04 January 2009

Treadmill of Debt and Family Bankruptcy

I was referred to a lecture that Elizabeth Warren gave last year called The Coming Collapse of the Middle Class. I don't think most blog readers want to spend an hour listening to an economics lecture, but I found it very interesting, especially since she used as her reference point a 2 parent, 2 child family in 1970 and 2005. I grew up in the first (plus 2 more kids) and am parent of the second. And the gist is that today's family is on a faster treadmill, and much closer to bankruptcy than the same family in 1970.

She investigated expenses and found that in today's dollars, families now spend LESS on clothing, appliances and food but spend MORE on Health Insurance, Housing/ Education and Taxes (because the second income is taxed as supplemental to the first). She says children today are more likely to be in a family that experiences bankruptcy than a family that experiences divorce.

She also says that car ownership is NOT more expensive but that now, 2 cars are a requirement, not just an option:

"With an [inflation-adjusted] income of $42,450, the average family from the early 1970s covered their basic mortgage expenses of $5,820, health-insurance costs of $1,130 and car payments, maintenance, gas, and repairs of $5,640.
"With both people in the workforce, the family spends more than $8,000 a year on its two vehicles."
Instead of 3 classes (poor, middle, rich) she says it is more appropriate to classify people into those on the treadmill of debt, and those who are healthy and maybe childless, who stay debt free.

I had never heard of Ms Warren before yesterday, but she is apparently widely read and appears often on talk and news shows. If you google her, you will get many results. She was recently appointed to the Chair the Committee that will oversee how the government spends that $700 Billion bailout of the banking industry.


Cincinnati NAMjA said...

Thanks for sharing! The economist in me has added the lecture to My Favorites....lol

DP said...

Kind of depressing. (I read the article - didn't watch the lecture.) For me, this summed it up:

"Today’s families have budgeted to the limits of their new two-paycheck status. As a result, they have lost the parachute they once had in times of financial setback—a back-up earner (usually Mom) who could go into the workforce if the primary earner got laid off or fell sick."

I wonder how closely this has paralleled the run-up in the housing market. You really don't have control over health insurance; if you're sensible about it your car expenses should be pretty comparable to your peers; same could be said for childcare. The big difference is mortgage cost. People seem willing to increase their income-risk in order to own the kind of house they think they should have. Someone (probably my mother - ugh) once told me that you should only buy as much house as you can afford on one spouse's income. How many people do that? Not us.

CityKin said...

In the lecture, she also says that much of the mortgage pressure is school district based. She cites two Boston suburban neighborhoods that are equivalent in every measurement except that one has a shcool district with a 5 point advantage in reading scores. She says this results in tens of thousands of dollars of increase in housing prices in the better school district.

Her point is that parents feel that they MUST get the best school for their kids, or else risk that the kids will not make college and thus into the middle class.

If you think about the ways that school districts have propped-up housing costs in many "good" suburbs you realized how unrealistic real school choice (as in vouchers) is. People want the vouchers for inner city children, but do not want those kids coming into their district and lowering the test scores, IMO.

Unknown said...

Its important to see these comparisons. Large companies are not emplying the middle class like they did in the 70's. So many of my friends and family are self employed or working for small businesses with limited health and retirement benefits. Way different than in the 70's. Thanks for the post.