• Stories from Strapped: College Education
• Stories from Strapped: Paycheck
• Stories from Strapped: Debt
• Stories from Strapped: Housing
• Stories from Strapped: Child Care

Those real-life anecdotes are supposed to support the author’s case for why America’s 18-to-34 generation can’t get ahead. As you probably figured out by now, I’m not impressed by the stories. Example after example, I see big gaps between expectations and economic means.

In addition to the stories, Ms. Draut also cited many statistics. You can read them on the book’s official Web site. When she cited Suze Orman as “one of America’s leading personal finance experts,” I laughed. Suze Orman is no personal finance expert. She’s a personal finance entertainer.

The basic premises of economics are scarcity and choice. Scarcity means you can’t have everything you want and therefore you have to make a choice. I also have a number of things I want, but it doesn’t mean that I will get them, because I have to weigh them against other priorities.

The “rich” have always done better — they live in better houses; they drive better cars; their kids go to private schools and private colleges. I don’t have a problem with that. I make my own choices with what I have. I disagree with Ms. Draut when she says the 18-to-34 generation can’t get ahead. They can get ahead, if they make common sense decisions in education, career, and their daily living. Many of them did just that. The stories from readers serbeer, Ted, and finance girl are perfect examples.

Does it feel good when you can’t have everything you want? Of course not. Is it the government’s or the society’s fault you have to choose? Hardly. Maybe the Baby Boomer generation had an easier time, when United States didn’t have to compete with the developing countries as much as we do now. Time has changed. The globalization genie is out of the bottle and it’s not going back in.

Instead of teaching our young adults how to succeed in the global competition, Ms. Draut reinforces the entitlement mentality. She said that “their biggest character flaw is that they expect too little from our society.” Oh great, let’s all sit back and wait for the government to provide for us from cradle to grave. She wrote about the government as if it were an abstract entity that produces these nice benefits out of thin air.

The issues of college education, paycheck, debt, housing, and child care are legit. We can decide as a society what’s the best way to produce the services and how to pay for them. But we should make those choices clear. If the young adult generation as a whole were to receive free or subsidized college education, housing, and child care, that means another generation would have to pay for them. Should it be their parents the Baby Boomers, or their grandparents the retirees? Everybody expects more from the society, as long as they don’t have to pay for it. We know it can’t work that way.

Final verdict for the book: 1 star, harmful more than helpful. Getting hung up on entitlement and developing a victim mentality will not help our younger generation get ahead.

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Software picked, likely related articles at The Finance Buff:

• Stories from Strapped: Child Care
• Call Out Bad Money Advice
• Stories from Strapped: Housing

• Stories from Strapped: College Education
• Stories from Strapped: Paycheck
• Stories from Strapped: Debt
• Stories from Strapped: Housing

Chapter 5 in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead by Tamara Draut is And Baby Makes Broke. Basically the author says the younger generation can’t get ahead because child care costs too much.

For a change, I’m going to keep my comments to the minimum this time. I will present the stories and give you a chance to chime in. The first story:

After Renee had her baby son Ben, she and her husband divorced. Her employer only gave her unpaid maternity leave. She got help from welfare, food stamps, and WIC. For one reason or another, the family child care providers Renee found didn’t work out as well as she liked. After a raise and a state budget cut, she lost some child care subsidy from the state. She’d like to put Ben in a formal child care center, but she can’t afford the price.

Next story:

Robin and Jack (from the last chapter) send their son David to a Montessori child care center which costs them $1,300 a month. The center has two teachers for every four children. Because there is high demand for good quality child care, they had to wait a long time before a slot opened up for their son.

Now we know why a couple making $160,000 a year live paycheck to paycheck when they have a $2,500/month mortgage payment. The third story:

Carolyn and Ryan, a teacher and a police officer, were happy with their child care provider until Carolyn got a new job at the opposite end of the town. They visited many child care centers but none met their requirements. When their older son reached three, they also had a hard time finding a good preschool they liked. They finally found one but it cost them total $1,280 a month for preschool for one son and toddler care for another. They had to cut back their retirement savings in order to afford it.

