Chatper Seven: The Financial Fire Drill

The final chapter of the book serves as a list of advice to families in danger of falling into the two income trap. They suggest that families should read up on financial planning and begin preparing for possible disasters. They call this list the "Financial Fire Drill" in honor of firefighters who advocate preparing for fire before the fire actually occurs.

The first item on the checklist is to make sure your family can survive without one income. If the family cannot, then they have some work to do.

The second item is to make sure the family can decrease their fixed expenses in case of financial trouble. If your family is forced to cut back on "frivolities" now, then there will be nothing to cut if financial disaster occurs. Families should actually look at cutting their fixed costs (cars, tuition, health insurance, mortgage payments) first. If a family has to scrimp to pay for a home, they cannot afford that home. Of course, this means families are free to spend extra when they aren't in trouble.

The final item is to create an emergency backup plan. Determine what you would do and how you would pay for it if they unthinkable should occur. In particular, they suggest decreasing the amount of time you spend paying off long-term financial commitments and purchasing a disability insurance policy or a long-term care insurance. Finally, they tell families to be very careful not to buy insurance that doesn't actually help, like credit insurance.

The last bit of advice applies to those already in financial trouble. The authors tell families not to blame anyone and to be very careful not to take frustration out on their spouse, lest they destroy their marriage. They reassure families in debt that there are millions out there in the same position they are currently in. They also suggest to these families to look at their expenses and decide which one they want to keep the most. For example, if families decide health insurance is the most important, they should be willing to sell the house. They suggest that if families cannot pay off their debt within two years, they should wait until the financial crisis has for the most part passed and then declare bankruptcy. Finally, they tell families to make SURE that they do not reassume debts the bankruptcy allowed them to eliminate. Companies will try to get you to pay back these debts you no longer owe. They tell families to remember that these companies took a risk loaning money to you and they deserve to pay the consequences; you do not owe them anything.

The authors do not suggest that one spouse quit their job and remain at home. Rather, they suggest that if both parents work, families should use the extra income to prepare for disaster and increase wealth rather than spend both incomes on fixed income. They also suggest that families seriously look at the idea of not having children and make sure to consider the cost of having children before they choose to have them.

The end of the book focuses on the last group the two-income trap harms: children. Children are torn apart by bankruptcy much like they are torn apart by divorce or any other major family disasters. If anything, the children affected by their parents' bankruptcy are even worse off because there is no community to support victims or children of victims of bankruptcy.

The authors end the book by urging readers to follow their suggestions to make a difference and save the families who play by the rules by destroying the two-income trap.

Chatper Six: The Cement Life Raft

The chapter begins with a personal anecdote from Elizabeth Warren's life. In 1998, Elizabeth was called to the White House to meet with then First Lady Hillary Clinton about a scathing editorial Elizabeth had written denouncing a bill aimed at undercutting bankruptcy protections for the middle class. After thirty minutes with the First Lady at lunch, Elizabeth had explained the entire bankruptcy system and what the current proposed law would do to it. By the time she finished, Mrs. Clinton was convinced that the bankruptcy bill would do more harm that good. The First Lady managed to get the entire Clinton administration to revoke their support for the bill and her husband vetoed the bill when it crossed his desk a few months later. However, a year later the bill was re-introduced under the Bush Congress and this time, Hillary voted in favor of the bill.

The authors now begin to explore how the unregulated lending industry has affected the average middle-class family. Obviously, the amount of debt the average middle class family is in has increased substantially over the last decade. The authors attribute this increase in debt to the deregulation of the lending industry. Twenty years ago, families did not have as much debt because they could not get as much. Since the lending industry was limited as to how much interest they could charge, they only loaned money to people they were sure could pay it back. Nowadays, banks can "export" interest rates from states with high interest caps to states with low interest caps. States would raise their interest caps to attract business, and suddenly banks and credit card companies were essentially unlimited as to how much interest they could charge. These higher profit margins allow banks to lend to everyone--even people who will not be able to pay them back.

Statistics show that Americans are bombarded daily with numerous offers to get more debt. Most Americans do not use this debt on frivolous "stuff." They use it to try to get ahead in the two-income trap bidding war. They use it to pay for groceries while Dad is out of a job or to cover health costs until something changes. It is certainly true that all of this credit card debt causes more people to go bankrupt--a third of bankruptcy filers owe more than an entire year's salary in credit card debt. The authors argue that although these families did try to live beyond their means, it was only because they did not see the unexpected tragedy in their futures or wanted a better life for their children.

