The Coming Collapse of the Middle Class?

Sound a bit bleak, but this lecture by Professor Elizabeth Warren explores how a middle class family in 1970 differs financially from one in 2005. The full title is The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net. The actual talk starts at 4:45 in, and lasts about 45 minutes. Via Economist’s View and gbs at Diehards. My notes below.

Earning More
Starting around 1970, more and more mothers started working full-time. How did this affect finances? Household income indeed went up from 1970-2000 from ~$40,000 to ~$65,000. However, the inflation-adjusted income for employed males actually went down slightly. So the increase was entirely due to the additional women working.

But hey, households are still earning more. Good, right? Next, she crunched some data on what a dual-income, 2-kid family spent their money on in 1970 vs. 2000.

Spending Less
We actually spend less on an inflation-adjusted basis on many things nowadays:

  • 32% less on clothing
  • 18% less on food – including groceries, eating out, and yes, even Starbucks
  • 52% less on appliances
  • 24% less on car expenses, per car

Spending More
Not so fast, we also spend more in many areas:

  • 76% increase in home mortgage payments . Surprising, the actual house size didn’t grow that much based on number of rooms (5.8 vs. 6.1). I wonder if this would hold true if it was based on square footage, however, as my research on that indicates a big increase in size.
  • 74% more for health insurance, even adjusted for healthy family with employer-sponsored health plans.
  • 52% more for cars, since now we have more cars per household. We gotta get to work, right?
  • Infinite% more for childcare
  • 25% more in effective tax rates, due to higher income

In 1970, credit card debt was 1.4% of annual income for the median household. In 2005, it is 15%.

Education
Finally, we spend a lot more on education. In 1970, you needed a high school diploma to get a good job, which took 12 years of government-provided schooling. Nowadays, the average family pays for 2 more years of pre-school, plus 4 more years of college, all out of pocket.

Net Result: Not Good
Note that the cheaper things are the smaller, more flexible expenses… while the more expensive things are the larger, more fixed expenses. So a family now earns a bit more, but also spends a much, much larger percentage of their income. So much, in fact, that now we need both of those incomes to afford everything we buy. If either spouse loses a job, the family falls behind. Studies show that a family with children has between double and triple the bankruptcy rate of childless households.

I was kind of hoping for some solutions at the end… but none came!

Comments

  1. Seeing “infinite%” more for childcare makes me question her methodology… is she purporting that no money was spent on childcare in 1970? Typically, a zero in the denominator is how you’d get “infinite%.”

  2. Ted Valentine says:

    This post should be retitled “The 2 income trap”. We avoided that hamster wheel when we got married by setting our standard of living based on one income.

    The government loves the 2 income trap. Those payroll taxes just keep rolling in.

  3. Katharine says:

    Well, if she is comparing a family pre-1970 where the mother stayed at home, then it would be almost infinite, yes. A baby-sitter a couple of nights a year vs. childcare every day? And then still getting a baby-sitter when you want to go out?

  4. …which is the exact title of Warren’s book: The Two Income Trap.

    But the catch seems to be that because everyone else is two-income, this possibly explains the increases in demand and therefore cost of many things like housing near good schools.

  5. I did a review of the Two Income Trap on my blog – it’s a pretty interesting book although it’s very negative and tends to skew stats to bolster the argument that mothers in general are all on the verge of bankruptcy.

    It’s worth a read.

  6. The statistics are certainly negative, but how much of this is based on choice? We buy much larger, more luxurious houses now. What was a luxury 30 years ago is now considered a necessity, even by low-income families. I think lifestyle creep is more to blame than economic conditions. Certainly education and health care costs are a concern, but those could be more than offset by buying a reasonably-sized house and quality, used automobiles rather than that new Lexus ever 4 years. The “infinite” increase in childcare costs is an obvious red herring, since it’s impossible to have an infinite increase in any cost. Even comparing babysitting a few nights per year to daily childcare doesn’t bring an increase large enough to be considered anything near infinite.

  7. hayhehes says:

    But there is a solution at the end. Don’t overextend yourself, don’t buy more than you can afford, plan ahead for possible bad times and you should be fine.

  8. Nerdy Jen says:

    The cost of housing in Southern California could be solving itself right now. It looks like the price of houses will keep dropping until the cost of a monthly mortgage payment can compete with the cost of rent.

    Health insurance continues to be a big expense, though. Last year I paid about $3800+ in health insurance premiums for myself and my husband, and I put $2850 into a Health Savings Account. Luckily, he’ll qualify for health insurance through his workplace soon. I’m planning to take the $6650/year that I would have otherwise paid for insurance/HSA and invest it in a Vanguard index fund. :^)

  9. Not to be too negative (or perhaps a little resentful), but the two income trap is often overcome by an educated and/or ambitious man who is willing to support his wife while the children are young. To me, the money needed is often just a matter of logistics. With good planning and a decent salary (that of a college educated computer programmer, say), the wife can still stay home.

    Not to say that there aren’t some guys who just can’t afford it because their career opportunities are limited and even living a meager lifestyle would be difficult without the other spouse working.

    But there is another set of people who have just come to expect their wives to work, and if they don’t they resent them big time. This group could possibly get by on one income but think it’s too stressful and put the pins to the wife not to stop working, when it could be done. This isn’t really a trap, it is a setup. And since the wives do work, they probably do buy a few nicer things, but that is just a side effect, not the cause.

