The US economy’s trust deficit

While official sources and the media highlight strong consumer-spending and jobs data in the US, or tout high US stock-market valuations, more than three-quarters of Americans view economic conditions as poor (36%) or fair (41%). This disconnect between performance and perception can have far-reaching consequences; it already helped to propel Donald Trump to victory in last month’s presidential election. So, what is causing it?Here, it is worth considering how market participants deal with asymmetric information – when one party has more or better information than another party or parties. Imagine you were seeking to make a purchase. As a buyer, there is a limit to the information you can glean about your options through direct observation. So, you make your decision based on your beliefs about those options, which extend beyond discernible facts to include unseen or anticipated characteristics.But the process is not finished when the transaction is complete. You then engage in "discovery” – essentially, observation. If, during this process, you learn things that do not correspond with the beliefs that drove your decision, you modify your beliefs.In the signalling and screening models that economists use, the choices made by a variety of agents close information gaps and lead to equilibrium: the beliefs shaping demand lead to choices on the supply side that turn out to be consistent with those beliefs. The crucial point is that the direct observation that follows a transaction anchors beliefs and determines equilibrium.But in our highly complex economy, characterised by specialisation and interconnectedness, such observation is not always possible. On the contrary, many or even most of the conditions that are salient for an individual’s well-being or decision-making today are not local or subject to personal observation. There can be no comprehensive discovery process ensuring that beliefs are linked to underlying realities.Where personal verification is impractical or impossible, we rely on informational intermediaries, including the traditional media, government, or experts, such as climate scientists. In our digital age, social-media platforms and online sources have also claimed a prominent position in our information ecosystems.But if these intermediaries are to close information gaps, they must be trustworthy – and Americans are not convinced that they are. A 2023 Gallup poll showed that faith in institutions, from media to government, had reached historic lows in the US, with only 18% of respondents expressing confidence in newspapers, 14% in television news, and 8% in Congress. Scientists fare better, with 76% of Americans reporting a "great deal” or "fair amount” of confidence that they will act in the public’s best interests, though the group that identifies as "highly sceptical” is growing, especially among self-reported Republicans.Why don’t Americans trust the institutions that are supposed to be helping to close information gaps? Rosy news about the economy’s performance that fails to account for people’s pocketbook realities might be part of the answer.Income-distribution data can help shed light on these realities. The 2008 global financial crisis – which began with the collapse of a housing bubble – dealt a major blow to the balance sheets of the bottom 50% of households. In 2010, this group accounted for just 0.7% of total household net worth. A partial recovery followed, but the Covid-19 pandemic and subsequent surge in inflation, which spurred the US Federal Reserve to raise interest rates, produced new headwinds. More than a quarter of US households now spend more than 95% of their income on necessities, leaving them vulnerable to even mild shocks and making wealth-building all but impossible.This year, total US household net worth stood at $154tn, with the bottom 50% of the distribution accounting for $3.8tn – just 2.5% of the total. That works out to $58,000, on average, for some 66mn US households, with many owning much less. The top 10% hold two-thirds of all US household wealth, and the bottom 90% share the remaining one-third.It is not difficult to understand why Americans might be mistrustful of those delivering a rosy economic narrative that does not correspond with their experience. Even when media outlets do highlight the challenging economic conditions many Americans face, their reports are not translated into policies and actions that make a significant difference. This has been true for at least two decades, and undermines confidence in the system as a whole. At a certain point, people may start assuming that traditional institutions are either lying or clueless.The de-anchoring of beliefs from traditional sources of information leaves the field wide open for alternatives, which may well be unreliable. The Internet – and social media, in particular – both facilitates and complicates this process, as it delivers access to vast numbers of unverified sources. The results can be highly polarizing.While research into social media’s impact on our behaviour is ongoing, it seems clear that platforms like Facebook, X, and TikTok have become powerful mechanisms for group formation. The process is self-reinforcing: individuals select their group based partly on shared beliefs, and the group influences members’ perspectives. Confirmation bias – the tendency to seek information that is consistent with one’s prior beliefs – reinforces groups’ diverging perceptions of reality. Some controversial beliefs – such as the claim that the 2020 presidential election was stolen from Donald Trump – are not actually beliefs for many, but rather screening devices to verify group members’ allegiance to the same "facts”.Against this backdrop, restoring a shared baseline perception of reality as a foundation for economic policy amounts to a formidable task. Americans’ sharply divergent economic experiences, rooted in soaring wealth inequality and many other hardships, including the rising costs of health care and college, will only compound the challenge. – Project Syndicate

• Michael Spence, a Nobel laureate in economics, is Emeritus Professor of Economics and a former dean of the Graduate School of Business at Stanford University and a co-author (with Mohamed A El-Erian, Gordon Brown, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023).