Middle Class Squeeze
By Robert D. Atkinson
Table of Contents
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THE TWO INCOME TRAP:
Why Middle-Class Mothers and Fathers Are Going Broke
by Elizabeth Warren and
Amelia Warren Tyagi
Basic Books, 288 pp, $26.00
Given the loss of more than 3.2 million private-sector jobs on George W. Bush's watch, it's no surprise that The Two-Income Trap is all the rage, on talk shows and in the print media. Elizabeth Warren, a Harvard law professor specializing in bankruptcy law, and Amelia Warren Tyagi, a business consultant, try to explain a seeming paradox: With two-income families earning significantly more than the one-income households most people grew up in, why are families' discretionary income down and bankruptcies and insecurity up?
The authors put the blame on two factors. First, as parents attempt to get the best for their kids, the costs of housing and education have skyrocketed. Second, two-earner families base their lifestyles on two incomes, and if either earner loses a job (an increased probability if for no other reason than that both people are in the work force), they are thrown into a financial crisis. This is why the authors find that a family with children is three times more likely to file for bankruptcy than a family without children.
There's no question that the costs of essentials
To get out of the housing bind, the authors argue that we should decouple school attendance from neighborhood location by instituting universal public school choice. With choice, parents wouldn't have to buy more expensive houses in high-priced school districts just to ensure that their kids go to good schools.
But while more choice would dampen the bidding war and boost the quality of public schools, it wouldn't address the core issue of making sure that the supply of housing (and good school districts) keeps up with demand. Recent studies have pointed to local land-use zoning practices as a major factor in limiting the number of buildable lots in metropolitan areas, leading builders to maximize their profits by building larger, more expensive homes.
If we are to fix this problem, we can't expect localities to change on their own. We need strong federal and state policies that give local governments positive and negative incentives to zone for more housing, especially housing that families with kids are likely to buy. Moreover, much of the run-up in housing prices stems not only from competition for good neighborhoods, but also from competition for particular metropolitan areas. Housing prices in large metro areas such as New York, Washington, San Francisco, and Seattle have escalated as more people and jobs have located there. That's why we need a national "balanced growth" policy focused on shifting some growth from expensive, crowded, large metro areas to rural areas and smaller cities.
The authors also address the growing affordability problem of higher education, made even worse by the Bush tax cuts and resulting reductions in state tax revenues. Part of the solution will involve expanding policies to help lower-income families afford college. But the authors rightly point to the need for getting a handle on rapidly rising costs. Like the housing market, higher education suffers from significant market failures, in this case the difficulty of judging quality and thereby falling back on price as a proxy.
As Business Week and other studies have recently pointed out, American
higher education is anything but the model of efficiency and good management.
Institutions of higher education could do a host of things that would
cut costs while possibly even improving the quality of education
The authors propose a simple, yet innovative, solution: federal legislation that would limit tuition increases at public universities. Perhaps tying federal aid to universities that limit tuition increases would force universities and colleges finally to institute serious cost controls. If designed properly (for example, by not punishing schools that have been able to avoid tuition increases), such a measure would put most schools on the same playing field.
The authors propose other sensible measures. They rightly point out that universal day care subsidies would be biased against families that choose to have one parent stay at home. Instead, they call for any day care subsidies to include tax credits for families with a stay-at-home parent. To help working families save for unseen emergencies, they propose more generous savings tax credits.
Notwithstanding these sensible proposals, the authors at times seem a bit paternalistic, wanting to take away choices middle-class households have because they sometimes make bad ones. For example, to stem the demand for housing, they propose government regulations on the mortgage market that would require higher down payments and lower debt-to-income ratios. This might reduce the demand for housing, but it would consign millions of Americans to renter status and deny them a chance to build wealth.
Moreover, while bringing needed attention to a troublesome trend affecting
the broad middle class, the authors are too willing to absolve the upper
middle class of responsibility for consumption patterns. They reject
the claim made by a number of authors, including Robert Frank (Luxury
Fever) and Juliet Schor (The Overspent American), that many Americans,
particularly those at the upper end of the middle class
One reason to reject the authors' claim is that they use faulty methodology to conclude that over the past 20 years American families are not buying more designer clothes and eating out more, but that, in fact, they are spending less on such basics as clothing and food. Unfortunately, rather than calculating the change in consumption of a particular item by using the specific rate of inflation for it, they incorrectly use the economy-wide consumer price index (CPI). Using the correct deflator means that an average family of four spent more, not less, on clothes in 2001 ($2,081) than in 1984 ($1,741). The same turns out to be true for housing, cars, and food.
With more Americans facing a financial squeeze, it's time for fuller consideration of the kind of creative policy proposals Warren and Tyagai make. But, in contrast to the conservative free-market solutions Republicans would advise, this would actually mean a stronger federal role, particularly in developing the kind of creative incentives to help drive down costs of key essentials like housing, health care, and education.
Robert D. Atkinson is vice president of the Progressive Policy Institute and director of its Technology and New Economy Project.