The authors also blame high mortgage rates on the deregulation of the lending industry. Banks allow families who cannot afford houses to purchase mortgages they cannot pay back. Before deregulation, banks would not allow home buyers to purchase a home if they could not put down a 20% down payment; now, banks could care less. The people who cannot make a down payment are the people the banks charge the highest interest to. If banks foreclose on the home, they can then sell the home at auction for an even larger profit. Finally, banks have come up with the idea of a "subprime" loan, a loan with 10% more interest that is offered to families with poor credit scores. They claim that these subprime homes increase the number of homeowners, but the facts simply do not support this claim. In fact, it is possible subprime loans lower the number of homeowners because they increase foreclosures so much. Finally, these subprime loans are often paid by people who would have qualified for the much cheaper conventional mortgage. These people, often minorities targeted by banks, are often unaware of their options and get sucked into the much more profitable (for the bank) subprime loans.

Most people nowadays believe that debt has increased because people simply do not work as hard or have the same values as they once did. These authors propose that the real increase in debt is because the lending industry itself has changed. Most credit card companies actually target those who fall behind on their loans because that is the group from which companies receive the highest profits. Elizabeth backs this up by telling the story of the time she went to advise Citibank (the largest credit card issuer) on how to increase its profits. She suggested that they stop loaning to people who are already in financial trouble. The highest ranking executive told her flat-out that her idea was unacceptable because those are the people from whom they receive the highest profit margins. In short, debt has increased because companies target the people least likely to be able to pay them back and then charge them exorbitant interest they cannot afford on top of repaying the company. Companies make people pay by constantly calling them and (falsely) promising the send the "repo man" after them. Companies often threaten measures they are not even allowed to take to force people to pay up (like going after families of the deceased who do not owe the dead person's debts but often end up paying it anyways).

The authors suggest that the way to fix the entire problem would be for Congress to pass a bill either creating a federal interest limit or forbid states from overriding one another's interest rates. Congress even could tie the interest cap to the inflation rate to prevent a bank crash like the one of the late 1970's. It would not cost taxpayers anything and all the changes the lending industry has undergone in the last thirty years would slowly reverse themselves. Right now, the credit industry is uneven because not all people have the same access to credit information. Re-regulation the lending industry would give all people the chance to be safe even if they did not understand the concept, much like how the federal government currently regulates consumer products from toys to cars for safety reasons. Re-regulating the lending industry would cause foreclosures, credit card debt, and house prices to decrease, prevent money from shifting away from middle class families to credit card executives, and eliminate lending abuse. Some might argue that regulation would decrease the amount of families who could access credit. The authors point out that since the original idea of allowing more families access to credit was to increase these families financial opportunities and the deregulation of the lending industry has actually decrease financial opportunity and security, it only makes sense to regulate the industry once more. Lawmakers will never be able to keep with lending abuse practices on a case by case basis. It is time to eliminate the chance for lending companies to abuse borrowers once and for all.

The authors finally return to the bill with which the chapter opened: the bill to change bankruptcy regulations. Originally, Congress created a commission to explore why so many more people were going bankrupt. The Committee (which Elizabeth advised) gave the same reasons as this book for the increase in bankruptcy and suggested that the bankruptcy laws be kept the same. However, the banking industry lobby pushed for Congress to reduce the number of bankruptcies by making it harder for consumers to file for it. This would of course help the lending industry immensely--now they could decide when to let customers off the hook for debt, even if the day never came. The bankruptcy bill proposed would increase profits for the entire lending industry and the lending industry poured millions into political donations to get it passed. They tried to get the American people behind the bill by claiming that it would save Americans $550 a year in bankruptcy taxes, something that could never realistically happen.

The true twist in the story is how this "awful bill" was stopped. It was actually stopped by women who were pro-life. Pro-choice groups often sue pro-life protestors and win thousands of dollars in reparations. The sued then declare bankruptcy and have the fine nullified. Pro-life women organized to keep the option for these people to declare bankruptcy alive, so that protestors would not have to pay hundreds of thousands just for protesting what they believed was morally unjust. The bill became a battle between pro-life and pro-choice groups, and the pro-life groups built up enough momentum to kill the bill.

