Will 2 Paychecks Be Enough in 2012? Ask Elizabeth Warren

Most "baby boomers" remember the days when mom stayed home to see the kids come home from school, while dad was still at work, working a 40-hour-a-week job to pay the mortgage and car payment. Since those days, a 2-income family has become a necessity...and latch key kids and daycare centers have become common in our society.

And with millions of adults currently unemployed and grappling for the same part-time jobs that teenagers now hold, it makes one wonder why Republicans like Newt Gingrich wants to abolish the minimum wage and child labor laws. Are they deliberately squeezing the middle-class?

Robert H. Frank, an economics professor at the Johnson Graduate School of Management at Cornell University asks in the New York Times, "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?"

One answer is, according to the book The Two-Income Trap: Why Middle-Class Parents are Going Broke (co-authored by Elizabeth Warren and her daughter Amelia), sending mothers to work has made families more vulnerable to financial disaster than ever before. (Amelia Warren-Tyagi is also a former McKinsey consultant).

The number of families declaring bankruptcy or receiving a foreclosure against their house has shot up dramatically. Presenting carefully researched economic data to support their arguments, Warren and Tyagi contend that, contrary to popular myth, families aren't in trouble because they're squandering their second income on luxuries.

On the contrary, both incomes are almost entirely committed to necessities, such as home and car payments, health insurance and children's education costs. When an unforeseen event such as serious illness, job loss or divorce occurs, families have no discretionary income to fall back on.

Today's two-income family earns 75% more money than its single-income counterpart of a generation ago, but has 25% less discretionary income to cover living costs. The cost-of -living has dramatically increased, especially for housing, food, and energy...the basics that aren't included in the government's standard for inflation (See my posts: Cost-of-Living Sham and The Cost-of-Living Keeps Us Unemployed).

And many second paychecks today go toward financing a largely fruitless bidding war for homes in good school districts. Warren and Tyagi point out that families buy homes they cannot afford in order to live in a neighborhood with better schools. Their one proposed solution: to institute a public school voucher system with wider choices.

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. Republicans want to de-fund public schools and privatize them. Some want to eliminate the Department of Education completely.

A decade ago, in another book that Elizabeth Warren co-authored, The Fragile Middle Class: Americans in Debt, the authors had warned "A sizable portion of the U.S. middle class, far more than pundits acknowledge, teeters on the brink of economic failure." (Elizabeth Warren also co-authored As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America)

Included in their interviews were teachers, accountants, computer engineers, sales clerks, executives, entrepreneurs, doctors and dentists...solidly middle-class folk who fell into financial disaster. Employment problems such as layoffs from out-sourcing or automation, "skidding" to a lower-paying job, and part-time work, were the biggest factor - - - as was the overuse of credit cards, just to make ends meet.

They also cited un-payable medical bills (healthcare insurance and high cost of healthcare), loss of income from illness or accident, the financial burden on single-adult households that result from divorce, and home buyers purchasing more than they could afford...sometimes because they didn't understand adjustable rate mortgages, or they under-estimated their job security.

The economic professor, Robert H. Frank, constructed a measure that he calls "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.

The increase in two-earner households explains only part of it. The climb in the toil index was also driven by the easy credit that fueled the housing bubble, as well as by an expenditure cascade in housing caused by growing income disparities.

Since 1970, the top 1 percent have captured most of the income growth in the nation. Like everyone else, the rich spend more on housing when they have more money. High-end houses become bigger and fancier. That shifts the frame of reference for the near rich, and so on down the income ladder.

Because the median hourly wage, adjusted for inflation, has been falling, there’s really no other way to explain why the median new house built in the United States in 2007 was about 50 percent larger than its counterpart in 1970.

The increase in the toil index has been spectacular. From a postwar low of 41 hours a month in 1970, it rose to more than 100 hours in 2005. Although it has fallen somewhat since the housing bubble burst in 2008, the middle-class squeeze persists.

Growing income disparities don’t just make the 99 percent angry. They also raise the cost of achieving basic goals....like paying for food and rent, never mind a bigger house, a newer car, or their children's college education.

Elizabeth Warren is running for the Senate in Massachusetts

Her website http://elizabethwarren.com/