31 Mar

It’s a Trap!

Book Review: The Two-Income Trap: Why Middle Class Mothers & Fathers are Going Broke

The Two-Income Trap cover

The Two-Income Trap cover

I picked up this book not because I am a mother (as if I would have time to read if I had a child), but because I came across this quotation on Reddit about a month ago, “Having a child is now the single best predictor that a woman will end up in financial collapse.” And my thoughts were That’s all the reason I need not to procreate and also I should read that book. This is a big claim though; the main thing that will bring a woman down is children. I was interested to see how Warren and Warren-Tyagi (the mother-daughter duo that wrote the book) substantiated that claim and treated the issue.

The basic premise of The Two-Income Trap is that by sending mothers (the book does focus on mothers, rather than second-earner more generally) into the workforce, we have doomed ourselves. At first, this sounds very anti-feminist. I found myself wondering whether the authors thought women should go back to staying at home, but they later make it clear that this is absolutely not what they are proposing. Rather, the “trap” is twofold: having two income earners means that families structure their budgets around having two full time workers. Using this increase in cash (compared to families with only one income), these two-income families buy homes in better school districts, driving up the home values of everything in the area, making it impossible (for most people) to afford a home in a decent district on only on income. The second piece of the trap is that because families are focusing all their resources on affording homes in a nice school district, if one parent becomes unable to work or loses his or her job, the family is immediately sunk. We have created a system in which the only way to compete is to have two full time incomes and no one gets injured or laid off.

I was surprised to learn that school districts were such a major factor in where people decided to live (although, as a former teacher, I should not have been). In fact, “A study conducted in Fresno found that, for similar homes, school quality was the single most important determinant of neighborhood prices [emphasis theirs].” And furthermore, I found this statistic quite telling, “Schools that scored just 5 percent higher on fourth-grade math and reading tests added a premium of nearly $4,000 to nearby homes.” What! That’s basically adding a whole year’s salary onto a mortgage just for 5% more in test scores. The tone of this book definitely communicated the importance of getting into better school districts to middle class families. People are willing to bring themselves to the brink of financial ruin just to make it happen. I expect this is a function of the middle class drive for children to do better than their parents and the parents make this part of the American Dream come true by positioning themselves as strategically as possible, even if it means spending almost all your money on a house. Warren and Warren-Tyagi’s solution to this housing madness is “a well-designed voucher program.” I know that for anyone in education, vouchers make you tense up, but the goal of their proposed voucher is to make it so each child is entitled to go to school somewhere, but that school doesn’t have to be tied to the family’s domicile. The “voucher” travels with the student to whatever school the family chooses. I like the idea of de-coupling residence and school; however, I find it hard to believe that this can work in a pragmatic sense. Won’t everyone just try to get into the best school in the area? Wouldn’t this just result in lotteries like many charter schools already do? How are kids going to get to school? I will admit that I don’t have a better idea (of course I’m not a professor at Harvard Law School like warren is), but I am not confident that this would work without seeing a lot more data and plans.

Even though the book is primarily about two-income families, it also gives some attention to single mothers who have it even worse than everyone else. Unfortunately, “Single mothers are more likely than any other group to file for bankruptcy.” Essentially, anything that is financially negative, will happen to single mothers more than anyone else. They are more likely to lose their homes and to be past due on bills. Even though the “trap” described in this book is for two-income families, single mothers (and presumably fathers) are caught up in it in their own way. According to Warren and Warren-Tyagi, “For every increase in the paycheck of a single mother, there is now a corresponding increase in a married couple’s income as well … the income gap between single and married parents is growing.” So, if you think that being a single parent will let you opt-out of this two-income trap, you’re wrong about that.