The authors include this as an example of what would happen if all the groups harmed by the deregulation of the lending industry banded together to demand change. If predatory lending became the number one issue for hispanics, African Americans, women, and other groups, they would see the same amount of progress they currently see in battling discrimination. If all groups band together like some current faith groups (Jews, Catholics, Unitarians) to battle predatory lending, eventually they will succeed in eliminating the two-income trap.

Chapter Five: Going It Alone in a Two-Income World

This chapter covers the risks and hardships faced by single parents raising children in a two income world. It starts out by exploring ideas other groups had held in the past on the extent of the problem for single mothers and the best way to solve it. They examine the idea proposed by the women's rights movement that mothers should get a strong education so they can receive a high paycheck and be able to support themselves if their marriage collapses. Millions of women have followed this advice to the letter, going to college and seeking equal-paying jobs in the workplace. Although it may not seem like it because the general media tends to focus on low-income single mothers and all of their problems, middle-class single women have actually made significant strides. Today women can expect equal pay in almost every workplace. In addition, women are actually more likely to graduate high school and college than men are. Women are common in high profile jobs like attorneys, supervisors, university professors, and corporation board members. As if this weren't enough, women have also made strides in making sure ex-husbands pay child support. Women are now allowed to garnish child support directly from their ex-husbands' wages. Overall, the advice of the women's rights movements have been followed exactly.

However, it hasn't made any difference. Middle-class single mothers are now less financially secure than they were 25 years ago. They are now the group most likely to file for bankruptcy, be behind on their payments, and lose their homes. These women in danger are middle class and over thirty and have college degrees, houses, and good jobs.

Why are these women in the most danger? They are the ones likely to have the debt they cannot afford. These women are the ones likely to have houses they could barely afford with two salaries and now cannot afford at all with one. In addition, these women are the ones who are most likely to fight to keep these homes to try to ensure stability for their children. However, if both paychecks were committed to just staying afloat in the first place, there is little chance a single mother will suddenly be able to afford to keep the family fed, pay the mortgage, and cover all the legal fees and property losses from the divorce. These women cannot cut back by eliminating other necessary bills such as the car, college, and health insurance. They have no place to turn when the average single mother now has 4% discretionary spending from the pre-divorce income. All of these numbers do not even account for the women who remain tied to their husband's debt and are forced to help him pay it off if he goes bankrupt. These women have no choices to cut back in a world where they must compete with families earning two incomes. In short, the average woman who divorces or even splits off from a long-term partnership today starts out her single live in dire financial peril.

Many groups advocate that the best solution to the single mother's problem is to make the dad pay more. However, this solution does not stand up when scrutinized. Most dads today already pay exactly what the courts required them to pay. The ones who don't are the ones who have not yet filed for divorce or who live below the poverty line. The authors acknowledge that "Share the Pain" laws that force women and men to live at an equal economic level post-divorce are a good idea. However, when looking at the numbers, the authors show the laws would only aid, not save, women. They also dismiss the idea that fathers should share joint custody, pointing out that this idea forces both parents to pay for middle class privileges and the women often get less overall child support. Their research supports that divorced middle-class fathers are also extremely likely to file for bankruptcy (which incidentally will not forgive their alimony debts).

The authors offer a solution of their own, since the common one suggests that women get more money from men that are already tapped out. They believe their suggestions for eliminating the two-income trap (public education vouchers, encouraging personal savings) would also save single mothers. The only suggestion they make for legislation aimed directly at single women is government subsidized childcare for single women. The authors suggest that legislation attacks the problems single women face at their source: the state of their finances pre-divorce.

Chapter Four: The Myth of the Immoral Debtor

This chapter tackles the myth that debtors are, by the standards of the "past" when people always paid their debts, immoral. At least a few conservatives claim that debtors do not pay because they do not want to and then use bankruptcy as a "get out of jail free" card. This chapter delves into detail whether American debtors seek to "cheat the system."

The numbers do not corroborate the prevalent public opinion. Of the 1.5 million families that filed for bankruptcy in the year they studied, 16 million more who could have significantly benefited from filing were trying to get by without it. In addition, the people who had filed for bankruptcy reported being extremely embarrassed and shameful after filing for bankruptcy. They filed because they had to, not because bankruptcy isn't a big deal anymore.

