Elizabeth Warren's research on the "The Over-consumption Myth"

[sandiahiker]

At the risk of being call a complainy-pants, I present some research that refutes a lot of common wisdom here on this site:

http://www.yale.edu/law/leo/052005/papers/Warren.pdf

Her basic assertion is that spending on things like food (groceries and eating out), clothes, tv, etc. has, over the past generation, been basically neutral or gone down, keeping-up-with-Jones spending doesn't account for much, and the real driver of debt and bankruptcy are skyrocketing housing prices, health care costs, child care, and tuition. Her idea is that "The Over-consumption Myth" benefits the financial services industry, where profits are made on consumer debt and tighter bankruptcy laws, and the idea that those who shirk personal responsibility are at fault for their circumstances, whereas the main causes are job loss and medical bankruptcy.

Discuss.

[Hugh H]

One side you can control (discretionary spending), the other (health services, tuition costs, etc..) you can't.

[briandougherty]

That may be true, but I think a lot of us would argue our parents and grandparents worked more than they needed to to spend more than they needed to.

We also know that the expensive housing is generally in the area with great job prospects. By working for FI and maybe RE then we can remove the need to live in areas where housing is expensive. For instance, I live in the Northeast and love my commute to work.  When I no longer work I might be willing to move to a small town where my commute would otherwise have been an hour and take advantage of great houses for half the price of mine.

[Cyrano]

If you look at the typical my budget is a wreck oh help case study here, many do boil down to, you have more house than you can afford, or you have more car than you can afford. The other expenses are minor optimizations that help but won't change the picture as long as the family has too much house or too much car.

This article seems to put housing and transportation expenses in a different category than consumer goods, mistakenly because while you do need a place to live and a way to get around, if your budget is broken, you don't need the particular housing or vehicle that's breaking it.

[Tyler]

Over-simplifying her thought process to a bite-sized chunk, her basic premise appears to be:

Buying a house is too expensive for one earner anymore, so two people work. This requires two cars and childcare. The interest payments required to pay for it all (combined with rising healthcare costs) keeps them in a hole with no money left for discretionary spending. So families are struggling even while they aren't completely blowing all their money on stupid stuff. 

I'll simply point out that Mustachians of all political persuasions and income levels find plenty of good ways to avoid the house, car, and debt traps. You are in control of your own choices.

[Malaysia41]

I love the way she writes and uses data to question conventional wisdom. 

In the end, I think her message is not inconsistent with MMM.  The main difference being that MMM scrutinizes to the bloody edge all of the expenses that make up what she calls 'the nut'.  In contrast, Ms. Warren makes the assumption that two cars are necessary in modern day suburbia where two parents work far away from their homes and put their kids in daycare.  She says, 'There are always options, but for families with children, these options signal that their middle-class lives are slipping away,' and leaves it at that.  MMM digs further to question each and every one of these expenses. In fact that is exactly his shtick. 

The larger issues she addresses that have to do with structural economic policy and political maneuvering are simply beyond the scope of MMM.  Indeed, MMM may say they are beyond one's locus of influence and thus are not worth focusing attention on for too long.   Not inconsistent, just different scope.

In the end, I think MMM and Ms. Warren could agree that the 'over-consumption' story can be a tactically useful storyline/red-herring for any vested interest.  Pick your topic: banking de-regulation, tightening bankruptcy laws, reducing social safety nets... dare I say... frugality blogging sites.  Looking at the data to decide whether changes in policy make sense is a boring cable news story, unnecessary for elected legislators who've already made up their minds via election promises, and out of scope for people taking a good look at their own personal responsibility (e.g people here). 

For people who already have their minds made up on macro-policy, the over-consumption myth is a convenient tactical red-herring.  For people who want to feel good about frugality, the over-consumption myth can fuel resolve.  After all, one doesn't need to look far for tangible examples of people blowing their money on stupid shit.  (Overheard at Work thread anyone?)

[Goldielocks]

At the risk of being call a complainy-pants, I present some research that refutes a lot of common wisdom here on this site:

http://www.yale.edu/law/leo/052005/papers/Warren.pdf

Her basic assertion is that spending on things like food (groceries and eating out), clothes, tv, etc. has, over the past generation, been basically neutral or gone down, keeping-up-with-Jones spending doesn't account for much, and the real driver of debt and bankruptcy are skyrocketing housing prices, health care costs, child care, and tuition. Her idea is that "The Over-consumption Myth" benefits the financial services industry, where profits are made on consumer debt and tighter bankruptcy laws, and the idea that those who shirk personal responsibility are at fault for their circumstances, whereas the main causes are job loss and medical bankruptcy.

Discuss.

I thought the research supports MMM view.

