A Fighting Chance

Our minds made up, we set about launching our unconventional version of a family business, and that’s how our book, The Two-Income Trap, was born. We started with a familiar question: Why are so many families going broke? Ask almost any pundit, and the response would likely have been: Families are going broke because they buy too much stuff! All those name-brand running shoes, closets full of clothes, and microwave ovens were pushing the middle class deep into debt. The “urge to splurge” was overtaking us.

Amelia tackled the conventional wisdom head-on. As it happens, for decades the government has been collecting data on how much families spend on pretty much everything—from frozen fish to pet food to boys’ pajamas. When Amelia dug into this trove of information, she found that the numbers simply didn’t support the story. Consider clothing, a favorite target for the pundits. Even when we accounted for all the Nike sneakers and name-brand sunglasses, the average family of four spent less on clothing in 2001 than they did a generation earlier (adjusted for inflation). What about food? Even including all the restaurant meals, Starbucks coffee, and fresh-squeezed smoothies, the average family spent less on food than they did thirty years earlier.

That’s not to say that families never frittered away any money. Americans spent more than they used to on such things as televisions, premium channels, and home computers. But they spent less on furniture and home appliances (microwaves included), and the savings just about balanced out. The balancing act held in other places, too. Families spent more on airplane travel, less on dry cleaning. More on cell phones, less on tobacco. More on pets, less on carpets. And when we added it all up, we realized that the hollowed-out middle class of Amelia’s generation wasn’t any more frivolous in its spending than the solid, comfortable, growing middle class of my generation.

So what had gone wrong? Wages were flat; that was part of the story. For most of the twentieth century, wages had risen steadily. But that stopped happening in the 1970s. For the middle class, wages (adjusted for inflation) had remained stagnant for an entire generation.

Other things being equal, the middle class might have made it through—no richer than their parents, but no poorer either. But other things weren’t equal, because costs went up for stuff that was a lot harder to live without, like health care and education.

And then there was housing. Millions of families did exactly what my parents had done two generations earlier—they stretched to buy homes in good school districts. But now the stretch was different. Thanks to a newly deregulated banking industry, the strict lending standards that my parents faced had gone the way of the dinosaur. Teaser rates, interest-only loans, and no-down-payment loans appeared, and families grabbed hold. Many figured this was their best chance for their kids to get a good education or to live in a nice neighborhood. The rush to buy homes seemed so hopeful at the beginning. But with all that money flowing into the housing market, prices were starting to climb fast, so even families who wanted to play it safe didn’t have much choice—take on a giant mortgage or get shut out. Much was said about fancy new “McMansions,” but that proved to be another myth, at least among the middle class. Most middle-class families lived in a house only slightly larger—and often quite a bit older—than the one their parents owned, and the huge, new homes remained the domain of the wealthy.

As the family budget got tighter and tighter, women all across the country made the same move I had made a generation earlier: they took a job. But I had gone to work because I wanted to, while a lot of these women didn’t have much choice.

Single-income families found themselves falling further and further behind. Even for those lucky enough to have two incomes, it often wasn’t enough. On average, once the basic bills were covered—the mortgage, the health insurance, day care, the cost of preschool or college tuition—the modern two-income family had less money left over each month than the one-income family of a generation earlier. Amelia and I called this “the two-income trap,” and middle-class families everywhere were caught in it and could see no way out.

Once families got caught in this trap, they had to make some hard choices. First to go was savings. Back when I was a young mother, a typical one-income family put away 11 percent of their take-home pay in savings. By 2001, even though many families now had two incomes, the savings rate for the average family was approaching zero.

For some families, working hard and pinching pennies allowed them to get by. If a married couple could somehow get their kids off to college (which now cost three times what it cost when they were young), they might pay down the mortgage on the house and still have a little left over to retire on.