The Two-Income Trap

Families in financial trouble are working hard and playing by the rules — but the game is stacked against them.

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Middle-class parents are stretched thin these days. Between health care costs, child care hassles, looking for a home in a good district, and paying for college, raising a child is becoming increasingly expensive. Little wonder, then, that married couples with children are more than twice as likely to file for bankruptcy as their childless counterparts, and 75 percent more likely to have their homes foreclosed. And the danger is growing worse by the year: In 2002 1.6 million people filed for bankruptcy, many of those middle-class parents. a record . As Elizabeth Warren and Amelia Tyagi note in their book, The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke, having a child is now “the single best predictor” of bankruptcy. “

In the face of such hardships, many families have sent both parents into the workforce to try to make ends meet. After all, surely if both parents work full-time it shouldn’t be hard to ensure financial security, right? Wrong, say authors Elizabeth Warren and Amelia Tyagi, in their book, The Two Income Trap. Two-income families are almost always worse off than their single-income counterparts were a generation ago, even though they pull in 75 percent more in income. The problem is that so many fixed costs are rising — health care, child care, finding a good home — that two-income families today actually have less discretionary money left over than those single-earner families did. As the authors write: “Our data show families in financial trouble are working hard, playing by the rules — and the game is stacked against them.”

Amelia Tyagi recently sat down with to talk about the two-income trap: how families get into to it, how it affects them, and what can be done to help them out. Can you explain what the two-income trap is?


Amelia Tyagi: More and more families today are sending both parents into the workforce — t’s become the norm, it’s what we now expect. The overwhelming majority of us do it because we think it will make our families more secure. But that’s not how things have worked out. By the end of this decade, one in seven families with children will go bankrupt. Having a child is now the single best predictor of bankruptcy, and this holds true even for families with two incomes.

So we looked at the data for two-income families today earning an average income. What we found was that, while those families certainly make more money than a one-income family did a generation ago, by the time they pay for the basics — an average home, a health insurance policy, a second car to get Mom to work, child care, and taxes — that family actually has less money left over at the end of the month to show for it. We tend to assume with two incomes you’re doubly secure. But if you count on every penny of both of those incomes, which most families today do, then you’re in big trouble if either income goes away. And obviously, if you have two people in the workforce, you have double the chance that someone will get laid off, or double the chance that someone could get too sick to work. When that happens, two-income families really get into trouble, and that’s how a lot of families quickly go bankrupt. In the past, it seems like a stay-at-home mom could act as an insurance policy for the family if the dad was laid off or whatnot. But today two-income families have nothing to fall back on in the event of a disaster.

AT: Right. It used to be that a stay-at-home parent was a sort of safety net — she (and it was usually a “she”) not only took care of the children, but she was there if anyone got sick. Or if Grandma broke a hip, she could step in and provide care without costing the family financially. But today, with both parents in the workforce 100 percent of the time, there’s just no way to care for somebody on the side — either somebody has to take time off work or somebody has to pay someone to provide that care. In either it represents a big financial blow, and families just don’t have the flexibility to deal with it anymore. Some conservative commentators might see this as evidence that the mother should return home.

AT: [Laughs] Right. Of course, the notion that mothers are all going to run pell-mell back to the hearth and turn back the clock to 1950 is absurd. But that aside, a big part of the two-income trap is that families have basically bid up the cost of living. Housing is a big example. A generation ago, an average family could buy an average home on one income. Today you can’t do that in three-quarters of American cities. We all know that housing prices are going up, but what most people don’t realize is that this has become a family problem. Housing prices are rising twice as fast for families with kids.

A lot of that has to do with public schools. As confidence in the public schools has dwindled, people are bidding up the prices on homes in those school districts with good reputations; so for a typical family, the only way to afford one of those homes is to send mom to work. Average mortgage expenses have gone 70 times faster than the average father’s income, and the only way families are keeping up is by bringing in two incomes.