Ms. Draut recommends that the federal and state governments provide paid parental leave for 6 months and universal child care for age 0-5. That sounds good if nobody has to pay but everybody knows that’s not possible. So I have a question. If the younger generation as a whole will receive a net benefit of paid parental leave and age 0-5 child care, that only means the two older generations above them will have to pay because money doesn’t grow on trees. At the same time, the younger generation is paying Social Security and Medicare tax which goes to the older generations’ retirement and post-retirement health care. Shouldn’t we just cut the Social Security and Medicare tax rates and call it even?

Life would be a lot simpler if money were of no object. Then we would all be able to get what we want. What is the proper role of government, if we decide we are not going down the path of “from each according to his ability, to each according to his needs”?

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Software picked, likely related articles at The Finance Buff:

• Stories from Strapped: Conclusion
• Open Enrollment, Part 4: Flexible Spending Account
• Stories from Strapped: Housing

• Stories from Strapped: College Education
• Stories from Strapped: Paycheck
• Stories from Strapped: Debt

Chapter 4 in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead by Tamara Draut is The High Cost of Putting a Roof Over Your Head. No need to explain. The author says the younger generation can’t get ahead because housing is too expensive. I’m only interested in the stories.

Lori earns $97,000 a year but she still can’t afford to buy a home because she lives in a big city.

Ricardo and Salina, both immigrants from Mexico 18 years ago, can’t afford to buy a home either. They live in Bronx.

Irene, 33, returned to her parent’s home. She and her ex-husband Adam used to live in a studio apartment in Manhattan, paying $1,900 a month in rent. They could afford the rent because Adam worked in corporate law. She earned $54,000. They lived paycheck to paycheck and wedding expenses added to the financial strain. Adam kicked her out after they had an argument. She couldn’t afford to live in New York city on her own salary.

The author Ms. Draut didn’t say exactly where Lori lives but she mentioned Boston, San Francisco, Los Angeles, New York, and Washington, D.C. as expensive big cities. Is this Lori the same Lori in Manhattan from the last chapter who has $40,000 in student loan debt? $97,000 a year even in Manhattan isn’t too bad, is it? Some people like big cities. Some prefer smaller towns. Income and living expenses are different. Lifestyles are different. We can’t expect to earn a coastal big city salary and pay Midwest small town housing prices, can we? I don’t know what we are supposed to do to address this housing affordability problem. Put in price control like rent control in some cities? Housing prices don’t exist in a vacuum. They are high because other people are paying those high prices. They are your competition. You either have to compete with them head-on or refuse to play the same game with them. Rent, buy less desirable home, or go somewhere else.

The next story:

After working in San Francisco on a $41,000 a year salary as a teacher and paying $1,050 a month in rent, Tony moved to San Diego. His salary is lower, at $36,000 a year, but the rent is lower too, at $700 a month. It’s a little better but he still lived paycheck to paycheck. He had to borrow money from his parents five times in the last two years, usually for weddings and car repairs. He will have to find a girlfriend if he wants to buy a condo.

There we see weddings again. Perhaps it has become socially unacceptable if members of our 18-to-34 generation don’t attend their friends’ weddings even if they live thousands of miles away. Or perhaps our author Ms. Draut is really a fan of weddings. Going to weddings is perfectly fine. It’s all a matter of priority. I don’t see a problem with not being able to buy a condo on one income either. Is every single person expecting to buy a condo? Where does that expectation come from?

Another story:

Nancy and Ed earn $46,000 a year in a suburb near Cleveland. They pay $730 a month for rent. Their other big expenses were their car payments, which cost $700 a month. They drive a 2004 Chevy Cavalier and a 2003 Dodge Sebring (the book was written in 2005). They’d like to save $15,000 to $20,000 for a house down payment but they only saved $1,000 so far. Nancy explains why they are so far away from their goal — “Every time we try to put money in the bank to save, there’s no extra to put away. By the time we get done paying the bills, there’s always something else requiring an expenditure — a birthday, anniversary, or wedding — and so there’s nothing left.”