Largest spend increase vs 1970 is housing, health insurance, second car, child care and taxes according to the article.

MMM states housing, transportation and food are big areas of focus.   MMM also indicates how to get lower health care costs and how to reduce childcare ( by early FIRE).

Both implicate the easy access to credit for the debt trap facing average or non MMM households.

The biggest difference is MMM is about great ideas on how to get ahead in the current world, while the article is research on average human behaviors and causes driving the perceived debt trap of now versus then.

[Cpa Cat]

Well, this paper is clearly written with a political agenda, not an academic agenda. As such, it's difficult to truly trust her "research" - since we all know how easy it is to manipulate statistics to support an argument.

Note that she cherry-picks categories and statistics. For example, in her childcare category, she inflates how much people pay in childcare, by including "free" child care provided by grandparents and siblings. But there was plenty of free childcare to go around in the 70s too - somehow it doesn't count, though.

Sure we pay more for cars. But that's because we need giant SUVs to make room for carseats and safety!

Yes, the average house size is larger - but that's supply driven, not demand driven - it's not that people want to buy those houses, it's that greedy developers make more money that way. Also, just FYI, the middle class would never stoop so low as to purchase such a house (those houses are for rich Republicans), the middle class is stuck paying too much for hand-me-down houses with old roofs. It's not clear from the paper why they are choosing to pay so much for housing, other than that they need an extra bathroom and a spare bedroom.

I'll note that she includes taxes in the list of things that suck up a single income, but doesn't discuss whether our tax burden has increased or decreased. Not part of her agenda, I guess. ;)

Are gymnastics and music lessons included as "childcare?" What about private school tuition? Is that a childcare/education cost? What about overall "stuff we buy for our kids" - up or down? How about entertainment (cable is touched on, but nothing else - and it's excusable because our fridges are cheaper)?

Oh well. I guess Elizabeth Warren hasn't met many Mustachians - who prove daily that we don't have to spend 75% of our income on "fixed costs." Or maybe she has, and they just didn't fit into her paper.

In the end, people around this forum understand that we have quite a lot of control over fixed costs and a high savings rate relies on looking for ways to lower them.

[Cassie]

Thanks for this article!  It was very interesting.  You used to be able to file bankruptcy over medical debt & now you can't.  Even with decent insurance a serious illness could wipe someone out.   It does seem that many of the case studies are people living above their means but of all my friends only one couple I know does this. Both my parents & grandparents were frugal so the example was set. 

[deborah]

Clothing Food and Appliances - people have more and are over consuming, but the price of clothing food and appliances has gone down so much that families are spending less on it in total.

Housing - she says it herself - the average size of the American house has increased dramatically. Overconsumption.

Cars - extra cars - overconsumption

Tuition - do people need to pay the extra?

Services - it is good to see that child care has increased, so that people in child care are paid a decent wage.

Yes, medicine is a problem - people are making more and more expensive cures, rather than concentrating on more economical cures.

[briandougherty]

Housing - she says it herself - the average size of the American house has increased dramatically. Overconsumption.

She says that more people are living in houses over 25-year years old and asserts that the new homes are not bought by median earning families.

[Malaysia41]

I think MMM is about coming up with personal strategies to better one's life, while Ms. Warren is concerned with macro-policy. Both try to look at reality and question assumptions in order to make the best decisions possible.   Both try to look at the data and facts and get on with making decisions in their circles of influence.  Her circle is simply bigger.

She says at the beginning of the paper that there are lots of way to cut the data and she has included data relevant for the discussion (savings rates over 3 decades seems relevant - she didn't cherry pick good years and leave out years that don't help her case).  Anyway it is a position paper intended as a place to start a discussion.  This is the way people communicate and converse. 

I've got no problem with people documenting a line of reasoning based on data they've studied and asking for a discussion.

[Spork]

I have pretty much pidgeonholed Ms Warren as the complainypants in chief (way before MMM coined the phrase and before she became a politician.)

If you approach every problem with the idea that you cannot win and that everyone is against you -- then you're already at the conclusion.  You won't win (unless possibly someone saves you.) 

I prefer the MMM way of looking at things:  We are living in times where we have more stuff and more opportunity for far less money.  Yes, we can overspend: but we have control over that, so it's totally solvable.

There are certainly outliers that have just really stupid bad luck.  But they are in the extreme minority.

[Malaysia41]

I have pretty much pidgeonholed Ms Warren as the complainypants in chief (way before MMM coined the phrase and before she became a politician.)

If you approach every problem with the idea that you cannot win and that everyone is against you -- then you're already at the conclusion.  You won't win (unless possibly someone saves you.) 

I prefer the MMM way of looking at things:  We are living in times where we have more stuff and more opportunity for far less money.  Yes, we can overspend: but we have control over that, so it's totally solvable.

