Want to Help the Economy? Learn to Trust.

(Bloomberg View) -- It's hard to know whom you can trust anymore -- at least that's the attitude of many Americans today. Therein lies a crucial challenge for the world's largest economy.

Five years ago, Justin Wolfers and I examined data showing that trust in institutions such as Congress, banks and big business had plummeted during the recession, hitting an all-time low. Because historically trust had fallen as unemployment rose, we argued that it would increase as unemployment declined.

We were wrong. Despite all the progress the economy has made, measures of trust remain stuck at historicallylow levels.

Worse, people are losing faith in one another. One long-running survey shows that only 30 percent of Americans believe most people can be trusted, down from 46 percent in 1972 (when the survey started). Young people are the most disillusioned; only one in five millennials believe that most people can be trusted.

Trust is essential to the economy. Without it, people have a harder time figuring out with whom they can trade, work or even go on a date. As a result, they're more likely to miss beneficial opportunities. Research has shown that in aggregate, less trust leads to lowergross domestic product.

Innovators have responded by developing tools to help us vet and monitor people better and faster: Angie's List, Yelp, GPS trackers for dog walkers, nanny cams for parents, monitoring software for employers. But this simply reduces some of the negative consequences without solving the problem.

Government institutions have tried to step in -- for example with new rules on financial advice and payday lending. But they can't do their job well if people trust neither them nor one another. Striking the right regulatory balance is extremely difficult when businesses argue for less so they don't get sued by untrustworthy people and consumers argue for more to protect them from untrustworthy businesses.  

So what do we do? How do we restore trust in each other and in our institutions?

One theory is that trust comesfrom genuine social interactions -- the mundane chats we have standing on the sidelines of a kid's soccer game, hanging out at a park or a bar, at neighborhood block parties, and in the aisles of the grocery store. The effect is most powerful if we interact with people who have different views, experiences and beliefs.

Yet we have actively sought to avoid such interactions. We increasingly choose to live in neighborhoods -- and inhabit networks on social media -- segregated by race, income and political views.

This segregation extends to the workplace. Professionals often no longer even work in the same companies as janitors, security guards and cafeteria staff, whose jobs have been moved to outside service providers. This undermines any sense of community and cuts off the career ladder that once allowed lower-skilled workers a shot at good-paying jobs.

Trust and growth also suffer in times of greater income inequality. It's lowestamong the poorest and least-educated, among people who are dissatisfied with their financial situation or generally unhappy. It has declined most among those with only a high-school degree, relative to college graduates -- which is not surprising, given the wage stagnation and declining job opportunities for high-school-educated men.

Restoring trust will require finding ways to spend more time together, particularly with people who differ from ourselves. That means, for example, getting rid of zoning rules that keep poorer families out of desirable neighborhoods, where they would have a better chance of getting a job or sending their children to a good school.

It also means finding real solutions for widening income inequality. Companies need to revive training programs that create accessible career paths for more of their workers. Policy makers must provide new ideas for restoring greater equality and wage growth for the median worker -- and devote a lot more resources to programs such as early childhood education and care, paid family leave, mid-career training and income supplements for the working poor.

Leaning on tax cuts as a solution simply fuels the growing distrust of our institutions -- the logic being that if the government can't get anything right, they should give us our money back. Instead, institutions need to earn back our trust by making it clearer that we are better off because of the work they do.

More broadly, behavior matters. People who don't trust others turn out to be not very trustworthy themselves. We undermine ourselves when we post invective online, avoid those with different backgrounds or unfriend people with opposing views. Being more respectful and tolerant is something anyone can start doing today.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story: Betsey A Stevenson at betseys@umich.edu.

To contact the editor responsible for this story: Mark Whitehouse at mwhitehouse1@bloomberg.net.

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