The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke [Hardcover]

Most would agree that it pretty well sums up what millions in this country work for. But as mother-daughter team Elizabeth Warren and Amelia Warren Tyagi argue in their insightful book, The Two Income Trap: Why Middle Class Mothers And Fathers Are Going Broke (Basic Books: 2003), it may all be a mirage. Despite incomes several times greater than their single-earner parents' households, more middle class Americans -- one in seven dual-income American families, to be exact -- are declaring bankruptcy than ever before.

Both liberal and conservative commentators regularly take aim at what they perceive to be a rising level of consumption among American consumers, particularly the middle class. They attack swelling debt loads to pay for ever-larger McMansions, SUVs, and fancy restaurant meals while decrying either a lack of fiscal discipline (conservatives) or a lack of social concern (liberals). Warren and Tyagi say they have it all wrong: today's two-income paragons of middle income wealth -- the very image that brings immigrants to our shores -- actually have less discretionary income than their own mothers and fathers did on a single income.

The main culprit? The authors argue that it's the overall cost of real estate and education, not runaway spending on consumer goods. As the supply shrinks and demand grows for quality housing -- especially in districts with public schools that excel-- people take on more debt and manage their lives on ever slimmer margins. The Two Income Trap is filled with sad testimonials of couples who thought they had captured "the dream," only to end up in bankruptcy court. These tales are no strangers to any of us- as much as we've become aware of the "millionaire next door," we also know those who are barely hanging on to their middle class status.

This is no secret; polling recently released by the Drum Major Institute for Public Policy as part of a larger inquiry into the Myth of the Middle revealed that people who identify themselves as middle class -- living the dream -- do not necessarily feel secure financially. They are worried about the same things as the stressed middle class of the Two Income Trap: education, health care, and affordable housing. Solid majorities of working college graduates who identified themselves as middle class told DMI pollsters that they're worried about making ends meet and affording everyday things. As for saving for a rainy day: 51% said they either rarely or never are able to do so.

What can reduce the two income trap and its increasing pressure on the middle class? Is it hopelessly liberal to suggest that more spending on better public schools would increase the pool of good housing units in more neighborhoods? Increased education spending alone won't solve the problem-and indeed, the authors argue that giving parents more choice over where to send their kids is the ultimate solution to motivating public schools to improve while also reconnecting the middle class to institutions on which they are giving up hope. That may give too much credit to market forces, especially when it was misguided supply-side economic policy that created a wildly increasing Federal deficit that has starved state and city governments, forcing them to renege on their obligation to provide quality services in exchange for tax dollars.

Tellingly, the middle class New Yorkers polled by DMI saw relatively little value in tax cuts, while more than 50% identified education as an area that must be protected from budget cuts. This jibes with the Two Income Trap contention that the bank balances of families with children are more dependent on the quality of public education than on minimal tax refunds.

The DMI polling also factors in another huge expense-sometimes fixed, always necessary: health care. With shrinking employer contributions, an increasing number outside of the traditional workforce that links jobs to insurance, and a growing number of unemployed, millions of middle class Americans are shelling out more for basic health services. A health care system that doesn't force those on the lower end of the middle income spectrum to make terrifying choices between housing costs and insurance remains far from the top of the agenda of the current administration. Of course, they may be more motivated to tackle it when health care affordability becomes an issue not just for the poor and working class, but for the middle class and their treasured votes.

In fact, during this election year, as President Bush and a bevy of Democrats vie for this coveted middle class vote - especially courting the massive electoral prize of middle class women -- they'd do well to read the sweet line at the beginning of The Two Income Trap, which dedicates the book to "all those who wake up with hearts thudding over the possibility that buying school shoes and Girl Scout uniforms will mean that there won't be enough left over to pay the mortgage."

Most young couples today come from middle-class families with nice houses and good education. They are desperate now to get their children in good public school like they were before. The good schools today are found in the good neighborhoods. To live in these places, parents typically spend at least one paycheck on housing. Statistically, the house prices have raised with "79 percentage between 1983 and 1998". Apparently, these high housing costs have originated at the time when mothers entered in the workforce, generating parental bidding wars for good places with good schools. Also, the most recent credit system has dramatically changed the loan approval for housing from twenty percent down payment thirty years ago to three percent down payment today, attracting more and more families in the mortgage system. Without any good strategy, like to pay the high debt first, many of the two income couples seem to lose the loan's advantage, knowing that the late mortgage payment entails very high interest or even losing property. In order to reduce the long run mortgage bad effect, the book offers possible solutions such as school vouchers or a regulated mortgage market, making parents free to choose convenient public schools or financial nightmare release.

More often the idea of moving into the safe place with good school arises when mom and dad decide to have children. The arrival of children adds more long-term expenses to the already fixed mortgage, which represents full-day preschool education and later college education. Warren and Tyagi researches demonstrate that, today, the preschool public institutions cost is "six thousand and five hundred dollars a year" in Chicago for one child. For the higher learning education "The price of college has grown twice as fast as the average professor's salary", and "Tuition room, and board now cost more than eight thousand and six hundred a year at the average of public university". Particular education is even more prohibitively expensive. Mentality about children education has changed from one generation to another. To succeed in life today, the mentality dictates at least high school diploma. A generation ago, the need of high education was not indispensable to reach the middle class level. Accordingly, the middle class parents are caught in the middle of another bidding war, budgeting once again the family's incomes for long term. Solutions to attenuate these high education costs remain to be solved by the public founds from government or by all state colleges themselves, mandating the increase of their tuition fees.

Because the increasing frequency of divorces and job losses, in the past thirty years more and more families declare bankruptcy. Already in debt with the long-term payments, the family's financial position is in jeopardy at any time especially before these tragic events struck. The Warrens explain well that neither moms nor dads are protected against the bankruptcy's hit, once they declared the divorce. Since the fixed debts are made under the both signatures, there are no winners in this diabolic trial. Dads must pay their parts even though their incomes are lower than alimonies, and moms struggle to keep up the payments on debts. In most cases both parents financially are tied up for their rest of their lives. When mom or dad is laid off, or one of the two salaries at least is reduced, the crisis begins. Usually, both family members try to cut some daily expenses as much as they can, but in reality, these cuts do not allow them to cover the one lost or reduced paycheck. Evan though one member works extra hours and the other one has a part time job, the newest income is still not sufficient to cover the total family monthly expenses. If moms want to exit the financial disaster the book recommend that they should find other dads quickly, to cover the lost income. Dads should also find a way to help paying the old, common debt part as quickly as possible. For the laid offs, the best solution seems to be a saving plan, covering the fixed items payments for a few months. Finding quickly another job or selling the house represents two major actions that parents should take, before the disaster strikes again, and the debt rages out of control.

In their way to middle class stage, two income families attempt to duplicate in few years what may have taken a generation ago fifteen years to accumulate. The results are well known. Within few years they have many assets, but they are all caught in many liabilities. The book is a good financial lesson for the condition of middle-class families in United States. However the book treats sensible financial proposals, Elisabeth Warren and Amelia Tyagi details the real life in a good neighborhood.