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WHY do many middle-class families now struggle to get by on two paychecks, whereas most got by on just one back in the 1950s and ’60s?Frank cites other factors, too (housing bubble, credit bubble). It would be interesting to see an estimate of how much the bidding war for suburban schools has contributed to the increase in Frank's toil index.
The answer, according to “The Two-Income Trap,” by Elizabeth Warren and Amelia Warren Tyagi, is that many second paychecks today go toward financing a largely fruitless bidding war for homes in good school districts.
Parents naturally want to send their kids to good schools. But quality is relative. Because the best schools tend to be those serving expensive neighborhoods, parents must outbid 50 percent of other parents with the same goal just to send their children to a school of average quality.
How hard is that? I constructed a measure I call the toil index. It tracks the number of hours a median earner must work each month to earn the implicit rent for the median-priced house.
From 1950 to 1970, when incomes were growing at about the same rate for families up and down the income ladder, the toil index actually declined slightly. But since 1970 — a period during which income inequality has grown — the toil index has risen sharply.
[snip]
From a postwar low of 41 hours a month in 1970, it rose to more than 100 hours in 2005.
December 31, 2011
I remember, a few years ago, reading an estimate of what would happen to home prices in Westchester County if the state adopted a voucher system. A large drop, as I recall. Very large.
When I was a child, my dad, a farmer in central Illinois, was able to support a wife and four children. He didn't buy health insurance because he figured he'd come out ahead paying doctors out of pocket, and he was right. He put four children through college without loans.
Why are things different today?
Why has the cost of houses, health care, and public schools risen at above-inflation rates for decades?
That's what I'd like to know.
46 comments:
Have you read the Two-Income Trap? I recommend it highly.
You can also watch Elizabeth Warren on youtube: here's one of her videos:
The Coming Collapse of the Middle Class
You can skip the first 6 minutes of the above video. It's just intro.
I still haven't after all these years!
However, I've just discovered that the book is available on iBooks, so I've downloaded the sample chapter-will go from there.
In California, a large portion of the problem is due to constraints on the for-sale inventory because of Prop. 13. Many empty-nesters who elsewhere would downsize don't because moving would result in a huge increase in property taxes. I live in a neighborhood of 4 BR, 2500 sq. ft. houses built in 1988. Most of the houses are still owned by the original owners even though their children have long since grown up and left. Pretty much the only time anyone moves is if they absolutely have no other choice (for example, our house was an estate sale).
Those empty-nesters can move anywhere in the same county and take their pre-Prop 13 tax base with them, as long as their new house is appraised at the same value or a lower value than their old house. It is simply a fallacy that Prop 13 keeps retired people in too-large homes that they do not want. It doesn't. Instead, people stay in their too-large homes because they like them. My own wealthy in-laws own two houses with nine bedrooms in total--they are perfectly comfortable owning this much space, and have no thought that a younger family might like that real estate.
I think props 60 and 90 addressed the issue of retirees moving.
http://boe.ca.gov/proptaxes/faqs/caproptaxprop.htm
-Mark Roulo
I can't speak for 1950-1970, but in the 1970s when I was growing up, middle class families were like this:
- multiple children; children of same sex shared bedrooms
- children wore hand-me-downs, Sears Toughskins, and sometimes clothes sewn by Mom
- you might get new clothes at the beginning of the school year and a new fancy outfit for Easter.
- for Christmas, there was one big toy and several smaller toys. The big toy was something like a bike.
- there was one TV in the house, and the family watched what Dad wanted to watch
- shag carpet, wood paneling, linoleum
Nowadays:
- fewer children; each child has his own giant bedroom with his own TV, computer, cell phone, iPod, iPad, ...
- children wear designer labels and heaven forbid they should ever have to wear used clothes, even the babies
- Christmas involves multiple large presents
- multiple flat screen TVs throughout the house
- travertine, granite, designer surfaces
Our expectations of how a "middle class" family "should" live have risen enormously in the past 40 years, so of course we can't do it all on one salary anymore.