    The only thing really more expensive today is housing – and yeah, it’s pretty bad. But instead of getting married at 20 like we used to, now we need to wait until 30, so we can save for the house. Otherwise, our lives could be managed in a pretty similar way, IMO. If the man is educated, and willing.

  10. What about the kids that the family has? Did kids work in High school in the 1970′s? How has the decrease in kids per couple and decrease in real minimum wage affected the bottom line?

  11. Projoe1979 says:

    Why would you have to wait until 30 to get married because you can’t afford a house? If you find the person you want to spend the rest of your life get married as soon as you can. Live, love and save together.

  12. SomeGuy says:

    mimi, is it automatically the man’s responsibility to earn the money, presumably enough to support the family on one income? Why shouldn’t the woman earn enough to support the family so the man doesn’t have to work? It sounds to me like you may be in a situation where plans for who was doing what weren’t agreed on ahead of time? Have you thought about finding some kind of from-home or low-hours job where you can pull in some money which might allay some of your man’s fears? If you are educated/ambitious and willing you might even be surprised to find that you can make close to what you make now but in a much more child-conducive setting (from home, fewer hours, etc).

    Regarding the original article, I do think prices/expenses on core family items have inflated due to increased demand.

  13. SomeGuy says:

    mimi, is it automatically the man’s responsibility to earn the money, presumably enough to support the family on one income? Why shouldn’t the woman earn enough to support the family so the man doesn’t have to work? It sounds to me like you may be in a situation where plans for who was doing what weren’t agreed on ahead of time? Have you thought about finding some kind of from-home or low-hours job where you can pull in some money which might allay some of your man’s fears? If you are educated/ambitious and willing you might even be surprised to find that you can make close to what you make now but in a much more child-conducive setting (from home, fewer hours, etc).

    Regarding the original article, I do think prices/expenses on core family items have inflated due to increased demand. I also believe square footage is a better indicator than number of rooms. The average square footage of homes has gone up dramatically. Also consider that in many areas the price of land has consistently increased above the rate of inflation (~3%/year). The area SomeGal and I live in is a perfect example. A home we know specifics of is on about 1/2 acre and about 5 years ago was $50K (this is for fully-prepared land including utility hookups). A second section of exactly similar lots just opened up and the cost is now $110-$125K, and that during one of the worst real estate slumps in decades.

  14. Nerdy Jen says:

    “With good planning and a decent salary (that of a college educated computer programmer, say), the wife can still stay home.”

    I’d pick a safer, steadier job than computer programmer. It’s tough to compete with salaries in India.

    ;^)

  15. Mike H says:

    I think this is all crap, I would so much rather live now than be middle class back in the day. Our lives are so much better, with so many new things that just weren’t available before.

    Healthcare costs so much more because in the current system, everyone has little choice on what healthcare to get. Everyone is covered for practically everything, even if there is little or no chance for you to suffer from it. And now there are many more drugs and procedures that you are covered for that only a few people will ever need. Thus, you are paying for helping the few people with chronic problems. But all that extremely advanced medicine is now available to you if you ever need it.

    Houses cost more simply from demand. Too many people have so much money and they all want to live in the same places. Again, I don’t see this as a problem, just an effect of prosperity.

    Education is also demand driven. It costs a lot of money to keep schools going, looking nice, and keep up with the huge increase in students every year. No one says you have to go to a private or big state school. So when you have debt because of it, you shouldn’t complain.

    The higher tax rates means one thing, we need to lower the rates! And index them better than we’re currently doing. We index for inflation, but overtime people do a lot better than keeping up with inflation, thus higher taxes due to bracket creep.

    Life is great, there will be no ‘Collapse of the Middle Class.’ There are just a bunch of whiners out there wanting to blame something besides themselves for their current situation. And people trying to perpetuate and make money off the fear by selling books and giving talks.

  16. Mimi:

    That is exactly what my SO and I plan to do, as we are in a position to afford it and I look forward to staying home with my children. However, I understand why many of my friends do not consider this a reasonable solution. Although they might only need to stay at home for a few years before they could return to work with limited childcare, after a few years they will probably not be able to return to the type of intellectually-challenging, well-paying job that they had before they had kids. They will be branded as mothers, women not serious about their careers, and they will not garner the same respect from employers and coworkers. This is not true of every field, but it is certainly true in mine and many others. Although staying home works as a solution for my partner and me, I wouldn’t presume to claim that it works for most couples, even those in which one partner makes enough to support the other.

  17. Thinking about it, these problems apply to all households/individuals whether you have two incomes or not.

    All families are paying more for children, housing, health expenses and cars.

    I personally don’t know any family living in suburbia that has less then two cars (with teenage drivers they have at least three). If one of the parents is not working they are busy all week long driving kids and running errands.

    Regardless of number of incomes, somebody has to pay for preschool, extra-curricular activities during K-12 and then college.

    If the parents cannot /do not pay for college then the individual person is making that investment (hopefully with a payback).

    Eventually, the taxes catch up with you whether you are dual-income or not. As your household income increases you pay more taxes and a higher percentage at least in the middle to upper middle-class (I hate that term) in my experience.

    To comment on the poster who was paying > $6000 for health coverage. That is lot of money regardless if you make $40K or $80K in household income.

    The current economic environment and trends will only make the problem worse for those living at or beyonds their means.