Of course that’s where you see the trap. If families were simply sending Mom into the workforce and using that money to build their savings, or to have more fun, or to go on more vacations, you wouldn’t see the same kind of financial trap. If Mom or Dad got laid off, heck, they’d stop going on vacation. But that’s not the case. If mom gets laid off now you can’t say, “Well, we’ll just stop paying the mortgage for awhile.” One of the things we’ve heard over and over after our book was released was mothers stepping forward and saying: “You’re telling my story. You know, maybe I prefer to work and maybe I don’t, but I tell you I have no choice financially. The only way we’re getting health insurance and the only way I’m sending my kids to a decent school is for me to work and work some more.” Even so, there still seems to be this perception that families are only going bankrupt because they’re splurging on frivolities.

AT: [Laughs] Yes, there’s this great myth out there that we call the “Over-consumption Myth,” which goes: If you earn a decent income, and you’re in trouble financially, it must be because you’re blowing all your money at the Gap, and TGIF. The myth is so powerful, it almost seems like heresy to question it. But when we actually looked into the data on what real families actually spend, it’s just not true. An average family of four actually spends less on clothing than their parents did a generation ago, adjusted for inflation. That includes all the Tommy Hilfiger sweatshirts and all the Nike sneakers. How does this work? Well we forget all the things we don’t spend money on anymore — how many kids have leather shoes for Sunday school anymore? How many people dress up in wool suits for work everyday?

The point is that families today are spending their money no more foolishly than their parents did. And yet they’re five times more likely to go bankrupt, and three times more likely to lose their homes. Families are going broke on the basics –housing, health insurance, and education. These are the kind of bills that you can’t just trim around the edges in the event of a downturn. Now you also found that single mothers, and single divorced mothers especially, have the highest risk of bankruptcy. Why is that?

AT: Well, everybody knows that single mothers have it rough financially. But if you ask people what the solutions are, you will nearly always hear that we should increase child support, and that single mothers should make higher incomes. Makes sense, right? The problem is that’s exactly what America has been doing for the past 30 years. Child support enforcement is not perfect but it’s better than ever. Child support awards are more consistent and they’re higher. And women’s incomes are increasing ten times faster than men’s. There’s still a wage gap but it’s closing. So you add all that up—single mothers should be doing today than ever. But the sad fact is in the past generation the number of single mothers filing for bankruptcy has increased more than 700 percent. At the rate we’re headed one in six single moms is going to go broke by the end of this decade — that’s a scary statistic.

We found that this has nothing to do with child support. The problem is that two-income married couples are in trouble financially, and if they’re not making it, then the single mom doesn’t have a prayer. It used to be that when a family got divorced, the stay-at-home mother went back into the workforce and brought in a new income. Plus, they probably had a mortgage they could afford, as well as some money in the bank and no credit card debt. So the divorce was a big financial shock back then, but they had a lot more resources to cope with it. Today there’s no way to bring in new income, since the mom’s already working. Plus, the average family today owes a couple thousand dollars or more in credit card debt, and all their fixed expenses are already claiming the overwhelming majority of two incomes. So they don’t have any give to deal with the new situation. Then on top of it all there are the legal costs and the costs of setting up a second household. It’s devastating. Let’s talk about some of the solutions you propose in your book to help alleviate the two-income trap. You mention that the housing crunch and unaffordable mortgages could be dealt with through policies that promote public school choice—basically, offering vouchers to families so that they can send their kids to schools anywhere in a district.

AT: Right. The point here is to give every child access to good public schools regardless of where they live. Today if a parent wants to choose where their kid goes to school, they can either fork over a whole bunch of money in tuition for private school or they can buy a new house near the school of their choice. And it’s driving up property prices in certain key areas. When you stop and think about it, that’s kind of ridiculous.

So we’re suggesting that you need to decouple schools from home location — a zip code should not automatically equal what public school you go to. Ultimately this would give families more choices — they could live anywhere in a city and not worry as much about getting a good education for their kids. You also argue that skyrocketing college costs are putting families in a pinch. And one of the solutions you mention is a tuition freeze for state universities, so that families can start affording to send their kids to college once again.

