This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren't as rich as we used to think.
He has been riding this horse for quite some time. It is the sort of statement that resonates with non-economists' natural pessimism. That is, after a crash it is very tempting for people to believe that the previous prosperity was false. However, there is a good economic case for presuming that it is a recession that is an aberration, not prosperity. For example, a graph of long-term GDP growth shows a steady upward trend, to which we return even after severe recessions.
We still have the capacity to produce the output we produced in 2006. Therefore, to a first approximation, we should still be able to consume what we consumed in 2006.
Within economics, it is not so easy to come up with reasons why we are not as rich as we used to think we were--that is, reasons that what we produced and consumed in 2006 overstates what we can produce and consume going forward. At the moment, I can think of these possibilities:
1. Mismeasurement. For example, as Cowen points out, government's contribution to GDP is measured as the cost of the inputs employed rather than the value of the services produced. If costs are high relative to value, this means that national income is overstated and government consumption is in some sense unsustainable.
2. Capital consumption. We could enjoy a high standard of living at the expense of leaving a smaller legacy to future generations. The smaller legacy would consist of either less physical capital or a slower rate of technological innovation. The housing bubble gave us residential construction that, ex post, had low value at the margin compared with alternatives.
3. Failure of Ricardian Equivalence. That is, when the government runs a deficit, we act as if wealth had been created. People who own government bonds do not realize that their savings are going to be taxed or defaulted away.