    For those living within their means they will have make different choices to maintain their financial goals.

  18. I have a Wife and 3 Children. We have been married for 25 years and have managed to live on one income. I am an Engineer. Yes we have gone through hard times but we have little debt. We cut up hour credit cards 16 years ago and only use a debit card. We moved from California to Alabama 15 years ago as home rates in Alabama were so low. The result – We have a modest home 3500 sf in a very nice neighborhood with a golfcourse – the home is almost paid off. We have had to finance things like cars etc but we also work hard at paying them off. Now that my kids are older and one has moved out, my wife is able to work on the side cleaning houses etc. The extra money is great and gives us lots of freedom to do things. I might add also that we have been faithfull with our tithing and God has certainly taken good care of us. Yes – we are very giving with our income and well, we continue to get blessed as a result – if you want more, you have to give more – I never really believed that principle until I put it into action….

  19. But there is another set of people who have just come to expect their , and if they don’t they resent them big time.

  20. The difference between now and the 70′s has nothing to do with what we earn and everything to do with our attitudes towards it. Most Americans feel that because they work, they deserve certain things (big house, big car, big tv, etc). I’ll just finance it, and worry about it later. Living within our means is no longer how we live. We need to have what our neighbor has. Cell phones, cable, internet expenses all eat away at our disposable income while they weren’t even an issue in the 70′s

    My wife and I decided that when we had kids one of us would stay home full time. It made more financial sense for that someone to be me. I have absolutely no regrets. Two kids later, and our standard of living hasn’t diminished, but our priorities certainly have. Saving for our childrens’ education, retirement, house payments. Our net worth continues to increase even though are income was reduced substantially. It is certainly possible for anyone to accomplish this if they are prudent and responsible.

    Great blog by the way!

  21. chrisMR says:

    ok, how do i put this politely…
    my wife and i bought the nicest house we could afford on what we were willing to pay a month, and yet the cheapest house we could buy and avoid the hill rats. sounds a bit elitist, but the way is see it, people with less money, less education, no real desire to mow their lawn and a closet full of stained wife-beater t-shirts tend to spend a larger % of what they make, which means that while I live in a home that is within my means, I run the risk of Joe Bucktooth and his 6 kids moving in next door, while running up a debt, when he should be crammed in the rundown trailer with his wife/sister breeding out a new kid every 11 months and dragging down the property values elsewhere. ive been lucky so far, but the % of this in my neighborhood has grown since I moved in, and it makes me nervous.
    sorry to get so un-PC, but I hope you get my overly exaggerated point.

  22. Consider that, of all the increased costs you list, the one that represents the largest dollar amount is taxes. Families pay thousands more in taxes not just because of the additional income, but because of the unfavorable tax brackets applied to married joint filers. The government could lend 2-income families a HUGE assist by eliminating the marriage penalty.

  23. I the 70′s my dad was able to buy a brand new 4 bedroom house in a nice neighborhood for a liitle over an engineer’s annual salary.
    in CA.

    today for me that would be more like 7 year’s engineer’s salary.
    quite a difference.

  24. Health care and housing are definitely the two elephants in the room.
    - The government should fix the first problem by adopting some sort of universal health care (insurance, govt provided or something in between)
    - Lots of blame to go around on the housing bubble. People bought more than they could afford; banks lent money knowing people couldn’t afford it (and selling off the loan, washing hands…), gov’t turned a blind eye to questionable banking practices. The fix is better regulations, 20% down (10% with stable job), and people living within their means.

    Of course, the recent increases in fuel and food prices may be eating into the lower prices we’ve been dealing with in the past.

  25. sadhu–really? An engineer in CA can easily make $100k. You can probably buy a house for about 5x your income, so that’s $500k. Even in CA you can buy something for that. Really most of the increase has come since ~2000, not since the 70s.

  26. I attribute the housing boom primarily to the fact that most families have dual incomes. Living on one income is unheard of these days. My wife stays at home with our kid. When I explain to my co-workers that my wife does not work outside of the home, their jaws drop. It simply is absurd these days.

    I liked the analysis presented on purchasing power of goods today compared with 30 years ago. It’s interesting to see that the real price of most goods has decreased due to manufacturing/farming improvements and outsourcing. I have been wanting to see that quantified for some time now.

    The bottom line is that our society feels entitled to a significantly higher standard of living than what previous generations have experienced. We can no longer live modest lives. We have to keep up with the Johneses. We want instant gratification, so we buy stuff on credit.

    The whole situation seems pretty bleak to me. We’re overworking ourselves to the grave to satisfy material wants which have little consequence to true happiness.

  27. Albrecht says:

    Well, no wonder no solutions were offered. The sole purpose of such ‘lectures’ is agitation, stirring class warfare and alarmism, asl long as the conservative president is at the wheel. As soon as a fellow commie president follows next, everything will be honky-dory and the mud-stirring will mysteriously cease. This ‘professor’ is a well-known marxist, frequenting PBS-based crusades against credit card companies and other ‘evil’ corporations while in reality what we need is to live more frugal lifestyles and stop spending like drunken sailors both on the individual and federal levels. Duh!

  28. Miranda says:

    Thanks for sharing this lecture! It is very insightful. I especially like the point that the large, fixed things are what are making the huge inroads in income. It’s great that we spend less on clothes, but what we spend in health care eclipses that to a great degree. What it comes down to is that middle class is being hit by a huge increase the cost of “needs.”

