WBR: The Two-Income Trap

Yesterday got away from me, so we’re having a Wednesday Book Review this week. The book is The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (With Surprising Solutions That Will Change Our Children’s Future), by Elizabeth Warren and Amelia Warren Tyagi.

First, let me say that in spite of the title, the book doesn’t bash two-income families. It’s about how more and more American families are only one setback away from financial disaster and bankruptcy. The authors (a mother-daughter team) argue that two-earner families (and single-earner families) who are spending up to their income actually have less of a safety net than families with another earner “in reserve” in the form of an at-home parent.

The book is full of statistics, and I’m not sure I believe all of them. For example, on page 6 they say that “if these trends persist… nearly one of every seven families with children would have declared itself flat broke…” and on the very next page, they cite a study that indicates that “for every family that officially declares bankruptcy, there are seven more whose debt loads suggest that they should file for bankruptcy.” These two figures together suggest that essentially ALL families with children should file for bankruptcy, which clearly isn’t the case. So I recommend taking the claims of the book with a grain of salt. But the arguments are interesting enough that the book is worth reading nonetheless.

For me, the most interesting argument in the book is the claim that housing prices – especially housing prices in neighborhoods with good schools — along with child care/pre-school and college costs, are the main factor driving up family spending, rather than the “overconsumption” that is typically blamed. I think they overstate their argument somewhat, but there’s a lot of truth to it. They focus on homeownership, but the rental market in urban areas is just as bad. And they’re right that the costs of food and clothing are unbelievably low by historical standards. (I’m not sure why they don’t discuss health care costs, which are growing like kudzu.)

Warren and Tyagi’s solution to the problem is to totally de-link housing location from access to schools, with a voucher system. Note that this is a much more radical proposal than most of the vouchers that have been considered in the US, which are essentially a safety valve for a limited number of children in certain school districts. Under their proposal, there would be no such thing as a default school that a child was entitled to attend based on where his or or her family lives. It’s hard to imagine that they seriously expect anyone to adopt their proposal, but it’s an interesting thought experiment.

Another interesting section was their discussion of divorce. Warren and Tyagi note that historically, the reason that women and children were impoverished by divorce was: a) the women were less educated than the men and therefore had less earning potential and b) the courts did not enforce child support well. We’ve made significant progress on both fronts, but women and children are still often impoverished and at risk of bankruptcy following divorce. They argue that the problem is that, if a two-earning couple is just barely making ends meet prior to a divorce, the divorce will increase their total expenses as they need to set up two households, but not increase the total income available to the members. Moreover, parents are often unwilling to disrupt their children’s lives even further by taking the steps needed to cut expenses — selling the family home, moving to a less expensive neighborhood, pulling children out of pre-school or afterschool activities — so they wind up in debt.

The villians of this book are clearly the credit card and mortgage lending companies. The authors note that they are most eager to lend to people when they’re already in a little bit of trouble, because they make the most money from people who carry balances. Warren and Tyagi describe this as the “cement life raft,” arguing that borrowing allows people to postpone facing the harsh realities of divorce and unemployment, but puts them into a hole that they can’t dig out of.

The book concludes with some surprising financial advice. They particularly advise against the common practice of taking out a lower-interest home equity loan in order to pay off credit cards — most people simple run up the credit card balance again, and are now at risk of losing their homes. They also argue against the “no latte” strategy beloved of consumer finance magazines — they say you’re better off spending some money on non-essentials that can be easily cut in an emergency, than committing every last dollar to your mortgage or tuition bill, which are fixed costs.

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