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The Two-Income Trap - Nathan
July 14th, 2005
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The Two-Income Trap
I just finished reading The Two-Income Trap. It's an interesting book, crammed full of interesting statistics that I am only marginally qualified to evaluate. The basic points it makes seem simple enough, but there are a lot of questions and assumptions left unanswered, as well as some frightening habits, like comparing averages against medians for what I can only assume is rhetorical benefit.

The subtitle of the book is "Why Middle-Class Mothers & Fathers are Going Broke", and this leads nicely into my first big question: who do they mean by "middle class"? Since their primary data set of people in the "trap" is people who have declared bankruptcy, it's not purely an economic measure; it's as much about class trappings such as having gone to college, held a job above the bottom 20% of "occupational prestige", or owning a home.

That last bothers me particularly. Homeownership is the biggest problem that many of the "trapped" people face: too much of their money goes to a house and they have too much to lose, emotionally as well as financially, if they have to move out. I appreciate that there are advantages to homeownership, but it seems like homeownership has moved beyond any kind of rational cost/benefit analysis and into a thoroughly cult-like mode; it is the only acceptable option if you want to be one of the Right People.

Even before the most recent frightening statistics about the percentage of new homeowners getting interest-only loans and similarly dangerous instruments, there was a measurement of what proportion of homeowners were gaining any tax advantage from their ownership - something like a quarter weren't (I would love to find this data again, but I seem to have misplaced it). Many of those people should reconsider whether they ought to own a home, and we should be sure to be supportive of people making rational decisions not to buy a home.

Having restricted itself to "middle class" families who are homeowners, the authors sketch out the key features of the trap: as it became acceptable and then commonplace for women to enter the workforce, an increasing number of families became two-income families. However, all of the increase in income has gone into bidding up a scarce resource - homes in "good neighborhoods with good schools", with the result that the typical two-income family of the early 2000s has slightly less discretionary income than the typical one-income family of the early 1970s. However, having two incomes means an increased chance of losing one of the incomes, and a greater correlation between losing an income and being able to replace it with another income (that is, in a single-earner family, many things that lead to the earner losing their income would not apply immediately to the non-earner, so it's more likely that such a family could recoup some of their losses). In short, higher fixed expenses plus a higher chance of losing the income that pays for them means a much higher chance of financial disaster. An important corollary is that since the bidding up of house prices is a collective effect, the choice of a particular family to only have one income puts them at a disadvantage, and does not rescue them from the trap.

There's clearly a link between this and the increased income instability of recent decades, though the argument doesn't explicitly rely on it.

On the idea that the key problem is the middle class family's struggle to obtain a good education and safe upbringing for their children, and the resulting spike in prices of homes in "good" areas, a key statistic cited is that between 1984 and 2001, the median home price for a home purchased by a childless couple increased 28% (after adjusting for inflation; the authors are very good about consistently using constant dollars). The median price of a home purchased by a married couple with children went up 78% in the same time period. This sounds pretty shocking, but given the dominance of childrearing, it seems quite likely that this is not a sensible comparison to make so directly; a breakdown by age cohort of the childless couples would be very informative.

This can't be the whole story. Some families, for reasons of proximity to jobs, proximity to extended family, or simple parochialism, aren't going to be following this path of stretching themselves financially to maximize apparent "neighborhood quality". Are they exempt from the trap? Are they statistically insignificant? Are they not middle-class, by definition because they are not so maximizing, or because they are not homeowners, and hence not of concern? Are they caught up in a rising tide of house prices that affects everyone, and if so, is the problem really the disparity among schools and neighborhoods?

The authors' proposed solution to the claimed problem of school disparity driving up house prices is to decouple geography from school attendance. They put the proposal in terms of a "fully funded voucher" and a transportation system that would let families send their children to school "where they choose". They concede that in the short term this amounts to a lottery for the good schools, but defend it with the idea that putting the brakes on house prices would be worth it.

The decoupling idea is attractive, but it is far from a fully formed solution. On what geographic scale is this practical? I commuted 50 miles to go to high school, and while I think that was worth it, it would not have been worth it for the elementary or middle schools I went to - which were considered decent. What does "fully funded" mean? Spending on students varies greatly from district to district already. Where does the money come from? The traditional model of paying for local schools with local property taxes seems unlikely to work; it's too easy to cut your town's property taxes when the town school is only educating a fraction of your children. What if the better schools, fundamentally, are better because they have more money from higher local property values (and the associated feedback effect)? Will all good schools sink down to a lower level, the level of the funding in the super-district? Finally, will middle-class parents accept the notion that the quality of their children's school is explicitly determined by chance (as opposed to implicitly determined by chance, as expressed in wealth and opportunity)?

The authors proceed from this specific problem into more general financial crisis territory, and attempt to debunk some myths. In particular, they look at the idea that middle-class families spend too much money on "junk"; the idea that people who go bankrupt are immoral spendthrifts who go into bankruptcy casually; and the idea that single mothers would be substantially better off if only fathers were made to pay more. In each case they conclude that these are not true; they attribute all to a desire to convince oneself that "well, I won't get in trouble because I am a good person". I find their arguments reasonably compelling although, again, I'm not that familiar with the underlying economics.

