The Nov. 10th Wall Street Journal article “Worry Over Inequality Occupies Wall Street” highlights the impact of trust erosion on the US economy. The article cites Bill Gross, manager of the world’s largest bond fund by assets, as saying “Developed economies work best when inequality of incomes are at a minimum.” The article goes on to mention other big fund managers who are concerned about growing disincentives for people to participate in the US economy. One disincentive, in manager James Chanos’ words, is when the public believes the “game isn't fair.”
In my book The Decision to Trust, I explain why the question of fairness and income distribution is so central to trust. Studies have shown that lower levels of trust are found in nations with greater income disparities. The explanation given for why low trust tends to be associated with more income disparity is that trust is connected with people’s sense of optimism and hope for a better life, both of which suffer when there is great variance in wealth. When we feel hopeful that we can have a better life, we tend to be more trusting. In contrast, if we feel despair and think others have advantages that are not available to us (i.e. there is a lack of fairness), we tend to be suspicious. Low trust tends to result when there are many “have-nots” looking at the “haves.”
Some argue that redistributing wealth robs people of the chance to build self-esteem through hard work, creating incentives for sloth and disincentives for entrepreneurship. Although this may be true in certain circumstances, these arguments do not change the empirical fact that high trust correlates to higher levels of income equality. If a nation values a high level of societal trust as a goal, fairness in the ability to earn income coupled with mechanisms to avoid excessive income inequalities must exist.
