interesting lecture on income/consumption over the last 30 years

[Independent]

I'd like to point out that Prof Warren is talking about a very specific group of people - median income couples with two children at home.

Unfortunately, she uses the word "class". The problem is that lots of high income people like doctors consider themselves hard-working members of the "middle class", but their incomes are way above Warren's families. The high income people are doing fine, she's talking about the problems with the median income.

And, she isn't talking about retired people. Her argument is that it's hard to be parents of young children in today's economy.

 

[ladelfina]

Independent, while she uses the mom/dad/2 kids as it is the most common family "format"... many of her points could be made for singles, those with above-average income, AND retirees.

People on this board are pretty well off.. and I see many struggling with care of parents.. or in some cases partners, or even children or grandchildren who are ill or need care. If a couple (gay or straight, kids or no kids) NEEDS two incomes for a middle-class lifestyle.. they are behind the 8-ball if anything happens, period. They are still further "behind" than their 1970s analogs, and there has been REgression rather than PROgression. Increased productivity, etc. has not brought increased wealth or leisure or security over the last 30-40 years, to the extent that we have been led to believe.

You ask "and the myths are?" Uhm... the myths are that people have overextended themselves primarily due to frivolous consumer habits (SUVs, fancy clothes, etc.). I thought that was pretty obvious.

Twaddle, you have a pretty vivid imagination if you thought either I or the presenter said anything like "oh, the humanity!". Nor is it a question of how to "keep assets inflated".

When you ask "what is the problem?" I have to wonder whether you actually watched the presentation. The problem is.. what we imagine, and what most people, Americans in particular, desire to achieve --the middle-class lifestyle of relative comfort and relative security-- is at the brink of extinction... a kind of endangered species. Now I don't recall any political nostrums urged by the presenter. We are all free to have our own opinions on 1.) WHETHER government should address this and, if so.. 2.) HOW gov. should address this. She is just presenting a wealth of facts that challenge some of our more complacent collective assumptions.

You're doing just what I said NOT to do in the OP.. focusing on the words "safety net" and assuming this means only heinous taxes and expanding the dole. The larger sense of "safety net" could come from rising wages, as well.. getting them back in line with prices. The "middle class" can only absorb so much before it breaks; that's the point.

 

[Delawaredave5]

US Manufacturing jobs built the middle class. As manufacturing went away, other forces helped "prop up" the middle class:

• "Mom going to work" added to family wealth while individual wages eroded, then
• Imported goods from low wage coutries kept US purchasing power growing despite flat/declining real wages, then
• Mortgage equity withdrawl from inflated houses kept the middle class party going.

What's left to prop up the middle class ?

Here's a link showing income distribution by country. Below it is link of GDP per capita for countries. Seems the richer a country, the more equitable the wealth distribution.

However, not sure the "causality" - what causes what...

Image:Gini Coefficient World Human Development Report 2007-2008.png - Wikipedia, the free encyclopedia
Gini coefficient - Wikipedia, the free encyclopedia

GNP per capita (wealth distribution) @ Countries of the World

 

[Texas Proud]

I suspect that just about every poster on this board would qualify as "middle class" under most definitions of middle class.

I would say that this board is skewed toward the upper middle class....

What IS above the upper middle class Because we have a good slice of them here also...

 

[Ronstar]

Great lecture! thanks for posting. It doesnt change any of my beliefs - it reinforces my belief that a person or family's prosperity is simply their own responsibility. It should not be government's responsibility to subsidize a portion of society that is hell bent on keeping up with the Jones's.

The presenter brings out a pattern of increasing consumption.

1. Car costs (per car) are essentially less now than in the 70's, but car costs per family have increased. This is because middle class families now have two (or several) cars whereas a 70's family had one car.

2. Education costs are up because the middle class now believes that college and pre-school are required in order to get a good job. And families now pay for 100% of this extra education. In the 70's, the middle class thought that a high school education was enough.

3. Housing costs for families with children are up. This is partially due to bigger homes and homes near good schools having a higher price tag.

Almost all of the key points of the lecture reference cost increases of non-necessities. The middle class needs cut consumption and LBYM.

 

[chinaco]

Fantastic post. Great information with some factual information.

I think what this points out is the need to live within your means.

Some of the problems of these people were avoidable. They could have purchased a smaller house and likely less expensive vehicles, etc...

Child care is needed if both parents work.

Health care costs are a bit unavoidable.


What Warren points out that clarifies the issue is that many families living above their risk adjusted means. The risk being one of the income sources stops.

