The Upside to the Downturn

The impending recession may yield economic and social benefits

April 7, 2001

When the stock market was skyrocketing, everyone watched high-tech and Wall Street moguls getting rich. Countless other investors thought they'd get rich, too -- but most people never saw their would-be fortunes materialize. Now that the market has plummeted, and the boom is officially over, many Americans find themselves wondering where their money went.

What's even worse than the disappointment of not getting rich is the current state of many Americans' personal finances in the aftermath of the boom. This is marked by a disturbing trend: credit-card debt per household is record-high, and personal savings as a percentage of disposable income is, for the first time, negative, which means that Americans borrowed money in order to get through the past year. Surprisingly, many Americans ended up in worse circumstances after the boom, often from mismanaging their finances during it.

Some people spent money they didn't have in anticipation of making it up later with stock options or other high-valued investments. Others went into debt just to pay for the recent rising cost of living. In addition, many people lost control of their finances because they were spending so much time working that they didn't devote enough time to properly manage the money they were working for. Chuck Collins, co-director of United for a Fair Economy, an organization providing economic literacy education, explains, "the real downside of this economy has been masked for many middle-income families by two trends -- working longer hours and consumer borrowing." Ric Edelman, author of Ordinary People, Extraordinary Wealth, is also concerned with the poor state of the nation's personal finances. During the February 28th airing of The Oprah Winfrey Show, he asked, "How is it in the biggest bull market of our American nation's history, more bankruptcy filings occurred last year than ever?"

Despite this grim picture, Americans have an unexpected opportunity before them. The economic downturn and news of corporate cutbacks and layoffs is, interestingly, exactly the clarion many people need to straighten out their finances. Jeannine Daly, director of communications at the Consumer Credit Counseling Service (CCCS) of San Francisco, a nonprofit financial planning and debt management organization, says it's surprising to see how few people know how much they owe, or even how much they earn. During the economic boom, the clientele at CCCS dwindled, but that didn't mean people didn't need help managing their finances and coping with mounting debt. As the downturn loomed, CCCS witnessed a 25% increase in clientele over the past year. "Ironically, the rumblings of the potential economic crisis are benefiting a lot of people," observes Daly. "It's waking them up to be responsible and accountable for their personal finances." Daly has seen clients living on a negative cash flow, often spending 120% of their current income. Even workers in the until recently booming high-tech industry are also heeding the alarm. "Now, people see their peers getting laid off, people with the same skills as they have, and not just being able to jump to next dot-com. People have come out of the past few years with lot of debt instead of savings."

Eric Brown, communications director at the Center for a New American Dream, sees the downturn as an opportunity for Americans to slow down, cut back, and reevaluate their lives. "Up until now, there's been a lot of excess consuming. People are overworked, overstressed, and somewhat rudderless in terms of what really matters in their lives. They definitely feel disconnected from their neighbors and community, and spend a lot of hours in the car during the commute to get to the job to pay the mortgage on the big house." Brown believes that people who have already taken the time to simplify their lives are one step ahead. "Those who differentiate between what they want and what they really need are in a better position to deal with a slower economy."

Brown may be optimistic, but he isn't nave. He believes it's not enough to just have a recession to help people change their behavior; there must be an intention behind it. "If people don't change their consumption habits, then, during a recession, people continue to consume and rack up lots of debt to pay for it. That's not a solution. The solution is you have to spend less, and, in order to spend less, you have to consume less."

When the money was flowing and Americans were gleefully spending it, it was hard to foresee that people would be worse off after the boom, or, indeed, because of it. While no one is overjoyed at the idea of a recession, Americans can salvage from it a valuable lesson in sound financial -- and life -- planning. Brown concludes, "Bearing in mind that there's a lot of trauma, an economic downturn can be an opportunity for people to change the way they live."

Copyright 2001 Mariva H. Aviram. All rights reserved.