Why 2 Paychecks Are Barely Enough

Fascinating analysis of how the desire to live in districts with good schools helped fuel the housing bubble and, over the last 40 years, the rise of two-income families:

Why 2 Paychecks Are Barely Enough

ROBERT H. FRANK An economics professor at the Johnson Graduate School of Management at Cornell University.

NYT

www.nytimes.com/2012/01/01/business/from-6-economists-6-ways-to-face-2012-economic-view.html

WHY do many middle-class families now struggle to get by on two paychecks, whereas most got by on just one back in the 1950s and '60s?

The answer, according to "The Two-Income Trap," by Elizabeth Warren and Amelia Warren Tyagi, is that many second paychecks today go toward financing a largely fruitless bidding war for homes in good school districts.

Parents naturally want to send their kids to good schools. But quality is relative. Because the best schools tend to be those serving expensive neighborhoods, parents must outbid 50 percent of other parents with the same goal just to send their children to a school of average quality.  

How hard is that? I constructed a measure I call the toil index. It tracks the number of hours a median earner must work each month to earn the implicit rent for the median-priced house.  

From 1950 to 1970, when incomes were growing at about the same rate for families up and down the income ladder, the toil index actually declined slightly. But since 1970 — a period during which income inequality has grown — the toil index has risen sharply.  

The increase in two-earner households explains only part of it. The climb in the toil index was also driven by the easy credit that fueled the housing bubble, as well as by an expenditure cascade in housing caused by growing income disparities.  

Since 1970, the top 1 percent have captured most of the income growth in the nation. Like everyone else, the rich spend more on housing when they have more money. High-end houses become bigger and fancier. That shifts the frame of reference for the near rich, and so on down the income ladder. Because the median hourly wage, adjusted for inflation, has been falling, there's really no other way to explain why the median new house built in the United States in 2007 was about 50 percent larger than its counterpart in 1970.  

The increase in the toil index has been spectacular. From a postwar low of 41 hours a month in 1970, it rose to more than 100 hours in 2005. Although it has fallen since the housing bubble burst, the middle-class squeeze persists.

Growing income disparities don't just make the 99 percent angry. They also raise the cost of achieving basic goals.