The only issue that I believe needs to be addressed in some way (by the govt) is Health Care... It is the one thing that is a bit out of your control that can bankrupt you.

All of the other issues are under the control of the family. What they need is education on the issues and personal finance. I would be all for government helping in some way to educate people on the issues.

 

[Mysto]

I think that there are some truths in the piece but be careful. Yes home costs are up but...

Avg. home size 1970 1440 sq. ft
Avg. home size 2004 2330 sq. ft

Average expectations have grown for what is considered normal.

 

[ladelfina]

Extra cars and housing might seem to have elements under the average person's control. But 2 jobs pretty much means 2 cars unless you are one of the minority of families that can live/work in urban areas with good public transit. If the jobs are in the suburbs or exurbs, thither one must go. To communities with 1-acre zoning.. single-family zoning.. minimum home size.. that don't allow shops and residences together, etc. These are planning issues.

 

[Independent]

Independent, while she uses the mom/dad/2 kids as it is the most common family "format"... many of her points could be made for singles, those with above-average income, AND retirees.

People on this board are pretty well off.. and I see many struggling with care of parents.. or in some cases partners, or even children or grandchildren who are ill or need care. If a couple (gay or straight, kids or no kids) NEEDS two incomes for a middle-class lifestyle.. they are behind the 8-ball if anything happens, period. They are still further "behind" than their 1970s analogs, and there has been REgression rather than PROgression. Increased productivity, etc. has not brought increased wealth or leisure or security over the last 30-40 years, to the extent that we have been led to believe.

You ask "and the myths are?" Uhm... the myths are that people have overextended themselves primarily due to frivolous consumer habits (SUVs, fancy clothes, etc.). I thought that was pretty obvious.

One of the "myths" that I've read is that since the US GDP per capita has been going up, "most people" are doing pretty well. People who promote this often look at mean (instead of median) incomes, and at family incomes, without noting the additional workers. It was easier to find pieces like this a year ago than today, but I'm sure I've read them.

Another "myth" is that we've got a complete disaster. People can't possibly live as well as their parents.

I don't believe either.

Prof Warren paints families as struggling to hold on while they are tossed about by forces beyond their control. There is some truth to that. Real wages for males have been about flat for the last 30 years. Medical care costs really have gone up faster than most other expenses. Both of these are beyond the control of families.

But then she says that savings rates are down. That's not beyond people's control. Her suggestion is that people are buying essentially the same things they did a generation ago, but they have to spend 101% of their (two) incomes to do that. I'm skeptical.

I wish I could spend a couple days with some median one income families in 1970 and see where they lived, what they drove, what they ate, etc. and then do the same thing with the median two income families in 2003. My thought is that things which used to be "nice to have" are now "neccessities".

I'm old enough to remember 1970, in fact I got married and bought a car that year. I look around today and the average American "car" seems bigger, more powerful, with more gadgets than what we had then. Warren says that Americans are spending a lower percent of their income per car. She doesn't say that in spite of this they are getting nicer cars. In 2003, automakers had big rebates on their compact fuel efficient cars because nobody wanted to buy them. If people were content with the basic cars from a generation ago, they'd be spending even less today.

My impression is that this is true about most things. We're spending a lower percent of our incomes on food and clothes, but we're still getting "better" (more of what we want, not necessarily healthier) food and clothes.

I think part of the issue is expectations. People really expected to do better than their parents. After all, that had always been the American experience. And they thought that if they had two incomes, they should do a lot better than their parents (Warren says this is what she expected, too). But it didn't happen. People are working more hours, and getting just modest gains in material goods. That feels "wrong".

But I don't see that they're doing a lot worse, just not a lot better. People spend their entire incomes and go into debt to afford the things they think they should be able to afford instead of settling for the things they really can afford. Then they are at risk for the first financial bump in the road.

 

[twaddle]

I think that there are some truths in the piece but be careful. Yes home costs are up but...

Avg. home size 1970 1440 sq. ft
Avg. home size 2004 2330 sq. ft

Average expectations have grown for what is considered normal.

Yes, I noticed she was careful to frame the stats in a way that supported her "crisis" theory.

She defined home size in terms of number of rooms rather than square feet. And she defined increasing costs as percentage of income, without noting that family income had gone up in real terms.

And cost of housing is at the center of her "crisis," but she failed to note that home ownership rates have gone up considerably.

My only question about all of this is her motivation. What would motivate somebody to create a "crisis" with no identifiable problems and no identifiable solutions? Has she written a book yet?

 

[Eagle43]

I agree with the lecturer, but I too wonder what the consequences of losing the middle class are.

