This is from an op-ed in the Harvard Gazette from Harvard Law professor, Elizabeth Warren. Though the article is dated 2003, it's very reticent today.
"Even though the modern two-earner family brings in 75% more inflation-adjusted income than the one-earner family of a generation ago, it actually has less discretionary income -- and far more financial instability. The primary reason: The decline of public education has dramatically raised the price of housing in good school districts, prompting parents to overstretch on mortgages and bid up the price of a middle-class life.
Encouraging this trend is a deregulated lending industry, which has adopted the step-right-up antics of carnival barkers. Thirty years ago, the typical family had no choice but to scrape together a 20% downpayment. Today, it's often 3% down, and Americans are urged by Internet lenders to take out 120% mortgages. "In their desperate rush to save their children from failing schools," the authors write, "families are literally spending themselves into bankruptcy."
At the same time, these middle-class couples are working in an era of unprecedented job insecurity, when even top-tier MBAs can easily get whacked. Salaries as well as health insurance have become a now-you-have-it, now-you-don't proposition. Since the 1970s, the risk of involuntary job loss has soared 150%, while the chance of losing health coverage has increased 49%.
The research includes a survey of more than 2,000 families who had filed for bankruptcy, told a different tale from familiar bankruptcy sagas of the elderly, the young, or the profligate. It also draws upon 30 years of bankruptcy, U.S. Census, and Bureau of Labor Statistics data to provide a provocative reason why so many of the supposed-to-be-rich -- people with college degrees, good jobs, and their own homes -- have become the newly poor.
"We discovered that having a child is the single best predictor that a person will go bankrupt," she says. By the end of this decade, one of every seven families with children will file for bankruptcy.
Even more surprising to Warren were the causes of this financial breakdown, which she assumed would implicate the battered culprit of overconsumption of luxury goods. "I thought I would write a story about too many trips to the mall, too many $200 sneakers, too many Gameboys," says Warren.
But stacks of government data on consumer spending, which she combed through as a Radcliffe Institute Fellow in 2002, proved her hunch wrong. Compared with a generation ago, she found, today's middle-class families earn about 75 percent more (all figures are adjusted for inflation), thanks in large part to Mom's entrance into the work force. But after shelling out for four fixed expenses - mortgage, health insurance, child care or education, and car payments - today's median-income family has less left over, in inflation-adjusted dollars, than the single-income family of the 1970s.
"Families are not going broke over lattes," Warren quips. "Families are going broke over mortgages."
| 'Families are not going broke over lattes. Families are going broke over mortgages.' - Elizabeth Warren, the Leo Gottlieb Professor of Law Read more about Warren's research |
There goes the safety net...
Warren has reported her findings, as well as a few proposed solutions, in the book "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke".
The book's title highlights a central paradox of middle-class families today versus a generation ago: While middle-class families generally need two incomes to make ends meet, it's reliance on that second income (usually Mom's) that's putting them in financial peril. By counting on two incomes to fund the basics of a middle-class lifestyle - including modest homes in safe neighborhoods with good schools and high-quality child care, preschool, after-school care, or college - families have forfeited their safety nets.
"When a family builds its budget around two workers ... they're much more exposed to any economic disruption," says Warren. A generation ago, if the sole breadwinner lost his (or her) job or became disabled, the family had a backup earner who could step into the workforce. Further, reliance on two incomes makes families twice as vulnerable to layoffs.
"The two-income family is like a speeding race car," says Warren. "It goes faster than its one-income counterpart, but if it hits a rock, it careens out of control and crashes."
Making those crashes all the more devastating, Warren adds, is a deregulated consumer credit industry that she calls "a monster that feeds on families in trouble." With both incomes committed to fixed costs, families who hit a financial rock in the road turn to credit cards, mortgage refinancing, and payday lenders - often at ballooning interest costs that drag families into a spiral of debt. More and more often, bankruptcy is the only way out. This year, more children will live through their parents' bankruptcy than their parents' divorce.
Blame it on good schools, safe neighborhoods
How did being middle class get so expensive? The answers run contrary to popular wisdom as well as to Warren's own assumptions. Today's family is spending 21 percent less on clothing, 22 percent less on food - including eating out - and 44 percent less on appliances than they did a generation ago. Warren notes that a combination of lowered production costs and changing lifestyles are at work. Discount stores, meals that include less red meat and are more likely to have been purchased in bulk from wholesalers like Costco, and casual dressing at all ages have spelled savings for families.
Nor are warehouse-sized McMansions to blame; this type of housing is generally not going to middle-class families. Although housing costs have skyrocketed nationwide in the past generation, the size of average homes has grown far more modestly, by less than one room between 1975 and the late 1990s, Warren found.
Instead, Warren points the finger at two concepts dear to the hearts of almost all Americans: safety and education. Both are perceived to be more elusive now than a generation ago, when families bought a house they could afford and sent their children to the school down the street without a second thought. Now, she says, middle-class families are stretching themselves to the breaking point to afford homes in safe neighborhoods and "better" school districts.
Warren insists she's not discussing a phenomenon exclusive to Cambridge academics or the wealthy go-getters of Boston's tony suburbs who measure the subtle distinctions between two towns' outstanding public schools. "I'm talking about families that are weighing the differences between Plymouth and Weymouth," she says, describing two middle-class communities south of Boston.
Not surprisingly, improving public education is one of the policy fixes "The Two-Income Trap" recommends, along with reining in the credit industry and boosting family savings with tax policy. But families need to save themselves, she says, and trimming out the daily latte isn't going to do the trick.
"We recommend that families take a financial fire drill," she says. What would you do if one income disappeared? The answer, she admits, can be painful to contemplate, but she nonetheless encourages families to create a plan - savings to cover the mortgage payment for a few months, valuables to sell, a relative to move in with if circumstances dictate giving up the house - before disaster strikes and debt rages out of control.
"I can't say strongly enough how decent and hardworking these people are," she says. "The cost of being middle class has shot out of the reach of the median family. For millions of families, the situation is getting desperate."