I’m starting to repeat myself. So I will just leave it like that. You tell me why Nancy and Ed can’t buy a house.

There is a fourth story about Robin and Jack. They make $160,000 a year. They bought a house in Norwalk, Connecticut for $487,000 with the help of their parents for down payment. The author laments that Robin and Jack live paycheck-to-paycheck because their mortgage costs them $2,500 a month.

What should we do about it? How do we make housing affordable? Ms. Draut recommends that the government should cap the mortgage interest deduction to $10,000 a year and make it refundable for families earning less than $50,000 a year. She said the government should use the extra revenue for a matched savings program (dollar for dollar for first-time home buyers earning less than $50k a year).

I’m OK with reducing or removing the mortgage interest deduction. That’s one reason why house prices are expensive. People already have a natural preference toward buying a house. I don’t think the government needs to put in an extra inducement. A subsidy creates more demand. More demand translates into higher prices. Let’s not reduce one subsidy and create another simultaneously. Canada for example does not give tax deduction for mortgage interest. They don’t exempt profits on home sales from taxes either. They also don’t have GSEs like Fannie Mae and Freddie Mac holding the mortgage interest rate down. Take a look at the mortgage rates at a random Canadian bank. Note there is no 30-year fixed rate refi-anytime mortgage. The longest you can have your rate fixed is 10 years. However according to Wikipedia, the home ownership rate in Canada is just as high as in the U.S. The neighborhoods and communities in Canada are just as strong, if not stronger.

Separately, a recent Newsweek column The Homeownership Obsession by Robert J. Samuelson said it much better than I can. Let’s stop being obsessed about pushing everybody into home ownership.

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Software picked, likely related articles at The Finance Buff:

• Stories from Strapped: Conclusion
• Stories from Strapped: Child Care
• Mortgage Loans Around the World

• Stories from Strapped: College Education
• Stories from Strapped: Paycheck

Chapter 3 in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead is Generation Debt. I think we all know what that means. The author says the younger generation can’t get ahead because they have too much debt. Now, the stories:

Lori, a 33-year-old living in Manhattan, still has $40,000 in student loans debt. She earned only $16,000 a year in her first job as a social worker and community organizer in New York. Her income “inched upward” over time but it’s still not enough to pay all her bills and loan payment. So she deferred payments on her student loans.

Ah, living in Manhattan on $16,000 a year. The book doesn’t say what Lori’s current salary is but even double that, at $32,000 a year, it’s still going to be tough living in Manhattan. When I was in New York city a few months ago, I rode in the commuter train on a random workday. It was packed. There was hardly any standing room. I’m sure many of the commuters earn much more than $32,000 a year. I’m guessing they chose to spend a lot of time commuting every day because the living expenses are lower outside of New York city. Between paying off debt and spending less time commuting, Lori chose the latter.

Next story:

Elaine got her credit card in college and a free T-shirt too. She used her credit card to pay for tuition and living expenses because her parents couldn’t help pay for college. Elaine plays the credit card game well. She transfers balance from one card to another every six months for the low introductory rates. She now owes $40,000 but half of it was racked up after college. She bought a new computer and new furniture because she “wanted to make her apartment look like an adult’s apartment.” She also used credit cards to pay for her wedding and flights for family visits. Elaine has no regrets. She thinks about the things her cards enabled her to do: studying in Scotland, flying to Paris, her perfect wedding.

This is a good story. I want my home to look good too. If I don’t have to pay back the money, I would also like to have a perfect wedding or study in Scotland. Elaine is not afraid of debt. She used debt for “consumption smoothing.” She was able to do things she didn’t have money for. I flash back to my student days. I did many things which looked silly now, like working in the college cafeteria serving nacho and cleaning up, for minimum wage $4.25/hour plus free food. Until today I still have my employee badge with that food service contractor. It serves as a reminder of the days when I was poor. I knew I would earn a much higher salary after I graduated. I had credit cards but somehow carrying a balance simply wasn’t an option for me. I wasn’t as smart as Elaine. My college years would’ve been much more comfortable if I borrowed from my credit cards.

