Trust and the growth of government.

• Author: Garen, John
• Position: Essay

An important part of post-World War II economic history is the growth of government. In the United States, much of this growth has taken the form of an increased scope of federal involvement in the economy via income redistribution programs and in regulatory activity. However, it has been accompanied by a large decline in trust of government. Pew Research Center (2010) reports that respondents who indicate that they trust government "most of the time" or "just about always" fell from 76.6 percent in 1966 to 21.5 percent in 2010. (1) A good deal of anecdotal evidence is consistent with the simultaneous growth in and mistrust of government (e.g., see Lewis 2010, who discusses the decline of trust and civic life in Greece as government has grown).

The decline in the public's trust of government, given its increased importance in society, has caused great unease among many commentators. A concern often raised is that trust is an important aspect of social capital and its decline may detract from the performance of government, as well as in the ease and efficacy of economic and social interactions. Moreover, the simultaneous growth in government and deterioration in trust in government presents something of a paradox: How does a mistrusted institution grow and become so large? This article develops a framework to understand this paradox as well as related issues.

To do so, we utilize key findings in the economics, psychology, and experimental literatures that illuminate the interrelationships among trust in government, productivity, rent seeking, and government growth. A good deal has been written about each of these phenomena separately--and the fundamentals that underlie them--and this has produced a number of important findings. We bring many of these findings together in a unifying framework regarding trust, reciprocity, and cooperation; social capital and productivity; and rent seeking and political economy/public choice to understand equilibria and interactions among them.

A basic outcome from our modeling is the mutual dependence of the public's mistrust in government and the extent of political/rent-seeking activity fostered by government. It seems straightforward that trust in government is a declining function of government actions that generate rent seeking and reward special interests--and indeed this is an aspect of our model. However, a less apparent implication is the feedback mechanism that generates greater rent seeking as the degree of mistrustfulness grows; essentially, the returns to rent seeking are relatively higher in a mistrustful environment. It is this feedback effect that leads to a situation where government growth and mistrust might perpetuate one another. Thus, an initial small change in government policy that encourages rent seeking can produce mistrust and multiply itself, leading to further growth in government activity and mounting mistrust. This may help provide an explanation of the historical comovement of government size and mistrust in government.

Good government activity also occurs and we incorporate it into our model. However, it is simply not plausible for government growth to be regarded as predominantly good while leading to less trust in government. Thus, much of our focus is on government action that fosters rent seeking/political activity and rewards interest groups.

Extensions of our basic model also contribute to models of Leviathan, i.e., how government growth may sustain itself and rarely reverse. Important frameworks in this regard are developed by Higgs (1987), Olson (1982), and Caplan (2003), but ours brings in the role of the public's trust in government. In particular, a version of our model has two equilibria--where one equilibrium is good, with high trust and low rent seeking, and another is bad, with the converse--in which an economy can become trapped in a big government/high rent-seeking/low trust equilibrium. Once policies are adopted that move the economy from the former to the latter equilibrium, moving back is difficult. A return to the original policies is insufficient; the economy remains in a bad equilibrium. There is a "trust trap" that impedes a reversal in the growth of rent-seeking government and the decline in trust.

The article begins with a review of the literature indicating the importance of citizen trust and cooperation with government in order that the latter may function effectively. Many functions of good government--such as property rights and contract enforcement, general law enforcement, and dealing with externalities--raise productivity, and a cooperative public enhances and enables this to occur. This relates to ideas regarding the importance of social capital. Another strand of the literature considers several key findings in the trust and reciprocity research. Generally speaking, individuals are more likely to be cooperative with other individuals or institutions if they are perceived to be acting in a fair manner and/or are a legitimate authority. Trust and cooperation decline with the extent of rent seeking that the government encourages.

Next, we present a model based on the above findings as well as on a political economy/public choice-style model of politicians. In particular, we model government/politicians as self-interested individuals who find it in their interests to reward rent seeking/lobbying activity. Formally, the approach is comparable to that of Grossman and Helpman (1994) regarding trade protection where special interest groups end up being disproportionately favored. Similar to that article, our framework has politicians that may offer favors in return for political support. This distorts citizen effort away from productive activity in the private sector toward political/rent-seeking activity. The latter results in welfare costs and generates mistrust and a growing government necessary to support the rent seeking. Mistrust, in turn, erodes cooperation and social capital, lowers productivity, and induces a substitution away from productive activity and toward rent seeking. More welfare-reducing government activity ensues, followed by another round of erosion of trust. Thus, we have the mutual reinforcement of government growth and mistrust.

After formulating our basic model, we provide details regarding the subsequent rounds of declining trust and increased rent seeking. The mutual dependence of trust and political activity/rent seeking has similarities to other articles that model the codetermination of attitudes and economic outcomes. (2) Our framework, however, explicitly brings the behavioral/experimental literature into rent-seeking models to understand broad patterns of trust and government activity.

Next, we present a model with two equilibria and show how a "trust trap" can emerge where once the economy moves to the low trust, high rent-seeking equilibrium, it cannot easily move back. The final section offers some concluding thoughts.

Background and Supporting Literature

This section provides discussion of some general background literature, related models on the codetermination of trust and political activity, as well as literature specific to trust, reciprocity, and cooperation that are foundational to our model.

Some General Background

The ideas of trust and cooperation are closely linked to social capital, culture, and attitudes. There is large literature with many studies showing their importance to economic outcomes. For example, Knack and Keefer (1997) show that cross-country measures of trust are positively related to GDP growth and investment. Guiso, Sapienza, and Zingales (2006) show that differences in cultural attitudes translate into differences in entrepreneurship and savings. Greif (1994) contrasts the culture and practices of the Maghribi traders and the Genoese merchants, especially regarding contract enforcement, and suggests that these led to different growth rates. At a perhaps more fundamental level, Rosenberg and Birdzell (1986) maintain that the development of a moral system consistent with capitalism was an important ingredient to the growth of the Western world. McCloskey (2010, 2015) argues that favorable attitudes toward the bourgeoisie and civic virtue are much more important than previously thought.

Related Models

The mutual dependence of trust and political activity/rent seeking has similarities to other papers that model the codetermination of attitudes and economic outcomes. For example, Francois and Zabojnik (2005) discuss contract enforcement through kin and clan or through external methods (e.g., government). Tabellini (2008) is similar in this regard. In their models, parents "invest" in the honesty of their children based on expected success, where the degree of honesty in the populace and GDP are mutually dependent. Other notable papers that relate closely to our approach include Clark and Lee (2001a, 2001b). They emphasize that, while trust is important for government to function, the trust of the public is earned by good performance of the government, and they model this simultaneous relationship--that trust enables government action, but government action affects the degree of trust. This mutual relationship is evidently believed to be an important one and has been noted in the nonacademic literature. Galston and Kamarck (2008), in trying to revitalize progressive government, write, "Change you can believe in needs a government you can trust."

In another closely related paper, Aghion et al. (2010) consider cross-country correlations of trust in government with government regulation. They find that governments that have heavy regulation, are the least trusted. In their article, there are two equilibria: a good one is where most people become civic and vote for little regulation, and a bad one is where they are not civic and vote for heavy regulation. In their model, heavy regulation reduces productivity but it is better than light regulation of...