend to be more trusting countries. My colleague David Madland published an article on growth and the middle class recently in which he develops the argument that the main line of causation is that equality increases trust and trust increases growth.

It’s difficult to disentangle these issues statistically, but I think the theoretical argument that trust causes growth rather than the reverse is strong since more trust should mean lower transaction costs. It also seems to me that high levels of trust (as in Northern Europe) boost political will to spend money on poor people (lacking in the US even in situations where people’s spending priorities are generally progressive) since people have more confidence that anti-poverty spending is meeting genuine needs rather than to “welfare queens” or what have you.

I was surprised that Matt didn’t revisit Robert Putnam’s findings regarding the relationship between trust and ethnoracial diversity. Michael Jonas discussed Putnam’s findings in a 2007 article in the Boston Globe:

Harvard political scientist Robert Putnam — famous for “Bowling Alone,” his 2000 book on declining civic engagement — has found that the greater the diversity in a community, the fewer people vote and the less they volunteer, the less they give to charity and work on community projects. In the most diverse communities, neighbors trust one another about half as much as they do in the most homogenous settings. The study, the largest ever on civic engagement in America, found that virtually all measures of civic health are lower in more diverse settings.

Jonas also linked Putnam’s findings to the work of Edward Glaeser and Alberto Alesina on diversity and redistribution:

 

In a recent study, Glaeser and colleague Alberto Alesina [and Bruce Sacerdote -- here's a link -- but Glaeser and Alesina were the co-authors on a book that drew on the same research] demonstrated that roughly half the difference in social welfare spending between the US and Europe — Europe spends far more — can be attributed to the greater ethnic diversity of the US population. Glaeser says lower national social welfare spending in the US is a “macro” version of the decreased civic engagement Putnam found in more diverse communities within the country.

Economists Matthew Kahn of UCLA and Dora Costa of MIT reviewed 15 recent studies in a 2003 paper, all of which linked diversity with lower levels of social capital. Greater ethnic diversity was linked, for example, to lower school funding, census response rates, and trust in others. Kahn and Costa’s own research documented higher desertion rates in the Civil War among Union Army soldiers serving in companies whose soldiers varied more by age, occupation, and birthplace. [Emphasis added]

This reminds me of Ross Douthat’s argument that the changing demographic composition of the prime-age working population has implications for the future of entitlements:

Apparently, [Joan] Walsh thinks that it’s entirely sensible for progressives to ask “older white voters” to accept higher taxes in order to “invest in our multiracial future,” but it’s completely draconian and cruel for conservatives to ask those same seniors to pay higher premiums for medical care so that the working-age inhabitants of that multiracial future don’t have to labor under the largest tax burden in American history. And then more broadly, she seems to agree that the problem I’ve outlined potentially exists (or, if you prefer, she shares my “racial paranoia”). 

I had assumed that Ross’s argument was uncontroversial, so I was surprised by some of the more outlandish characterizations of it. 

Matt cites David Madland’s article on “Growth and the Middle Class.” I can’t say I found Madland’s arguments very convincing. He never addresses the role of ethnoracial diversity, and I was surprised to see that he didn’t reference Francis Fukuyama’s Trust, a book that also made the argument that high levels of trust lead to wealth, citing the historical success of the American, German, and Japanese economies in contrast to the “amoral familism” that had prevailed in China. 

The relationship between growth and trust is a tricky one.

(a) Matt’s argument from transaction costs makes sense to me. Fukuyama argued that low-trust societies are defined by high transaction costs outside of family or tribal networks and relatively low transaction costs within them. This is reflected in the pitiful quality of management in firms in low-trust societies like India. Family-owned firms are often reluctant to embrace professional management, which puts a bottleneck on firm expansion (there are only so many sons, and only so many competent sons).

(b) But there are also larger ethnic networks. The Chinese diasporas in Southeast Asia are said to have relatively high levels of in-group trust, which facilitates commercial transactions. One wonders if we see something similar in the United States, e.g., one imagines that there is a high-level of in-group trust among Mormons, or among people with certain credentials or class markers. Could it be that high levels of trust among, say, white people are relatively high? Given the large number of white-identified people in the United States is quite large, this could mitigate the erosion of trust, though of course this scenario would prove problematic for non-white people like myself, and increasingly so as visible minorities represent a larger share of the population. 

(c) Let’s say we accept that higher levels of ethnoracial diversity have eroded the level of trust in U.S. society and this has, ceteris paribus, dampened economic growth. Higher levels of ethnoracial diversity reflect relatively high immigration levels. One could argue that immigration, both high-skilled and less-skilled, has enhanced our growth potential in a number of ways, e.g., a large number of less-skilled immigrants have proven to be valuable complements to high-skilled native-born workers by facilitating the outsourcing of household labor. Might this effect balance out the erosion of trust? I have no idea, and some will of course dispute the idea that less-skilled immigrants have been a significant economic boon. This idea is, however, worthy of consideration.

(d) U.S. entrepreneurs have a strong incentive to work around the erosion of trust by embracing technological solutions to the problem, e.g., sophisticated reputation systems, like those built by popular auction sites and payment services. This might be a cheaper way to alleviate the trust trade-off than to, say, engineer radical cultural change or embrace egalitarian policies that could have a negative impact on growth in the short- to medium-term that mitigates the (hypothesized) positive impact on growth of a more trusting society. 

My guess: the gains to growth that derive from maintaining a lightly regulated, lightly taxed economy that is relatively open to immigration and that is relatively comfortable with a level of wage and wealth dispersion closer to the levels found in Singapore and Hong Kong than the levels found in Japan and Finland among countries with very high human development outweigh the potential gains to trust and thus growth from pursuing the most plausible mix of egalitarian policies.  

It should be obvious, however, that there are many moving pieces, and that the answer is far from obvious. Much depends on our initial gut instincts, e.g., are you inclined to believe that technological substitutes for “organic trust” can do a decent job?



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