    When you think about it, talking about all this purchasing power that we now have is kind of like how the government reports on core inflation, leaving out inflation to energy and food prices. But those are the things that actually affect us the most in terms of budget.

  29. I think instead of whining, we (the author included) should accept the new reality. The developing world is developing and we need to compete with that. More education is needed to compete with them for jobs. This drives up demand for education and therefore cost.

    Housing in the inflated areas is the only gripe that I have because it’s driven my artificial rather than real demands. I hope the the market will become more sane in the near future.

    When making these comparisons, people forget to take into account that the living standards have improved quite a bit for everyone including middle class. Their houses are bigger. They spend less money on food and the quality and quantity of food have improved. Most everyone can afford a car and again, their quality has improved as well, more reliable and more features. Most everyone, even the lower classes have access to modern amenities like DVDs, flatscreen TVs, etc….

    Overall, I think the US is still a great country. Life will be harder in the future, but basically it is due to the changing world. We now have to compete with countries of China and India who too want our living standard. Instead of whining, just take a look at what you yourself can do to improve your and your family’s situation. There are still plenty of opportunities available in this country.

  30. Amalthia says:

    I read somewhere that it’s actually sometimes better that the person who makes the least amount of money to quit their job and stay home and take care of the kids (for a family that is planning kids) than to work full time because the cost of owning a second vehicle on top of child care costs are so high. (and then taxes take the rest)

    My husband and I both work and neither of us have kids. After reading Mimi’s story I’m not sure I want to go down that road either. My husband can’t even load a dishwasher properly. I can already tell I’ll be doing all the work.

  31. “Typical” Returns from Equities over the past ten years have been dismal, contrary to popular mythology.

    The S&P 500 Total Return (per annum) for the last 10 years is +3.89%. Using the Official CPI Statistics, the CPI over the last 10 years (March ’98 through March ’08) has been 2.79% annually. Thus in the last 10 years the S&P has only returned about 1.10% annually (assuming Official Figures are correct, which is not a tenable assumption) a dismal rate of return.

    If one considers U.S. capital gains taxes and transaction costs, one could argue the Total Return for the S&P was zero, or worse.

    But consider those whose Equities Portfolios have outperformed the Market, increasing by 10, or 15, or 20% since the October, 2002 lows, as measured in U.S. Dollars.

    If they were to liquidate their portfolios today, consider whether the proceeds of that liquidation would represent an increase in value, or not? (Of course, it probably would represent an increase in value for U.S. capital gains tax purposes.)

    In fact, the liquidation proceeds would represent a decrease in value (even when one disregards tax consequences) if one agrees that the proper measure for a gain in value is “purchasing power.”

    In the aforementioned scenario, there would be a loss in value because, measured in “purchasing power” terms, the U.S. Dollar has dropped over 35% (when measured by the USDX, a market basket of other major currencies) since its 2002 highs of 120 to below 75 on the USDX today. (Of course, to the extent that one assumes the transaction costs are solely in U.S. Dollars, this generalization would be modified, but that is not a realistic assumption.)

    Thus an important question arises: How can one produce good real returns, that is, returns which best preserve purchasing power?

    Put another way, how can one profit from shrinking (in purchasing power) assets which appear not to be shrinking because their nominal value has increased? To answer this question we must consider how this phenomenon – - increased nominal value with decreased purchasing power – - can come about.

    There are two main causes. Perhaps the main one is the massive monetary inflation which has been engineered in recent years by the (private-for-profit) U.S. Federal Reserve as measured by M3, the broadest measure of money in circulation. It is important to note that the rate of M3 increase dramatically accelerated after the March, 2006 decision by the Federal Reserve not to report M3 anymore. M3 is now increasing by nearly 18% annualized (according to shadowstats.com) – - that is nearly a 4-year doubling time rate.

    Therefore it is no wonder that everything costs so much more. The purchasing power of the U.S. Dollar has dropped dramatically in recent years while the printing of U.S. Dollars has never been more profligate.

    One would think this Massive Monetary Expansion would be inflationary, and one would be correct. So what are we to make of the Official Figures that show that the U.S. CPI averaged 2.79% over the last 10 years and is currently running at about 4% annualized as of the latest report?

    Well, we emphasize that that 2.79% and 4% are Official Figures. Actual CPI is running at nearly 12% annualized according to shadowstats.com (shadowstats.com calculates Consumer Price Inflation today as if it were still calculated the way it was in 1990 – - since 1990 the Official Calculation method has been gimmicked).

  32. The average size of the American family has decreased while the size of the average home has increased substantially on a square foot basis. Larger homes cost more to buy. Larger homes cost more to maintain. Larger homes cost more to heat and cool. Larger homes result in higher property taxes. Larger homes result in larger insurance premiums. Larger homes cost more to furnish. Larger homes… blah, blah, blah…

    Lifestyle is a hidden component in the rising cost of day to day life. Americans don’t want to live in a modest little house anymore. We need more space to store all the other crap we buy that we don’t need.

    And we buy a lot more vehicles now too. The percentage of homes built in the U.S. that have three or more garage bays has skyrocketed in the past two decades.

    Lifestyle… it is why despite the endless 24/7 drumbeat of the environmentalists Americans per capita consume more energy today than ever before. Need to power all those ipods and cell phones and blackberries and heat and cool or massive homes and fuel our fleet of large gas guzzling vehicles.

