The tragic reverberations of the Apr. 20 explosion aboard the Deepwater Horizon offshore rig aren't letting up. The Gulf oil spill is an ecological disaster for the affected coastlines of Florida, Louisiana, Alabama, Mississippi, and Texas. The eventual economic damage will be substantial, too. The local fishing and tourism industries face bleak years. The Federal Reserve Bank of Atlanta recently calculated that some 132,000 jobs are at risk in the accommodation and food industries of metropolitan areas along the Gulf.
The financial damage extends far beyond the Gulf and its environs. BP (BP) has lost some 45 percent, or $80 billion, of its market value, suspended its dividend, and agreed to put $20 billion into an escrow fund to compensate victims of the oil spill. Offshore oil rigs and their workers are idle, with the Administration having placed a six-month moratorium on deepwater drilling.
That said, the most worrisome long-term economic impact of the Gulf spill lies elsewhere: The catastrophe is adding to the gradual erosion in trust in U.S. professional elites and major institutions, from government to business. It has hardly inspired confidence to watch the White House scramble to prove that President Barack Obama wasn't as detached from the crisis as he often seemed, or to witness the inability of the world's best oil engineers to stop the underwater gusher.
Confidence in the economy's commanding heights has taken a beating following a long run of scandals and malfeasance. The list includes everything from the Enron and Worldcom failures, Bernie Madoff's massive fraud, the subprime loan mess, the government rescues of Fannie Mae, Freddie Mac, and AIG (AIG), the controversy surrounding Goldman Sachs' (GS) collateralized debt obligations, and so on. The Tea Party movement may grab all the attention with its antigovernment rhetoric, but surveys have repeatedly shown that its sentiment is widely shared. For instance, a series of long-run surveys by the Pew Research Center find that only 22 percent of those surveyed say they can trust government. That's about the lowest measure in half a century. The ratings are similarly abysmal for large corporations and banks and other financial institutions: respectively 25 percent and 22 percent.
Trust isn't as easy to measure as land, labor, and capital. It's more like a recipe or a software protocol that allows for economic exchange and all kinds of innovation. Nobel Prize Laureate Kenneth Arrow famously remarked that "virtually every commercial transaction has within itself an element of trust." Societies with high levels of trust are fertile ground for developing large corporations and innovative enterprises. Low-trust societies feature people who don't like to do business with folks outside their family or community; smaller, family-run companies are the norm.
There is compelling evidence that large economic benefits stem from both high levels of trust in institutions and a belief in the general trustworthiness of individuals in society. What's more, trust becomes increasingly vital to commerce as the products or services that are traded grow more sophisticated. It takes a lot more trust to buy a giant printing press—from a belief that it is well-made to confidence that repair services will keep it running—than to buy a simple commodity such as wheat.
"Along these lines sociologists, political scientists, and recently, economists have argued—and showed—that having a higher level of trust can increase trade, promote financial development, and even foster economic growth," says Paolo Guiliano, professor at the Anderson School of Management, UCLA. "Hence the more trust, the better for a country's economy."
And vice-versa.
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