The Coming Test of Social Trust in America

TL;DR

This paper analyzes how fluctuations in unemployment rates relative to adaptation levels can trigger confidence collapses in the US, potentially leading to economic downturns amid rising inequality and declining trust.

Contribution

It models the relationship between unemployment, confidence, and economic cycles, highlighting the role of adaptation levels in predicting confidence collapses.

Findings

Unemployment crossing above adaptation level predicts confidence collapse.

Confidence drops precede recession periods.

US trust in institutions is vulnerable to cyclical unemployment increases.

Abstract

'Animal spirits' or confidence levels are heavily dependent on how current conditions compare to adaptation levels. In the US, with its highly flexible labor markets and weak safety nets, the unemployment rate seems to serve as a generalized job insecurity indicator. In data spanning the postwar period, approximately when the unemployment rate crosses above its adaptation level as modeled by an exponential moving average over the trailing four years, a collapse of confidence occurs, and unemployment accelerates upward into a recession. In the current context of massive inequality in incomes and wealth in America, secularly declining real incomes for most Americans, and minimal trust in central government (as reflected in the election of a 'third party candidate' in the recent Presidential election) it seems likely that Americans' trust in their economic system and system of government will face severe challenges in the next cyclical downturn. If the next cycle follows previous patterns, it will be triggered by a collapse of 'animal spirits' as the unemployment rate rises above its adaptation level.