Thoughts on Warren's The Two Income Trap

A friend had suggested I read Elizabeth Warren's book The Two Income Trap, and since she seems to stand one of the better chances of becoming the Democratic Party nominee, it seemed like a good idea. It's an exceedingly thought-provoking book, though it fails to follow through on its key ideas. In this post, I'll lay out the book's main points and give some overall reactions.

The book opens with something that Warren found in her research: a large portion of bankruptcies are filed by women who would otherwise be considered middle class. Why is this? According to popular wisdom, she says, people should have more money and be more financially secure because now most women work full time whereas a generation before (she wrote the book around 2000, so she's talking about the 1960s/1970s) women had less employment opportunities and most women stayed home after marriage.

She examines the theory that this is because people are blowing all their money on dinners out, designer clothing, and expensive vacations, running up irresponsible credit card debt, but after examining inflation-adjusted average household spending on categories such as food and clothing, she concludes that people actually spend less money on most types of consumer goods now than in the past.

What are people spending more money on, then? Warren argues that women entering the workforce has allowed married couples to enter a bidding war for good housing (driving up the price of houses in neighborhoods with good public schools) and for private preschools and college educations. So even though the average married couple makes more in 2000 than in the 1970s, they don't actually have more available money than couples did then because they're spending it all on these things.

But that's just in the good times. Warren argues that because both spouses now work, and because they've made commitments to mortgage payments, tuition, car payments, etc. which take up both those incomes, couples are less able to weather a major financial reverse like a job loss, disability, or divorce than single income couples. The argument goes like this:

Under the single income, stay-at-home-mom model, the family had a significant extra resource for either doing unpaid work or adding a second person to the workforce if something went wrong. Say the husband's factory shuts down, and he's out of work. The wife can go out and get a job, and the husband might take a part time or lower level job while looking for a good new job. The combination of these efforts might not make up for all his lost income, but it would cover enough that they stood a good chance of being able to keep up with their essential bills. If he could get a job making 50% of what he used to make, and she could get a job making another 40% of his former income, they'd still be making 90% of what they were before. Or imagine a different type of reverse, where one of their parents becomes sick and needs a lot of care, the stay-at-home spouse could devote her unpaid labor to taking care of the sick parent, thus avoiding the necessity of shelling out major money for paid supervision.

In the two-income model, if one spouse is laid off, there's no fallback. The second spouse is already in the workforce. Perhaps they could try to get more hours, but the family is likely to suffer a 50% drop in income. Similarly, if there's a family problem which requires lots of time, like a child with a serious medical condition or a frail parent needing care, there's no one available to do the work, so they either need to pay someone (which is expensive) or one of them will need to reduce hours or even quit their job, thus significantly reducing their income. Since they've made fixed financial commitments based on both of them working, if suddenly only one of them is working they'll quickly fall behind on the mortgage, car payment, tuition, etc.

This also makes divorce financially catastrophic. When a couple splits, one of them (often the woman) ends up with the kids and the house and thus has basically the same bills as before. However, that parent has a significant drop in income. If she was already working her income is exactly the same as it was before, but instead of having her husband's full income to help cover those bills, she has only a fraction of it designated as child support. Increasing the child support payments isn't much of a solution, because the ex-husband now needs to pay for his own apartment, etc. Warren argues that "deadbeat dads" are not a solution to the financial woes of divorced women, because divorced men are also driven down into poverty by the same financial dynamics.

Moreover, even if the divorced mother adjusts to this first shock by moving into a cheaper house, getting rid of a car payment, or cutting tuition spending, the single parent is now in a permanently disadvantaged position versus two income households. With the majority of households being two income households, the price of houses, cars, tuition, etc. is set by the market of two income households. Single income households, whether single parent or stay-at-home-parent, will invariably find themselves at a disadvantage, and single parent households much more so because they lack the support in non-paid labor of the non-employed spouse.

