Book Review: The Two Income Trap

A few weeks ago Jonathan at My Money Blog posted a video presentation by Harvard Law School Professor Elizabeth Warren, The Coming Collapse of the Middle Class. It turned out to be a summary of her book The Two-Income Trap. The video presentation piqued my interest so I got the book and read it.

Professor Elizabeth Warren specializes in studying personal bankruptcies. She often appears before congressional hearings against credit card companies. She’s also in the documentary Maxed Out. She and several other law professors blog at Credit Slips which I read and sometimes comment on.

The subtitle of the book is “Why Middle-Class Mothers & Fathers Are Going Broke.” The basic premise of her book is that families go bankrupt at a higher rate today because housing, health insurance, and education have become much more expensive than they were a generation ago in the 1970s. Families commit two incomes to these expenses today. Therefore they are vulnerable to any disruption of their income, like job loss, illness, and divorce.

In the previous generation, the stay-at-home mom served as a valuable reserve. If dad lost his job or became ill, mom could enter the labor force and the family would survive without having to file bankruptcy. Today’s two-income families don’t have this reserve. They are worse off than the one-income families a generation ago. Hence the title of the book “The Two-Income Trap.”

Because Professor Warren studies personal bankruptcies all the time, she probably developed great sympathy toward the families involved. In this book, she and her co-author (her daughter) spent a lot of time dismissing the myth of over-consumption, saying that families today don’t spend more on unnecessary stuff than families did in the 1970s. After adjusting for inflation, the spending went down in many categories. It’s the big item expenses — housing, health insurance, cars, and education — that are throwing these families over. And the reasons people file bankruptcy are dominated by the big three causes — job loss, medical problems, and divorce or separation.

Although the authors didn’t necessarily say it out loud, I get the impression they are saying it’s not these families’ fault because it’s out of their control. I’m not convinced. Here’s my naive view of personal bankruptcy:

People have to file bankruptcy because their expenses exceed their income for an extended period of time which outlasts their available insurance, savings, and credit.

Think about it. If your expenses are always below your income (“live below your means”), you will never have to file bankruptcy. Or if you have high expenses (medical bills for example) or low income (job loss for example) temporarily, but you have insurance, savings, or credit that can tide you over until your income exceeds your expenses again, you won’t have to file bankruptcy.

How someone manages their expenses and incomes is their personal responsibility. While they don’t have control over whether they will lose their job or become ill, they do have control over whether they will have insurance or how much they will save for a rainy day. They also have control over a long list of family finance decisions which directly affect how much cushion a family creates for itself. In other words, you don’t have to live on the edge and leave no room for contingencies. If you live below your means, buy insurance and save for a rainy day, I don’t see how you can put yourself at risk of bankruptcy. Make no excuses. We are all responsible for our own destiny.

I don’t like it when people don’t take responsibility for their own actions. There’s too much of that going on in America. Whenever something goes wrong, it’s always somebody else’s fault. Over-consumption is a problem. It directly contributes to the bankruptcy problem. The book showed that since the 1970s savings went down and credit card debt went up. If people didn’t save, then by definition they over-consumed. That’s not a myth.

The book showed that housing, education and health care have become much more expensive from a generation ago. It attributed the increase in housing prices to two-income families entering into “bidding wars” for houses in good school districts. The book didn’t offer any proof for that theory other than casual observations that houses in good school districts are more expensive (remember the authors are not economists).

Considering that houses in average school districts also increased in value by a lot and commercial real estate which has little to do school districts also appreciated dramatically since the 1970s, I doubt the “bidding wars” are a significant factor. Housing, education, and health care are more expensive today because there is more demand and because there is high expectation.

We are buying more housing, more education and more health care. Family sizes became smaller but house sizes became bigger. Preschools are no longer a luxury. More people are going to college. Health care industry is coming up with more and more expensive drugs and treatments. Consumers never say no. In order to revert this trend, we have to consume less housing, education and health care. Buy smaller houses in lower cost areas. Go to state universities and community colleges. Cover the basic health and forego expensive drugs and treatments. “Health care rationing” is not a dirty phrase. We just can’t afford to give the health care industry a blank check.

We are in a different kind of economy today. In the post World War II era (1950s – 1970s), the United States dominated the world. American companies were prosperous. Jobs were well paid and more secure. Benefits were generous. Today we are competing with lower paid workers in a global economy. American companies are no longer in a position to offer secure and well paid jobs with generous benefits. The good ol’ days are gone. Either you upgrade your skills for higher paying jobs or you have to change your lifestyle expectations. There’s no other way around it.

Professor Warren made some public policy suggestions in the book. They may help a little at the edge but I think unless we reduce the aggregate demand for housing, education and health care, the prices won’t come down. She suggested that credit card interest rates should be capped. OK, it will help a little. With less credit available, there won’t be as many dollars chasing the limited supply of housing, health care or education.