AT: I think we need to put the “public” back into public universities. College tuition has been increasing at nearly three times the rate of inflation. In the past generation, college tuition has doubled, adjusted for inflation. I don’t think more student loans is the answer — kids are already drowning in student loans. So we need to start thinking about other ways to make college more affordable.

What we found is that colleges often increase tuition just because they can. When you look at what universities are spending money on, they’re spending far more on sports programs, far more on administrative overhead, far more on food services. Those are all nice, to be sure, but not when the college tuition goes out of reach of middle-class families. So a tuition freeze would force universities to stop and think about what they really need to offer, what’s really necessary. You have a whole bunch of solutions and policy recommendations in your book, but one interesting thing about all this is that you’re always looking at how policies would affect the way policies compete with each other. So, for instance, you note that free child care would actually put stay-at-home moms at a disadvantage.

AT: Exactly. So our recommendation is that subsidized child-care should be offered in tandem with some sort of subsidy for stay-at-home parents, in the hopes that that would offset the competition between families. Otherwise, you’re providing even more financial pressure on one-income families, and forcing those remaining stay-at-home mothers to enter the workplace in order to keep up with everyone else.

Another proposal we offer is universal preschool — basically we would extend public education to start at age 3 or 4 instead of age 5. There’s not an expert out there who thinks that kids don’t need to go to their first day of school until age 5. But that’s another policy proposal that benefits stay-at-home parents and working parents alike. One of the big lessons from this book seems to be that if you want to look at how families are doing in the US, you can’t just look at employment. Why do you think bankruptcy statistics don’t really garner a lot of attention?

AT: Absolutely, that’s a huge lesson. In general, I think income statistics don’t garner much attention. It seems that incomes have dropped in the past couple of years and we haven’t heard so much about that. It seems like the stock market and employment numbers always gets the attention. And that seems to miss the point. As we interviewed people for the book, we kept hearing people make the assumption that bankruptcy is merely a side effect of bad economy. But there’s no evidence of that. Bankruptcy rate increased all through the 1990s, when the economy was pretty robust. And there a lot of reasons for that. One of the things you have to remember when you talk about how to measure the financial health of the American family is health care. Half of all people who go bankrupt cite a medical problem as one of the things that drove them into bankruptcy. And today, even as the economy is rebounding, there’s no evidence at all that medical care is getting more affordable — in fact, just the opposite. There also seems to be this idea out there that debtors are immoral, or that they’re gaming the bankruptcy courts in order to get out of having made bad choices, so we shouldn’t worry too much about them.

AT: Yeah, there’s this great myth that back in the some murky past, people paid their bills no matter what. Why? Because they had more honor! Whereas today, people say, our morals are willy-nilly and we run to the bankruptcy court at the first sign of trouble. But when we look into real data on the real people going bankrupt, there’s no evidence for this myth. The fact is, out of all the possible reasons for going bankrupt, only three account for nearly 90 percent of bankruptcy: a job loss, a medical problem, or a divorce. And the fact is that those are exactly the kind of calamities that the bankruptcy courts were designed to help people through. The courts are supposed to be there for somebody who has lost their job and can’t pay their bills. Most people simply aren’t gaming the system in any way.

Oh, and then the other half of the myth is that people just have no shame, that bankruptcy has lost its stigma, which again, it held in some murky past. But more than 80 percent of people who filed for bankruptcy said they were deeply ashamed, and didn’t even tell their family members or their coworkers or their neighbors—even when the reason they filed for bankruptcy most anyone would sympathize with. I talked with a woman who filed for bankruptcy because she had breast cancer, and her new insurance had not kicked in, and she could either take on the medical bills or get breast cancer without care. Even still, she talked still of being so ashamed and not wanting anyone to know that she filed. The notion that there is no shame in filing would be news to the people who are actually going down to the bankruptcy court. Now you mention that, in addition to spiraling costs, the deregulated lending industry has been largely responsible for putting families further and further into debt.