Affordable housing is limited by the community's planning & zoning board.
Have to agree about seniors in large homes - no incentive to downsize since they don't want to pay the realtor the large (in their mind) commission, and they get a 50% reduction in property taxes. My in-laws also have two homes which are quite affordable due to the property tax setup. I'd be in a bigger home too if I could get the reduction. Most folks I know who earn middle class wages and are in a larger home have done so by buying enough property and managing it to get the agriculture exemption.
There is no "middle class". There are just categories: single, with or without kids, and married (or living together), with or without kids - one income or two. The middle class was gone by the end of the 70's. It's discontinuous with no slot that can be called middle class.
It's not our expectations of middle class that have risen. It's the cost of housing that has risen. Most can't buy a house without two incomes. If you are married (with kids) and have one income, that income has to be much higher for the same kind of house of a generation ago. It takes a much higher income to fit the image of the old middle class.
It's a trap in the sense that the dual income tepmts you to spend more, but opens you up to more job loss risk, especially if your house is not increasing in value. Having two incomes is not a trap. Buying a house can become a trap.
It's not just a toil index. Someone should define a risk index. The cost of TV's, computers, and Ipods are almost meaningless. It seems that either times are good or times are really tough. There is no "middle" ground.
To the Anonymous who commented about today's "luxurious" living standards:
This is exactly the point of view that Elizabeth Warren takes on in the Two-Income Trap. She examined middle-class families who were going bankrupt.
She thought, as apparently you do, and as many people did at the time, that she would find people wasting money on luxuries, but that's not what she found at all. Families were being bankrupted by housing costs and medical bills.
All our luxuries of today are nowhere near the money-sucker of our houses.
I watched the Elizabeth Warren video. I was left wondering if current families had the same buying habits as the previous generation, would they be able to make it on one salary.
For example, while the cost of cars has gone done, most families now have to have 2 cars instead of one. While food costs have gone down, what about if families bought and cooked food, could food costs be even less? Also families spend less on electronics than in the past, but could we decrease it even more (ie each family only having 1 television, no x-box, etc.).
My guess is that it would still be very hard because health care and housing costs have gone up so much.
I'd say so, Genevieve. We have one TV (in fact it's the only one we've ever bought, previous ones were hand-me-downs), no Xbox or whatever, we cook from scratch, etc. etc. We have always tried to buy used cars and pay in cash. Our kids wear a lot of hand-me-downs. Most of my friends are the same. But house payments and health care are killing many of us.
In California, a large portion of the problem is due to constraints on the for-sale inventory because of Prop. 13. Many empty-nesters who elsewhere would downsize don't because moving would result in a huge increase in property taxes.
oh gosh, yes
Back when we lived in Studio City, everyone (including us) built new additions onto their houses instead of moving.
All our luxuries of today are nowhere near the money-sucker of our houses.
Right.
Again, back in Studio City, we called it being "house poor" -- that's what everyone called it.
Trouble is, I'm still house poor today.
Then there are the -- is it 25? -- of homeowners who are underwater.
I don't know what neologism to use for them.
House destitute, maybe?
Affordable housing is limited by the community's planning & zoning board.
you can say that again
Ed Glaser (sp?) has posted some interesting things on zoning & housing costs in MA. He says that young families are leaving places like MA (and I think NY) in droves because zoning keeps the supply of new homes down & prices up.
Our kids have shared rooms, and that's been tough: Chris, for years, slept with Andrew, who doesn't sleep because of his autism. For awhile we had Chris sleeping on the floor of my upstairs office.
They wear hand-me-downs, too.
We take far fewer vacations than my folks did.
Those empty-nesters can move anywhere in the same county and take their pre-Prop 13 tax base with them, as long as their new house is appraised at the same value or a lower value than their old house.
oh sorry - didn't know that
My question on stagnating incomes is always: what is income?