She also suggested that families should be given vouchers so they can send their kids to any public school. I’m afraid that does not change the overall supply and demand for education or housing. As long as there are good schools and there are bad schools, no all kids will be able to go to good schools. The premium on houses in good districts may disappear but the houses in other areas will go up. In aggregate families will still pay the same if everyone feels they are entitled to a big house.

It’s difficult to give a star rating to this book. I can feel the authors’ bleeding heart, although I disagree with their economic analysis. We don’t need more books making excuses for people. Nevertheless, there is still a lot of good information in the book about the landscape of personal bankruptcies.

Rating: ***

Finally, the “math question of the day” for all of you. The book says the bankruptcy filing rate for families with kids is 15 per 1,000 in a given year. So over a course of 20 years (from the time the first kid is born until the time the last kid reaches 18), what is the chance of this “family with kids” filing bankruptcy at least once?

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  1. mcfnord says

    she identified the backup income potential of the non-working parent, and other reasons why the modern era affords less margin for error. i also think unexpected medical costs are more disruptive now due to size. this does suggest a loss of control that previously existed. a similar line of research says pensions held more value than self-management because most people aren’t, say, finance buffs. hmm you go on to acknowledge the more treacherous employment environment… another loss of security. you can give all the responsibility speeches you want, but the tangeable facts confirm her thesis to me.

  2. Harry Sit says

    I don’t disagree with her saying the stay-at-home mom serves as a reserve. It’s true, although in today’s knowledge-based economy, I don’t know if the reserve can be as readily tapped if it isn’t kept “fresh.” It may require longer “prep time.” I also don’t disagree with the loss of economic security. Like it or not, the good ol’ days are gone. Those days are not sustainable. I disagree with the “myth of over-consumption.” Given that the incomes are no longer as secure and the unexpected expenses can be large, if you still continue the same spending habit like in the good ol’ days, and even consume more in housing, education and health care, no wonder you push yourself to the edge. How to come out of the two-income trap? Consume less.

  3. Franklin R says

    I’m a doctor, and I see firsthand the huge expenses that can be incurred with illness. A broken ankle that requires surgery and three days in a hospital (say, for a moderate complication) could easily cost $ 60,000. Cancer? Hundreds of thousands of dollars. My 11 year old niece had a brain tumor–the costs were over $500,000. Fortunately she had excellent, “dad is an investment banker” level insurance. There is simply no way for most people to save that much money.

    I suspect that if your readers are old enough to get sick and unlucky enough to be uninsured, they might develop a different attitude toward working class people who go bankrupt after a medical crisis. Bad stuff can happen to you, too.

    Now, as for average income people who feel compelled to live in 4000 square foot mini mansions, or people who insist on owning BMWs and having fancy granite countertops–well, that is irresponsible overconsumption.

    When I grew up, an average family lived in a 1600 sq foot home, and an affluent family in a 2200 squre foot home. Even my wealthy school friends (in a very affluent community) shared bathrooms with their siblings. Now the US borrows money from China to pay for luxuries which, until recently, were restricted to the phenomenally rich. And back then, none of us felt poor because our kitchens were built with formica.

  4. weeklymg says

    Interesting post, but I partially disagree with you. There are structural problems which take away a lot of reasonable choices.

    How can a family really choose to save money on health care? They could spend more money on healthy food, gym, etc. to reduce medical risks, but that’s increasing consumption. They could buy no insurance and hope no one gets sick. They could buy crappy insurance and hope no one gets sick. They could just say no to little Maggie’s chemotherapy, since the insurance only covers 80%… I refer you to the movie “Sicko”, which shows that even in poor countries like Cuba people have better choices regarding health care.

    Housing is another tricky area. It’s not the size of the house which is the problem, it’s the location. That comes indirectly from the fact that OTHER PEOPLE have big houses in the area where the good jobs are (and good luck to any developer getting approval for a project to tear down a block of houses to build more, smaller ones), so you can’t find a little shack near your job, and if you want to save money you can spend $50 a day on gas and lose 4 hours of your life per day getting to and from your $60/hour job (assuming that value of time: cost of commute is $290/day, or more than $70K per year!).

  5. mcfnord says

    based on her thesis, which you seem to have confirmed, it is necessary to live further below your means now than in the past, because the risk of expense is substantially higher now, and reserves for addressing such a situation are weaker. so we must live FAR below our means now.

    (i believe i do live far below my means.)

  6. Ted says

    I am the single bread winner for my family. We live below our means. We save. I have insurance. We drive old paid for cars. No consumer debt. Kids share a room. But its not easy, especially when I see so many couples that APPEAR to be doing so much better.

    You say “consume less” like that’s easy. Our whole US economy is dependent on consumption and is a force like a freight train bearing down at all times. People were recently guilted into spending their stimulus checks “for the good of the country.” What a bunch of bologna that is!

    Nevertheless, we who don’t over consume are still one really bad thing (accident, extended job loss, death, economic troubles) from being on the edge. That’s the way it is these days.

