Saturday, November 22, 2008

The Two Income Trap

I recently read The Two Income Trap by Elizabeth Warren and Amelia Warren Tyagi. It was published in 2004 but is quite pertinent to the current financial situation and, in fact, predicted it to an extent. Elizabeth is a professor at Harvard. I must confess I'm not sure what her daughter does. The book's main premise is that the cause of increasing bankruptcy and disappearing middle class (and remember this was in 2004) is not due to the middle class spending frivolously but instead due to a convergence of risk factors that come together to spell disaster when families are faced with a fairly common array of moderate disasters.

They first make a compelling argument about school funding reform. The current system is mainly based on property taxes which means that the children in the more affluent districts wind up with better funded schools which leads to more people wanting into that school district which causes the housing prices to go up even more. So, parents have a compelling motivator (their children's wellbeing) to buy houses which they can just barely afford. Secondly, since mothers began entering the workplace, it is now the norm to be competing against families with both adults contributing income which has cause housing prices, in proportion to overall income, to raise even higher. This means that not only can the parents only barely afford the house they feel vital to their children's future happiness and prosperity but, both parents MUST be working to have any hope of making the payments.

The authors then go into great detail about the horrible practices of the banking and credit industries which led to their collapse a few short months ago (as the authors predicted). Basically, the more difficulty you have paying back a loan, the more these companies would like to lend to you. The authors make a very astute argument refuting the common assertion that people are simply less honorable than they once were. In fact, it was much more that once people began having difficulty paying bill their credit was cut off, greatly decreasing the amount of debt people could accrue and greatly decreasing the risk factor for the lender. At this point, it seems the creditors are getting exactly what they deserve for lending to people in such a predatory manner.

I found the arguments FOR remaining a one income family rather validating. The authors pointed out the value of having one person not in the job market. First, because of the non-monetary contributions I make to both my immediate and extended family. In addition to providing child care, cooking, cleaning, etc, I am also available to help fill in the gaps should my husband ever loose his job. While I won't make as much as he does, when combined with unemployment we will still be doing considerably better than if our income was abruptly halved with no means to make up for the loss.

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