After laying all this out, Warren struggles to come up with any useful suggestions. She insists that she does not mean to say that women going into the workforce is a bad idea. There's an extended section in which she suggests that the loan industry should be significantly more regulated, so that people who might end up in financial trouble can't get credit card loans, but it's unclear how that helps. Indeed, it would mostly push people to a crisis even faster if they had no ability to borrow on credit cards to get through a short term financial crisis. She observes that women are much less likely to experience bankruptcy if they choose never to have children, but backs off actually suggesting that mass childlessness is a solution. In a brief practical section near the end she advises couples not to take on fixed bills such a mortgage, car payments, tuition, etc. in excess of the income of one of the earners, saying that the second income should be used for savings and for "extra" spending such as vacations and dinners out. While it may seem irresponsible to spend lots of money on such "extras" the advantage is that in a crisis you can always cut extra spending. You can't cut loan payments and other committed bills.

I think there's value to the exercise that she describes of doing a "financial fire drill" where you look at what your income in versus how many bills you have each month that can't be changed. Interestingly, many of the creative suggestions she has in the book for breaking some of these cycles are things she's had to abandon as she's tried to become a Democratic candidate. In the book she advocates for a public school full tuition voucher that would allow families to truly choose schools. Her stated purpose with the vouchers is to break the connection between bidding up neighborhood housing prices and specific public schools. She's since dropped support for school choice. She also argues in the book that supporting publicly funded preschool and daycare just adds to the cycle, since it provides money to two-income families and leaves families with a single income and one parent at home even further behind. She suggests that instead it would be better to provide some sort of per-child credit or subsidy which could be used either for child care or to make a single income family more viable. Needless to say, that kind of thinking is missing from the presidential candidate Warren, who needs to fit into the standard Democrat box.

It's also worth noting that her bidding up home prices theory is not actually all that well supported by the data she presents in the book, something she obscures by the way she presents the numbers. She lays out an example of a middle income family in the 1970s where the husband works and the wife stays home. The husband makes $38,700/yr in inflation adjusted income. They spend just over a thousand a year on health insurance, $5210/yr on their mortgage, $5140/yr on their car expenses, pay 24% in taxes, and have just under $18k (46% of their income) left to pay for food, clothes, and other non-fixed expenses. She compares this with a two income couple in 2000. The sum of their two incomes is $67,800. They pay $9000 for their mortgage, $8000 in car expenses (two cars), $4350 for daycare, $5320 for private pre-school, and pay 33% in taxes. This leaves $17k left to cover food, clothes, etc. Less in straight dollars than the 1970s couple, and a significantly lower percentage of their income. Note, however, that she gives the taxes as percentages. If you actually do the math to calculate those taxes in dollars, their tax burden has gone from $9,288 to $22,374. Their income has increased by 75% and their mortgage, insurance, and car have all increased by less than 70%, while their taxes have increased by 140%. That and daycare/preschool are by far their biggest increases in dollar spending. If we take it that the daycare, preschool, and increased tax rates are all a direct result of taking on the second job, we see that taking on the second job (assuming that the husband makes no more than in the 1970s once you adjust for inflation -- which for a white male at that earning level is probably true) provides $29k in extra earnings but nearly $23k in extra expenses. It drops very little money to the family's bottom line. Perhaps I'm suspicious, but it seems likely to me that Warren talks about taxes in terms of percent because an increase in tax rate from 24% to 33% doesn't at first sound like that big a change, and she doesn't want the reader to notice that her example couple has had their taxes go up by $13k while their mortgage (supposedly a key factor in the two income trap) has gone up less than $4k.

Set aside the fact that since the Bush tax cuts, it seems hard to credit the idea of a couple with two kids and a mortgage making under $70k per year paying $22k in taxes. (Maybe this is supposed to include payroll, state, and local as well? She doesn't seem to say, though talking being bumped into a higher bracket suggests she's thinking of federal taxes.)

Taking her numbers at face value, it seems to me that what both the idea of the two income trap and also the very low return in disposable income she shows from putting a second person into the workforce point to is that our society has a tendency to focus too heavily on paid work and not enough on the value of unpaid work.