    The idea of actually living below one’s means is just theory not practice for most of the participants in the American economy.

    Our own government encourages us to spend, spend, spend. Get out there and blow that tax rebate check as fast as you can – the economy needs you!

    What a mess.

  33. Amanda says:

    There’s a guy called Michael Parenti who argues that they who are THEY has been trying for decades and decades to get us all back to a situation where there are a few rich people (THEY, of course) and everyone else is in abject poverty and just slaving away for the few for a pittance, with no protections or assurances. THEY are trying to strip away every gain that “the people” have made in the last hundred years.

    I have to say, if that’s the case then it does appear that THEY are doing a bang-up job!

  34. I am a woman and I work and support my non-working, disable husband.

    I agree with those who said before me here, don’t whine. Whatever your personal situation is, it is up to you to fix it and make yourself happy.

    And whenever someone starts counting what’s wrong with this country I have memory flashes.. back to Russia.. where I am from.. I have lived in the US for the last 16 years. I had enough time to see the good and the bad.

    And I say, this is an easy place to survive, to enjoy whatever you enjoy and find fulfillment…

    I think those of us who lived in another country are able better see and appreciate all the things that are right with this country.

  35. One thing that I think is worth mentioning is how “males” with working wives can find it easy to justify not striving to make more money, because they are no longer dealing with being the only breadwinner. That would be another reason why the average male income didn’t increase nearly as much as one would expect.

    If I remember correctly Elizabeth Warren appeared many times in the movie Maxed Out and in many other credit/financial documentaries. Even though she isn’t the most talented public speaker, she always has interesting things to say.

  36. I don’t think this information should be used as an excuse, but as a way to perhaps learn from mistakes that have been made. If you don’t learn from history, you are doomed to repeat it.

    We can use the information both improve our specific situations, and perhaps help convince the politicians to make more macro changes.

  37. Terry, plagerism is evil. Your post is word for word “Profiting from Shrinking Assets with Gold & Silver” by DeepCaster LLC, deepcaster.com | May 2, 2008.

  38. Charles says:

    “…perhaps help convince the politicians to make more macro changes.”

    Jonathan,

    I’m probably close to the same age as yourself, and I think that we share a similar outlook on our retirements: the government will not be our security blankets. I think that in most cases the government is actually getting in the way of us retiring happily (and wealthy).
    The only macro changes I would like to see is less government (therefore less taxes). By taking less from me, I can achieve my goals quicker.
    Yesterday I received my social security statement. I have 29 years until I can retire with minimal benefits. I just cannot imagine working 29 more years, with that as my only goal.

    Charles

  39. PeaceMom says:

    I like Jonathan’s assessment that this report is just that–not whining.

    Rather than jumping to a conclusion that one parent should stay home with the children and one works (that’s the arrangement my husband and I have), why don’t we use some imagination.

    I’m seeing more parents figure out ways to live on one income, but that income is made of two people working part-time, or one 3/4 time and one doing frequent side jobs. Jonathan, I know you’re working on this.

    As more people arrange their lives this way with investments and living beneath their means, I think more small and mid-size companies will adapt, because they will be headed by people who dropped out of the rat race.

    The greatest hope for extricating ourselves from the consumer trap is buying less but being willing to pay more for more durable, high quality items. In other workds, we’ll buy less but get more.

    I have to admit that reading the news lately has gotten me nervous about what’s ahead and how much will collapse, like air travel. But then I started thinking about what will rise from the ashes, and I feel positive about that.

    Andy and sadhu–
    My dad was able to buy a house in Illinois in the mid-1960s for one year of his engineer’s salary, which was $16,000. This was his first job. My first job out of college, 29 years later, also paid $16,000. Houses were at $75K-$200K. No to whine, but housing can be a very difficult deal.

  40. My proposed solution to middle class collapse..use all the extra housing square footage to return to a multi-generational household. Solves the “infinite” increase in childcare problem at the same time.

  41. I don’t like this kind of whining. Even if we accept the stats at face value, the question is “so what?” The economic landscape changed. We have to change with it. We don’t have a certain lifestyle as our birth right. The days when one parent working in a factory supported a family of four living in a 4-bedroom house and sent all kids to college and all are gone, due to globalization and changes in our economy. Professor Warren’s implied messages have been more government regulation and social welfare. She also perpetuates an entitlement mentality. Should the government regulate home prices to a fixed multiple of median salary? Or force creditors to forgive their loans every five years? Lifestyle is by choice. If one cannot afford the high real estate prices in one area, rent, or buy a smaller house, or get a higher paying job, or move to a lower cost area. Mere complaining is not going to get anywhere.

  42. Dan Isaacs says:

    My wife and I paid about 10K per year per kid for the first 5 years of their lives (that’s a 100K by the time my 3yo starts public school). My parents paid 0K for my siblings and I. In my experience, at least, Warren is spot on.

  43. Dan Isaacs says:

    And TFB, I don’t believe Warren is proposing any of the solutions you ascribe to her. If anything, she’s just pointing out that it’s harder to be median than it used to be.

