The Two-Income Trap: Why Middle-Class Debt is a Structural Crisis, Not "Overspending"

Debt in Billions (1989 - 2006) 2006 Dollars

What is getting American consumers into such a large amount of credit card debt? Contrary to popular belief, it is not rampant or irresponsible spending that the government and banking interests often point to. With the rise in necessary expenses such as healthcare, homes, and secondary education, the margin for error is closing. Families are getting hit the hardest. With no stay-at-home moms anymore, during emergencies, families must turn to their credit cards until the next payday. 

Visa and MasterCard commercials should advertise families using credit cards to support their families when they lose their job or when fathers leave mothers because this is the cause of most financial debt. With ever-increasing corporate layoffs, American citizens turn to credit cards to get them through until they get a job. When health insurance cost ring-in, citizens look to their credit cards to cover the funds. When fathers leave their mothers, they use their credit cards to stabilize themselves until the child support comes in. Soon, there is so much debt piled up that it becomes unmanageable and parents, families, and individuals take out a second mortgage to consolidate the debt. 

US Household Credit Card Debt

No one could ever tell from the ads that credit card companies display. For everything else than what the commercial portrays, there’s MasterCard. Elizabeth Warren is a contract law, bankruptcy, and commercial law professor at Harvard Law School. Along with her daughter, Amelia Warren Tyagi, they are authors of the book The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, which explains the situation perfectly: 

"For every family taking out a second mortgage to pay for a vacation, there are sixty-one more families taking on a second mortgage so they can pay down their credit card bills and medical bills. Ninety-one percent of the families in bankruptcy were carrying balances on their cars by the time they filed. A third of homeowners were carrying second or even third mortgages or had refinanced their mortgages to gets some cash. The amount of debt was truly staggering. Nearly one-third of bankruptcy filers – more than 400,000 families – owned an entire year’s salary on their credit cards, a hole that was virtually impossible to dig a generation ago. 

(Source)

But the critics are off the mark on one point – the role played by over-consumption or it's ubiquitous cousin, ‘trouble managing money.’ By 2001, those two reasons combined to account for less than 6 percent of families in bankruptcy. What about the rest? The overwhelming majority of bankrupt families faced far more serious problems. As we showed in chapter 4, nearly 90 percent had been felled by a job loss, a medical problem, or a family breakup, or by some combination of all three.

Potential Supreme Court nominee Judge Edith Jones asserts that ‘overspending and an unwillingness to live with in one’s means ‘causes’ debt.’ She is probably right. These families certainly overspent, accepting medical care they could not afford and making child support payment that left them with too little to pay the rent. They also lived beyond their means, trying to hold on to their houses and cars even after they lost their jobs. But we are forced to wonder, what would Judge Jones suggest those families have done? Not gone to the emergency room when the chest pains started? Moved the kids into a shelter the day their father moved out? Paid MasterCard and visa, even if it meant not feeding their children? It is doubtlessly satisfying to point the long finger of blame at personal irresponsibility and overspending. But only the willfully ignorant refuse to acknowledge the real reasons behind all that debt." 1 

1. Warren, Elizabeth and Tyagi, Amelia Warren. “’The Cement Life Raft’ (Chapter Six)” PBS Frontline. November 24, 2004

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