Are health benefits included in that figure?
Or does the expression 'stagnating income' refer specifically to wages?
In terms of disposable income, it doesn't matter, but I don't think there's any way for me to know whether incomes really have been stagnating without knowing whether benefits are or are not included in the figure....
SteveH said:
"It's a trap in the sense that the dual income tempts you to spend more, but opens you up to more job loss risk, especially if your house is not increasing in value. Having two incomes is not a trap. Buying a house can become a trap."
Husband is a realtor and made a nice income in the real estate bubble in Phoenix. We have been renters now for 5 years and I love it.
Property values in our town are still inflated and husband insists that a house is not a sure investment... "It's a roof. The days of the huge increases in home value are gone." So it could be a while before we ever buy again.
BTW, our current rental is a 4400 sq ft home in the foothills of the Rocky Mts. Because the homeowners bought at the TOP of the bubble, our rent barely covers their mortgage payments, but they have an emotional attachment to the house and would have lost money had they sold it when they moved. Instead, they hold on to it in the hopes that someday they'll move back from California.
Realtor husband says emotional attachment is a real problem in the biz, and that can also apply to a lot of middle-class things these days, like cell phones, televisions and iphones.
"Realtor husband says emotional attachment is a real problem in the biz, and that can also apply to a lot of middle-class things these days, like cell phones, televisions and iphones."
My brother bought a home from a family that had hit unemployment, and I think that was true for them--they had hung on to the house for far too long. Bro offered them cash for some of their furnishings, but they preferred to rent two storage units for the stuff instead.
Cell phones & TVs aren't the problem; we've had deflation in those prices (right?)
Not just deflation since the crash, deflation period.
We've had high and sustained inflation in health, education, and housing.
(Please correct me or add to this if I'm wrong!)
People are emotionally attached to their homes and their possessions because they are people!
My question really has to do with affordability (and the toil index, or whatever you want to call it): why was it OK for my parents to be emotionally attached to their home while it's not OK for me to be emotionally attached to my home?
(Not OK financially, I mean.)
It's not our expectations of middle class that have risen.
Well, according to Frank that's not the case; our expectations have risen.
Assuming he's right, two things have happened: health/education/housing has become much more expensive in terms of how many hours one must work to pay for them AND our expectations of housing, at least, have grown.
for a contrary opinion on warren's 2 income trap, start here:
http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/
http://www.theatlantic.com/business/archive/2010/07/more-weird-metrics-for-elizabeth-warren/60351/
short version of the argument against warren's argument is from todd zywicki: dual incomes hit a two income trap in taxes that is huge, while health insurance, mortgages, and other costs declined as a percentage of income. his analysis, quoted by mcardle, includes this:
n fact, for the typical 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income is $22,374.
Although income only rose 75%, and expenditures for the mortgage, car and health insurance rose by even less than that, the tax bill increased by $13,086 -- a whopping 140% increase. The percentage of family income dedicated to health insurance, mortgage and automobiles actually declined between the two periods.
"... paying 33% of its income is $22,374"
Aren't you talking about the federal marginal tax bracket? They don't pay 33% of their entire income in taxes. Tax charts put them barely into the 31% marginal tax bracket in 2000. They are mostly taxed at lower rates.
If you go to two incomes, expenses as a percentage of total income should naturally go down, but is that a fair comparison? What do the percentages look like when calculated with just the larger of the two incomes? The second income comes from extra work. It's not free. If you add the income of a teenage child, then the percentages would go down even further. You should use percentages of hours worked.
However, if one of the incomes is much smaller than the other, then it can be viewed as being taxed at the marginal tax bracket of the larger income. The net additional income, after taxes, day care, car expenses, extra food coses (ordering pizza!), might not be worth the added stress.
From various sources readily available by googling...
