The Two-Income Trap

The Two Income Trap, Why Middle-Class Mothers and Fathers Are Going Broke by Elizabeth Warren and Amelia Warren Tyagi. New York: Basic Books, 2003. 255 p., $26.00

I first encountered this book upon hearing the news that Elizabeth Warren, a law professor at Harvard had been appointed to chair the congressional oversight panel for TARP. The article mentioned that Warren had previously written a book decrying the financial trap that two-income households had fallen into during the past four decades. Frankly, I was surprised since I assumed that all liberal Harvard professors hate the nuclear family and would do anything they can to promote working women in the home.

I am joking of course. Warren's analysis is in fact academic, concise, and important. Working with her daughter, Elizabeth Warren combed through national bankruptcy statistics to uncover some disturbing facts such as:

1) More children will live through their parents' bankruptcy than their parents' divorce this year.

2) Having a child is now the single best predictor that a woman will end up in financial collapse.

3) Adjusting for inflation, today's two-income family earns 75% more than a single-income family thirty years ago, yet has less discretionary income.

What is going on? Why are so many people going bankrupt at a time when more families are now living on two incomes?

The answer is a ferocious bidding war. Middle-class families are anxious to place their children in good schools in safe neighborhoods. Since every middle-class family wants the same thing, families are all simultaneously attempting to migrate to safe, suburban America, and more specifically within school districts that have a strong reputation. Home prices in such areas are increasing rapidly, yet families are willing to continue to pay since they value the education and safety of their children as the very definition of middle-class life. In order to finance this bidding war, mothers have entered the workforce to give the family the added competitive edge. But, if everyone else does the same thing, prices simply keep going up and families are left putting nearly all their paychecks towards large mortgage payments, with little money left for a rainy day.

In other words, the root cause of financially strapped America is its public education system. This logic goes against the traditional logic that American families are spending irresponsibly on toys and gadgets. But Warren demonstrates that families today are actually spending less on such things than they were thirty years ago, due to the relative decrease in prices. In fact, Americans are simply trying to hold onto the middle-class dream of a safe home and a good education for their kids.

Mom going to work was supposed to help in achieving this dream. Instead, by going to work just to support basic mortgage payments, mother working makes the family ends up less secure financially. The reason is that the family is operating on the presumption that the status quo will continue. If one parent loses his/her job or an injury or family-related emergency comes up, the decrease in income can be catestrophic. In previous decades, if Dad lost his job Mom could go to work to help offset some of the lost revenue. Today, with both parents in the workforce, there is no backup revenue to speak of. Bankruptcy is unfortunately all too often the only option left.

Warren's research highlights the inevitable unanticipated side effects of public policy decisions. In our current educational system, the only way families can choose a school is by moving. Demand for good schools leads to demand for the homes within that schoold district. The rising demand means rising prices. Ironically then, only those with money get a good education. This is clearly opposite to the intention of a free public education system. Warren is a strong advocate of education reform, such as a voucher program that would empower families to choose between schools without having to move to do so.

Some have pointed out that the authors fail to fully account for increases in taxes or the increase in health care costs in the past three decades. These alternative explanations may explain some of the financial straits of middle-class Americans. But I believe Warren (who wrote this book in 2003) is fully justified by the financial crisis of 2007-2008. It was the housing market that triggered the Great Fall, and many middle-class Americans are suffering just as Warren said. Now the Great Readjustment is taking place. Let's hope that educational reform is a major part of that.