Financially and emotionally, bankruptcy is still a huge deal. Though the debtor is granted a reprieve, it is at a high price. Most of their assets are lost, their entire financial record is divulged, they are supervised by the courts for many more years, they will be forced to pay more for many common loans, and their bankruptcy will always show up when they apply for jobs. Though many may think that bankruptcy is now just an easy way out, that just isn't true. Families today are much father into debt (150%+ of income) and have struggled for much longer with debt than families of the past before filing for bankruptcy.

The authors further strengthen their claim by examining the issue of bankruptcy filers commuting fraud. It is nearly impossible for the average bankruptcy filer to even have to skill to commit fraud so competently that they can get away unscathed. The numbers simply do not support the idea that bankruptcy filing has increased simply because fraud has increased.

The authors now explore why so many families are in such dire financial straights. Though there are a number of different minor reasons, the most common reasons were job loss, medical problem, or divorce. These reasons explain almost 90% of the people who apply for bankruptcy.

The authors now revisit once again how families with two incomes are at a higher risk. Since the families have two workers, the risk that one of them will get laid off or become unable to work is doubled. In addition, the chance to become unemployed has doubled since the last generation. In the recent decade, the costs of medical expenses have increased while the number of people with the health insurance to cover it has decreased sharply. On top of this, many more elderly and sick patients are forced to rely on their families for care. Finally, families that have a working mother are 40% more likely to break apart than families who have a stay-at-home mother. It is much more likely for one of the incomes in the the two-income trap to walk out the door. Finally, it is extremely possible for all three of these major disasters to happen to a family in combination, leaving them completely unable to cope with their unexpected expenses.

The authors suggest that the Immoral Debtor myth persists only because families find it much more comfortable to think that they have managed to stay out of dire financial straights because they are "better" rather than that they are just lucky. The authors then cover the story of a family that managed to stay out of bankruptcy when faced with medical bills and a leave of absence from a job--but only just barely. The authors attribute the family's success to their health and disability insurance. The authors suggest that to decrease the number of bankruptcies, the government should reform the Social Security Disability Insurance to apply to many more people and give them a safety net. They end the chapter with a plea to bury the myth that debtors are somehow immoral people.

Chapter Three: Mom: The All-Purpose Safety Net

This chapter will explore how a two-income family gets into financial trouble. As an example, they show a couple at the beginning who had a baby with extremely poor health that needs constant care and medical expenses. However, when this couple had to file for bankruptcy, they had only paid $2000 in medical costs.

The authors begin to explore how little there is in the way of middle class safety nets since each family is responsible for their own safety nets. They argue directly against the common belief that two-income families are more equipped to handle financial difficulties. They show that if a family with one primary breadwinner undergoes economic stress (such as the breadwinner losing his job or sudden medical illness), the other member of the couple can enter the workforce and help cover costs until the hard times pass. They back this up with numerous statistics and anecdotes from Elizabeth's past. In addition, the stay-at-home member of the couple can provide free care for any family members that might need it.

Finally, the authors come to the meat of the problem. Single-income families plan their financial lives around that one paycheck. The stay-at-home spouse acts as a safety net in case something should ever go wrong. Dual income families often plan their lives around having that second paycheck. Rather than investing in unnecessary "stuff" that they can stop buying when times are bad, the two income family usually invests in giving their children better, safer lives. These payments for cars, houses, tuition, health insurance, and the like cannot simply be dropped in bad times. The two-income family has a much larger and much more serious shortfall to face in dire financial times. In addition, even if the second spouse finds a job again in a few months, the family still must find a way to pay back the debts they racked up during the unemployment period on top of their regular commitments.

One might wonder where this national financial crisis came from if it is truly this dire. The authors have an answer for that too. No experts during the time period when women entered the workforce were able to sit down and rationally work out the impact of women leaving the home. The battle between feminists and conservatives was too fierce for any middle ground to be left at the time. The families themselves do not notice the increased risk with all the extra money pouring in.

The authors do not suggest a solution as radical as forcing all women to return to their homes. Rather, they suggest that the government make programs that reward ALL savings done by middle class families, rather than the few specific savings the government gives tax exemptions to now. They recap the reasons why two-income families are actually more vulnerable to financial disaster at the end of the chapter.