How can unpaid work have value? One example appears right in Warren's figures, though she doesn't describe it that way. When the wife enters the workforce, it immediately becomes necessary to pay someone outside the family to spend time with the young children as she was previously doing. Her example family spends nearly $10k on daycare and preschool. Because there is no longer a parent home to watch the kids play, read to them, etc. the family now has to pay someone else to do that -- a change which absorbs a significant portion of the family's increased income from the second outside job. Additionally, as Warren describes in the two-income-trap phenomenon itself, having both parents in full time outside employment depletes the family's reserve of labor. Now that both parents are working full time, there's not someone available if either taking additional paid work or taking on some important piece of unpaid work (such a caring for a sick child or parent) becomes necessary.

Having a person in reserve might at first sound wasteful or demeaning. Are we saying that that person should just sit around, wasting their time, just in case they're needed to step in later? Why not commit everyone to be fully useful? A reserve is hardly useless, however. In planning a battle, a general who kept no reserve would be almost certainly condemning himself to defeat. Reserves exist to meet unexpected eventualities. The idea is not, "I'm keeping these reserves as extra, just in case I need them" but rather "I hold back on committing my reserves until I see where they are needed." The commander who commits all his reserves at the beginning no longer has any flexibility, and so when a crisis comes up, he had no resources to meet it with.

I think this is essentially the problem that the "two income trap" identifies. If both spouses are allocated to working full time in traditional jobs, and if the family is then using the money from both those jobs to meet necessary monthly expenses, the family no longer has any flexibility in deciding how to apply its resources.

Of course, as the book also identifies, the fact that the majority of married couples with children are two income families means that families trying to fight the trend and survive on a single income have it harder. While a lot of the second income goes to daycare, schooling, and taxes, there is also money available to afford things which a couple holding just one comparable job instead of two will not be able to afford. At this point, we ourselves are in the somewhat privileged group of families in which the single spouse holding down a traditional job earns more than the median married household. That was not always the case, however. When we started this blog we were expecting our third child and my income was right at the median income. Back when we had our second child, I made well below the median.

It's impossible to select one approach that every family should follow, however, and that is not my aim. What I do think is important, however, is to think about these issues with two things in mind.

First of all, we should not think of paid work as more important than other forms of work simply because it is paid. Yes, every family needs an income, but the unpaid of work of caring for others is just as if not more important than the work of earning outside money, and even non-paid or low paid non-traditional works which a spouse does while "in reserve" is not low value or holding pattern work. Often, these kinds of non-paid work are the most valuable work that we can do, in that they are the work which we actually select without having to bias our decision-making according to what is most highly paid.

Second, we should keep in mind the existence of families that survive on a single income (whether with one spouse staying home or because there is only one parent) when thinking about family policy and avoid picking policies that needlessly give advantage to families with two working parents over families with one. If we assume that all parents will work, but we recognize that parents need a certain degree of flexibility in order to deal with taking care of new babies, sick children, aging relatives in need of help, etc., there's a tendency to try to make employers or the state pay for flexibility. What if we required that everyone be offered a year of paid new baby leave, generous time to care for children, relatives, etc.? Well, logically, that means that in order to get the same amount of work done, a company would need more people in order to cover for the percentage of people who were out on leave at a given time. If the company needs more people to get the same amount of work done, it stands to reason that each individual person will be paid less. But in a world where couples trying to survive on a single traditional income already find themselves struggling to keep up, lowering their pay in return for more flexibility only pushes them closer to the point where they can't afford to have a spouse at home. If we're to advocate for "family friendly" policies, we should at least pick ones which don't needlessly hurt the few remaining single income couples relative to the dual income ones. This gets tricky because for the increasingly large number of single parents trying to juggle a full time job and parenting, these sorts of benefits do help a great deal, and yet the trade off of benefits for income serves to put those single parents even further behind the two income families. Warren hints at a few solutions to such problems. For instance, rather than providing subsidized child care or pre-school, people might instead advocate for a per-child benefit which families could use either to cover expenses such as childcare or use to offset the forgone income of a spouse staying home. Such a per child benefit could go down as household income increases so that it's not increasing the gap between dual income and single income families. However, Warren's advice in these areas is pretty cursory, in part because she doesn't seem all that committed to thinking of ways to make it easier for couples to have one parent at home. Even though she identifies the two income trap phenomenon and talks about it interestingly, she still seems to buy in to the basic idea that being in the full time traditional workforce is the most important and fulfilling way for every adult to spend their days.