Economics Asked by nigel on March 7, 2021
In the book The Two-Income Trap: Why Middle-Class Parents Are Going Broke) by Warren and her daughter, she states the following in chapter 1:
If two-income families had saved the second paycheck, they would
have built a different kind of safety net—the kind that comes from
having plenty of money in the bank. But families didn’t save that
money. Even as millions of mothers marched into the workforce, savings
declined, and not, as we will show, because families were frittering
away their paychecks on toys for themselves or their children. Instead,
families were swept up in a bidding war, competing furiously
with one another for their most important possession: a house in a decent
school district. As confidence in the school system crumbled, the
bidding war for family housing intensified, and parents soon found
themselves bidding up the price for other opportunities for their kids,
such as a slot in a decent preschool or admission to a good college.
Mom’s extra income fit in perfectly, coming at just the right time to
give each family extra ammunition to compete in the bidding wars —
and to drive the prices even higher for the things they all wanted.
Could someone provide some references for this? I’d like to see when this happened, and some evidence. And is this what economists call a “bubble”?
Todd Zywicki has tried to directly evaluate this claim. He finds that it housing prices and other costs are much lower than the increase in the tax burden.
Thus, taxes increase in the example by $13,086. By contrast, annual mortgage obligations increased by only $3690 and automobile obligations by $2860 and health insurance $620. Those increases are not trivial, but they are swamped by the increase in tax obligations. Too put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage (the supposed driver of the "two income trap") and about double the increase in the combined obligations of mortgage and automobile payments. This also leaves aside the peculiarity that the 2000s family is paying $9670 in new child care and $2860 in new automobile expenses supposedly to meet a $3690 increase in mortgage expenses, the supposed driver of the model.
Evaluating The Two-Income Trap Hypothesis
Arnold Kling (Taxes and the Two-Income Trap) notes that Zywicki's estimate doesn't include payroll taxes and therefore underestimates the change in tax burden.
Correct answer by BKay on March 7, 2021
I actually have been thinking about this theory as well. In fact, the improvement of education and gender equality together produce more educated woman. Educated woman would want to contribute to the society even after marriage hence produce more dual income household. In the beginning, maybe there is only a small percentage of dual income household. They are more willing to pay more to get a house which drive the price higher. Eventually more single income household become dual income household in order to afford a house.
How about those investor who flip real estate property to make money? I don't think they are the real reason because eventually someone will buy the house and stay inside. Based on supply and demand, if there aren't so many household who can afford an expensive house, there will be less sale and the price won't go up so fast.
Answered by Ah Biao on March 7, 2021
Todd Zywicki makes the point that the increase in tax payments is greater than the increase in mortgage payments. This is interesting, but if we view taxation as a counter-inflationary measure, controlling the money suppy, we can consider both the increase in mortgage payments and the increase in tax payments as consequences of the inflationary effect of the increase in household income.
In other words, as two income households increase in number, the inflationary effect of the second income results in zero net gain for two income households, which is still the gist of Warren's argument.
Answered by Thom Murchie on March 7, 2021
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