Going broke

When commentators worry about Americans’ growing proclivity for debt, the nation’s lenders trot out a comforting set of charts. These show the delinquency rates of families at various income levels, and they are remarkable on at least two counts.

They show that through boom and bust alike the vast majority of Americans pay their bills on time or pretty close to it. Secondly -- and perhaps more surprising, since it has been in only the last few decades that lenders have pumped credit into lower-income households with abandon -- they show that Americans at almost every point in the economic spectrum pay their bills.

Lenders and some conservative economists leap to an extravagant conclusion: That debt now functions as America’s private social safety net, letting people borrow through bad times and charge their way to the good life. The increasing ease with which almost anyone can get a credit card, an auto loan or a mortgage makes old-fashioned government programs like cash welfare and unemployment compensation largely irrelevant.

But there’s a cloud over this sunny picture: People are going bust in large and rising numbers.

This is the jumping-off point for the mother-daughter team of Harvard law professor Elizabeth Warren and McKinsey & Co. consultant Amelia Warren Tyagi in their new book, “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke.”

“This year,” the authors write, “more people will end up bankrupt than will” suffer a heart attack, be diagnosed with cancer, graduate from college, be diagnosed with cancer or file for divorce.

“Heart attacks. Cancer. College graduations. Divorce. These are markers in the lives of nearly every American family,” they write. “And yet, we will soon have more friends and coworkers who have gone through bankruptcy than any one of these other life events.”

This is a stinging rebuke to industry and ideological happy talk about bettering America through borrowing. And it is not the only one in this important book, Warren and Tyagi also document how economically risky it now is to have children in America.

Drawing on material from the Consumer Bankruptcy Project -- a survey Warren oversees with University of Texas academics Teresa A. Sullivan and Jay Lawrence Westbrook that is regarded as the most comprehensive look at families filing for personal bankruptcy -- the authors report that married couples with children are more than twice as likely as their childless counterparts to end up in financial ruin. Divorced women with youngsters are more than three times as likely. The pair estimates that since the early 1980s the number of single mothers in bankruptcy has jumped 600%.

Such results are unexpected because they come after two decades of women pouring into the workforce by the millions, a trend that should have improved U.S. families’ ability to cope with economic reverses, not diminished it. In trying to square the rising financial resources of families with evidence of their reduced economic prospects, the authors are at their most provocative -- and most tenuous.

To their credit, Warren and Tyagi mince no words about what they see as the problem. “The average two-income family earns far more today than did the single-breadwinner family of a generation ago,” and yet when all the bills are paid, is worse off. The reason: Families have bid up the price of houses and schools so fantastically that they’ve erased the benefit of a second income. Hence the “Two-Income Trap.”

The authors are just as tough-minded in proposing solutions. They would revive state usury laws limiting how much interest lenders could charge. They acknowledge that such a move would discourage lending to low-income families, who now pay more for their loans. But they say the benefits of such lending are overblown and that reducing the debts of those families would help curb bankruptcies.

The problem comes when one stands back and looks at the broad strokes of the pair’s case.

Do Warren and Tyagi really mean to say that rising house prices and tuition bills alone have wiped out an entire generation of economic progress by women? And even if they have in such hot real estate markets as Boston (where Warren lives) or Los Angeles (where Tyagi lives), what about in Cincinnati or Amarillo?

Is it really only spending on necessities such as housing and schools that is doing in families, or does the love of SUVs, wide-screen TVs and Tommy Hilfiger have something to do with it as well?

Warren and Tyagi take a fascinating tack in arguing that it’s necessities, not luxuries, that are at fault. They cite government statistics showing that an average family of four spends 21% less on clothing and 44% less on household appliances today than in the 1970s. These categories presumably include the luxuries that critics often point to as the source of families’ financial woes.

But the pair’s case may be weakened by the fact that it is largely based on the Labor Department’s Consumer Expenditure Survey. Recent studies suggest that the survey is deeply flawed. Among other things, it shows consumers spending 65% less than they do in other major measures of personal expenditure.

Such questions notwithstanding, “The Two-Income Trap” goes a long way toward explaining one of the central mysteries of the era: why so many Americans, even quite affluent ones, are convinced they aren’t doing as well as their parents did or that they could have their success snatched away much more easily.

That conviction already is taking a toll of one sort, priming much of the country to see the economic glass as half empty until persuaded otherwise. It could soon take a toll of another kind, by making President Bush vulnerable to the same economic malaise that brought down his father.

If it does, Warren and Tyagi may deserve much of the credit for telling a story that is strikingly similar to the one that carried Bill Clinton into office: of middle-class Americans who work hard, play by the rules, yet find themselves treading perilously close to the financial precipice.