The Trust Deficit

The Trust Deficit

When Americans lose confidence, even multi-billion dollar stimulus packages don’t work.


When my friend and her husband bought their Tuscan-style cliff house in Marin County late last year, they thought they were among the luckiest people on the planet. As they saw it, the sprawling salmon-colored beauty with a pool, an in-house theatre and breathtaking views of the Golden Gate Bridge was a steal at more than 30 percent below the original asking price. 

But now they are really scared and not just for themselves. Their former home is still on the market with no offers, and only one serious shopper from Asia has taken a look. That’s left them in a financial squeeze carrying two mortgages. At the same time their normally vibrant real estate business is struggling, as tenants pay their rent late, or not at all.

“This is a nightmare,” says my friend. “We’ve stopped spending money for anything except fundamentals.  My Visa bill has gone from $10,000 a month to $400.” And even in affluent Marin County, she says they are not alone. “Everyone is hunkering down. It’s like they’re in shelters waiting for the bombs to stop dropping. And no one knows how long this economic winter will last, or if they have enough supplies.” 

Worse yet, says this lifelong Democrat, Washington seems to be fiddling:  “The stimulus isn’t working. The bailouts aren’t working. And the politicians are trying to ram a health care package down our throats that the polls show the people don’t want. What are they thinking?  I am scared to death for the country.”

Marin County is probably one of the last places in America to feel the pinch of the Great Recession. My friend’s bunker mentality – not usually seen among America’s affluent – seems a particular sign of the times. And her new distrust of Washington points to another American deficit, one that may ultimately prove linked to the economy and the budget deficit.

Call it the trust deficit, a loss of faith in America’s political and business institutions, which may make it harder than usual for people to start spending and businesses to start hiring again. A recent CNN/Opinion Research poll found that nearly six out of 10 Americans were dissatisfied with the way our democracy was working, and eight out of 10 thought their elected representatives were out of touch, influenced by special interests, and mainly concerned with getting re-elected.

The Post-Traumatic Consumer Mindset

David M. Sachs, an analyst at the Psychoanalytic Center of Philadelphia, compares the psychological state of the American consumer to a post-9/11 trauma victim. After Madoff, AIG and a host of other betrayals, Sachs says, “normal expectations of what is safe and dependable were abruptly shattered.”  As a result, “planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred." Now, says Sachs, people feel safer relying on themselves and saving money rather than spending it.

Harvard Business School professor John Quelch sees four distinct personality types in the consumer marketplace today: 1) the slam-on-the-brakes types like my friend who have been so devastated by the recession that they are cutting back to what they consider bare necessities; 2) the pained -but- patient types who are optimistic long-term but cutting back short-term, say by buying non-brand name products or taking one vacation not two; 3) the live-for-today crowd, mostly young, urban professionals who continue to spend until they lose their jobs; and 4) the comfortably well who are still spending though less ostentatiously. The longer and deeper the downturn, says Quelch, the more likely it is that consumers will manage themselves into “a new normal.”

What’s the New Normal?

For months, consumer confidence has been in free fall.  Last week, the Conference Board reported that its Consumer Confidence Index had dropped to 46.0 in February from 56.5 in January. Even more telling, consumers’ assessment of current conditions dropped to 19.4, the lowest point in 27 years. Expectations for the next six months dropped as well. “Consumers also remain extremely pessimistic about their income prospects,” said Lynn Franco, Director of The Conference Board Consumer Research Center. “This combination of earnings and job anxieties is likely to continue to curb spending."

There are a few glimmers of hope. The stock market seems to be climbing a wall of worry. And last week, two retailers at opposite extremes of the market reported better-than-expected earnings: Nordstrom, a favorite of affluent fashionistas, and Target, which seems to be edging out Wal-Mart (whose earnings were weak). Overall, the Commerce Department reported that spending rose 0.5 percent in January, slightly better than expected.

Still, unemployment remains high and income growth tepid, which bodes ill for a robust revival in consumer spending anytime soon. That’s why many market analysts are worried about another downdraft in the stock market, where the recent rally was fueled largely by inventory rebuilding, which is slowing, and exports, which could be hurt by a strengthening dollar. The next leg up for the market depends on a more decisive comeback in consumer spending, which drives 70 percent of U.S. economic growth.

Needed: A New Bipartisan Civility

So what can Washington do?  My friend from Tiburon has a common-sense idea that just could help. “I live my life by the three C’s: collaboration, communication and cooperation,” she says. “Why can’t Washington?” Amen to that. Without a return to bipartisan civility, it’s hard to imagine we can cut the trust deficit, and craft pragmatic solutions on the budget, jobs, health care and environment. But if politicians can come together to do the people’s work, it just could begin to rebuild the kind of confidence that gets businesses hiring, banks lending and people spending again.