#34 - The Two-Income Trap

And sometimes, things just come together. I check out The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (New York: Basic Books, 2003), which has been on my "must read" list for a while, and suddenly, co-author Elizabeth Warren is all over the place. She's a guest on one of the podcasts I listen to; she chairs the Congressional Oversight Panel for the banking bailout program; and she may even be on President Obama's short list for the Supreme Court. Who knew?

Jacket summary: "More than two decades ago, the women's movement flung open the doors of the workplace. Although this social revolution created a firestorm of controversy, no one questioned the idea that women's involvement in the workforce was certain to improve families' financial lot. Until now.In this brilliantly argued book, Harvard Law School bankruptcy expert Elizabeth Warren and business consultant Amelia Tyagi show that today's middle-class parents are suffering from an unprecedented and totally unexpected economic meltdown. Astonishingly, sending mothers to work has made families more vulnerable than ever before. Today's two-income family earns 75% more money than its single-income counterpart of a generation ago, but actually has less discretionary income once their fixed monthly bills are paid. How did this happen? Warren and Tyagi provide convincing evidence that the culprit is not 'overconsumption,' as many critics have charged. Instead, they point to the ferocious bidding war for housing and education that has quietly engulfed America's suburbs. Stay-at-home mothers once provided a financial safety net if disaster struck; their move into the workforce has left today's families chillingly at risk. The authors show why the usual remedies -- child-support enforcement, subsidized daycare, and higher salaries for women -- won't solve the problem, and propose a set of innovative solutions, from rate caps on credit cards to open-access public schools, to restore security to the middle class."

Table of Contents:

1. Just the Way She Planned
2. The Over-Consumption Myth
3. Mom: The All-Purpose Safety Net
4. The Myth of the Immoral Debtor
5. Going It Alone in a Two-Income World
6. The Cement Life Raft
7. The Financial Fire Drill

My take: No doubt about it, Warren knows her stuff. In brief, her thesis in Two-Income Trap is that the mass influx of married women with kids into the work force that began in the 1970s has actually left many women and families worse off financially. Specifically, she argues that with more women working, more families have been willing and able to spend ever-increasing amounts on homes in safe neighborhoods and good school districts -- thus leading to a bidding war that drives up the price of houses for everyone. The end result is that even though families may have higher incomes, they're spending a much larger fraction of these incomes on their homes.

More to the point, they're leveraged to the max. Whereas single-income families of yore had what Warren calls "the all-purpose safety net" -- a stay-at-home mother/wife who could go out to work if Dad lost his job or some other financial hardship struck -- the same isn't true of families in which both adults are already working, and using both incomes to make ends meet. In the latter case, families are much more likely to file bankruptcy and/or have their homes foreclosed on when times get tough.

Warren rails without hesitation at what she dubs "the myth of the immoral debtor," or the notion that bankruptcies have increased in the last generation chiefly because more and more people are running up more and more debt for luxury items, and then -- surprise, surprise -- glibly skipping off to the bankruptcy court once they inevitably can't pay the bills. On the contrary, she argues that while we're spending more on some things (i.e., technology) than we used to, we're also spending less on others (i.e., food and clothing) -- which in the end makes for a wash. She notes that about 90% of all bankruptcies and foreclosures are the result of factors beyond families' immediate control: job loss, divorce, or catastrophic medical events. The problem is compounded by an increasingly volatile labor market, even for once-safe white collar jobs, and an expanding credit industry that's transformed from offering credit as a means to sell goods and services to credit -- specifically, high-risk, high-interest-and-fees credit -- as a profit-making end in itself.

I found it fascinating to read this book and contemplate Warren's prescience knowing that it was published in 2003, at or near the effervescent peak of the housing bubble, and several years before the current recession. And the immoral debtor chapter is important food for thought; I've blogged about Affluenza and the more recent Cheap here not too long ago, and I do think there's some element of mass hyper-consumerism to blame, even if Warren would disagree. However, that's not to say this wasn't made possible by the predatory lending behaviors she describes, and I have to (pardon the pun) give her credit for both presenting this information clearly, but also offering enough detail for those of us whose interest in such things goes beyond the usual, Sunday Parade magazine sound bite level.

The one piece I'm not sure of, though, is the whole "mom as all-purpose safety net" argument. I'll agree that having an adult at home can lessen the financial impact of hardships other than job loss; for example, it's a lot easier to deal with the needs of a sick child or frail grandparent under these circumstances. But I think Warren overstates the ease with which someone who's been outside the labor force for several years can just jump right back in when Dad loses his job, and save the family from ruin. Chances are, the same conditions that caused Dad to be let go (and/or that make it tough for him to find a new job quickly) are also going to make it hard for Mom to find work. And unless Mom has a particularly rare, specialized skill set, and has managed to keep it current during her time away from work, she may not be an employer's top candidate -- especially in times of high unemployment, when they'll have plenty of resumes to choose from.

Warren does, in the final chapter, make a point I've long agreed with along these lines; I just wish she'd made it more clearly and earlier. The point is, despite what we might have told ourselves during the early 2000's housing boom, stretching yourself paper-thin to buy as much house as you can afford Just Isn't a Good Idea. The unexpected can and does happen, even in boom times: people lose their jobs, marriages break up, children or adults acquire chronic illnesses or disabilities. While I personally lean towards saving the second income, and/or investing it in non-housing assets (e.g., the college fund), rather than spending it on easy-to-curtail discretionary expenses as Warren suggests, I think we're in agreement that you're better off not fully committing 2 adults' peak earnings to a mortgage that may prove impossible to maintain if the tide turns.