Stuck in the middle

In their new book, Professor Elizabeth Warren and her daughter reveal the diminishing fortunes of middle-class families and show a way out of the "Two-Income Trap"

Elizabeth Warren argues that a family with two incomes has a tougher
time today than a family with a single earner had a generation ago.

Here's the problem with people nowadays. They spend spend spend on fancy toys, gadgets, food, clothes, vacations, cars, boats, McMansions and that second home in the country. So if they can't pay the bills for their indulgences, they shouldn't cry poor mouth and expect any handouts. There's no personal responsibility anymore, that's the problem. Why, back in my day . . .

It's a screed we've all heard before. Or maybe even said ourselves. But here's the real problem. It's absolutely wrong.

So say HLS Professor Elizabeth Warren and her daughter, Amelia Warren Tyagi, in a new book that shatters the myth of the overconsuming American and the immoral debtor. That stereotype is not only wrong, they say, it's dangerous, overlooking a crisis afflicting the middle class, particularly women--responsible, moral people, yet in deep financial trouble.

The book stems from Warren's research and interviews as part of the Harvard University-based Consumer Bankruptcy Project, which studied nearly 2,000 families who declared bankruptcy. But it also is a product of her career-long focus on families in financial trouble. To add the perspective of a businessperson--and a member of the generation facing these issues--Warren teamed with her daughter, a Wharton M.B.A. who worked for McKinsey & Co. and co-founded a health care start-up.

As they write in "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (Basic Books, 2003), things were different not long ago. In the 1970s, most families could survive and even thrive on one income. An average family then was left with 46 percent of its sole earner's wages after paying for housing, health insurance and other fixed costs. Yet that family today, despite the benefit of two paychecks, has only 25 percent of its income left for discretionary purchases. The situation deteriorates further for single parents, most of whom are women, who have a mere 4 percent of income remaining after paying their fixed costs. That's because the cost of nondiscretionary items has skyrocketed in the last 30 years, leaving many ordinary, hardworking families on the precipice of financial disaster, report the authors in a book suffused with data and enlivened by personal stories of real people who fell into a trap usually sprung by a job loss, a medical problem or a divorce.

"So many of the people in financial trouble are desperately trying to hold it all together. They are struggling to save themselves, their children and their elderly parents from the consequences of complete collapse. They work hard, but they just can't seem to get it right," said Warren. "Doing this kind of work is not just about numbers and regressions. It's about human beings."

They are people like Ruth Ann and James, who learn the peril that good intentions can bring. They married, bought a house--a fixer-upper they could afford on their two salaries--and had two kids. They didn't have much left after paying for child care, auto, food and mortgage expenses, and they didn't spend money they didn't have, but they were, they believed, doing the right thing for themselves and for their children. Then James was laid off. Ruth Ann and James borrowed money from family but could not keep up with the bills. Badgered by creditors, they filed for bankruptcy--and an American success story was transformed, in many people's eyes, to an American failure, by one unforeseen, unpreventable blow.

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