Byline: Christopher Whalen, SPECIAL TO INSIGHT
If you want to understand why the widely reported U.S. "economic recovery" feels less than convincing, go buy yourself a copy of a new book, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, by Elizabeth Warren and Amelia Warren Tyagi.
Warren, a law professor at Harvard University and author of The Fragile Middle Class, and her daughter Tyagi, a former McKinsey & Co. consultant, have collaborated on this book to argue that two-parent, middle-class, working families are on the brink of financial disaster. The reason? The demographic wave known as the baby boom has bid up the cost of housing and related services to unmanageable levels. Warren argues that families have boosted income and used easily available consumer credit to keep pace with the rising costs, but many families considered by the banking industry to be solidly middle class and of high credit quality in fact are insolvent.
The number of families declaring bankruptcy or receiving a foreclosure against their house has shot up dramatically, Warren and Tyagi report. But, for every American family declaring insolvency, another seven families have financial problems that would warrant a bankruptcy filing. Contrary to popular myth, American families aren't in financial trouble because they're squandering second incomes on luxuries, Warren reveals. On the contrary, both incomes are almost entirely committed to necessities such as home and car payments, health insurance and education.
One of the most respected bankruptcy-law experts in the United States, Warren is vice president of the American Law Institute and on the executive committee of the National Bankruptcy Conference. She directed the National Bankruptcy Review Commission's study of federal bankruptcy laws and drafted its report to Congress. The National Law Journal named the celebrated author and teacher one of its "fifty most influential women lawyers in America."
Ominously, during an interview with Bill Moyers on Feb. 8, Warren reported that more middle-class American families will go through bankruptcy in 2004 than ever. Warren reports that 90 percent of the bankruptcy filings this year will be made by middle-class families, including some 9 million American households in divorce roughly one new filing every five minutes. By no coincidence, the Daily Bankruptcy News reports that consumer debt now equals 110 percent of disposable income, in comparison with 85 percent of disposable income 10 years ago and 65 percent 20 years ago. The consumer is exposed to rising interest rates, says Daily Bankruptcy News, because 40 percent of consumer debt is priced at floating rates.
Warren warns that when an unforeseen event such as serious illness, job loss or divorce occurs, middle-class American families have no discretionary income to fall back on and little or no savings. The Internet bubble of the late 1990s and the related swings in the value of the equity markets may have seemed gigantic at the time, but this important book suggests that the biggest bubble of all namely, the market for U. …