There are certainly outliers that have just really stupid bad luck.  But they are in the extreme minority.

Wow we have developed very different opinions of her.  I see her as someone who is willing to question the system in a thoughtful analysis-driven and productive way.  It sometimes may come off as grand-standing, especially when interrogating executive bankers, but she's got a pretty good understanding of the industry. 

I personally believe that banking de-regulation was taken too far.  So, I'm aware that for that topic I look for evidence to support my conclusion (as if the 2008 financial meltdown weren't enough).  So, when I see her digging into the thorny structural policy and proposing how to do better, I see that more as her rolling up her sleeves than being a complainy pants.

That said, recently she has come close to ad hominem attacks on senators across the aisle.  I'm not a fan of that, but I can understand the frustration that leads her to it.

(modification - bolded a sentence in your quote - I'm not sure where that comment is coming from.  You think she approaches every problem as a loser victim and that she wants to be taken care of or wants the government to take care of everyone?  I think she just wants, for example, banks to not gamble with money that is insured by the federal government and to structurally avoid moral hazard in the financial system.  Seems sensible to me. )

[deborah]

Housing - she says it herself - the average size of the American house has increased dramatically. Overconsumption.

She says that more people are living in houses over 25-year years old and asserts that the new homes are not bought by median earning families.

If the average size has jumped, it has jumped.

[Johnez]

Well I guess there is a choice, vote Elizabeth Warren for prez 2016....or join MMM cult and be a badass. : )

In seriousness though, I read the whole piece and the example that I found quite startling was that the wages earned by a decent middle class profession such as a cop wouldn't be enough to purchase a home in 75% of markets.  To address previous posters about the second car and child care-those are the costs incurred with having both parents going full bore into the workplace.  Wouldn't have to rely on siblings or granny to take care of the kids before the '70s cos Mom wasn't working!  These days granny's probably got her own health problems and is probably working as a Walmart greeter anyway, or is being taken care of along with the 2 kids. And yes, 2 vehicles ARE a reality for many.  No we don't need big cushy Escalades, but hell a beater isn't particularly safe either, ever take a look at vehicle death statistics and how they've gone down over the years? 

There are choices to be made however, hard ones that HAVE to be considered.  Biking in, cable out, change your cell plan and smarten up about health care.  These things we can control.  MMM is king in this domain. 

ps:  Also, the costs that are going up are either ones that can be controlled or completely avoided by young people.  As long as young people wait on kids, they can avoid child care, pick cheap living space to save for better (less safe, but no kid to worry about), and go with and HDHP with HSA attached and full contributions, they should be set.  MMM's stuff should really be read immediately by anyone 15 or older (or younger!) as they younger you start the better off you'll be.

[Malaysia41]

...the example that I found quite startling was that the wages earned by a decent middle class profession such as a cop wouldn't be enough to purchase a home in 75% of markets.  ..

That jumped out at me too.  Something ain't right.  Lifestyle inflation isn't the SOLE cause of financial ruin for the middle class.  I still think it is a significant factor and an alarming number of people fail to scrutinize their spending decisions.  But I can agree there is more going on here and it may have to do with any number of the structural and political causal factors she proposes at the end of her paper.

[DarinC]

Wow we have developed very different opinions of her.  I see her as someone who is willing to question the system in a thoughtful analysis-driven and productive way.  It sometimes may come off as grand-standing, especially when interrogating executive bankers, but she's got a pretty good understanding of the industry. 

I personally believe that banking de-regulation was taken too far.  So, I'm aware that for that topic I look for evidence to support my conclusion (as if the 2008 financial meltdown weren't enough).  So, when I see her digging into the thorny structural policy and proposing how to do better, I see that more as her rolling up her sleeves than being a complainy pants.

That said, recently she has come close to ad hominem attacks on senators across the aisle.  I'm not a fan of that, but I can understand the frustration that leads her to it.

(modification - bolded a sentence in your quote - I'm not sure where that comment is coming from.  You think she approaches every problem as a loser victim and that she wants to be taken care of or wants the government to take care of everyone?  I think she just wants, for example, banks to not gamble with money that is insured by the federal government and to structurally avoid moral hazard in the financial system.  Seems sensible to me. )

Do you have any examples of the ad hominem attacks? There is some crazy stuff going on and it needs to be addressed aggressively.

I work in the financial services industry, although not in the worst part IMO, and I've seen some ridiculousness.

Long story short, a big bank contracted with an offshore telemarketer to sell some service. The telemarketers blatantly lied to prospective customers, and the customers were understandably pissed when what they signed up for wasn't what the telemarketer said they were signing up for. The bank claimed they should be able to keep the money because it was their contractor who broke the law, not them.