The third story:

David and Lisa, both 31, have Ivy League degrees. They bought their home when they were 28. They earn $86,000 together in Cincinnati but they also have $40,000 in credit card debt. Their credit card debt has grown since they got married. David calls it “unavoidable debt” because the debt came from the cost of traveling around the country for friends’ weddings, holiday trips to visit their families and the cost of clothing and feeding their two children. David acknowledges that going to weddings and visiting family is a major source of their debt but they believe seeing friends and family is more important. They are now trying to move to a larger house with a real backyard and enough bedrooms so each of the boys can have his own room. Seven years after they got married, they are basically treading water because they have as much debt now as seven years ago.

Once again we see David and Lisa made the life style choice between debt and attending friends’ weddings because they think the latter is more important. Although I wouldn’t make the same choice, I don’t want to judge or criticize their choice either. It’s their life. They get to choose how to live it. There’s nothing right or wrong about it. But we can’t say they can’t get ahead. They chose not to.

The author suggested some public policy changes to deal with the consumer debt problem.

1. Allow credit card rate increases only on new balances, not on the existing balance. I can see the arguments on either side. Borrowers say it’s unfair to have a higher rate apply to money they already borrowed. Credit card companies say because the loan is revolving, it’s actually renewed month-to-month. If the borrower doesn’t like the new rate, they can transfer the balance to a different card, just like what Elaine in the book did. There is so much competition in credit cards. If a company raises their rate willy-nilly, it risks losing a profitable customer.
2. Ban credit card solicitations on college campuses. OK, not a problem, although I’m not sure how effective it’ll be in reducing the debt people have. If we decide that credit cards are a dangerous product and we want to protect our younger generation, we could raise the minimum age for obtaining a credit card to 25, like we have minimum age for smoking and drinking. We could also require a test for debt management and financial responsibility before someone can get a credit card, like we do before a gun license or a driver’s license can be issued. These measures will be much more effective than merely banning on-campus credit card solicitations because college students have plenty of exposure to credit card ads elsewhere: online, on billboards, on TV and in newspapers and magazines.
3. End predatory lending in mortgage refinance. Fees, points, and prepayment penalties are too high. Expensive products are everywhere. Let’s protect the consumers and regulate the prices. We should start with weddings, jewelry, furniture, designer apparel, shoes and accessories, and cosmetics and perfumes because their profit margins are too high. These expensive products are draining the wallet of our younger generation. But who gets to decide when something is worth or not worth the price?

Credit card companies make easy targets for the blame game. They are not saint but they are just like other companies working hard for making a profit. The credit card industry is very competitive. The cost of switching is negative (low introductory rates and sign-up bonuses). More laws and regulations are great on the supply side. Let’s not forget the demand side either. Let’s also make a law that caps the debt-to-income ratio or the debt-to-assets ratio for young adults. That’ll guarantee that our younger generation will not have too heavy a debt load dragging them down. As we have seen, self-discipline isn’t working. People willingly take on credit card debt despite the bad press credit card companies receive. We don’t let anyone buy alcohol, tobacco, prescription drugs, or guns at will. Limiting how much our citizens can borrow isn’t too far fetched. Or else they shoot themselves in the foot.

Or we can just let adults be adults. The perpetual “guns kill or people kill” argument lives on.

How do you make people do the right thing for themselves? This isn’t only credit cards. It applies to smoking and eating healthy too. I think it’s common knowledge that french fries are not good for one’s health. Yet the amount of french fried consumed every day in this country is probably measured by thousands of tons. People want french fries. Restaurants happily serve them. Whose problem is it that people eat too much fries?

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Software picked, likely related articles at The Finance Buff:

• Stories from Strapped: Conclusion
• Stories from Strapped: Child Care
• Stories from Strapped: Housing

• Strapped: College Education

Chapter 2 in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead is Paycheck Paralysis. It says the younger generation can’t get ahead because they don’t get good jobs. They have become Bouncers, Jugglers, Tempsters, and the Pajama Class. The stories are as good as the ones in the previous chapter.