Average family size has decreased by about 20% since 1970, while the square footage of the average home has doubled. Do we really require 2.5x as much space each as we did in 1970?
All of that extra space costs more in taxes, heating/cooling, cleaning time, ...
The percentages are from Warren. Zywiki did the math to convert them to dollar values. I have no idea what taxes Warren included, but the percentages look reasonable if everything ( state and federal income tax, sales tax, property tax, ...) is included.
-Mark Roulo
"In fact, for the typical 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income is $22,374."
The 2000's family is said to bring in a total salary of $67,800. $22,374 is exactly 33% of that number. The mortgage payments are said to be $9000 and I would assume that most of that is in interest payments. You need to subtract that from the gross income, along with other deductions, like property taxes!
So, of course families that bring in more money are in a higher tax bracket. Of course you get less from working more after taxes. There is nothing new about that. That's part of the tax code.
First, a complaint is made about percentages:
"The authors present no explanation for why they present only the tax data in their two examples as percentages instead of dollars."
And then percentages are used:
"The percentage of family income dedicated to health insurance, mortgage and automobiles actually declined between the two periods."
The percentage of fixed costs should go down as incomes get larger. They can't use that to imply much of anything. The issue is being turned into an attack on taxes.
Don't expect me to board either of their busses. There are political agendas here, and I really dislike team politics and analyses. If they want to make a case about income tax brackets or total taxes paid, then they should do so directly.
It's not our expectations of middle class that have risen.
"Well, according to Frank that's not the case; our expectations have risen."
This is a definition problem. If both parents are working, do they feel that they are just average middle class? Perhaps after they are saddled with a big mortgage, they think they are just average. So forget labels and look at some kind of effort or toil index.
Part of the problem is fixed in the graduated tax code. Some even argue that if the smaller of the two incomes is quite a bit smaller, then the extra effort of the second job does not outweigh the extra expenses and the marginal tax bracket. This would indicate that you can't use some general toil index. The toil index should reflect the graduated tax code and how each income benefits the family. Each extra net dollar a family makes requires more toil, by definition.
The feel of toil seems to be non-linear. It feels much harder once you get past 40 hours per week. It also feels harder if both parents are working and there is more stress at home - things aren't getting done around the house.
It's also not a continuous function. You can't pick how many (and which) hours to work. You either work or you don't. A small salary on top of a large one benefits less than two equal salaries. I think the key issue (trap) is the need for both salaries to qualify for a mortgage. This is more of a trap nowadays because there is less guarantee that housing will continue to rise in the short term and that more job risk might force you to sell and move.
The long term benefits of leverage in home ownership is unquestionable, but the short term risks are higher. The trap is that once you make the nonlinear jump to two incomes, you can qualify for a larger house. However, if the house will increase in value, then the leveraged investment can really pay off over the long term. The down payment on our current house has turned into a property that is worth 40 times more than that after about 30 years. (We couldn't afford to move to our town nowadays.) Of course, we had to pay for the house and pay interest, but the interest comes off at the top of our tax bracket. Every year, I always look at the difference in taxes before and after our deductions. It's huge.
So what, exactly, is the problem? Is it the tax bracket? That's nothing new. Is it government spending? One could make a case for this - that the governmnt's idea of middle class (and poverty) has risen.
Is it the cost of the house? If it is a proper investment, it should go up in value over the long term. That it doesn't is a risk issue - and a potential trap.
Health care and college costs are problems. So are energy costs. To me, however, the key issue is risk. Buying a house requires two incomes now much more than 40 years ago. This discontinuous jump in income make one feel anything but average middle class. It also encourages buying a larger house. Gone is the traditional middle class. Families with one income can't possibly compete with two income families. You are either above average or below average. Many two income families are very close to the edge, and buying fewer toys won't make much difference.
Average family size has decreased by about 20% since 1970, while the square footage of the average home has doubled. Do we really require 2.5x as much space each as we did in 1970?
This is the observation Frank makes.
