Occam's Razor

I like it when the little light bulb above my head goes off. It doesn’t happen as often these days, but it did the other day when I read this interview in Salon with Elizabeth Warren. She is professor at the Harvard Law School. Together with her daughter Amelia Warren Tyagi they wrote a recently published book “The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke.”

It’s a great interview and I’ll probably have go out and buy the book now. The book puts its finger on a nagging question: why more of us are going broke in America. The results were not what I expected. The McMansions popping up around my neighborhood do not mean that we are living better; in fact the study shows that people are living pretty much the same lifestyle our parents did. Yes, we have more toys like DVD players and computers, but we are not spending more on similar things than our parents did.

What has changed is that to live the lifestyle our parents lived it takes two incomes, not one. And because it takes two incomes, the loss of any one income is devastating and can lead rather rapidly to bankruptcy. Consequences range from homelessness to moving your husband, wife and children into the basement of your parent’s house, if you are that lucky.

I see it around me in this economic malaise, but in reality this is a 30 year phenomenon. A neighbor’s husband down the street lost his job about a year back and is still unemployed. They’ve burned through his 401-K and most of their other assets. He was another victim of the high tech implosion. Her income, which is pretty decent working as she does for Fannie Mae, is insufficient to maintain their fairly modest lifestyle.

They live in the same sort of house I had growing up: just another colonial in a decent neighborhood. But in the past if one parent became unemployed the other could probably get some work to help make ends meet. In a depressed economy finding two or three jobs to make ends meet is difficult. If they can be found they are unlikely to pay the bills.

Why? Because lots of bills have gone through the roof. As the authors document, things cost more — a lot more, in real terms, than they used to. Two big examples: mortgage payments and health insurance. It used to be that you did not need health insurance; if necessary you could pay for medical costs out of pocket. That’s not an option anymore. The mortgage payment phenomenon is more interesting. The problem seems to be that we are drawn to zip codes with good schools and will pay inflated prices for housing so that our children will benefit from good education. It’s quite possible to find more affordable housing elsewhere, it’s just that most of us have a fear of living in these neighborhoods. But, paradoxically, if we had the courage to live in these neighborhoods rather than “follow the crowd” there would be sufficient critical mass to likely improve the local schools to our liking.

A few of their observations I figured out a long time ago and implemented in my life but still could not quite articulate them. One was that kids are huge financial risk factors. In short kids not only increase the risk that you will go broke but are huge income drains on the family. Sensing this was one of the reasons I was comfortable with stopping at one child. My wife and I had talked about having a second child but thinking of how much money it would take to raise a second child and send him or her to college was one reason I wanted to stop at one: adding another child would be too risky to our family unit. Of course I was also aware that life would be a lot more manageable with one child. But on some level I understood that even though I came from a family of ten I would be lucky to maintain the same lifestyle my parents had, which was pretty Spartan, with two children.

The interview though made me realize why it’s almost impossible to elect a politician these days who will raise your taxes. It’s not that taxes are evil, as many Republicans assert, it is because families have no more money to throw at taxes. Their money is already committed and they are at enough risk with two incomes trying to navigate their family through life to pay more taxes. It’s not a matter of philosophy, it’s a matter of economic necessity. Metaphorically, parents are on their front porch with a loaded shotgun warily looking up and down the street. They know it won’t take much for their American Dream to vanish, and they are vigilant in an almost reflexive way.

The consequences of “me first” on society at large are very real. If my income were cut in half I probably would be neglecting a lot of basic maintenance. The house and yard would look pretty shabby. The same is true of our society. As our costs of living escalate, and with little ability or will to maintain the infrastructure, things suffer. That’s why our roads and schools are so crowded. Citizens are saying “Sorry, me first!”

You have seen this happen most recently in California in the election of Arnold Schwarzenegger. Schwarzenegger said he would repeal the tripling of car taxes. This is money that people can put in their pockets. Naturally it’s hard not to vote for someone like that. The consequence is to exacerbate California’s budget problems but citizens are saying “Too bad: me and my family first.” It’s not that Californians explicitly want their state to go to hell; it’s that they are living too close to the margin and are consequently too scared to pull together.

I’m not sure how this will play out but most likely we will continue to see a decline in our prosperity. Right now we don’t really see it because dual income families are providing the illusion that it is under control. But increasingly cracks are beginning to show and soon we may have a bellwether event. It may be that with the costs of health insurance becoming out of reach even for middle class Americans we will demand national health insurance. It may be that the engines that sustain our growth, like cheap land, will gradually disappear and there will be no real way to get out of this economic box.

Ultimately this “me first” approach is not sustainable. We are in this together. It’s all well and good to promote growth as President Bush is doing, but this is not going to solve these systemic problems. To some extent the Wal-mart-izing of American may be the last step. We are making it as cheap as possible to buy the stuff we need, but eventually all the cost savings from that supply chain will be realized. And then what?

The malaise that so many people are feeling is very palpable. The solution out of it is not.