  7. Harry Sit says

    Ted – If I made it sound like easy, I apologize. It’s not easy. We all know that. The lower on the income ladder you go down, the harder it is. All I’m saying is what mcfnord said more succinctly. At the end of the day, we can complain or whine about how it got worse than in the good ol’ days, or we can do what we can to protect ourselves. When we face more economic uncertainty, do we continue our path of consumption or even increase our consumption as if we were still in the good ol’ days, or do we consume less and live further below our means? I think the answer is obvious. That’s exactly what you and mcfnord and many others are doing. It’s not easy and you won’t eliminate your risk completely, but if you ever go to a developing country, you will find that Americans are still worrying about a lot of things people there don’t even have the luxury to worry about. They’d love to have our problems. Americans who are facing foreclosure at least have a house to be foreclosed on. Consider people in a developing country who are doing the same job as you do, and ask yourself, “What am I doing that makes me have a higher standard of living than theirs, other than the fact I live in America?” They are my competitors in the global workforce. They have the same skills and they are working just as hard. Can I live like they do?

    For people who consume less, save money and have insurance, we can’t guarantee we won’t fall off the cliff if something bad happens to us. All we are doing is keeping some distance away from the edge.

  8. Anonymous says

    WRT to the math problem. Assuming that bankruptcy is an annual independent event, its 238 out of 1,000 will file for bankruptcy. Wow, that’s high.

  9. Harry Sit says

    261 out of 1,000 – You got it! Since you are the only taker on the math challenge, I will give out the calculation here. Assuming filing bankruptcy in any given year is independent of each other, the probability of a “family with kids” not filing bankruptcy in any year is 98.5%. The probability of keeping it clean for 20 years is

    .985 ^ 20 = 0.739

    That is, 739 of 1,000 families with kids will be able to live through those 20 years bankruptcy-free. The other 261 families will have filed bankruptcy at least once. Astonishing!

    Somehow that number does not jive with intuition. Really? 26% of families file bankruptcy at least once in their child-rearing years? Maybe it’s because it’s such a stigma people are not telling. I just don’t know that many families who have filed bankruptcy.

  10. Steaming in Chicago says

    Anonymous has it right: the assumption that bankruptcies are uncorrelated random events from year to year is what causes the number to be so high. That assumption stinks.

  11. Harry Sit says

    Steaming – Just curious, why do you think that’s a bad assumption? Because a large part of the families who file bankruptcy in a year are actually repeat filers? That means if you filed last year you are more likely to file again this year. The book didn’t mention that. So I don’t know whether it’s true or not. I thought if you got your debt discharged in bankruptcy, you are not allowed to file again in the next seven years (or was it six?).

  12. Anonymous says


    It seems some of you are just howling at the moon. Humans adapt. If you don’t adapt to the current times, you will fail…..or file bankruptcy.

    Many APPEAR to be living the high life Ted, but you must stay strong for you and your family. There will always be haves and have-nots. If your neighbor has a BMW and is in debt up to their hairline, look the other way. Don’t sit there and spin your wheels thinking about it as it will get you no where.

    I always read how tough it is out there and then there is always the story about keeping up with the Joneses. Well what are the Joneses doing right? We all seem to be chasing people doing better than us, right? The doom and gloom stuff is just silly. Cuba has better medical choices? These type of absurd comments are just ridiculous and I feel that when discussing “bankruptcy” it is better to use a specific example of a person. Generalities, for the most part, keep people discussing on blogs on totally different pages.

    Aside from medical emergencies and job loss among others, what about the vast spending I see going on each and every day. I went to a large mall two weeks ago and parked about 1000 spaces away (I am not kidding about that). People are buying coach bags, iPods, nice clothes, $100 headphones, $60 PS3 games, what about these people and there difficulties? I spend money there when I could have put that in an IRA or savings account. If I spend myself into a bankruptcy, please don’t shed a tear for me. Saver the tear for someone who had a perfect storm of disaster before filing a bankruptcy and there are many of those people out there, but by no means are they the vast majority.

    It just isn’t true that everyone filing for bankruptcy has a sorry story. Many have over indulged and then lost their job and had a “nice run”.

    We don’t cut your head off in the country when you file bankruptcy. We don’t take away your car, although you may need to switch wheels. We don’t take away the education you get at the public school or the air conditioning you get at your house.

    TRUST ME. MILLIONS of smart families over seas would love to have the chances we have here (or in Cuba). You are finding it difficult to scrap by with a household income of $65,000 a year for a family of four? Someone would be living a DREAM, I repeat a DREAM making that and using all of the amazing things this couintry offers.

  13. Anonymous says

    TFB said: …Because a large part of the families who file bankruptcy in a year are actually repeat filers?…I thought if you got your debt discharged in bankruptcy, you are not allowed to file again in the next seven years (or was it six?).

    1) Yes, many filers repeat, and many do repeatedly. 2) You can file again, but you can’t get a second Ch. 7 discharge for 7 years. Other chapters don’t have similar restrictions.

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