Mexico. You get Mexico, if you lose the middle class.

I watched all but first five minutes. I liked the lecturer. I still think if you LBYM you can make it. I still think that taxes are too high. Are taxes considered a "basic expense"? What's so bad about keeping your car longer before buying another one? Bankruptcy, although socially degrading, is a way out of your financial responsibilities. People divorce and go bankrupt because they can. I remember when neither was socially acceptable, and you did your best to avoid either.

LBYM. That's the solution.

BTW. I've heard that there are 75 million U.S. homeowners and there are only 2 million involved in this sub-prime mess. If that's so, well, the "crisis" is not that bad.

The lecture got me to order her book "The two income Trap" from the library.

 

[twaddle]

Real wages for males have been about flat for the last 30 years.

Could be, but she was talking about 2-earner households.

And here's the home ownership rate:

Clearly a lot of people bought homes they couldn't afford recently, but with the recent increase in home ownership, I think that represents a lot of people wishing to live the middle class lifestyle without having a middle class means.

I'm sure the middle class, as defined by home ownership, will shrink, but it'll probably just get back to the old trend line.

 

[Notmuchlonger]

Mexico. You get Mexico, if you lose the middle class.

I watched all but first five minutes. I liked the lecturer. I still think if you LBYM you can make it. I still think that taxes are too high. Are taxes considered a "basic expense"? What's so bad about keeping your car longer before buying another one? Bankruptcy, although socially degrading, is a way out of your financial responsibilities. People divorce and go bankrupt because they can. I remember when neither was socially acceptable, and you did your best to avoid either.

LBYM. That's the solution.

BTW. I've heard that there are 75 million U.S. homeowners and there are only 2 million involved in this sub-prime mess. If that's so, well, the "crisis" is not that bad.

The lecture got me to order her book "The two income Trap" from the library.

Taxes too high? Well get used to higher ones in the next few years. The really rich wont really care. The slightly rich wont really care. However the people who are striving to get "rich" will be the ones who will care. To subsidize all the people with their hands out. Thats what you will get with someone like Obama massive wealth redistribution. Cripes Id take 8 years of Hillary over that guy.

 

[Dudester]

I would say that this board is skewed toward the upper middle class....

What IS above the upper middle class Because we have a good slice of them here also...

The Wikipedia gives the following "colloquial" definition of middle class:

The middle class, in colloquial usage, consists of those people who have a degree of economic independence, but not a great deal of social influence or power.

On a lot of investing-oriented boards I frequent, the above definition is implicitly used. The class that is above the middle class is called the PTB, the PPT, management, trilateral commission, etc. In another words, a lot of people have the sense that there is something above the middle class, but they have a lot of difficulty describing who exactly this upper class is.

Years and years ago, I read a book that had a wonderful phrase: "Your end of the boat is sinking." This thread could be loosely paraphrased as starting with a posting that said, "Our boat is sinking." I'm amazed at how many people replied (once again paraphrasing), "It's the other guy's end of the boat that's sinking."

 

[twaddle]

The people in the sinking boat appear to be characterized by a negative savings rate. How many people on this board are in that particular boat?

 

[Independent]

Could be, but she was talking about 2-earner households.

Yes, she was talking about 2-earner households. But her hypothesis is that families "need" two incomes to stay even.

Much of the second income is chewed up by the costs of the second income - taxes, child care, second car, clothes, meals. So people only end up with a small contribution to discretionary spending.
(I'd add "and that doesn't really compensate the family for the time away from the kids and the hassles of dealing with two fulltime jobs plus kids.")
Warren says that the modest left over amount is getting chewed up by the higher costs of houses, medical care, and education, so families can't afford to save.

I think that when you net the things that went up faster than husband's incomes with the things that went up more slowly, you get a wash. The result is that some of the second income is buying "extras" that the 70's family didn't have.

That's why I'm skeptical of the claim that today's two income families are "behind" their parents. I think they are somewhat ahead, but the gain is much less than they expected.

 

[twaddle]

Yes, the crisis appears to be that the median family has more income, more house, more cars, more education for their kids, and more child care than their parents had, but a lower savings rate.

Another point that she failed to mention was that despite a lower savings rate, this middle class family in crisis has a higher net worth. I guess there are two sides to those higher home costs....

 

[barbarus]

To create/protect these safety nets will require more taxes, and drastically less government spending. I wonder if our society is willing to make the sacrifices.

Do you think the government is willing to lower spending?

Once people see their formerly middle-class grandma and grandpa living hand to mouth they might start demanding that government keep its promises.