In the process much bankruptcy law is discussed, including the bad changes that are in the (recently-passed, though after this book's publication) bankruptcy bill, and suggest a number of policy improvements in unemployment and disability law. Roughly, they argue for a larger safety net, though not substantially larger.

Next is a rant against the state of the credit industry, focusing on the explosion of credit after the 1978/1980 changes in state and federal usury limits. Their core position is that credit is too loose; it is easy to get locked into highly unfavorable terms. They explore some of the nastier patterns of sub-prime and predatory lending, and question whether easy credit has been at all worthwhile for society. "It's easier to borrow money that you can't pay back, but can merely make installments on forever. Great."

Finally, they conclude with financial advice, including the idea of a "financial fire drill" - exploring in advance the effects of losing one income - and repeatedly pointing out that living within your means with a margin of error is more about the long-term fixed costs (mortgage, maybe car payments) than it is about the impulse spending (relative to saving, not relative to racking up credit card debt). They're big on the idea that if you're stretching to make a house or car loan work, that's a sign that the loan is too dangerous if anything goes wrong, and there's no way to be sure that nothing will go wrong. Perhaps you should save up for another decade before buying a house.

Almost as an afterthought, they discuss the option of not having children and thus escaping the trap entirely, noting that this is a suggestion that has recently moved from utterly absurd to merely uncommon. They concede that children have become a substantial and unpredictable financial burden in modern history (to say nothing of being LULUs), and that there may be substantial difference between the individual investment in children and the societal reaping of the economic benefits of continued population. They plea, however, that instead of rationally but selfishly avoiding children, we work to enact public policy that helps to eliminate the connection between having children and being financially ruined.

Their calls for fiscal restraint in the face of temptation appeals to my inner Puritan, while the discussion of the larger forces at play, as opposed to individual failure, appeals to my liberal sensibilities. The set of references and notes alone is probably worth the $6 I paid at the local non-profit worker-owned bookselling collective, and it will make a fine addition to my shelf of depressing pop-sociology.

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From:mhaille
Date:July 14th, 2005 11:06 am (UTC)
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I'd like to borrow it to read myself, if you don't mind.
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From:alphacygni
Date:July 14th, 2005 11:17 am (UTC)
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The problem that I continue to chew over is this: How are their calls for fiscal restraint applicable in an urban market? They acknowledge that it's much more about the fixed costs than the impulse spending, sure. But in an area where _any_ homeownership is an income stretch for most people, what can be done?

And at the same time, the lack of owner-occupancy, and the consequent degrading effect on neighborhoods is constantly bemoaned.
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From:rifmeister
Date:July 14th, 2005 12:06 pm (UTC)
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Sounds like an interesting book. That 78% statistic is eye-opening, but there's another explanation: houses are getting bigger. Everyone I talk to in our Ohio office who has kids is moving into a 3,000-4,000 square foot house, where 20 years ago it might well have been 1500-1800 sq. feet. Do they control for house size and quality?

If they'd use the mean instead of the median, I'd of course argue that the effect is mostly on the coast. However, on the flip side, if the median price has gone up 78%, that seems to roughly imply that at least half of these families live in districts with good schools, as they ante'd up an additional 78%. I didn't think there were that many good schools.

Medians are a wonderful statistic.
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From:nathanw
Date:July 14th, 2005 03:22 pm (UTC)
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They don't explicitly control the 78% statistic for size, no, but they do have a few things to say about large houses.

"... the average size of a new home has increased by nearly 40% over the past generation (though it is still less than 2200 square feet). But before the over-consumption camp declares victory, there are a few more details to consider. The overwhelming majority of middle-income families don't live in one of these spacious new homes. Indeed, the proportion of families living in older homes [more than 25 years old] has increased by nearly 50% over the past generation [from 40% in 1975 to 59% in 1999]... The median owner-occupied home grew from 5.7 rooms in 1975 to 6.1 rooms in the late 1990s... most often that extra room was a second bathroom or third bedroom."

It's things like the switch from square feet to number of rooms that make me nervous about the numbers.
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From:rifmeister
Date:July 14th, 2005 03:28 pm (UTC)
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As well as the switch from median to average. As well as the failure to break down the size of house by whether people have kids or not (it may be that the differential in size between families with children and families without has gone up).
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From:awfief
Date:July 14th, 2005 01:45 pm (UTC)
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I appreciate that there are advantages to homeownership, but it seems like homeownership has moved beyond any kind of rational cost/benefit analysis and into a thoroughly cult-like mode; it is the only acceptable option if you want to be one of the Right People.

I have seen this trend with people I know, and it's disturbing. People are always talking about how they want to buy a house, for stability, comfort, etc. Nobody ever thinks, "hey, the roof might leak" and they'll have to deal with that. Rent is really, really fixed -- it cannot be increased for the term of the lease. A mortgage is too, but there are costs to maintain the place, which you don't get with rent.

My parents fell into this very trap. We moved within a 3-town area, mostly for prestige, and then had to move back, renting, and moving every 2 years for 'better' places. In some way, I fall into this trap, too -- I've moved 8 times in 10 years, always to a better situation (not always to more expensive rent, but usually).

