Preparing for Bad Times Now and In the Future

Maria Panaritis, a business writer for the Philadelphia Inquirer, has written a moving column about how the current economic downturn has disproportionately affected members of Generations X and Y . Titled "The Crash's Hidden Losers," Ms. Panaritis's column makes many troubling points. She talks about how people in the post-Boomer age groups may miss out on the middle-class life that their parents enjoyed. This is because as they have entered the job market after college, their employment options have either greatly diminished or all but disappeared, nipped in the bud as it were.
Worse, there is likely to be no safety net for these folks. Pensions went the way of the vinyl LP long ago. There have been 401k's for a few decades, but many companies have eliminated the match. And forget about Social Security. That may run out before the last Boomers are done with it. (See Allen Sloan's article on fixing Social Security in the latest edition of Fortune magazine for a sobering reality check.)
I agree with Ms. Panaritis's insights, and I am sympathetic to the plight of the younger workers. I have only one observation: Why is this news? Why did we presume that the economy could only grow for every succeeding generation? Many economists have made the observation that "trees don't grow to the sky." Yet we came to believe that our economy was limitless. And that is probably what’s disturbing to people today. It is not so much that times are tough, but that times are different from what we have known.
GE president Jeff Immelt recently said, "This economic crisis doesn't represent a cycle. It represents a reset —an emotional, social, economic reset." Our collective dismay stems partly from our limited perspective as post-World War II Americans. When you have lived in a certain standard of living and that standard is all you know, it begins to look normal to you.
Let’s look at the economic history of the United States. Income per capita was essentially flat until the Industrial Revolution, when people left their farms and their crafts to work for others. Economic growth was slow as measured by the value of our goods and services — GDP. Growth of two to three percent a year was normal…and good.
Then came the end of World War II. There was pent-up demand for houses and automobiles. And as we satisfied those needs, our growth rate grew to four and five percent. And our national wealth shot up, starting around 1950 until recently. Prosperity began to look like a birthright.
Other specific social and economic realities have contributed to the downturn. Technology has improved productivity. That means we need fewer workers. Therefore, the job creation rate for American workers has fallen. So the wages for the average American worker has been falling since 2001. We should not expect to see higher wages in the foreseeable future.
Based on this evidence, and based on the "Prognostication" chapter of my book, "The Six P's of Change," I took steps to deal with an economic downturn. My most significant move was to live below my means, particularly during a prosperous five-year stretch. While I managed to enjoy the money somewhat by upgrading our cars and taking a couple of trips to Italy (Hey, life is short!), I poured the extra money into our mortgage. Now my monthly obligations are significantly reduced, because we don't have payments for our house or our cars.
There is still a long road ahead. I don't mean to be discouraging; I simply believe that forewarned is forearmed. Mountains of debt must be reduced. Consumers — you and I — will need to save more before we spend so much again. As we sort through the changes in the politics, the technology and the market forces that will shape our future, I encourage everyone to prepare for a period of austerity. Many Americans are already doing this. Since the credit crunch, the average U.S. household savings rate has jumped from 0.7 percent to 4 percent of income. That is a promising trend.
It is easy to deny our situations; clearly, Miss Panaritis has not. But denial is nothing new. I remember vividly a conversation that I had with a friend in the early 1990s when I said that Social Security was in trouble, that the beneficiaries were beginning to outpace the contributors, that life expectancy is much older today than it was when the program was created. Et cetera, et cetera, et cetera.
My friend reacted with angry, non sequiter bromides. "Well, I can see that you don't care about older people." "I don't hear you suggest that we cut defense programs."
There is a reason that many programs are sacrosanct and beyond consideration. Now we are past the point when decisions must be made.
While we can't always control the machinations of government, we can certainly control our own destinies to some extend. I believe that, armed with information and an informed attitude, you can also be well equipped to recalibrate your expectations for this economy.
In the meantime, let's do what we can for the next generations. Let's hire them when we can, give them as many opportunities as we are able, and be willing to sacrifice some of our own largess so that there is something on the table for them. We owe it to them, if for no other reason that it is the most ethical thing we can do.