  44. Large Talons says:

    Economic policy is the major cause of the decline of the middle class. The solutions are relatively simple, but it is important that people first realize that there is a problem. So, how about some suggestions:

    Problem: High inflation and the decline of the dollar. The federal reserve is a private organization whom is not accountable to the tax payers and whose purpose is to provide the US government with funds in order to fight wars which do not need to be borrowed directly from the American public. The problem is that when you create money out of nothing it destorys the value of money currently in existance. The offical CPI has been running at around 3% because of some ridiculous and unrealistic formula changes to the calculation, but as you can see form the numbers reported in this post, the actual number is closer to 12%. Inflation is mostly just a hidden tax. This obviuosly cannot continute into perpituity.

    Soloution: Repeal the Federal Reserve act. Go back to the silver standard abandoned in the 1960s, and outlaw the fractional reserve banking system. Of course these changes are incredibly unlikely. For this to happen, the general population would need to understand economics and why these changes are important. The government will obviously fight any attempt to remove their power of war without the need to actually declare it or pay for it.

    Problem: The real estate bubble and excesive housing costs. Durring the boom of the post WWII era the government wanted to promote home ownership as a means to stablize the business cycle while in a heated boom time economy. Of course, as with anytime the government tries to manipulate the economy, the uninteded consequences of government insured FHA loans, capital gains exclusions, and deductable mortage interest were to create an inflated demand for housing. Now add in some artifically suppressed interest rates and an subsidized unregulated mortgage industry, and suprise, housing bubble. Thanks again fed.

    Solution: Fix the tax code. Stop using the tax system to manipulate private markets. Get rid of deductions for mortgage interest. Close the FHA which is now mostly obsolete because of PMI anyways. Stop taxing captial gains. In fact, most economists would be in favor of exchanging the income tax for a progressive consumption tax. This would have the effect of encouraging savings while discouraging wasteful spending. Since savings is what fuels the availablity of credit and therefore investment, the increase in productivity would far outweigh the negative effect of decreased spending in the long term. Housing prices would stabilize and return to their pre-WWII inflation indexed increases. These changes are also incredibly unlikely, since these mortgage programs are overwhelmingly popular with Americans. What people are missing is that the money they save on taxes and subsidized interest rates is dwarfed by government induced hyper-inflated housing costs. Also, people are afraid of changing the tax system because they believe it would be an oppurtunity to raise taxes.

    Problem: Education and health care costs. The rise of productivity over the past centry has raised dramatically the standard of living for the average American over the same period. Of course, to maintain the productivity gains, business demands highly educated skilled workers. This requires that the majority of the population now be college educated. In the past, a college education was reserved for the already rich and ellite. Nowdays, it is a basic requirement to maintain a middle class lifestyle. 30 years ago, the government paid for an education that would allow the average American to join the middle class, today you’re on your own. Health care is another market where the government manipluates the free market. Having a portion of the population covered by medicare shifts those price controlled costs over to the private insurers. The lack of compition also encourages hyper-inflated health costs.

    Solution: Although I believe that this is the most likely of the needed solutions, it is also still very unlikely. If the government is going to be involved at all in health care, then we really have no choice but to provide universal single payer health insurance. This will standarize costs and save an estimated 20% of total health care costs in administrative expenses alone, not to mention the collective bargining power of the US government. I do not however, believe that this is the best system. Really, I believe we should provide a high deductible catostrophic insurance ($5000 deductible or so) for free. Allow private industry to cover the difference, but those who cannot or chose not to afford it would not be bankrupted by a medical emergency. Also, make medical costs exempt from the previously proposed consumption tax or allow them to be fully tax deductible together with an allowance for a tax free contribution to a health savings account up to the insurance deductible. As for education, thats simple, make state colleges free and enrollment based on merit (what a concept!). As I stated before, I wouldnt be holding my breath for these reforms. People have a strange and bitter reaction to government provided insurance, although they dont seem to have a problem with other more invasive government programs. Also, theres way to much money in government subsidized student loans for that industry to let college become free.

    Outlook: Not terrible, but not great. Be prepared to work longer hours for your devalued cash.

  45. Okay, here’s some examples of thinking pro-actively about the two big increases: housing and health insurance.

    When I spoke of macro changes, I was mainly thinking of health insurance reform. Look at the rate of increase of cost of health insurance. I don’t know if universal health care is the answer (whole other can of worms), but if our gov’t policies don’t change, at the very least Medicare will be insolvent soon and taxes will go up.

    As for housing, although the # of rooms hasn’t changed, I think the size of houses has. A family with limited disposable income should consider living in a smaller home if possible, you can fit 4-6 people in 1,500 sq ft like they did before.

  46. Since this is pretty much a reader’s digest version of her book The Two Income Trap, I looked up on Amazon to see what suggestions were offered in the book. Here’s an excerpt from the Publisher’s Weekly’s review:

    “The authors recommend a number of useful societal solutions to get families out of this trap, such as legally prohibiting credit card companies from charging grossly unfair interest rates and exposing banks that employ a loan-to-own strategy that steers minority customers to higher mortgage rates with an eye to future foreclosures. Warren and Tyagi point out that families buy homes they cannot afford in order to live in a neighborhood with better schools. Their proposed solution, however-to institute a public school voucher system with wider choice-is less carefully thought out.”

    Say we adopt these solutions. Cap the credit card interest rate. Ban subprime lending at high interest rate. Let every kid go to any public school they want. You think that will solve the biggest living cost increases — housing, health care, college education, cars, and child care?

