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CRITICAL FACULTIES

Two incomes, one bankruptcy

Reexamining the agony of the middle class

EVERYONE KNOWS that middle-class families are feeling the squeeze these days. But now a Harvard law professor and her business-consultant daughter have come up with a dramatically new way of framing the problem. You might think that two incomes add up to more than one, but two-earner families, they say, have fallen into their very own trap, and it's becoming harder and harder to pry the jaws loose.

Elizabeth Warren, who teaches bankruptcy law at Harvard, and her daughter Amelia Warren Tyagi, a former consultant with McKinsey & Co., make their case in The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (Basic). It's a potent cocktail of dire statistics and sympathetic interviews with families whose finances have gone off the rails. "Every new report on consumer debt or bankruptcy blames families for frivolous buying," Warren says. "Our data show families in financial trouble are working hard, playing by the rules -- and the game is stacked against them."

The final score in this rigged game? "Walk down any street in any middle-class neighborhood in America today," Warren says, "and one in seven families are on the brink of financial collapse." Home foreclosures have more than doubled since 1980. Bankruptcy rolls are up 430 percent: A record 1.6 million Americans filed for Chapter 7 or 13 protection in 2002.

And the single biggest predictor that financial failure lies ahead for a family? Having children. Even just one of them.. . .

Scolds of middle-class consumerism -- or "affluenza," as some have taken to calling it -- have been fixtures on both the political left and right for some time now. The Boston College social economist Juliet B. Schor blames a crassly materialistic culture for creating the "overspent American" while Utah Senator Orrin Hatch lambastes bankrupt families for running up irresponsible credit card bills and then trying to "get around debts . . . they are very capable of paying."

Warren and Tyagi, however, offer some powerful data against the plausible-sounding idea that Americans are indulging in flat-screen TVs, sushi dinners, and Tommy Hilfiger for the kiddies instead of socking money away for a rainy day. According to the Bureau of Labor Statistics's Consumer Expenditure Survey, American families spent 44 percent less on appliances in 2000 than they did in 1973, 22 percent less for food (both at home and in restaurants), and 21 percent less on clothes. If families spend more on home entertainment, they spend less on dry-cleaning. "People are going bankrupt in record numbers, and it doesn't have much to do with the Lexuses and the Nikes," says Tyagi.

Rather, it's the bigger, less optional expenses that are pushing families to the limit: child care, car payments, college tuition, and -- most important -- homes in safe neighborhoods with decent schools. House prices paid by single, childless buyers rose 23 percent in inflation-adjusted dollars from 1983 to 1998, the authors explainan impressive enough figure. But for families with children, they shot up a whopping 79 percent.

In a cruel irony, the two-income couple's quest for security may be inherently self-defeating. Women entered the work force in search of more spending power and better lives for their families (among many other reasons). But the two-earner family has caused a bidding war for housing in the suburbs, as all those families chased the same houses in the same school districts. And yet there's no going back: Getting by on a single income is pretty much impossible in many neighborhoods. (That may be why three in four married couples rely on two salaries these days.)

Average family budgets from 1973 and 2000 make the argument painfully clear. "Tom and Susan," Warren and Tyagi's typical single-income family from the early `70s, had an income (in today's dollars) of $38,700 -- all from Tom's salary. Fifty-four percent of that income went toward the mortgage, insurance, and other fixed costs. The balance -- $17,834 -- went to food, clothes, and other discretionary items.

In sharp contrast, "Justin and Kimberly," a typical contemporary two-income duo, get by on a seemingly princely $67,800. But the mortgage, child care, and other fixed costs take away fully 75 percent of their income, leaving them with -- voila! -- !$17,045 to spend, almost precisely the same amount that Tom and Susan had left over.

The real catch comes when a crisis hits. When Tom lost his $38,700 job, Susan could enter the workplace to help make ends meet until he found another one. In fact, Elizabeth Warren lived through this scenario in the 1960s, as a teenager: When her father had a heart attack, her mother pitched in as a clerk at Sears and continued there after he recovered. (They lost the family car but little else.) The modern family, however, is working without a net, just one layoff, medical crisis, or divorce away from financial disaster. What's more, with two people working, a layoff is twice as likely -- even before you take into account today's more tumultuous economy.

What to do? As a first step, Warren and Tyagi propose going after those who, they say, prey on families' financial vulnerability and push them over the edge. In the early 1980s, most states stopped enforcing any ceiling on credit card interest rates. So why not bring back the "usury laws" that limited those rates to 12 to 18 percent (adjusting for inflation, when necessary)? That would help keep, say, bills from a few months' unemployment from snowballing out of control. The authors also propose that requiring homebuyers to come up with a 20-percent down payment might keep them from straining for houses they can't afford.

Other proposals are considerably more pie-in-the sky. The introduction of statewide voucher programs would relax the pressure to locate one's family near a good school. And tuition freezes at public colleges might reduce the debt load on students and middle-class parents.

The authors strongly oppose the proposed bankruptcy "reform" bill, which has passed the House and awaits action in the Senate. The bill would force bankrupt families with above-average incomes to pay back a portion of their credit card debt over time. A spokesman for Senator Chuck Grassley, the Iowa Republican who chairs the Finance Committee, says it is founded on the principle that "law-abiding Americans pay their bills." But Warren and Tyagi argue that it will make it almost impossible for some bankrupt families, knocked down by forces beyond their control, to ever get back on their feet. They pointedly note that executives from the MBNA Corporation, a major credit card provider, were President Bush's largest single source of contributions in 2000. (They also speculate that campaign contributions may have led Hillary Clinton to flip-flop her position, from no to yes, on an earlier version of the bankruptcy bill.)

. . .Not all analysts buy every aspect of the two-income trap. In her 1998 book "The Overspent American," Juliet B. Schor insisted that debt-ridden families pursue the baubles of social status as well as the necessities of basic security. Parents' ideas of what counts as a "good" neighborhood, she wrote, often have as much to do with keeping up with the Joneses as with any reliable measures of safety or school quality.

Moreover, what you make of consumption trends often turns on how you read the numbers. Warren and Tyagi stress that the average new home has roughly the same number of rooms as new homes a generation ago. Yet it's also ballooned from 1,500 to over 2,100 square feet. Is that a sign of rampant overconsumption, or simply the price of admission to the contemporary suburb?

A recent report from the Harvard Joint Center for Housing Studies emphasizes that it's the poor who suffer most from rising housing prices. Almost all the increase in defaults results from high-interest "subprime loans" to buyers who already have poor credit histories -- and who also are poorer than average. For the mainstream middle class, rising mortgage debt is worrisome but "has yet to create serious problems," the report concludes. Still, Nicolas P. Retsinas, the Harvard center's director, agrees that there's a "new vulnerability" afoot in America. Meanwhile, "The Two-Income Trap" has caught the eye of Democratic presidential candidates Dick Gephardt and Howard Dean, who have taken to citing it on the stump.

What's this mom-and-daughter team's advice on protecting your own family? If at all possible, plan your budget so that you could get by on one income in a crisis, they say. Fixed costs and regular payments are your enemy: It's better, they say, to blow a second salary on jewelry, TiVo, and gewgaws than on an oversize mortgage that cannot be trimmed. If you're in the market for a new house, they say, resist the urge to stretch, stretch, stretch the budget to get into the perfect neighborhood. "Just because the bank is willing to give you a mortgage," Tyagi says, "don't take it."And the safest bet of all? Don't have kids.

Christopher Shea's column appears in Ideas biweekly. E-mail: critical.faculties@verizon.net.

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