Stuck in the middle, continued
The story of Ruth Ann and James, like those of many members of the middle class who share their experience of financial downfall, is "thick with irony," write Warren and Tyagi. Parents who want a house in a safe neighborhood and a good school district unwittingly pit themselves against others just like them, boosting home prices and forcing both parents to work in order to compete financially with other dual earners. Single parents, meanwhile, can rarely compete. Relying on two incomes also leaves parents with little cushion when one loses a job or faces a medical emergency. In the past, the authors report, if the sole working parent lost a job, the stay-at-home parent would often go to work to make up some of the shortfall.
The middle class today likewise can't solve the problem by cutting spending, despite the alleged conspicuous consumption so often blamed for people's financial woes, the authors contend. The "over-consumption myth" squares with our intuition but not with the facts, they say. In fact, the authors' analysis reveals that the current generation spends no more than the previous one did on discretionary purchases. "It's so much more comfortable to think that the people who are in trouble spent themselves into financial chaos," Warren said. "But if these people were a little less responsible, they wouldn't be in so much financial trouble. Financial problems in the middle class are not about too many dinners out and too many designer clothes. It's about mortgages people couldn't manage, it's about health insurance, it's about homes in safe neighborhoods."
But with middle-class families drowning in credit card debt (exceeding six months' take-home pay for half of the families in bankruptcy, with more than a quarter owing a year's salary, according to "The Two-Income Trap"), many point to a lack of personal responsibility as the underlying cause of the problem. Debt--and the avoidance of paying it through declaring bankruptcy--is often cited as proof of immoral behavior, as the authors outline. But the charge of immorality should rightly fall on the lenders themselves, contend Warren and Tyagi. They cite lenders that push subprime, high-interest mortgages, often in minority neighborhoods, on those who would qualify for lower rates; that besiege people already deep in debt with offers of credit; and that employ collectors who berate children about their parents' overdue bills.
"Some of these tactics are legal, some of them are illegal, but I think they are all wrong," said Tyagi. "And putting a stop to that would make a big difference in the lives of the most vulnerable."
Warren says she is all for personal responsibility. But she also believes in fairness. And it is patently unfair, she says, for lenders to devise applications that have confounded students in her bankruptcy class.
Outside academia, the HLS professor served as an adviser to the National Bankruptcy Review Commission, fighting against a bankruptcy bill that would have "undercut virtually every protection in the bankruptcy laws" and provided a windfall for the credit industry. Congress didn't listen to her, she says, but instead was swayed by industry lobbying and political contributions. (The bill failed to pass in 2002 only because of an abortion-related amendment attached to it, according to Warren.)
Years ago, she was also hired as a consultant by Citibank. In a room full of executives, she urged the company to stop lending money to families in financial trouble. But, said a top executive, those people provide the company with most of its profits.
The consultation was over.
"It's an Alice in Wonderland world, where everything is upside down," said Warren. "The most profitable customer is the customer who looks just like the families in bankruptcy but doesn't actually file for bankruptcy. And the least profitable customers are people who have enough money to pay in full, on time, every month."
Despite these experiences, Warren hopes and believes that the book she wrote with her daughter will help inspire change that will bring middle-class families back from the precipice.