Our ideas of how large a house should be have changed.
I assume the other problem is that we're aggregating data for the entire country.
I live in an OK house (not huge) in a town where my property taxes alone are now $24K --- the bulk of which go to the schools.
That kind of funding happens here because we have enough very, very affluent parents (and usually politically liberal) parents to keep voting taxes higher.
Cost of living on the coasts is high.
We couldn't afford to move to our town nowadays.
Ditto that!
We also can't afford to stay in our house, and, yes, I am emotionally attached to my house and 'my' town.
We've pretty much been taxed out of our home; our property taxes are now higher than our mortgage, not an uncommon situation.
The proportion of our taxes going to the schools has changed, too. Twenty years ago, half of property taxes went to the school, half to the town. Now it's 1/3 - 2/3 in a time of declining enrollment. Still the union and presumably most parents believe that the school is being squeezed: it needs more money.
We've had far-above-inflation increases in taxes and spending for a decade.
Is it possible to argue that we've had a bubble in housing prices and a bubble in college prices **and** that middle income purchasing power has not declined?
Here's McArdle: Among higher income families, much of the extra income has simply been poured into a bidding war with other higher income families for homes in good school districts.
That's McArdle, not Warren.
I'm pretty sure any real estate broker will tell you that house prices are heavily influenced by perceived quality of the local schools.
The perceived (or real) safety of the local schools is a major factor, too.
When public schools embrace 'radical inclusion,' there are economic consequences in terms of home prices.
A friend of mine said once that upper middle class parents are trying to buy their way out of urban inclusion, while rich parents then buy their way out of suburban inclusion.
I think there's a lot of truth to that.
If both parents are working, do they feel that they are just average middle class?
I don't know the fine-grained answer to that, but the not-fine-grained answer is that huge numbers of Americans consider themselves middle class.
I think the figure is as high as 80% (or was the last I checked).
That reminds me...I saw an interesting piece about people's money perceptions.....heck. Can't remember where or what now. It was interesting because it picked up inconsistencies in how people define terms like "middle class."
Broadly speaking, though, I suspect that Americans' tendency to think of themselves as middle class regardless of income probably still holds true.
It's a cultural definition as much as financial, I think.
btw, when I mentioned local voters who are "politically liberal," I didn't mean to criticize voters who are politically liberal - OR voters who are not politically liberal - !
I have the perception that voters who are left-of-center are more likely to support higher property taxes than voters who are right-of-center, but that may not be true at all.
Just to take one example, we now have 3 Republicans on our school board (majority of registered voters here are Democrats) & two of those 3 support higher taxes and spending.
The most liberal member of the board is the most fiscally conservative.
In terms of deciding whom to listen to, generally speaking I would choose an economist over an attorney. (GENERALLY speaking, not always.)
In terms of choosing which attorney to listen to, Warren or Zywicki, I don't know. Both specialize in bankruptcy law, it seems.
One of the points that Elizabeth Warren talks about is that education has become more expensive for the middle class, not just because of the bidding war for houses in "good" school districts, but because kids need more years of schooling to get a middle class job.
The reasonably well-paid factory jobs that you could get with just a high school degree are pretty much gone now. If you want a decent job, you now need a college degree, which is very expensive (I'm sure I don't have to explain that!)
At the other end of schooling, most kids these days have at least one year of school (or day care) before kindergarten, which, again, must be paid for by the middle-class parents.
One of the points that Elizabeth Warren talks about is that education has become more expensive for the middle class
Right!
You can find videos from ...the 80s, I think (maybe the 70s), where people question whether college is "worth it" because high school graduates earn more than college graduates. I remember a steady stream of articles about well-to-do plumbers.
I'd love to see someone add up how much we all spend on credentialism -- and on remediation at the college level.
The country as a whole, and parents as individuals, are paying twice for what we used to pay for just once.