Not If the young people are themselves in dire circumstances.
Then it will be everybody for themselves.

 

[Zoocat]

As I understand her lecture, the "crisis" is that the middle class is living on the edge of bankruptcy due to the high cost of two necessities, housing & health insurance, which require a two wage earner household.

If one wage earner becomes sick, or if a child in the family does and a wage earner has to take care of the child, then one half of the income is gone for that time. With no savings, the family is now in debt, sometimes serious debt.

Families want to "move up" in housing because they want to get their kids into good school districts in the suburbs. Has anyone here ever sent their kids to an urban school? I'm telling you, it's not a pretty picture. A smart kid will become brain dead within a few years of that kind of education environment.

The solution is not LBYM. For middle class families the solution is not to buy a cheaper house and live in a less desireable neighborhood and put up with crummy schools. That won't wash unless you don't care if our country becomes less educated, less able to compete with foreign countries who value education, i.e. support it with taxes, the way we do not. And I'm talking about urban school districts as well as state funded higher education.

To speculate about what might be the upshot of the whole situation, let me pose this future scenario: a whole society of middle class families living a lower middle class lifestyle, more like a blue collar family whose children don't go to college because the family can't afford it and society can't afford to subsidize tuitions through state scholarships, PELL grants, etc. A less educated society would put our country at a distinct disadvantage.

We would be a society in decline. Maybe we already are but the fog of denial is so thick we can't see it.

To reduce the whole scenario to the cliche that families need to LBYM and save more is to ignore the primary thrust of Warren's analysis-- and would be a position requiring at least as much research as she has provided. So far I haven't seen it here in this thread.

 

[ladelfina]

'm old enough to remember 1970, in fact I got married and bought a car that year. ... If people were content with the basic cars from a generation ago, they'd be spending even less today.

Well, I was thinking about cars in 1970 as well. The neighborhood I grew up in (1964-1977) and where my mom still lives USED to have within walking distance:
-a clothing store
-a shoe store
-a car dealership
-a McDonald's
-a Newport Creamery/Friendly's
-a nursery
-a pharmacy
-a supermarket
-a liquor store
- a credit union
-a 7/11
-a pizza joint
-elementary school
-several other stores I can't recall, one I think a Woolworth's

ALL of these have moved out/closed except the school, the liquor store, the credit union and the nursery. A CVS has replaced the supermarket. Everything else has either disappeared or moved a 15-20 min. drive away.. first to malls that are themselves now dead/dying: Sears, Filene's (gone, now JCP), Jordan Marsh (gone, now Kohl's).. then even further away to a huge swath of big box stores and strip malls off the interstate.

SO, living in the same modest place with the same modest house now REQUIRES a car, where it did not in 1970, unless you want to eat only the 'convenience' food found at CVS. Things can change out from underneath one quite easily. They even got rid of the corner mailboxes.

P.S. Even the local gas station is gone!

 

[Zoocat]

Do you think the government is willing to lower spending?

No, actually, I don't think legislators will be willing to make the case to the public. They're too afraid and too indebted to lobbyists. I don't have much hope in that regard.

If young people see their parents in dire straits at retirement due to the collapse of medicare and social security, they might be motivated to create a system where that won't happen again. This would require a complete revamping of our nation's priorities, which is long overdue, IMHO.

Ladelfina, I grew up in suburban S. California and remember that the milk truck, the bread truck, the ice cream truck, made weekly rounds. My siblings and I walked to our neighborhood schools. This continued until high school. We never drove anywhere, except for rare outings to the beach. My mom did the shopping on the weekend. I can't remember going anywhere on the freeway as a kid.

Imagine driving one of those old 1970 vehicles on today's freeway. No air bags, no safety belts. What carnage! Even the basic used car with safety features these days costs around $12,000. I remember my first VW cost $400.

Middle class families not only require two incomes because of financial necessities, women MUST be educated and have careers because in the all too common event of divorce they often will end up taking care of their children alone. Not only that they must take care of themselves when their husbands divorce them later in the marraige after the children are grown. Yes, this is a common occurance these days.

Let's fact it. Comparing today's society to the 1970s is a futile endeavor. It's like they are two different worlds.

 

[Hamlet]

I think the premise that most schools in America are crumbling is flawed. I think the "good" schools are mostly just the schools that all the students that were going to be sucessful anyway go to. Here is an article that talks about this:

Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More

I think American parents may be wasting a lot of money trying to afford homes in the "good" schools when the average schools are potentially just as good at teaching.

As I understand her lecture, the "crisis" is that the middle class is living on the edge of bankruptcy due to the high cost of two necessities, housing & health insurance, which require a two wage earner household.

