The honesty factor in reviving the economy

Researchers who study honesty in societies have just found a gold mine of virtue in Japan.

In the seven months since an earthquake and tsunami destroyed entire Japanese communities, some $78 million in cash has been found in the piles of debris. Most was returned to the rightful owners. In one case, as reported by the Los Angeles Times, a woman found a purse with $26,000 in yen notes and turned it in.

Japan’s culture of honesty is well known and helps account for that country’s past economic success. In Tokyo, experiments are often conducted by leaving wallets filled with cash around the city and then counting how many wallets are returned, along with the money. The numbers are astonishingly high.

Such lessons in honesty are important as America and Europe try to recover from their economic woes. In large part, those woes were caused by giant lapses in honesty.

In America’s case, the recent housing bubble was driven in part by people who lied about their finances to obtain home mortgages or who knew they had little chance of paying them back. Equally bad, these “liar’s loans” were then knowingly sold to investors by agents who knew such mortgages were “toxic.” Even now, many banks are reluctant to admit the real value of their mortgage assets – a big uncertainty that hangs over financial markets.

In Europe, the great fib occurred in Greece. It cooked its books on its fiscal deficit.

When it joined the euro community over a decade ago, Greece promised to follow the rule of not letting its deficit exceed 3 percent of its gross domestic product. But it lied to foreign investors, such as French banks. Its deficit was three times that amount.

Fortunately, when George Papandreou became prime minister in 2009, he exposed the lie. And he has worked to restore transparency in Greece’s accounting.

A similar cleansing is under way in the United States as the 2010 Dodd-Frank Act forces both homeowners and the mortgage industry to become more open and honest about borrowing. Those liar loans, for example, are disappearing with the law’s requirement that agents who bundle mortgages for investors must retain at least 5 percent of the assets.

Honesty is a key measure of the “social capital” essential to a healthy economy. Numerous studies show successful economies rely on people going beyond simply being honest out of fear of being caught or because of incentives to be honest. “Unselfish” honesty in which people act out of principle is also significant. It leads to more personal cooperation and fewer legal contracts. It allows greater efficiency and creativity.

Using the World Values Survey, researchers find a direct link between economic well-being and a society’s level of trust between individuals. In the US, trustworthiness has been in decline over recent decades, according to studies.

While more regulation may force honest behavior in the economy, it can also burden progress by creating disincentives for creating new jobs and new businesses. A proper balance is needed.

America and Europe must work harder on their “honesty deficit” as well as solve the more obvious economic problems. Japan’s post-tsunami display of honesty is a reminder of how much that virtue is a glue for society as well as a driver for growth.