Steven Pearlstein gets it exactly right in his column in today’s Washington Post when he relates the current headlines on our economic woes to our broader, longer-term economic challenges, including our government deficits problem. He leads off with:
Suddenly, it seems, we’re getting hit from all directions.
Energy and food prices are soaring. The housing market continues to collapse. Government revenue is falling, and taxes are rising. Airlines are jacking up fares and fees while reducing service. Banks are pulling credit lines. Auto companies are cutting production once again. Even investment bankers are losing their jobs.
The tendency is to see these as separate developments, each with its own causes and dynamic. Fundamentally, however, they are all part of the same story — the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were.
And he concludes with:
Across the country, state and local governments are already hip-deep into budget crises in response to declining revenue from property assessments and real estate transfers. Here in Washington, a dramatic drop off in revenue from business profits and capital gains has wiped out any hope of reducing federal operating deficits that, under the likeliest political and economic scenarios, will exceed $500 billion a year for as far as the eye can see.
This is another example of an unsustainable equilibrium that has roots in the trade deficit and the credit bubble. Despite the happy talk you might be hearing from the presidential candidates, it presents Americans with a stark and unpleasant choice.
One option is to raise taxes and leave less money for private spending, which is what many state and local governments have begun to do. The other is to accept lower levels of government service and subsidies, which inevitably will lower the incomes of some households while forcing others to go without services or pay for them privately. Either way, it amounts to a lower standard of living than we thought we had achieved.
Is all this the end of the world? For the richest country on the planet, certainly not. But it does represent the end of a decade or more during which Americans were permitted and even encouraged by the rest of the world — and by their own leaders — to live way beyond their means. As a result, the United States has gone from being the largest creditor nation to the world’s largest debtor. For the first time since the early 1980s, Americans will have to endure several years of uncomfortably slow growth and uncomfortably high inflation as the U.S. economy regains its balance and creates a foundation for more solid and sustainable growth.
Steven’s conclusion is exactly right–this is not the end of the world. It’s simply that for awhile now, both individually and collectively, we Americans have been saving far too little. Part of it was because of our American nature, wanting more things, and sooner. But part of it was because our institutions, both public and private, encouraged or at least enabled us to do that “living beyond our means.” It has led to this “super subprime” crisis. But now natural market forces, and hopefully new political will, we lead us back to a new “equilibrium,” where our economy will not go down in flames but will walk through the flames (save more) and emerge stronger in the longer run for it.