I used to wonder how the people around me could afford the lifestyles they were living -- two new cars in the drive, often Lexis or BMW or Mercedes brand. Kids wearing designer clothes and cashing out with the newest X-Box or Wii systems each holiday. Disney World trips, European vacations. I decided that I just had to ignore it and live my life my way. I made up a fantasy in which everyone else was overextended on car leases and home equity lines of credit with huge penalties for early repayment. And who knows? Maybe the fantasy was true. I had to laugh when gas prices soared and it looked for a while as though flashy SUVs would be impossible to re-sell. My 11-year-old minivan might not impress anyone at the village intersection, but it sure got better gas mileage.
The world has changed since those heady luxury days -- which were the norm just a year ago, really, although the warning signs were upon us by then. I don't believe that we are now in a cyclical downturn. It's more permanent. I don't think we'll ever forget the pain from the risky mortgages that has essentially gutted our financial system in these past few months. We won't return to the long extensions of credit, not in our lifetimes, anyway. This weekend, writing for the New York Times, Peter S. Goodman has uttered the unthinkable for people who are holding out for the return of the good times. He quotes Peter Schiff, president of Euro Pacific Capital, a Connecticut-based trading house.
Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover.
Reckless consumption, as Schiff points out, is only half the problem. For the other half, we need to return to my good friend Larry Summers, who is now director of President-elect Barack Obama's National Economic Council. Summers likes to point out that globalization lifts the standard of living for people in poor but industrializing countries. He also says that means that rich countries' living standards will fall. This frankness is part of what makes Larry Summers so unpopular -- but of course, he is right. If he would only temper his doomsaying for the Pittsburgh steelworker a little, he might be heard by more people instead of infuriating them.
In any case. Off the Summers soapbox. Our standard of living has been falling for decades, we have just been in denial about it. We have been able to deny it because...
1. It has been happening to specific industries -- manufacturing, mostly -- of which many of us are not members. 2. Spouses have entered the workforce since the 1970s, so the drop in the living standard doesn't seem so severe. Household income has been maintained, more or less. 3. We've been living on credit, like home equity loans, and higher home values to finance retirements and college expenses.
Now the pain is spreading and eroding 1 and 2. The loss of one job in most households makes the lifestyle unsustainable. And the bubble has burst for No. 3. I can't see any way out but to embrace a new way of life.