AT: Right. We all know that debt’s spiraling through the roof, and that Americans have vastly more debt than they ever did before. Most of us get the impression that it just happens, in a vacuum, or it’s a side-effect of our bad morals. The reality, though, is that it didn’t just happen. The laws changed. A generation ago, American had what were called “usury laws”, which limited how much interest a lender could charge. Pretty much every nation on earth has usury laws, and America had them in place since colonial days. But Congress effectively wiped out the usury laws in the late 1970s and early 1980s, and as a result the lending industry was transformed. A generation ago, when a bank could only charge 12 percent interest, they were in the business of carefully screening whom they lent money to. There were no all-purpose credit cards, there were no consolidation loans. They lent money only to people who could pay them back. But today, when you can charge 20 or 30 or 50 percent interest, heck, they can make money lending to every man, woman, and child, even an occasional family dog! And that’s exactly what’s happened. They offer more and more loans to people with bad credit, and most of those borrowers end up even further into debt. And your solution was to bring back the usury laws?

AT: Yes, we could put back those laws in one fell swoop, and it would help families get out of debt, make debt cost less, and it wouldn’t even cost taxpayers anything. It’s the best kind of regulation. I’d like to see other regulations as well — better disclosure, fro instance. And I’d like to see Congress outlaw the practice where lenders can change their rates even after you’ve borrowed the money, like they do on credit cards. Not even the mob gets to do that! What do you think are the biggest obstacles towards changing those laws?

AT: The credit lobby. [Laughs] It’s the best-financed lobby in Washington, and they would not like to see that happen. You have an interesting section in your book on policies to promote homeownership, where you note that some of these policies actually increase bankruptcy? Can you explain how that works?

AT: Sure. A number of groups, President Bush included, have advocated increasing homeownership. That’s a great goal, to be sure, and these groups have good intentions. The problem is that they usually advocate waiving downpayments, or subsidizing downpayments for people who can’t afford to put up the money up front. Unfortunately, a family that doesn’t the financial resources to put together a downpayment on their own, is 15-20 times more likely to lose the home on foreclosure. Let’s face it, if you haven’t been able to save up some money for a downpayment, it’s a sign that your income is too erratic or your expenses are already too high, and you can’t afford that house right now.

The second problem is that mortgage companies will charge these low-income homeowners a much higher rate, because they view them as a higher risk — the banks know full well they’re 20 times more likely to get foreclosed on. So they’re paying more for the same product. What sort of reception has your book received among politicians in Washington?

AT: Well the political reception has been really overwhelming, really fabulous. Folks like John Kerry, John Edwards, Howard Dean are all picking it up and quoting from it. I think people saw the description of the problem that families face is very powerful. It’s got people to start talking about the middle-class squeeze, and understand the notion that poor folks aren’t the only ones who are struggling financially. I think that’s a very important message for liberals and progressives who care about these issues and are committed to financial well-being for Americans. It forces them to realize the problem has a wider scope.

AT: Right. Throughout our book we try to think about policies that have a broad tent. Often policies that you hear from liberal thinkers tend to narrowly help only the poor. And I think that the middle-class today is so stretched, I don’t think there’s much appetite for that. So we’re thinking about policies that have a broader umbrella, like universal preschool. That will help poor and middle-class children alike. Usury rates will help middle-class families getting beat up with overpriced credit cards and mortgages, and it will also help poor families who are getting victimized by payday lenders. I think that broad scope is an important political message. So what happens if the government doesn’t do anything, and these problems aren’t fixed? Isn’t there a fear that families might stop having children if they start to see it as a financial detriment.

AT: I think it’s a real worry. As word gets out that having a child is the single best predictor of going broke, how many people are going to hear that and say, “You know what sweetie, maybe we shouldn’t.” I would worry about that. I don’t see that as being good for America — that the country pits parents against everybody else.


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