The Two-Income Trap

Despite the sensational title and endorsements by Dr. Phil, this is a really compelling quick read, with what seems like smart thinking about consumer debt. More than anything else, it makes me want to see more support for Warren's policy work.

What gets families into bankruptcy? It's not overconsumption - people don't spend their way into bankruptcy; it's caused by sudden loss of income (a layoff) or huge expenses (medical costs). And it's not that the social stigma has reduced - people still feel the moral burden of debt, and bankruptcy is still shameful.

Families spend up to their means to cover their homes and educations costs -- and homes are often really just education costs in disguise. If we don't send our kids to private school, then we move into the nicest school district we can afford. It's the allure of a good school that stretches our budgets.

Stay-at-home moms serve as an unrecognized safety net. Besides providing childcare and domestic services, she can enter the workforce if Dad gets laid off or hospitalized.

Here's the kicker: living on two incomes feels safer, but it's really more dangerous. When both parents work, you've doubled your chances for a layoff or a disability injury. And because we're all living at or near our means on fixed costs - not frittering our money away on luxury goods - there's no place to cut back. It would actually be safer if we all had spent lots on cruises and fancy restaurants, because that stuff is easy to cut.

So Warren's recommendations: If you live at the edge of your income, don't cut back on discretionary spending: reduce your fixed expenses.

Warren's policy proposals:
1. a serious school voucher program that lets parents stay in their houses and send kids to school anywhere.
2. public preschool. If we've decided as a society that preschool is more or less mandatory, then we should make it public just like kindergarten.
3. reduce college costs by specializing them. There's no need for every specialty at every school.

Noted on July 18, 2010