Perhaps people should be more concerned with teaching their children before they go to school. Children who have had a lot of parental attention and education can learn to read before kindergarted, and have a large advantage (it sets up that parents are interested and invested in their children's learning, and sets a tone at home for what's important). I excelled through public school, even a good one. I took advantage of what I had offered to me (classes on psychology, etc), but there were many opportunities not offered to me. We all make do with what we have.

What makes a school 'good', anyway? High test grade averages (like SAT)? Percentage of kids who go to college? Most of this can be solved with more of a parental priority on education, not necessarily what is taught in the school. And if the people who are getting high test scores and going to go to college no matter what anyway just go to a different school, you're just hurting that school more.

Where your kid goes is a matter of prestige these days, and that's a problem. A school is not about prestige, it's about education.

Definitely if you have to stretch to make a car loan work, you can't afford the car (and what about insurance, gas, accidents, etc and other resultant costs of having a car? Even 'more vacations' because you have a car costs money.).

My brother and his wife are doing well on one grad student's salary, and with 2 kids. Mostly they get inkind help -- her parents babysit the kids while she was getting her MD, and she is and has been a stay-at-home mom. They sent their kid to private (Jewish) school but are moving to a place where they will send their kid to public school. So kids don't mean financial ruin -- needing to have new clothes, having 2 incomes and basically having one of those incomes go right back into paying daycare, private school, etc.

Meanwhile, I can think of people I know, and you probably know people, who are a 2 income family with no kids, and still fall into that trap. And people who have kids, 1 or 2 incomes, and don't fall into that trap.
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From:mama_pipa
Date:July 14th, 2005 04:31 pm (UTC)
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Hrm, sounds like I have to find a copy of that book to myself, especially considering my personal financial situation of being in a two income household with children, it may be worth a read.
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From:temvald
Date:July 14th, 2005 07:16 pm (UTC)
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Huh. I don't know if this is just the way that you report the book, or if this reflects the book itself, but I'm a bit surprised at how specific these issues are. For instance, I'd think that issues like the minimum wage being at an inflation-adjusted low relative to what it was in the past would be a major factor in families struggling. And regarding home prices, if part of the problem is that families with children need to spend more money to get homes in places with good school districts, wouldn't the issue there be that there are fewer and fewer locations that have decent public schools? That is, is the problem really that middle class families with children are struggling because of problems specific to them, or is it just that everyone middle class or lower is struggling, and having children is just the large extra expense that puts families over the edge?
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From:nathanw
Date:July 14th, 2005 10:11 pm (UTC)
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I think it reflects the book itself. In terms of the numbers, they focus pretty solidly on the median, and don't give much attention to the low end except where it interacts with single motherhood.

I don't know if the plight of the working poor is uninteresting to them or merely considered out of scope for this book, but I suspect the latter. Their reasons for writing this book are rooted in a study of bankruptcy they did in 1999-2001, and I suspect that that set underrepresents the initially-poor, as opposed to the middle-income-but-then-poor.
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From:coffeekitty
Date:July 15th, 2005 03:16 am (UTC)
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the bottom line of the argument sounds, to me, like "don't spawn, you dork; it's expensive in n million ways, of which money is only the opening salvo." then again, i just came from spending a chunk of today talking with my NP about getting fixed. i am not cut out to be a parent, and despite all my intellectual understanding that yes, some people want to have children, and this is normal and Okay, the desire to have children looks like pernicious uber-lunacy to me on an emotional level, never mind the financial...
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From:ocschwar
Date:July 15th, 2005 05:05 am (UTC)
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Children as LULUs? Newer schools certainly seem to qualify, since they look like medium security prisons and are large enough to draw serious traffic from school buses, but neither needs to be true. Build small, build many, build'em nice, and design them for prospective alternate uses. Problem solved. Also, then at least for k-8 you have the two income trap done away with. If the school is small, the quality of education going on in it is a much more readily influenced function of the parents' efforts. Glad to be in Somerville, for these reasons, though I am not ready to spawn any time soon.
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From:nathanw
Date:July 15th, 2005 01:41 pm (UTC)
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When planners talk about children being LULUs, they're referring to the fact that you have to have schools at all, which cost money, make tax rates go up, etc. The physical presence or proximity to the schools is beside the point. This is one of the reasons that senior housing is so popular among communities looking to shore up their tax bases with new development. All the income and not nearly as much of the cost of services!
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From:mama_pipa
Date:July 22nd, 2005 09:13 pm (UTC)
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So after seeing this post, I actually went and borrowed the book from the local library. I will admit, knowing the trials and tribulations of being a parent with two children, that I was keenly interested in knowing how my becoming a mother was utterly diasterous.

Anyone who has children, and has what I would consider a "normal income" (aka, anyone making more than 150K doesn't apply) do have to consider the financial ramifications of what they do with their money and plan for it. Its sad that some people learn this too late and some never learn this. It makes me wonder, with the state that the middle class is in, just moments from financial disaster, do you think something has to eventually give way...

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