Another issue that is discussed in detail is the issue of debt, consumption and inflation. They explain that one of the major things that can drive a family into debt—and potentially bankruptcy—is medical bills. They state that “Over the past twenty years, the number of families declaring bankruptcy in the wake of a serious illness has multiplied more than twentyfold, or 2,000 percent.” They also discuss the rise of subprime mortgage lending (and for anyone who has lived in the 21st century, subprime is not a term I need to define for you). Subprime mortgages offer interest rates of more than twice as much as a standard loan. The authors give the example of a 6.5% and a 15.6% interest rate: on the life of a $175,000 mortgage, the higher rate would result in $420,000 more in payments over a 30 year loan. That is insane, you could buy two more houses (in someplace that isn’t California, I suppose) for that amount, yet people are racking that up as mere interest. Apparently, the mortgage industry was being somewhat less than honest at this point in time, and the authors cite a figure that 40% of people who were sold subprime mortgages could have qualified for a standard loan. It seems that many people are not well enough educated to know when they are being scammed by the bank, and thus were taken advantage of by lenders who were pretending to be friendly. Again, this is madness and it is absolutely irresponsible and predatory on the part of banks.

From my standpoint in 2013, I’m thinking, Well, obviously, but this book was published in 2003. It pre-empted the financial crisis by five years. Some of the issues they discuss make them seem almost prescient, but of course, they weren’t making magical predictions, it was clear even then that our economic model was not a sustainable one. To get on my soapbox for a moment: the fact that people knew and were writing about the problems of medical debt and people getting into mortgages that they could barely sustain in 2003 (which means the data would have been primarily from the 1990’s), but nothing happened and the economy was allowed to completely fall apart in 2008 is infuriating. The authors mention that in 2002, Citibank’s subprime lending arm was “prosecuted for deceptive marketing practices.” And yet, nothing happened. They paid $240 million to settle and, presumably, went on stoking the fires of financial ruin for the country. My generation is going to be trying to cope with the after effects of all this thanks to the legislature deregulating so many industries and bankers profiting off of all this foolishness.

At the end of the book, Warren and Warren-Tyagi offer some suggestions for how to avoid the two-income trap. The first is the somewhat obvious “Stay home?” I get that having a parent stay home can be a way to opt-out of this trap, but for that to work, one partner has to be making a significant amount of money and the other must be okay with staying at home and leaving the workforce. I don’t see that being a great solution (and even the authors present it in a tentative kind of way). However, I think the lesson from this suggestion is to not rely so heavily on two incomes. If a family has two incomes, then they shouldn’t be putting a full income of one member into a mortgage. An entire lifestyle cannot be predicated on having just enough to pay for necessities without any savings. The second solution (and my personal favorite) is “No children?” (all the suggestions have nice, tentative question marks). Notably, “By forgoing childbearing, a woman decreases her chances of going bankrupt by 66 percent” and “By remaining childless, a woman greatly improves her odds of having a comfortable retirement.” If you read this book looking for reasons you shouldn’t have children, then here it is, you win this round!

I had a hard time figuring out what I thought about this book on the whole. A part of me wants to say Well, just never have children! Problem solved, but of course that is not an actionable solution for everyone, and frankly, there are lots of people who want children and feel good about having them, and I wouldn’t want to deny people that choice just because the financial game is not a fun one for families with children. Another part of me was enraged because injustice is upsetting for me. Every school should be a good school that parents want their kids to go to! People shouldn’t be pushing themselves to the brink of bankruptcy just so their kid can get a free and appropriate education. That is the most anti-democratic concept that I can think of. It guarantees that only rich (or relatively wealthy people) will get a good education, thus perpetuating a cycle of socio-economic inequality. I’m not sure what a good answer would be, but I feel that, as a society, if education, equality, and democracy are things that we actually value (rather than things we just say we value) then this is a problem that needs to b e fixed.

Finally, if you hate reading, or just like watching things, here’s a lecture by Elizabeth Warren about things from this book and “the coming collapse of the middle class.”

The Coming Collapse of the Middle Class – Elizabeth Warren [57:37]