The Fading of the Mirage Economy

What I've described is a double whammy for American households: the slower growth that comes with downsizing a number of key industries that expanded as a result of the credit bubble, along with rising prices for a food, energy, health care and almost everything imported. And you can add a third blow, this one from government.

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 Pearlstein can be reached atpearlsteins@washpost.com.