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Working families on the brink of financial collapse |
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By The Hill Staff
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Posted: 10/08/03 12:00 AM [ET] |
The primary message of The Two-Income Trap — that increasingly, more American families cannot afford the bare necessities of a middle-class lifestyle — is likely to resonate with many working families. What may ruffle a few middle-class feathers is authors Elizabeth Warren’s and Amelia Warren Tyagi’s subtle argument that a return of women to the home would ameliorate at least part of this problem. Not exactly the solution one would expect from the mother-daughter duo of a Harvard Law professor and a Wharton Business School MBA.
The book begins with a character sketch of Ruth Ann and James, a typical American family leading a typical American life, until the day disaster strikes. When James loses his job, the family falls into financial peril. Despite their tireless efforts to find work for James and to increase Ruth Ann’s hours at the office, the family cannot pay its bills and must make difficult choices about where to cut its already frugal spending. Eventually Ruth Ann and James are forced to file for bankruptcy. And thus the “two-income trap” is sprung. The reader is then hit with the first of many dramatic statistics: from 1981 to 1999 the number of women declaring bankruptcy jumped from approximately 69,000 to nearly 500,000.
Warren and Tyagi blame the high bankruptcy rate on parents’ competition to place their children in the best schools, which fuels additional competition for homes in neighborhoods within those school districts. They contend that the scarcity of good schools has created a bidding war for nearby properties, a war that now has a much higher ceiling thanks to the growing number of dual-income families.
Another component of the two-income trap is the additional costs that come with having two parents in the workforce. Financial data indicate that daycare is among the single greatest expense in an average family’s budget. The authors cite one study which found the annual cost for a four-year-old to attend a childcare center in an urban area was more than double the price of college tuition in 15 states. Two working parents also creates the need for two family vehicles. According to Warren and Tyagi, a second car with enough room for the kids is a necessity for Middle America.
The book refutes claims that working families’ financial woes are a result of frivolous spending and over-consumption. Warren and Tyagi dispel many of the common myths surrounding the cause of families’ bankruptcies. For instance, a report issued by the Joint Center for Housing Studies showed that the average size of a new home increased 40 percent over the past generation. In reality, a minute portion of the population has skewed that figure, as the median home grew modestly from 5.7 rooms in 1975 to 6.1 rooms in the late 1990s.
Part of what creates and could potentially reverse the trap, Warren and Tyagi say, is mothers who work. When a family becomes reliant on two incomes, there is no margin of error when disaster strikes. There is no second parent to get a job and earn additional income in times of crisis. This leads to debt, usually credit card debt, the leading cause of bankruptcy. Also, when illness befalls a child or relative of two working parents, the options are either taking time off from work to care for them or paying for costly health aides, both potential sources of economic devastation. Before the advent of women in the workplace, stay-at-home moms provided “a safety net, an all-purpose insurance policy against disaster.” Yet Warren and Tyagi fully acknowledge that this is not a realistic possibility for most working families today.
The authors offer little in terms of solutions at the public policy level. To ease the burden of education costs, they advocate vouchers and a publicly funded, universal preschool program. They also propose tuition freezes at universities, rather than government subsidies. As a means of promoting more responsible economic habits, the authors suggest a tax break for all personal savings.
The Two-Income Trap accurately characterizes the plight of the middle class and illuminates the problems that arise when families become dependent upon two incomes without adequately saving. However, much of its argument is weak.
American homes in good neighborhoods are not a finite resource. As with any other commodity, the market grows to meet demand and therefore bidding remains within certain limits. The authors also have a questionable concept of what constitutes luxury, as they are quick to rationalize the purchase of a gas-guzzling SUV simply because it is spacious and gives parents peace of mind.
Why would Mom, who most likely lacks as much previous work experience, be able to find employment quicker and with greater ease than her husband? And, particularly for suburban families, having one parent at home does not eliminate the need for a second car.
My analysis: Don’t fall into the trap of buying this book; you’d be better served investing the money in your kid’s college tuition fund.
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