Christopher Caldwell Falls for the Two-Income Trap

In the most recent issue of the Weekly Standard Christopher Caldwell has an article, “Elizabeth Warren, Closet Conservative: The Most Misunderstood Woman in Washington.”  The basis for Caldwell’s article is Professor Warren’s 2003 book, The Two-Income Trap, which he refers to as “a brilliant and counterintuitive work of pop economics.”  Caldwell summarizes what he interprets as the central proposition of Warren’s book:

People were going bankrupt at an alarming rate…..  Why this was so had nothing to do with consumerism. Parents spent 32 percent less on clothing, and 52 percent less on appliances. What they spent more on was big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent). And the reason for all but the last of these was the entry of women into the workplace. Working mothers “ratcheted up the price of a middle-class life for everyone, including families that wanted to keep Mom at home,” Warren wrote. As a result, she showed, two-income families have less disposable income than one-income families did in the old days. What is more, today’s families are deprived of a safety net​—​a spare worker​—​of the sort her own family was able to lean on when she was a child. If anything goes seriously wrong in your average two-earner family today, they are in grave financial jeopardy.

But here’s the catch (as I have noted previously here and here)–while that conclusion is what Professor Warren says is the upshot of her analysis and is the what appears to be the conclusion of her analysis, that is not actually what her own data actually shows.  Although Caldwell’s reading is the logical and natural inference of how Warren presents her argument in the book, it is not actually what the data shows.  Although he is far from the first, Caldwell has fallen into the two-income trap.

Here’s the key problem in Caldwell’s argument: note his list of increased expenses for household “big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent).”  The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes.  For the other expenses it is the percentage increase in dollars spent on those expenses.  For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes.  So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes.  I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done.  And, again, I have laid this out in considerable detail previously here.

What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%.  The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back.

I should stress that I don’t blame Caldwell at all for misunderstanding this point from The Two-Income Trap.  Warren and Tyagi provide no explanation why they would present all other expenditures in terms of percentage change in dollar amounts but taxes, and taxes alone, in terms of the change in the percentage of income dedicated to taxes.  Moreover, nowhere in the book itself is the true apples to apples comparison (percentage change in dollars) directly presented.  I had to get out a calculator and do the math–not an arduous task, of course, but not an expected one either.  Finally, Caldwell’s interpretation is unquestionably an accurate interpretation of what Warren and Tyagi actually present as their conclusion–that struggles of the middle class are based on the chase for good housing.

Given all of this, Caldwell’s interpretation of what Warren and Tyagi wrote is an eminently reasonable mistake–the distinct impression left by the discussion in the book is that households are paying 25% more in taxes.  And virtually everyone who has read the book has interpreted that central point the way Caldwell does.  So I do not fault him.  The problem is the way that particular piece of data is presented in the book.  What begs explanation, of course, is why that piece of data–and that piece alone–is presented differently from all of the other data, especially when Warren and Tyagi seemingly had to go out of their way to present that data in a distinct, non-intuitive, and somewhat obfuscatory manner that virtually invites the misimpression that Caldwell and most readers have drawn as the central conclusion of the book.

In fact, based on their data once the math is done the real conclusions of Warren and Tyagi are inescapable and in fact (as Caldwell will be pleased to know) extremely conservative: the financial problems of the middle class are caused by an astonishing rise in the tax burden on middle class families over the past three decades.  Nowhere, however, will one read Professor Warren advocating income and property tax cuts as the obvious policy implication of their book–although that is unambiguously the logical inference.

For reference, here’s the relevant excerpt from The Two-Income Trap:

We offer two examples.

We begin with Tom and Susan, representatives of the average middle-class family of a generation ago [early 1970s]. Tom works full-time, earning $38,700, the median income for a fully employed man in 1973, while Susan stays at home to care for the house and children. Tom and Susan have the typical two children, one in grade school and a three-year-old who stays home with Susan. The family buys health insurance through Tom’s job, to which they contribute $1,030 a year–the average amount spent by an insured family that made at least some contribution to the cost of a private insurance policy. They own an average home in an average family neighborhood–costing them $5,310 a year in mortgage payments. Shopping is within walking distance, so the family owns just one car, on which it spends $5,140 a year for car payments, maintenance, gas, and repairs. And like all good citizens, they pay their taxes, which claim about 24 percent of Tom’s income. Once all the taxes, mortgage payments, and other fixed expenses are paid, Tom and Susan are left with $17,834 in discretionary income (inflation adjusted), or about 46 percent of Tom’s pretax paycheck. They aren’t rich, but they have nearly $1,500 a month to cover food, clothing, utilities, and anything else they might need.

So how does our 1973 couple compare with Justin and Kimberly, the modern-day version of the traditional family? Like Tom, Justin is an average earner, bringing home $39,000 in 2000–not even 1 percent more than his counterpart of a generation ago. But there is one big difference: Thanks to Kimberly’s full-time salary, the family’s combined income is $67,800–a whopping 75 percent higher than the household income for Tom and Susan. A quick look at their income statement shows how the modern dual-income couple has sailed past their single-income counterpart of a generation ago.

So where did all that money go? Like Tom and Susan bought an average home, but today that three-bedroom-two-bath ranch costs a lot more. Their annual mortgage payments are nearly $9,000. The older child still goes to the public elementary school, but after school and during summer vacations he goes to day care, at an average yearly cost of $4,350. The younger child attends a full-time preschool/day care program, which costs the family $5,320 a year. With Kimberly at work, the second car is a must, so the family spends more than $8,000 a year on its two vehicles. Health insurance is another must, and even with Justin’s employer picking up a big share of the cost, insurance takes $1,650 from the couple’s paychecks. Taxes also take their toll. Thanks in part to Kimberly’s extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family’s money. So where does that leave Justin and Kimberly after these basic expenses are deducted? With $17,045–about $800 less than Tom and Susan, who were getting by on just one income.

Let me add the caveat that when I wrote my WSJ commentary I focused on the perverse effects of progressive taxation in a two-income household, picking up on the book’s observation “thanks in part to Kimberly’s extra income.”  That is part of the issue.  But in so doing I overlooked the increased tax burden during this time was also due to state and local taxes, especially property taxes, which rose dramatically along with rising housing prices during this period.  Because these are essentially taxes on increased wealth in a relatively illiquid asset, but are paid from current income, they do present a difficult burden on homeowners.  The central point–that tax expenditures rose 140% during this period–remains true even if the contributors to this increased tax burden are more varied than I originally noted.