Guest Blog: A Lower Middle Class Life by Roberto G. Newell

The Dallas Regional Chamber along with our partners TechAmerica and The University of North Texas are hosting the U.S./Mexico Technology Summit September 30th (with an inaugural dinner on September 29), a forum that will focus on a bilateral partnership that drives innovation and increases economic prosperity in on either side of the U.S./Mexico border. 

Today we would like to offer our readership a guest blog from our dinner keynote speaker and participant in the forum, Roberto G. Newell. 

Newell is the CEO of the Mexican Institute for Competitiveness, AC, a privately sponsored, independent think tank in Mexico City whose mandate is to analyze and propose policies that will enhance Mexico’s competitiveness in the global economy.  During 2003 he served as deputy secretary for agribusiness in Mexico’s federal government.  Previously he served in the same administration as CEO of the Fideicomiso de las Empresas Expropiadas del Sector Azucarero. From 1984 to 2001, Newell worked for McKinsey & Company, retiring as director. At McKinsey he served clients in Mexico, the United States, Venezuela, Colombia, Peru, Ecuador, Argentina, Spain, Jamaica, Puerto Rico, and the Dominican Republic.  He is the author of two books and has published many articles in journals and international professional publications.  He currently writes weekly for the Reforma journal.  Roberto earned a bachelor’s and master’s degree from Universidad de las Americas in Mexico and a PhD in economics from the University of Texas at Austin.

The points of view in this column are personal.  These are not to be viewed as the position of or opinions of the Dallas Regional Chamber or its staff.

Liberal conviction
A lower middle class life
May 29, 2010

European and American families will have to get used to a more austere and modest lifestyle, as the recent crisis made noticeable the fragile economic structures on which their standard of living lay on.

In America as of the nineties, families have spent almost all of their income in consumption. At 2007 only an average of 3% had savings and even millions of these families did not even do that. To maintain their acquisition level, many were heavily indebted, gambling everything on their incomes to continue to rise faster than the cost of servicing their debts. When the crisis came, their average debt amounted more than a year of their disposable income, with a situation so vulnerable that any blow to their profits would necessarily have adverse consequences.

The U.S. financial crisis started at the lowest income segment of the mortgage market, but quickly spread in to the entire real estate market. From 2008 to date, the dwelling value in this country plunged more than 40%. Currently, over three million homes are worth less than the balance of the mortgage debt which funded the assets. All these families lost what they had invested in their houses and the market adjustment has not yet finished.

Their economic prospects are not good. Even though the U.S. economy has been growing for over a year, employment has still not recovered. Accordingly, the disposable income of these families have not returned to the pre-crisis level. To make matters worse, in order to confront and stimulate the economy, the U.S. federal government acquired a huge public debt which eventually will have to pay by reducing public spending and raising taxes, with all that this implies for economic activity, employment and disposable income levels of the families

What became clearer after the crisis is that American families can not resume their life as if nothing had happened. Millions of them lost all they had invested in their homes, a wide proportion is unemployed and may soon have to pay higher taxes. Americans will have to get used to living with a lower consumption level, aligned to a new reality.

At the Eurozone the families were more cautious saving about 15% of their disposable income, and in the wider European community, savings rated 10 percent. One would think that in relative terms, the Europeans were acting more responsibly, but not, for several reasons: First, because before the crisis the Europeans had lower-income than the Americans and were growing slower. Second, because their population is aging faster than the American population and therefore, the working population available to cover the cost of European social benefits package will soon be decreasing. Finally, because the public finances of many European countries (Greece, Italy, Portugal, France, Spain, Belgium, Austria, Ireland and several others) are not enough to address the pensions liabilities which these governments have acquired with their population.

European families face a similar situation as the Americans. They will also have to reduce future living standards. The European dream of working relatively light journeys for a few years, enjoy long holiday periods and retire at a relatively young age, is over.

Whoever wants to achieve this dream will have to save a far higher proportion of his income for many more years than those originally planned.

The recent economic crisis in the Eurozone countries reveals that the premises of the European dream were as false as the premises of the American dream. In both cases people will have to get used to a new reality. The economic crisis in the two continents shows that you can not live outside the parameter without obtaining, sooner or later, a reckoning.

Mexican politicians would do well to review the premises upon which the Mexican dream is built on. They continue acting and taking decisions as if the rubber band could be stretched infinitely.

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