    In order to lower the prices you pay, you have to buy less. Buy less housing (smaller houses in less expensive areas). Buy less health care (repeal coverage mandates; create no-frills policies). Buy less college eduction (state U., community colleges). Buy less child care (stay at home parent; enlist grandparents). These are the lifestyle choices people have to make. Not pretty but only when demand goes down will prices come down.

  47. appfunds says:

    I think the system might collapse because of retiring baby boomers.
    So far most folks saved money and put aside $100-$500 every month.
    Now, more and more guys will take their funds back. We`ll see what will happen to stock market and whole system.

  48. To all the people saying that we shouldn’t whine, that is not the point! (Certainly not of this blog post, at least.) Rather, we need to diagnose the problem if we are going to fix it. The causes are largely government policies, and if we figure them out and vote accordingly then we can fix them.

    People who take problems like this as inevitable, something that can never be fixed, are just as exasperating, if not more so, than people who whine about problems.

    For example, TFB writes, “Even if we accept the stats at face value, the question is ‘so what?’ The economic landscape changed. We have to change with it. We don’t have a certain lifestyle as our birth right.” This kind of fatalism, that we can’t do anything to fix our problems and therefore shouldn’t even bother trying to understand them, is itself a fundamental cause of our problems! If you are going to vote intelligently, so that our country moves in an intelligent direction, then you need to spend time to understand our problems and what decisions created them.

    On the other hand, when we the voters don’t educate ourselves, then we end up with pandering politicians proposing counterproductive initiatives like the summer gas tax vacation. This is exactly the kind of really stupid economic policy decision that has created this mess. Are we going to learn from the past and make better decisions in the future?

  49. Dan Isaacs says:

    Good points Sam.

    As for “most economists” agreeing that a consmption tax is better…care to share which ones not working for obscure GOP candidates they are? If anything, it’s universally understood such a tax would be regressive, and fair only to the top %5 or so of income earners.

    And getting rid of the exemption for mortgage interest? Ha! if you want to see a revolution, go ahead and try that.

    And while I agree it would be nice to make colleges entirely merit based (had too much of the way dumber than a plumber “business” majors in my time), without a manufacturing economy for the unskilled to become good taxpayers I fail to see how our society would continue to function.

  50. I think the real problem of inflation lies in the inflation of our expectations.

    Sure, in the information economy, you need a college degree to get a good job.

    But in the past, state schools did not have multiple gyms, rock climbing walls with certified instructors, multiple dining halls, etc. Heck, not every dorm had air conditioning when I was in school (as late as 2004)! In order to compete for the best students, State U. is trying to scale up its services and retrofit older buildings to have all the modern multimedia amenities. College is less and less about education and more and more about “lifestyle.” Consider, too, how many students choose to live in the dorms or apartments, even when mom & dad are within a 30 minute drive of campus.

    And to Harpo — 3500 square feet on a golf course can hardly be called “modest.” Expectation inflation.

  51. prices of necessities — food, shelter, fuel, clothing, health care, education — have all become orders of magnitude more expensive over my lifetime, so far. have wages increased by a like amount? hardly, though taxes nearly have.

    price of discretionary items like TVs, iPods, home computers, cellphones — many of these things did not exist when I was born in 1962 — have plunged and there are far more types and functionalities for discretionary items now than then. why aren’t a pair of Chuck Taylor sneakers $1 instead of $44 consider that they’re now made in a slave-wage country instead of the US? you had to pay $4-500 for a freaking calculator in 1971, now they’re basically disposable; same thing for cellphones ca. 1990 vs. today.

    price of US 1st-class stamp in 1962: four cents. now, soon to be 42 cents.

    no, I don’t have a point. I’m just mad.

  52. Large Talons says:

    It is generally accepted that economists tend to favor a consumption tax over productivity taxes (the income tax). A decent discussion of consumption tax can be found here:

    http://www.pbs.org/newshour/bb.....n_3-3.html

    And quoting from a money magazine article:

    “The FairTax is what economists call a consumption tax, and the basic economic rationale for it is the same as for all such taxes. It is designed to make saving and investing more attractive to people and companies, which most economists think would spur economic growth as people plow more cash into starting businesses, building factories and so on. With the FairTax you’d get taxed only when you spend money on retail goods and services.”

    http://money.cnn.com/2005/09/0.....ntax_0510/

    Saying that a consumption tax is “universally understood” to be regressive and fair to the only top 5% is just smoke and mirrors. While I agree that in theory such a system would tend to be more regressive than the current system, it all depends on how it would be structured. It could very easily be written as a progressive system. It also depends on what you consider to be unfair. Is taxing the middle class at 25-28% while lower income people pay no tax and actually get paid for having kids “fair”? (stimulus payment) I’m not saying I’m in favor of raising taxes on the poor, but I don’t think you can argue that our system is “fair” by its very definition.

    I agree that people freak when you even mention touching the sacred mortgage interest deduction. I just don’t believe that taxing us in order to subsidize the mortgage industry, lure people into life long debt, and artificially inflate housing costs is in the American people’s best interest.

    Why would paying for college destroy the manufacturing industry? There are plenty of people for whom college is not a reality or even desired and whose abilities tend toward the trades. I’m not saying everyone would go to college, but I do think we should be willing to send those of us to do desire to pursue an education. It astounds me that we would rather pay people not to work. And as for state schools competing on services, I’m pretty sure a paid tuition would be a relatively lucrative selling point.

