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Going Broke: What Middle-Class Families Are Spending Their Money On

The New York Times reports that Americans are spending despite the stormy economic climate.

This “treadmill spending" (as reporter Louis Uchitelle affectionately calls it) is great for the general economy, but not so great for the average American family. Many families have very little disposable income, quite a bit of debt, and almost no savings.

For the past several years, economists have blamed American culture and Americans themselves for their shaky economic situations. Materialism and over-consumption are commonly considered to be the roots of personal financial crises.

Uchitelle begins to challenge these assumptions by referencing The Two-Income Trap: Why Middle-Class Mothers and Fathers are Going Broke, a new book by Harvard Law Professor Elizabeth Warren and her daughter Amelia Warren Tyagi. But Uchitelle does not fully explore this mother-daughter team’s new theories. Instead, he confuses them with the older, more-accepted theory that Americans are broke because they buy things that they don’t need.

But Warren and Tyagi have a lot more to offer on the topic of the impoverished middle class.

The Two-Income Trap

Warren and Tyagi question what they call the Over-Consumption Myth. They say that contrary to common assumptions, Americans are actually spending less on frivolous items than they were a generation ago. And that’s not all. We are also spending a smaller percentage of our incomes on food (yes, that includes eating out) and clothing than we did in the early 1970s.

But Americans have less to spend than we did a generation ago, even though today’s two-income family earns 75% more. So what gives? How is it possible that we are earning so much more, spending less, but still have less discretionary income?

The answer is fairly simple. American families are spending more on housing, education, healthcare, and childcare than we ever have before.

Housing and education

Though housing costs have increased for everyone, families with children pay the highest prices. Warren and Tyagi explain that individuals and couples without children paid 23% more for housing in 1998 than they did in 1983. For couples with children, housing prices rose 79% for this same time period (adjusted for inflation).

Why are families paying so much more? Because they are buying safety and education. Warren and Tyagi write: “Families put Mom to work, used up the family’s economic reserves, and took on crushing debt loads in sacrifice to these twin gods, all in the hope of offering their children the best start in life" (23).

Most parents require two incomes to purchase a house in a good school district, and these districts are becoming increasingly hard to find. Warren and Tyagi cite a study conducted in Fresno that found school quality to be the #1 determinant of neighborhood prices; that’s above crime rate, commute time, or even proximity to a hazardous waste site (24).

Parents spring for a more-expensive home to ensure that their kids get into a good school district. They are also spending more on rising preschool and college tuitions. This common scenario is hardly the colorful picture of over-consumption and irresponsible spending that is painted by many economists and politicians.

Healthcare

Health insurance costs are rising as well, snatching up the discretionary income of the American family. Like housing and education, health insurance is a necessity and a monthly fixed cost. Therefore, families cannot cut back on this expenditure in times of financial trouble.

Further, it is common for a health crisis to cause a financial crisis, even for those with health insurance. Tight budgets and empty savings accounts allow medical bills and missed work to push a family off of the edge and into the bog of bankruptcy.

Childcare and the working mom

Although Warren and Tyagi don’t order the working mom back into the home, they suggest that her departure is something of a financial liability and not simply because of the enormous cost of childcare.

Prior to the women’s movement, many families relied on the mother’s labor in a different way. Warren and Tyagi call the stay-at-home mom “the all-purpose safety net" because in times of trouble, she could enter the workforce and help the family to survive. Before mom was expected to work, she could be dad’s substitute if he got fired or sick. Now, with the family budget riding on two incomes, there is no one left to rush in and save the day.

In one way of looking at it, The Two-Income Trap suggests that the traditional arrangement of one parent at work and one parent at home is advantageous. Others could easily criticize large chunks of the text; Warren and Tyagi ignore the topic of non-traditional family structures such as stay-at-home dads, single-parent families, and lesbian and gay partnerships. The work certainly stays within the boundaries of the white, heterosexual, middle-class, suburban family.

The personal is political- policy solutions

Warren and Tyagi offer several escape routes from the two-income trap.

Clearly, healing our public school system is essential. In addition to fuller funding for education, Warren and Tyagi propose extending public education to include kindergarten, tax-credits for stay at home parents (to support single-income families), and publicly-supported day care.

They also suggest programs to help middle-income families save money: “Middle class families could be rewarded for all savings. All savings – not just savings specifically designated for retirement or education – should be exempt from taxes" (69).

Of course, cutting taxes means reducing the Federal Trust, which is used for public education and programs like Head Start. But more than cutting taxes, Warren and Tyagi seem to be interested in diverting tax dollars toward the middle-class family, which, from their point of view, is in grave financial danger.

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Article Posted on: 12/10/2003

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