Is it Steinberg who has a passage about how his psychology department had begun to require a two-course sequence in statistics instead of the sole course they had required in the past?
He said that at first he was happy to see it -- and then he realized that they'd spread the same material across two semesters, and that the reason they had to do it that way was that students weren't well-enough prepared to take the old course.
btw, I'm a fan of Todd Zywicki -- once got in touch with him about a Dartmouth admissions officer who had been invited to speak here and who was apparently expected to endorse constructivism. (Long story.) I contacted Zywicki, who got right back to me & sounded utterly bewildered about what could possibly be going on that would cause a parent in a town he'd never heard of to be contacting a Dartmouth board member about a Dartmouth admissions officer.
I'll have to tell the long version of that story in a comments thread one of these days.
It was pretty funny.
I don't think people outside (or inside) California realize what Prop 13 has done. It has made old wealth and large corporations essentially untaxed, while the middle-class and small businesses pay enormous taxes.
For example, my house now has a Zillow estimate of about $750k (for a 2-bedroom, 1.5-bath house), but my property tax is just over $4k a year. Large landowners and businesses who bought their property a decade or more earlier than me have even smaller ratios (0.1% of property value or less). As a result, property taxes produce almost no revenue in California, and what they do produce comes almost entirely from recent home purchasers. Our schools are being financed now out of sales tax and income tax, and the consistent inability of our state legislature to fix the tax code means that the school budgets get cut year after year.
If your state is planning an initiative system like California's, resist it! Once an initiative is passed it becomes sacred, no matter how awful the consequences.
I was looking at a house for sale in Irvington. For $580K, you get about a half acre of land and a 1700 sq. ft. house, but the taxes are $9416. In our town (the lowest price house is in the $400K area), the same house would have taxes of less that half of that. However, our high school students are sent to the high school in the next town at a cost of less than $11,000 per student. Other struggling small towns have tried to get our students because below a certain size, school costs skyrocket. Irvington really needs to look at combining their kids with another town. In our town, this only happens for high school because parents want to keep their K-8 kids local. It costs a lot to do that - maybe about $25K per student. Our school budget also takes up two-thirds of our total budget.
Our town has been involved with comparing high schools over the years, and it's clear that below a certain size the costs go way up, but the sports, academics (number of AP classes), music, and activities go way down. Some people like small schools, but you pay a very big price for that, and I'm not just talking about money.
In my neighborhood, for $580-600K, you get a 2800-3000 sq ft house built either in 1920 or within the last 3 years, on either a 5000 sq ft lot or a 2000 sq ft lot. The taxes will be about $18,000 the first year, and about $15,000 the next, after your homestead exemption kicks in.
You'll be surrounded by a mix of old bungalows and new construction. The schools are not bad, but most people move out of the neighborhood once they have kids, or send their kids to private school.
The ZIP code contains 44 registered sex offenders out of 19,000 total population. Many homeless people camp nearby and will wander through the neighborhood at all hours.
But you can walk to work and to restaurants, which is a huge deal in my car-centric city with horrible public transportation.
The NY State Comptroller's Office publishes info on school taxes for each county. 2006 Comptroller Analysis
One of the common comments made at the school budget meetings (usually by someone who is a double income gov't union worker on a New York City wage scale) is that families should sell and move out of the area if they can't afford the rising school taxes. Looking at the data, it' s pretty obvious that just about everyone would have a very long commute to work in the midHudson region if they were to actually move to a rural county with lower taxes. We are taxed pretty high here.
I think the assessor's actions need to be considered too. I found a nice home in the school district I want to be in on a quick sale last year - $275K with an assessment of $450K. The assessor's office had no intention of lowering the valuation just because the fella wanted to not default. At $450K it was overvalued for the market, but it takes a few years for the assessor to agree to devalue. The tax difference is considerable..it was over $12K in property taxes so we didn't offer. It's cheaper to take talent search provider AP classes and distance learning than buy in to a school district that has them.
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