If one wage earner becomes sick, or if a child in the family does and a wage earner has to take care of the child, then one half of the income is gone for that time. With no savings, the family is now in debt, sometimes serious debt.

Families want to "move up" in housing because they want to get their kids into good school districts in the suburbs. Has anyone here ever sent their kids to an urban school? I'm telling you, it's not a pretty picture. A smart kid will become brain dead within a few years of that kind of education environment.

The solution is not LBYM. For middle class families the solution is not to buy a cheaper house and live in a less desireable neighborhood and put up with crummy schools. That won't wash unless you don't care if our country becomes less educated, less able to compete with foreign countries who value education, i.e. support it with taxes, the way we do not. And I'm talking about urban school districts as well as state funded higher education.

To speculate about what might be the upshot of the whole situation, let me pose this future scenario: a whole society of middle class families living a lower middle class lifestyle, more like a blue collar family whose children don't go to college because the family can't afford it and society can't afford to subsidize tuitions through state scholarships, PELL grants, etc. A less educated society would put our country at a distinct disadvantage.

We would be a society in decline. Maybe we already are but the fog of denial is so thick we can't see it.

To reduce the whole scenario to the cliche that families need to LBYM and save more is to ignore the primary thrust of Warren's analysis-- and would be a position requiring at least as much research as she has provided. So far I haven't seen it here in this thread.

 

[Zoocat]

I think the premise that most schools in America are crumbling is flawed. I think the "good" schools are mostly just the schools that all the students that were going to be sucessful anyway go to. Here is an article that talks about this:

Yahoo! Personal Finance: Calculators,Money Advice,Guides,& More

I think American parents may be wasting a lot of money trying to afford homes in the "good" schools when the average schools are potentially just as good at teaching.

Unfortunately, in most areas of the country there are only "good" public schools and "awful" public schools. There are no "average" schools anymore. The good schools are in suburban areas, which is everywhere except rural towns and urban cities, which have the awful schools. I've had my kids in California, Missouri, Ohio, and Colorado schools, urban, rural, and surburban and this has been the case. But my ex and I were professors/instructors so perhaps our standards were too high.
Whatever.

 

[clifp]

Good lecture but a bit misleading

I agree that was informative lecture and there was a lot she said that made sense, and frankly was different than I thought before listening.

However, her clever use of statistics is often misleading. I don't remember the exact numbers but essentially the median household income of a family of 4 went from 42K to just under 70K (in real $) or an increase of more than 50%. This is due to a second worker. (This is consistent with all other information on Household income I've seen.)

She then talks about a bunch of categories of spending that decreased clothing, food, appliances by amounts ranging from 20-50%. However, what she fails to point out is that in real dollars the median expenditures for all of these categories increased, because household income increased faster than purchases decreased. You can see this by looking at the unit sales of items like jeans, microwave ovens, TVs, and package foods.
In short the family of 4 of the 2000s is buying more stuff than the family of the 70s.

This increase amount of stuff has lead to a significantly larger house. She says the median number of rooms increase from 5.8 to 6.1. What she doesn't say is the average (not median) house increase from 1400 sq feet in the 70s to over 2300 sq feet now days. So we are getting bigger houses to hold the more stuff we have. Contrary to we she implies the material prosperity of 2000 family is significantly greater than the 70s.

Now the area which was so eye opening to me was the risk American families are taking to keep up with the Jones. The percentage of fixed cost primarly debt service for car, mortgage, and credit cards is much higher now in than in the 70s. Which means in financial emergency there is much less room for cutting back. (A classic example is the CA couple that worked in the subprime industry who have $10K in monthly fixed income.)
I loved Professor Warren comment that if the families were businesses, the 2000 family looks a lot more likely to go broke.

You combine the higher fixed cost requiring two incomes with twice the chance of a wage earning losing their job and families are in a more pecarious situation. What makes it even worse is the essentially zero (non-retirement) savings. We have turned into a nation of margin buyers!

I somewhat agree with Ladelfina that it is harder to survive nowdays
without two cars and some of the former luxury items that are now necessities.

Still my back of the envelope estimate is that if bought the same amount of stuff that a family in the 70s had, lived in the same size house, and had 2 cars instead of 1, they be able to save much more than 10% of their income. Clearly we have lots of people on the board who are able to do even better than that with 2 incomes.

 

[TromboneAl]

The solution is easy:

Don't have kids.

At least don't have two kids. Not if you can't afford it.

The at-risk people that she's referring to can't afford it, but they either don't know that or don't care.