  53. Harvey says:

    Part of the cost of housing is brought on by government being more involved with more codes and lot size min housing size etc,when I built my first house on seven acres in the early 60′s I did all the work including wiring ,plumbing, etc and there were no permits of any kind and I built it as I earned the money and it was paid for in a little over two years, a small brick house, can’t do that today because of government involvement.

  54. Shouldn’t we take the actual quality of health care into account? Just as we adjust prices based on inflation of the currency, we should adjust health care costs based on the “inflation” of health care standards. To put it in another way, would any of you pay 74% less for 1970-quality health care? I’d imagine getting an open-heart surgery in 1970 would be much more risky than today where it’s simply a routine surgery.

    So health care is much more expensive, yes. But most people forget that health care is also much better.

    Unfortunately there probably isn’t an easy way to index the quality of health care to get a better picture of this.

  55. as per jj’s comment, i’d argue the other way…the inflation measurements compare the price of say, meat, today compared to a past date. well, today the quality of meats are down and full of antibiotics, water, hormones, etc. so they should really compare the price of, say organic chicken, to the chicken of 1970. if they did this, inflation numbers would be much higher. really the quality of everything today, minus electronics, is much worse than then

  56. The spending for housing seems most concerning for an economy, because it seems like there would be a link between the FED. The economy sinks, we lower rates, everyone buys a house. Economy does a little better, and housing market goes up. Isn’t that a gradual elevation of the middle class that leaves lower class behind? I guess I’m saying, looks like we depend on the FED to bail out the economy, the middle and upper class can afford the ticket to cruise up the class system but the poor cannot. Maybe that’s where the middle class went? Does that make me a commie?

  57. I’d like to make call to replace the word “whining” with “fact-finding” in this thread. This is not about “whining” this lecture is about analyzing the shift American landscape.

    Yes, part of the problem is the US desire for “bigger” everything and the inability to live within ones means. This goes back to one of Jonathan’s older posts that looks like it’s pulling data from the same source. The average male salary stays the same. Is this bad? No, it’s expected. To support some other posters however, the quality of life has (in many ways) drastically increased. Better healthcare, cheaper airfares, safer & more fuel efficient cars, better communications tools (long distance, internet access), reduced “overhead” on many things (banking, paying bills).

    So yeah, we’re “blowing our raise”, but there’s more to it than that and it’s not just whining. The other thing happening is a shifting of risk. Employer pensions are disappearing, more employees risk. Jobs markets are less stable year-to-year, increased employee risk. Employers are providing less healthcare funding, increasing employee risk. Hospitals are providing shorter terms of care, increasing the risk for employees with family. Average commute times are up, more risk and more time consumption required (thank goodness we don’t have to get to the bank, we don’t actually have time). More education costs are required AND cost of education is rising faster than inflation, more risk for anyone with kids. The government keeps printing more and more money causing a rise in taxes and inflation, more risk for average people.

    The point here should be pretty clear. It’s just our rise in personal spending, it’s a big shift that’s putting more risk into the hands of middle-class people.

    So you want solutions?
    Public healthcare: like Canada. Healthcare is not elastic, so treating healthcare like a “free market” is just foolish. Public healthcare will reduce overhead. It will provide for “standards of care” that you can actually vote on. It gives you incentive, as a country, to promote healthier lifestyles for everyone’s benefit.
    - Free Merit-based colleges: let your smartest kids go to school, regardless of their ability to pay. This will help you compete in a global economy and it will reduce the burden on parents. Better yet, accept the new reality and provide better accelerated programs. Most students in the Ukraine graduate at 16 knowing “first-year calculus” (I’ve met several of them). Oh yeah and dump the dorms. Most of the numbers I’ve read point to students spending more on housing than on courses.
    - Fix the retirement system: IRAs, 401ks, Roth variants, it’s all complex and kind of crazy. Make it easier for average people to save for retirement. Pensions were a good way to do that, you just got companies to save for people. But they’re basically gone now. And people have to read blogs like this one just to figure out the details of retiring. It shouldn’t be this tough or weird.
    - Reduce government overhead: with the goal of reducing taxes. Start with the IRS (think flat tax), take a hard look at the DoD.
    - Find a way to “de-urbanize”: the whole “suburbia” thing is killing the middle class. It’s astounding how much waste is involved with moving around large hunks of metal and powering buildings that are only used for half of the day. Living “in a city” and yet still requiring a car just seems absurd to me. The whole point to these “population centres” is to bring things closer together.

    (I have a few more suggestions about federal reserves and teaching economics to the masses, but those are best reserved for later)

  58. “76% increase in home mortgage payments . Surprising, the actual house size didn’t grow that much based on number of rooms (5.8 vs. 6.1). I wonder if this would hold true if it was based on square footage, however, as my research on that indicates a big increase in size.”

    I think you’re on to something with that. When I compare my parent’s “starter home” (which I grew up in) with the starter home of today, it’s easy to see how the cost of housing has gone up so much.

  59. hey, Large Talons let me know when you run for president because you have my vote.

  60. somnolence says:

    Believe me, no home that is 3500 square feet is a “modest” home.

  61. eyewideopen says:

    Yep, and if she bought an Iphone she would have been paying oodles of money for a high tech item. Back then her calculator was a new hand held high tech item. How dumb can these people be?

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