Financing a Future With Kids: Another Kind of Family Planning

The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke , by Elizabeth Warren and Amelia Warren Tyagi. Basic Books, 255 pages, $26.

Harvard law professor Elizabeth Warren and business consultant Amelia Warren Tyagi (a mother-daughter team) have quite possibly hit on the most potent form of birth control ever to come on the market. A single sentence from their new book, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke , should do the trick: “[T]he people who consistently rank in the worst financial trouble are united by one surprising characteristic. They are parents with children at home.”

The Two-Income Trap , which was inspired by Ms. Warren’s work on a Harvard study, the Consumer Bankruptcy Project, shows how the financial position of America’s middle-class families is rapidly spinning out of control. “A family with children is now 75 percent more likely to be late on credit card payments than a family with no children,” the authors report. “The number of car repossessions doubled in just five years. Home foreclosuresmorethan tripled in less than 25 years, and families with children are more likely than anyone else to lose the roof over their heads.”

Is this the end of the American Dream? The authors point out that these days, the idea of improving your family’s economic standing across generations may be nothing more than wishful thinking. In 1981, about 69,000 women filed for bankruptcy. By 1999, that number had increased to nearly 500,000. If current trends continue, the authors predict, by 2010, one in seven U.S. families will have declared bankruptcy.

The explanation for this crisis may seem obvious: People are simply spending too much, living above their means, falling prey to “the urge to splurge.” But the authors quickly dispel what they call “the Over-Consumption Myth.” The relevant buying trends have not changed significantly in recent years. Consumer Expenditure Surveys issued by the Department of Labor show that, in fact, “there seems to be about as much frivolous spending today as there was a generation ago.” And filing for bankruptcy is not something that a family does lightly. Citing case studies and personal interviews (which unfortunately tend to veer toward the saccharine or melodramatic), the authors portray the practical and emotional hardships of financial ruin, of having the courts take control of the family assets. Indeed, one study shows that of the 18 million families that would benefit from declaring bankruptcy, only 1.5 million have actually filed. And almost 90 percent of those who actually do file say that they were pushed into bankruptcy because of lost jobs, family break-ups or medical problems.

The authors believe that the problems facing middle-class families are systemic in nature, and that the consequences of the crisis are profound and far-reaching. Ironically, they point to the entry of women into the paid labor force as a major contributing factor. One result of women going to work was that families lost their safety net. When there’s no stay-at-home parent to provide care, the hardship of having a sick child or an aging parent takes on a new, financial dimension. It used to be that in a pinch, the wife could go out and get a job to tide the family over. That’s obviously not an option if she’s already employed. With 75 percent of their earnings consumed by fixed expenses (leaving little margin for error), middle-class families need that safety net more than ever-and it’s not there.

When women entered the workforce en masse, “they ratcheted up the price of a middle-class life for everyone” by making it more difficult to subsist on a single income. You would think that a family’s financial muscle would be doubled with both parents working, but that’s not the case. Indeed, while today’s double-income family takes in 75 percent more than a single-breadwinner family a generation ago, it has 25 percent less discretionary income at its disposal. This steep decline in discretionary income is largely due to a sharp rise in fixed costs. Access to the very things that define the middle class, such as good education and owning a home, has become more expensive. Indeed, the crisis, as Ms. Warren and Ms. Tyagi portray it, has sprung from good intentions: the fundamental desire of parents to do well by their children, to provide them with the trappings of the middle class. Not long ago, for example, preschool and college (the bookends of a child’s education, and both paid for out of pocket), were seen as “extras.” Today, doing without is widely viewed as a handicap. And tuition has soared: In-state college costs have almost doubled in less than 25 years. Even public education-what the authors identify as “the heart of the problem”-is not free. Fierce bidding wars have erupted over the limited supply of housing within good school districts. Fanning the fire is the two-earner family, which, with its extra earning power, has helped to push housing prices off the charts.

And there’s more bad news on the way. “Just at the time when parents got caught in a vicious bidding war for middle-class housing,” the authors write, “just as the cost of college tuition and health insurance shot into the stratosphere, just as layoffs increased and the divorce rate jumped, a new player appeared on the scene. A newly deregulated lending industry emerged, eager to lend a few bucks whenever the family came up short.” In 1978, the lending industry was deregulated, enabling lenders to extend huge credit limits at huge interest rates. Middle-class families, with their decreased disposable income, gobbled them up and increased the country’s credit-card debt more than 6,000 percent in the last 30 years. A similar phenomenon followed in the mortgage industry. Today, homeowners are three and a half times more likely to have their house foreclosed on than a generation ago. The lending industry is booming. Families, often unable to cover little more than late fees and minimum payments, have found themselves in a sort of “modern-day debtor’s prison.”

There’s no turning back the clock; we can’t ask women to retreat to the domestic sphere-so what do we do about all this? The authors propose a number of policy changes. A public-school voucher program which would allow children to attend any school within a given area’s district would minimize the scramble for housing in limited “good school” districts. “Extend[ing] the scope of public education” to include early education would help ease financial strains. Amending the Social Security Disability Insurance Program would save some families from financial ruin when an illness or accident strikes. Ms. Warren and Ms. Tyagi also suggest amending federal law to cap lending and mortgage rates. (The discussion surrounding the lending industry is the one part of their book that gets a bit murky for those readers not equipped with an M.B.A.) “Interest rate regulation would also take the ammunition out of the middle-class bidding war,” they write. These proposals seem logical and sound-and unlikely in the current political climate.

The authors share pointers on how to protect your family from the two-income trap-but the suggestions are likely to leave you feeling helpless. “[A]ct collectively,” the authors advise, write to your senators, “read a good book on financial planning.” They also outline what they call “The Financial Fire Drill,” three questions readers should ask themselves: Can your family survive without one income? Can you downshift the fixed expenses? What is your emergency back-up plan?

If you’ve read this far in The Two-Income Trap , you feel as if you’re drowning-and now you’re being thrown a whoopee cushion as a flotation device.

But what kind of happy ending could we have expected? Despite their repeated claim that they remain optimistic, the authors conclude (quoting U.S. News and World Report ) that “bringing up children has indeed become a crummy financial bargain.” For those who find the Financial Fire Drill cold comfort, there’s one last alternative: Don’t have any kids yourself.

Beth Broome is deputy managing editor of The Observer .