Fractured Trust: How Undermining Contractual Obligations Threatens U.S. and Global Prosperity

The strength of the United States economy has long rested on more than just its natural resources or innovative spirit. At its core, American prosperity is undergirded by the credibility of its institutions: the rule of law, contract enforcement, fiscal reliability, and a reputation for honoring agreements. These mechanisms don't just ensure the smooth functioning of markets at home—they also serve as the backbone of the global economic system, which relies heavily on U.S. financial instruments, norms, and institutions. In this light, the Trump administration's track record of treating federal obligations as negotiable or revocable risks not only domestic economic stability but also the trust-based architecture of global commerce.

The Trump Administration and Contractual Reliability

Throughout his presidency, Donald Trump has frequently treated financial commitments made by the federal government as conditional or voidable. Whether it was renegotiating trade deals, questioning the legitimacy of NATO cost-sharing agreements, or attempting to rescind federal funding commitments for infrastructure and social programs, the pattern is clear: contractual obligations are not always honored.

More troubling are specific instances where the administration has reneged on congressionally ratified funding agreements, such as those tied to Affordable Care Act subsidies or multi-state grants. Even when courts upheld these obligations, the mere threat of noncompliance injected uncertainty into markets and policymaking.

This pattern of behavior represents a deviation from long-standing norms in U.S. governance. For decades, both domestic and international stakeholders operated under the assumption that commitments made by the U.S. federal government—particularly those backed by law or treaty—were trustworthy. By calling that assumption into question, the Trump administration eroded a foundational pillar of the nation's economic engine.

Why Enforceability of Contracts Matters

The enforceability of contracts is not a peripheral legal issue; it is central to how economies grow. When businesses, consumers, investors, and governments believe that agreements will be upheld, they are more likely to engage in complex and long-term economic activity. This reduces transaction costs, facilitates credit, encourages innovation, and invites domestic and international investment.

Empirical research bears this out. Studies by the World Bank, North and Weingast (1989), and others demonstrate a strong correlation between the quality of legal institutions and economic outcomes. Countries with dependable legal enforcement and low corruption enjoy:

• Higher GDP per capita

• Increased foreign direct investment

• Greater entrepreneurial activity

• Stronger economic resilience during crises

In contrast, when the enforceability of contracts is in doubt, risk premiums rise, and capital either becomes more expensive or flees altogether. Businesses must divert resources into legal contingencies, political lobbying, and insurance mechanisms. These added costs reduce productivity and slow economic dynamism.

The Global Stakes of U.S. Institutional Trust

The consequences of declining institutional trust in the United States do not end at the water’s edge. U.S. Treasury securities are among the safest assets in the world precisely because the U.S. government has historically honored its debt obligations without question. The U.S. dollar, the Federal Reserve System, and institutions like the Export-Import Bank serve as lynchpins for global trade and finance.

If the U.S. is seen as an unreliable counterparty, the global ramifications could include:

• Increased volatility in currency and bond markets

• A decline in the use of the dollar as the world’s reserve currency

• Reduced willingness of foreign entities to hold U.S. debt

• Weakened capacity for the U.S. to lead or respond to global crises

But the implications go beyond foreign exchange and abstract confidence indices. When trust in American institutions collapses, it can trigger real economic pain—domestically and globally. A clear example is the 2008 financial crisis, when the failure of major U.S. institutions like Lehman Brothers and the erosion of trust in American mortgage-backed securities triggered a global economic collapse. Households lost savings, pensions evaporated, unemployment surged, and entire national economies tipped into recession.

A similar loss of credibility—whether through fiscal brinkmanship, withdrawal from financial commitments, or overt politicization of economic norms—could have cascading effects:

• Rising borrowing costs for governments and businesses due to higher risk premiums

• Freezing of credit markets as lenders become reluctant to extend capital without reliable backstops

• Panic-driven capital flight from developing economies, many of which hold dollar-denominated debt

• Supply chain disruptions, as global trade slows in response to financial uncertainty

These are not speculative outcomes; they are the lived experiences of millions in the wake of institutional failure. As such, the reputational reliability of U.S. institutions is not just a geopolitical or financial abstraction—it is a lifeline for economic stability across the world.

Institutional Trust and Economic Prosperity

At a broader level, the relationship between institutional trust and economic prosperity is well documented. According to economists Daron Acemoglu and James Robinson, inclusive institutions that protect property rights and enforce contracts are essential for sustained economic growth. In contrast, extractive or arbitrary institutions—those where rules change based on politics rather than law—tend to concentrate power and wealth, stifle innovation, and deter investment.

The World Governance Indicators (WGI), produced by the World Bank, provide quantifiable evidence of this relationship. Countries that score highly on indicators such as "Rule of Law," "Government Effectiveness," and "Control of Corruption" consistently outperform others in terms of economic growth, quality of life, and resilience to shocks.

Rebuilding the Feedback Loop of Trust and Prosperity

The U.S. economy has long benefited from a positive feedback loop: trust in institutions enables investment and cooperation, which spurs growth, which in turn reinforces trust. Undermining this loop by treating contractual obligations as optional threatens to reverse the cycle. If citizens and businesses begin to doubt the reliability of government commitments, economic behavior will shift in ways that are hard to reverse.

To restore and maintain prosperity, future administrations must reaffirm a commitment to the rule of law, contract enforcement, and institutional integrity. This includes honoring financial agreements, respecting judicial decisions, and avoiding political interference in regulatory and fiscal processes. It also means strengthening transparency and accountability to rebuild the reputational capital that the U.S. has spent decades accumulating—and which underpins not just its own economy, but that of the world.

References

• North, D. C., & Weingast, B. R. (1989). Constitutions and commitment: The evolution of institutions governing public choice in seventeenth-century England. The Journal of Economic History, 49(4), 803-832.

• Acemoglu, D., & Robinson, J. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Publishing.

• World Bank. (2023). World Governance Indicators. https://info.worldbank.org/governance/wgi/

• World Bank. (2020). Doing Business Report. https://www.doingbusiness.org/

• IMF. (2023). Fiscal Monitor: Public Trust and Fiscal Policy. https://www.imf.org/en/Publications/FM