boombaard writes:
"A few days ago, I encountered this lecture (the lecture itself starts about 8mins in), the contents of which quickly grabbed my attention. In it, Elizabeth Warren attacked a number of very common myths and misconceptions about the modern economy, most notably the notion that two-income families are more financially secure than one-income families were 30 years ago. While this would seem to be the rather obvious obvious consequence of both partners working, the somewhat counterintuitive fact of the matter is that far more families are going bankrupt now than when mom was still expected to stay at home. Even though today's families have two incomes, they have less money left over for discretionary spending than comparable one-income families did 30 years ago. Or, in slightly charged statistical jargon: "Having a child is now the best single best predictor that a woman will end up in financial collapse."
In 1999, bankruptcy filings by single women were up 662% from 1981 (to 500.000/y), with the number married women filing (alongside their husbands, obviously) also in the hundreds of thousands per year. As Warren says near the end of the lecture, there are [now] more children being confronted with their parent(s) going bankrupt, than there are children being confronted with their parents opting for a divorce. And yet, almost nobody seems to acknowledge this pervasive problem, even though everybody and their dead grandparents worry about the horrible negative impact divorces have on children. Am I to conclude that it is better to be destitute than to have to go through a divorce, or is something else the issue here?
In the lecture Warren mentioned a book which she had written some years previously, in 2003, The Two-Income Trap: Why Middle-Class Mothers and Fathers are going broke, which she co-authored with her daughter, Amelia Warren, and it is this book I wish to bring to your attention.
The book was written in the wake of their 2001 Consumer Bankruptcy Project study (for which they interviewed 2000 people) on the prevalence and causes of personal bankrupty filings in the US, and is meant to create awareness among politicians and the public alike of the counterintuitive consequences of both parents working. However, given the political climate in 2003, and the message contained in the book, it would seem that the book was released at a rather inopportune moment, as it mostly seems to have been ignored so far.
The first claim the Warrens pretty much demolish in their book is the popular myth that People Bring It Upon Themselves, and do so by buying stuff they don't need. One of the most interesting conclusions that can be drawn from the CBP is that, in 90% of cases, the reason people are filing for bankruptcy cannot be traced back to frivolous spending (which, so the argument goes, would mean it's their own fault), but rather to one of three reasons: Job loss, Medical bills and family break-up, often with one of those reasons causing another. As they put it:They are not the very young, tempted by the freedom of their first credit cards. They are not the elderly, trapped by failing bodies and declining savings accounts. And they are not a random assortment of Americans who lack the self-control to keep their spending in check. Rather, the people who consistently rank in the worst financial trouble are united by one surprising characteristic. They are parents with children at home.(p.6)
While this may in a way seem logical (i.e., people, especially single mothers, who have more financial obligations are at more risk), the question which immediately comes to mind is: Shouldn't this be impossible specifically in the two-income family? Isn't it exactly to prevent this from happening that they both have jobs?
Consider, however, the following: Way back when women were not expected to work, they would be at home, taking care of the kids, their elderly parents, and the sick. If a child became ill, a grandparent needed more care, or someone had an accident, they would be cared for without the family income taking a hit. And if dad was the one to become ill, mom could choose to enter the workforce – earning less, of course, than dad had been, but generally they would still be able to rake in about 60% of what her husband used to earn (p.59). Nowadays, of course, the normal situation is one where both parents are working, so that, as soon as either worker becomes ill or is laid off, the family income will on average be halved almost immediately. And this is a problem because the average family is spending nearly 50% of their income on the mortgage payments, leaving less money for discretionary spending now – with both parents working – than in the 70s with only one ‘working’ parent, and no backup worker for when something goes wrong.
The question here, of course, is why people are so (I would indeed call it that) foolish as to buy a house which required you to take out a mortgage that basically eats up an entire income. The answer to this question is two-fold, with one half being due to market forces, and the other to legislation.