Chapter Two: The Overconsumption Myth

Many people, even authors such as the authors of Affluenza: The All-Consuming Epidemic, believe that many families are deep into debt and in poor financial straights because they spend too much on "unnecessary" items such as clothes, food, and luxury appliances. However, Elizabeth and Amelia quickly debunk this myth by examining actual records of how much American families spend on "luxury" items today when compared to families of the 1970's. The authors do add that families do spend much more on entertainment items, such as televisions, cable, and computers, than families did in past generations. However, this increase in spending is much less than the savings families of today make in other areas (comparatively). The authors believe that many people blame the increase of debt and foreclosure on overspending because it is an "easy" fix. However, overspending is not the true cause of America's many financial problems.

The authors also debunk the myth that American families of today are spending money they don't have living in unnecessarily large and opulent "McMansions." In reality, though Americans are spending much more on houses, almost half of all families live in houses that are more than 25 or 50 years old.

The authors blame the sharp increase (73%) in the price of houses for married couples with children on the cost of finding a house that assures children safety and a good education. The effect of a successful public school on houses is astronomical; identical houses can be almost three times as expensive based on their school zone. In addition, parents look to find houses in areas with a higher average income level which have much lower crime rates than houses in lower income level areas. And so, parents become willing to pay anything to assure their children a successful, happy future.

As families sought more and more specific types of houses to raise their children in, the prices of this finite number of houses skyrocketed. The families unwittingly began a "bidding war" on the most desirable of houses. This problem was only amplified by the increased income working mothers brought to the equation. The price of houses desirable to families with children have now increased so much that mothers are forced to work just to be able to afford these houses.

To fix this problem, the authors suggest that the public education move to be based on vouchers instead. Each parent would receive a voucher to pay for their child's education and then they would be allowed to place their child in whatever school they wanted. School woulds improve to compete for students and everyone would win.

Another issue the authors blame the struggle of middle class families on is the rising cost of preschool. Since preschool is now considered mandatory by many experts and parents, parents are forced to pay more for their children to get into a good preschool than many pay for a college education. To solve this, they suggest adding preschool to public education. They also believe that the government should consider making public, taxpayer subsidized day cares, as long as the day cares would not put dual income families above single income families.

The authors then move on to tackle the subject of college. They trace the path that as college has come to appear more and more necessary for success in the workforce, the price of colleges have almost doubled. To say that the authors do not exactly buy that the tuition rise was necessary would be an understatement. They say that the extra expenses colleges suddenly gained have instead been moved into administrative bonuses, undergraduate research, and draining sports programs. Colleges use the extra income they gain from parents to pursue what the authors imply is unnecessary prestige.

The authors quickly dismiss the conservative "more debt" and the liberal "more taxes" solutions. They instead suggest a temporary freeze on the increase of tuition at public colleges and universities. They believe it would decrease costs while focusing the universities to diversify and re-focus on the community.

The final expenditure the authors tackle is the family car. From their studies, the authors believe that most of the increased expenditures on cars today comes not from a desire for more amenities, but from a second car and cars with more safety features.

The authors wrap up the chapter by comparing a typical one-income family of the 1970's to the typical two-income family today. After all expenses and inflation are accounted for, the family of today has less discretionary income than the family of the 1970's, despite bringing in more than twice the amount of money than the older family did. They show how the family of today is forced to spend much of its income on costs that will never change. This, of course, leaves families in a perilous position. If anything goes wrong, they will have nothing they can do to recover.

Chapter 1: Just the Way She Planned

The first chapter of The Two Income Trap sets up the setting and goal for the rest of the book.

The chapter begins with a short anecdote about a "normal" American family. They set up the perfect life for themselves--two kids, decent house, a good job for both the mother and the father. However, after the father loses his job, the family slips father and farther into financial ruin until they are eventually forced to declare bankruptcy.

The authors set up their credentials; Elizabeth is a Harvard business law professor, Amelia is an economist. Both women are mothers; in fact, Elizabeth is Amelia's mother. They explain that while conducting a study on financial ruin, they discovered that families are much more likely to experience financial problems than single families. Single mothers are at the highest risk to declare bankruptcy of all age catagories. They attribute this to a number of different factors, such as how two-income families rarely save any of their checks and so are left with no emergency fund when financial crisis hits.

The authors promise to explain in the rest of the book how they believe the increase of women in the workforce has helped to inflate the costs of middle class "essentials," such as houses, day cares, and college educations. Finally, they plan to present possible solutions to the rapid (600%) increase of bankruptcies in both families and among single mothers. These solutions will encompass changes from the level of the national government to changes families can make in their lives today to prevent financial ruin from ever descending upon their household.