The Two-Income Trap

I just finished reading a very interesting book by Elizabeth Warren (yes, that Elizabeth Warren) and her daughter, Amelia Warren Tyagi, called The Two-Income Trap. It was published in 2003, long before the current economic meltdown was being predicted by any but the most prescient of voices. The main thrust of the book is that the American middle-class family (in 2003) was already in dire straits, thanks to a combination of real estate prices, health care costs, and post secondary tuition rates all running out of control. Within the first few pages, the authors proceed to debunk (through data) what they call the Over-Consumption Myth: the notion that the sharp rise in bankruptcy filings within the U.S. between 1981 and 2001 stemmed from the fact that people were just spending too much money on luxury items.

Some of the statistics in this book are jaw-dropping. For example, between 1981 and 1999, the number of American women filing for bankruptcy had gone from 69,000 to 500,000; more than 90% of the bankruptcy cases in the States involve individuals or families who would quality as "middle-income" (based on their situation before entering bankruptcy); and more Americans will file for bankruptcy in any given year than will graduate from college.

In analyzing the data, the two women quickly came to the realization that the three items I mentioned above - mortgage payments, medical insurance bills and college tuition - constitute the majority of where middle-class money goes. All three were way up at the time of the book's creation, leading to an ever-increasing percentage of the family's take home money needing to be set aside for them. One of the key points of the book is that these sorts of expenses, which are not the kind that can be jettisoned in tough times (unlike luxury items or expensive vacations), form the basis for the titular trap because anything going wrong - a job loss, a health problem beyond what the expensive insurance will cover, a marital breakdown - is enough to make the whole house of cards collapse. Had the Over-Consumption Myth been true, they argue, then a family suffering any of those types of setbacks could simply step down their extravagant lifestyle (for awhile) and recover from the blow.

The reason that the authors consider a two-income setup such a potential pitfall is that most American middle-class families with two wage earners find themselves in situations where the full output of both spouses is required just to make ends meet. A family with only one working member, on the other hand, has a "backup player" who could enter the workforce in times of trouble, to provide an added boost. It's quite the reversal of traditional thinking (which goes, "families with two working spouses are better off than those with one") and yet it also makes a lot of sense.

One of the first things that I thought, as I began reading The Two-Income Trap, is that it's almost certainly more applicable south of the border than here in Canada. For one thing, it's much less common here to learn of someone being in financial trouble due to medical expenses (not unheard of, but far from common). Our universal health care, with its focus on preventative care, means that most of us feel very little impact in the wallet from a medical emergency. Also, there appears to be a much bigger battle going on in America over where to live, as schools are zoned by residential address (moreso than here) and the difference between living near a good school and being zoned for a bad school can mean a lot more than it does here. The resulting bidding wars had driven real estate costs in the more highly-sought-after neighbourhoods through the roof (possibly now corrected somewhat, thanks to The Great Recession). All of which means that this book should resonate a lot more with a typical American than it will with someone living anywhere else, I think.

Having said that, though, I think that it's an excellent read (regardless of where you live). I gained a lot of insight on what middle-class America is up against, as well as some of the predatory habits within the credit industry. There's lots of good advice offered up within the book, almost all of which I'd heartily agree with and even advocate for some of the people who might be reading this blog (not naming any names, here!) I know that Vicki and I, for all those years in which both of us were working, always tried to live at a level that was supportable by only one of us bringing home a paycheque. And, as I e-mailed to Tammy, there's even a section on buying cars that could have been written by Vicki or I, seeing as it's exactly the way that we went about getting ourselves out of "car debt" all those years ago.