As most readers will probably know, the US has a school system where you can only get into certain schools if you belong to the zip code area for that school. As such, if you are worried that the school in the area you are living in is bad, you will have to move to another zip code area. And in reality this meant moving out of the inner cities into the suburbs, which were perceived to be safer, as well as offering higher quality education. This, of course, means that housing in those areas will be relatively scarce compared to housing elsewhere, which in turn means higher prices. Now, once people started having a second income, this meant that more could be spent on the mortgage, and, when the lending market was deregulated early in the 1980s, there was no longer an imposed limit of 30% of total income which could be spent on mortgage payments. This meant house prices could rise a lot, with the bidders having to choose between the fear/thought of “not giving your children the chance they deserve” and trying to make ends meet (and all the risks that that entails):
By way of example, consider University City, the West Philadelphia neighborhood surrounding the University of Pennsylvania. In an effort to improve the area, the university committed funds for a new elementary school. The results? At the time of the announcement, the median home value in the area was less than $60,000. Five years later, "homes within the boundaries go for about $200,000, even if they need to be totally renovated." The neighborhood is otherwise pretty much the same: the same commute to work, the same distance from the freeways, the same old houses. And yet, in five years families are willing to pay more than triple the price for a home, just so they can send their kids to a better public elementary school. (24)
So, we’ve got enormously increased housing costs, a family with two people working who must bring in twice as many paychecks as before to live at the same level of comfort (with a more-than-doubled chance that something will go wrong: "A family today with both husband and wife in the workforce is approximately two and a half times more likely to face a job loss than a single-income family of a generation ago." (82-3)). And then there is the socially pretty much invisible disease of bankruptcy, apparently quickly becoming just as prevalent as divorce (and sometimes accompanying it). The point with bankruptcy, of course, is that people try like the plague to avoid it. Once someone is laid off, most families seem hold out the hope that they will quickly be able to find a new job, and generally use their credit card to make up for the temporary difference in income, figuring they will be able to pay it back when they've got 2 jobs again, rather than deciding their only recourse is to take their child out of the school he/she is in, and move to another district, where housing is cheaper (and schools are potentially worse). This is, of course, statistically quite unrealistic, because even when they are able to find a job in, say, 3 months, they will be unable to save enough money every month to pay back the loan with. And so, after a while, they start incurring quickly-mounting "late fees", enormous interest hikes, and, oddly enough, more offers from credit companies to take out yet more loans, second or third mortgage, and so on, with the end result generally being (de facto) bankruptcy even when people do not file for it. ("In 1981, the median family filing for bankruptcy owed 80 percent of total annual income in credit card and other non-mortgage debts; by 2001, that figure had nearly doubled to 150 percent of annual income." (77)) Consider what they have to contend with:
After he suffered a heart attack, missed several months' work, and fell behind on his mortgage, Jamal Dupree (from chapter 4) got the hard sell from his mortgage lender. When Jamal missed a payment, the mortgage company sent him dozens of personalized letters with a single goal—to persuade him to take out yet another mortgage. "They'd send out a notice, saying 'you need a vacation, take out this thousand dollars and pay it back in ninety days.' If you didn't pay it back in ninety days, they charged you 22 percent interest." When he didn't respond to the mailers, the mortgage company started calling Jamal at home, as often as four times a week. Again, the company wasn't calling to collect the payments he had already missed; it was calling to sign him up for even more debt. Jamal resisted, but his mortgage lender didn't let up. "When I turned them down, they called my wife [at work], trying to get her to talk me into it."(139-40)
The book is filled with stuff like this, all backed up through a very impressive collection of references in the footnotes (the last 40 pages of the book contain the references to other research), and all basically pointing to a single conclusion: in the current unregulated lending market the banks get away with charging whatever they want, and there is really nothing you can do to complain about it. Bankruptcies are becoming a fact of life, but nearly 80% (p.73) of the people who would stand to gain financially from declaring themselves bankrupt don't do so because of the shame they feel over having to do so. And while the borrowers feel guilty over not being able to pay anything back, the banks do whatever they like. I mention this because, ever since 1997, banks had been lobbying to restrict bankruptcy filing, a fact the Warrens mention when they debunk the "fact" that bankruptcy filing rules were being abused by borrowers. Their attempts were blocked at first, but in 2005 consumers lost the fight, even though this book (and the results of study the book is based upon which showed the exact opposite was true) had already been published years earlier.
Other tidbits they mention is that college-educated single women are 60% more likely to go bankrupt than their less educated 'sisters' (106), and that affluent African Americans were more likely to be talked into a subprime mortgage (because of the recommendations/insistence/redlining of the mortgage seller, and basically suggesting discrimination is alive and well in that industry) than poor white people (indicating the sheer lack of information consumers have access to, and power the banks wield over them), or the fact that banks would often try to get people to take out second mortgages they didn't need in the hope they would fall behind on payments so that they could repossess the house, etc, a process called "loan-to-own".(136)
Now, I'm aware of the fact that "regulation" is almost as taboo in a some parts of US society as talking about taxpayer-funded access to healthcare, but I would really suggest that everyone reads this book in order to inform themselves of the consequences that belief, specifically when it comes to the banking industry. As the book suggest, they were trying to suck the middle class dry, even before the subprime crisis happened. Data really does matter in this debate, and this book is very honest & clear when it comes to showing what research they're basing their claims upon. (And if you also feel this book made you think, please recommend it to friends yourself. It doesn't seem right that these facts can be ignored in policy debates, either at home or in government.)"