Bouncers:

Susan had seven jobs in six years after she graduated from college. She quit her first job because she wanted to live close to her future husband. She left her second job because another job offered a higher salary, and she quit her third job because the hours were too long. She left her fourth job because a startup gave her substantially higher salary and commission. After the startup failed, she was unemployed for a while. Then she got into retail, her sixth job. She left the retail job for law school. Now she works for a non-profit while attending law school.

The author said these frequent job changes are a result of flawed economy. Except for the failed startup and the aftermath of the dot com bubble, I don’t see where the economy has anything to do with it. She left one job for another voluntarily for personal reasons, often for higher pay.

Jugglers:

Anna worked several jobs while going to community college. After that she worked for a government agency for 3-1/2 years until she decided to go to an art school in San Francisco. She worked several part-time jobs while she went to the art school. The $15,000-a-year tuition and fees were paid by student loans. Her part-time jobs paid her living expenses. Anna estimates she will have $76,000 in student loan debt after she’s done with the art school.

Working and going to school at the same time is tough. I don’t know what made Anna leave her comfort zone at the government agency for an art school in San Francisco, but we’ll have to respect her decision. She thought it was worth it despite the huge student loan debt she will have. Otherwise she wouldn’t have decided to go to an art school in one of the most expensive cities in the country.

Tempsters:

Dylan has a bachelor’s degree in screenwriting from NYU. When she graduated, she was only able to get a job as a receptionist at a production studio in New York earning $17,000 a year. She then worked as a freelancer for a few magazines. Five years after graduating from college, she got her first full time salaried position in New York City earning $35,000. Because the expenses were so high relative to her income, she had to file bankruptcy. Now, 10 years after she graduated, she earns $45,000 but she still has $15,000 student loans debt which couldn’t be eliminated in a bankruptcy.

New York City is expensive! Everybody knows that, right? I bet she’ll have a more comfortable life if she lived elsewhere.

The Pajama Class: No story but basically writers, editors, and designers who work in the “creative industries” work from their home as freelancers without the security of a steady salary or benefits. According to the book, 83% of the Pajama Class prefer the flexibility and freedom as a freelancer. The rest want a full-time job but can only get freelance work.

It’s tougher to make a living now because we are competing in a global economy with a global workforce. Manufacturing jobs shrank. Even some white collar office jobs are outsourced overseas (example). When we directly compete with lower paid workers in other countries, our wage growth slows or stagnates. That’s the unfortunate effect of globalization.

The author made two proposals to get us back on track. The first proposal is creating more career ladder programs in which people can be trained on the job and grow their career. Teaching assistants can train and become teachers. Nursing assistants can become registered nurses. This is a good proposal and I agree with it. The second proposal is making it easier to unionize. I’m not too sure about this one because a union may be able to hold up the wages for its members but more jobs will just go overseas. Imagine a world in which people in union jobs are paid well while others don’t have a job. I’m not sure as a country we are better off that way.

Any thoughts? More to come. Next week we will look at debt.

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Software picked, likely related articles at The Finance Buff:

• Stories from Strapped: Child Care
• Stories from Strapped: Conclusion
• Stories from Strapped: Housing

The author Tamara Draut is a Director of the Economic Opportunity Program at Demos, a national think tank in New York City. The main theme of the book is that young adults, born between 1971 and 1987, are worse off than their parents a generation ago because of these usual suspects:

• high costs for college education (tuition rose much faster than inflation)
• low starting salaries, especially for people without a college degree
• high student loan and credit card debt
• high rent and home prices, especially in big cities on the coasts
• high costs for child care

After presenting the evidence for obstacles faced by the 20- and 30-somethings, Ms. Draut gave a list of recommendations for public policy changes. Although I missed the author’s cutoff for being a “young adult” by a few years, I’m still able to count myself as a member of Generation X. I can relate to some of the challenges mentioned in the book. These challenges and how to overcome them warrant a serious discussion. So I’m going to take them up one by one and write down my thoughts. The book includes many real life stories. Those stories are much more interesting than dry statistics. I will try to do one topic from this book every week.

