September 16, 2003


Two incomes, more debt?: A new study offers a controversial theory of why today's families are having a tough time staying afloat. (Marilyn Gardner, 9/17/03, The Christian Science Monitor)

As a bankruptcy expert, Elizabeth Warren has seen the devastating effects on families when their finances collapse. She has also watched the number of bankruptcies escalate, rising 400 percent in the past 25 years. By the end of the decade, she says, an estimated 6 million families with children - 1 in every 7 such families - may declare bankruptcy. This year, more children are going through their parents' bankruptcies than their parents' divorces.

But Ms. Warren, a law professor at Harvard, rejects the conventional theory that overconsumption - squandering money on big-screen TVs, McMansions, restaurant meals, oversized cars, and luxury vacations - is to blame for insolvency and all those maxed-out credit cards. Instead, she points to the high cost of housing and education - fixed expenses that can quickly create a sea of red ink when families face layoffs, illness, or divorce. Skyrocketing healthcare costs add to the problem.

Ironically, Warren sees Mom's paycheck - a family's second income, the very asset meant to provide more financial stability - as a potential culprit rather than an economic cure. When middle-class mothers began entering the workforce en masse, she explains, their incomes gave parents more money to spend on housing. This created "frenzied bidding wars" for homes in desirable school districts. A deregulated mortgage industry compounded the peril by allowing homeowners to assume larger mortgages.

As a result, Warren says, dual-income families have less discretionary income and are more vulnerable economically than their single-breadwinner counterparts in the past.

She spells out her unusual theories in >The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, written with her daughter, Amelia Warren Tyagi.

Even if sympathetic to the argument that only one parent should work, one has to wonder why such families wouldn't use their extra discretionary income for similar moves to more expensive houses, etc.

Posted by Orrin Judd at September 16, 2003 7:41 PM

After you've bought your house, you have to heat it, provide water, sewer, cable, phone service, garbage, etc. Each of these is taxed. Plus you pay property tax in many states based on the value of your house (the more expensive, the higher the tax). It would be interesting to see how much of that second income goes directly to the government.

Posted by: Brian Boys at September 16, 2003 8:30 PM

I don't understand the distinction between Warren's theory and the overconsumption theory. She's saying that people are overconsuming housing, buying expensive homes in good school districts rather than buying cheaper homes and saving the second income. She disagrees with the view that people are squandering money on "McMansions". What's the difference, other than rhetoric?

Posted by: pj at September 16, 2003 8:47 PM

"A deregulated mortgage industry compounded the peril by allowing homeowners to assume larger mortgages."

Give me a break!

Posted by: Peter B at September 16, 2003 8:57 PM

For Pete's sake! Yesterday, this blog was pushing the silly idea that buying a residence was an
"investment" or a "form of saving."

It can be the latter, though not so much in a period of low inflation, but unless you're running a rooming house, it ain't an investment.

On the other hand, as I mentioned yesterday, most bankruptcies are not coming out of the home mortgaging class.

On the third hand, easy mortgages turn out to be no favor to the marginally financially stable.

The only time you see lots of homeowners going bankrupt is in districts like western Pennsylvania, where the rush to export jobs overseas in monocultural economic districts drives real estate values to zero.

A pox on all your houses.

Posted by: Harry Eagar at September 16, 2003 9:12 PM

But she didn't give any thought to the tax burden, did she? For example, take a look at how FICA has increased over the years, from 2% to the current 15% (7.4 + 7.4).

There's a saying I heard years ago, "Dad works to feed the family, Mom works to feed the government."

Posted by: ray at September 16, 2003 9:14 PM

Around 1971 or 72 banks began accepting a 2nd income (usually the wifes) for calculating how much they would allow for a home mortgage. In about a year the average home price had almost doubled. Now you need either two incomes (resulting in fewer "stay at home" mom's)or one really good income to purchase a home. Couple that with twice the risk of unemployment by one of the wage earners, and the lack of cushion generated by whatever the 2nd partner earned and you have much higher forclosure rates. Question? Who stood to make a lot of money by accepting 2 incomes besides the banks (getting to lend LOTS more money) and anyone who owned real estate they could sell? I know that accepting two incomes sounds so reasonable, but for the most part it has not helped the family.

Posted by: RCS at September 16, 2003 9:37 PM

Also, note that she ascribes (correctly, according to several studies) a huge portion of home value to school district quality. The effects of vouchers on the housing market could be enormous, if they break some of the link between housing location and school quality. People who already live in good school districts would lose out some, whereas many others would benefit. (It would also likely make inner-city living more attractive.)

Posted by: John Thacker at September 17, 2003 3:32 AM




I've lived in places where a single, average income was more than sufficient to purchase a home in a reasonable area.
For instance: Junction City, KS; Las Vegas, NV; Salt Lake City, UT; and Pensacola, FL.

Posted by: Michael Herdegen at September 17, 2003 5:41 AM

Just the consequence of The Law of Unintended Consequences.

The consequences of Mom's income - added to Dad's -were intended to be good for the family.

Families will learn.

Posted by: John J. Coupal at September 17, 2003 7:11 AM

It ain't rocket science. Federal, State, County, City, Property, Vehicle, Gas and Sales Taxes have absorbed the second income quite nicely. Add in inflation, which probably rose at a greater rate than "mom's" income, and spiraling healthcare costs which have far outpaced increases both incomes combined, and here we are. If Income #2 is "cash" - this discussion is almost moot.

Posted by: John Resnick at September 17, 2003 2:35 PM

Families could easily afford housing on one income if they were willing to live in the kind of housing their parents lived in.

That is, during the period between the start of FHA (before which few families owned homes) and about 1960.

Housing is a lot cheaper without central air.

Posted by: Harry Eagar at September 17, 2003 3:01 PM