Let me start today with Chapter 1 Higher and Higher Education. It says the younger generation can’t get ahead because college education has become more expensive. Some aspiring young adults and their families can’t afford it. They have to settle for community college. Because they also often have to work full time to support themselves, graduation rate is low. Without a college degree, they are stuck with low paying jobs.

It starts with this story:

Renee’s parents couldn’t afford to pay for her college, so she attended community college while working full time and supporting an unemployed boyfriend. A new job created conflicts with her class schedule. She dropped out with $4,500 in student loans. Four years later she’s still paying the loan. Without a college degree, Renee works as a legal secretary earning $28,000 a year. Renee regrets not being able to earn a four-year degree.

Renee missed the traditional window for college. She can still get a degree if she really wants to though. But I’m not sure the lack of a degree is holding her back. Usually after a few years on the job, people don’t care whether you have a degree any more. What matters is whether you do a good job. You learn much more on the job than what you can in school. Renee can get ahead, but she has to let her boyfriend support himself.

Next story:

Natalie chose to go to a small private college which cost $27,000 a year. She only stayed one semester because it was too expensive. After taking classes at a community college for one term, she went to an art school she really liked. 3 years later, she got an AA degree in multimedia and video production. She now earns $37,000 a year but she’s often short on cash because she has $20,000 in student loans and a car payment. She goes through a list of people she can call to borrow $10 for something to eat.

Going to a small, expensive private college is a luxury. If you have the money, great. If not, forget it. Just like I’d love to drive a Lexus but I don’t like the price. I settle with a Honda. I’m not sure what this story is supposed to show. Is it that bad for a single person to live on $37k a year? She had to borrow $10 for food? Something doesn’t add up here.

The third story:

Shaney got a scholarship which covered tuition for four years at the state university. She worked part time for room and board. She turned down internship opportunities because they don’t pay as much. She was a French major and she chose to study in France for a year, which she paid with student loans. She borrowed more from student loans because tuition increases made her scholarship run out sooner than she expected. By the time she graduated she had $25,000 in student loans. She couldn’t find a job because the job market was weak.

Did Shaney research career prospects before she chose to major in French? Studying in France is also a luxury which she took upon herself. Again, if you have the money and you think it’s worth it, go for it. But don’t complain about the student loans if you make that choice.

Later in the book the author Tamara Draut recommended that federal and state governments give more grants, as opposed to loans, to college students. Is the high cost of college education a problem? Yes, we should make higher education more affordable to more people. But I think more grants is the wrong solution, because it only addresses the paying part of the equation. With more grants, college education is just as expensive. What changes is who pays for it. One can even argue the additional grants will be absorbed by the increase in college tuition really fast in the same way having a gas tax moratorium won’t lower gas prices.

If we really want to lower the cost of higher education, we have to look at the supply and the demand. Either increase the supply or reduce the demand. That will make the cost lower instead of shifting the cost to somebody else. For example letting community colleges grant four-year degrees will increase the supply. Creating more career training programs which won’t take four years will reduce the demand. The program Natalie went to sounds like a good one. Let’s face it. If your only goal is to have a good salary, many four-year degrees are not so cost effective. I never used a lot of stuff I learned in college. If we take a narrow view, those classes were a waste of time and resources. If I only learned what I needed for doing my first job out of college, I could’ve been done in two years max. I would be just as productive and my employer wouldn’t see any difference. There seems to be a mismatch between what our education systems teach and what knowledge and skills employers need.

In a cost benefit analysis, college education isn’t that different from any other product people buy. Some colleges and degrees are a good value; some are not. You have to spend your money wisely like you do everywhere else. Not all schools or majors will lead to the same starting salary. If getting a good salary is the concern, pick your school and major carefully. If someone insists on getting a degree which doesn’t lead to a well paying job or they insist on attending an expensive private college for the experience, then it’s their personal choice. Money isn’t everything after all.

What do you think? Are colleges to be blamed for jacking up their tuition? Are more grants a good solution to the college education cost problem?

More to come. Next week we will look at the problem of low starting salaries.

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Software picked, likely related articles at The Finance Buff:

• Stories from Strapped: Conclusion
• Stories from Strapped: Child Care
• Stories from Strapped: Paycheck