In the good old days the bank would have just created a shell company and tried to pin liability on them while they walked away with the cash, but these days they need a new spin (contractor) because that's illegal. Ultimately it's the same thing.

In a meeting at work I literally heard someone refer to this as a "new product" when they were complaining about the Dodd-Frank act. It's mind blowing the kind of BS that entities (mostly corporations, but sometimes not) get away with and/or try to get away with these days.

[Another Reader]

Elizabeth Warren is leveraging her way into a higher level political career.  Her platform:

1.  It's not your fault and there's nothing you can do about it.

2.  Vote for me.  I'm from the government and I'm going to fix everything for you.

[Malaysia41]

Do you have any examples of the ad hominem attacks? There is some crazy stuff going on and it needs to be addressed aggressively.

Mostly I read and listened to her talking about Mitch McConnell on student loan debt reform.  At one point I felt she got a little too personal and I remember blanching a bit. 

This is the best I can find (without spending too much time):  "Mitch McConnell is so out of touch with this topic (student loan debt), ... no focus on details - all he worried about was that millionaires and billionaires might have to pay as much in taxes as middle class tax payers."

Granted, this is light weight, and Mitch McConnell is a bill blocker.  So she really just called him out on his own behavior.  Maybe it felt more like a personal attack, but I'm not finding any quotes that were literally ad hominem.  So, perhaps not the best phrase (but I did qualify it with a 'close to ' modifier :) .

What I remembered was blanching at some comments she made on the senate floor - at that time I felt like she was getting too personal.  Upon reflection, what bothered me was the divisiveness.  The 'us vs them'.  "Those republicans... etc.".  In my opinion this divisiveness is unproductive.   I guess I just didn't want to see her sink to that level. 

[austin]

Research like this always upsets people who like to think that their comfortable circumstances are entirely due to their own hard work. Some people don't like being shown that life isn't fair, and their reaction is to oppose those trying to even the odds.

[Dee]

Well said, Austin!

[Captain and Mrs Slow]

I'm a huge fan of Elizabeth Warren, and was going to start a thread on her book The Two Income Trap That book changed my whole view of family finance. I think it should be top of the list of any aspiring Mustachian.

The basic premise of her book is that having two incomes makes one more vulnerable to economic shocks rather than less because you don't the back up earning power, in other words if the husband loses his job, in a 1 income house the wife can go back to work.

Secondly and this is based on conversations and stuff I read. But the BIG mistake families make when unemployment hits is to borrow against the house. I noticed this with some super frugal friends of mine, when horizon oil rig went under his business dried up to make ends meet they borrowed against the house. Had things not quickly turned around they would have lost the house.

The second point of the book deals with the banking sector and here's a question for you.

Who is a banks preferred customer

1. A person who pays their bills on time and has money in the bank
2. Someone of the edge of Bankruptcy struggling to make ends meet, who can't always make the payment and eventually goes bankrupt.

The answer may surprise you but it's the latter, they make a lot of money off a family spiralling into bankruptcy. The longer they can keep them on the debt treadmill the more money they make.

Edit: there are points you can quibble about she doesn't talk about frugality as much as she could but it's a research book rather than a simple living book.

[4alpacas]

I'm a huge fan of Elizabeth Warren, and was going to start a thread on her book The Two Income Trap That book changed my whole view of family finance. I think it should be top of the list of any aspiring Mustachian.

The basic premise of her book is that having two incomes makes one more vulnerable to economic shocks rather than less because you don't the back up earning power, in other words if the husband loses his job, in a 1 income house the wife can go back to work.

I'm reading the book right now!  I didn't read her paper, but the book mentions the move to more expensive neighborhoods and two car families.  The first part of the book (and the only part I've finished) discusses the great lengths people go to in order to get their kids into "good" schools. 

Her book cemented the idea that you should wait until you're financially prepared to buy a home (20% down, huge cash cushion).  I also thought it highlighted the need to be able to survive off of one job loss.  She also talks about the cost of an extra car and childcare. 

I think the book highlights the need for families to take a step back and prioritize.  Do you need to stretch to put your kids in the "best" elementary school?  Or could you stay in a more affordable area with so-so schools?  The book does bring up a few points about how your zipcode affects your educational opportunities. 

Warren's work highlights the issues brought around by the average middle class American.  People feel strangled by their mortgages and need for SUVs.  If people opted for less expensive homes, smaller/less cars like MMM proposes, the middle class wouldn't feel so strangled by their "obligations" and could spend money on the things they value. 

[Cpa Cat]

Research like this always upsets people who like to think that their comfortable circumstances are entirely due to their own hard work. Some people don't like being shown that life isn't fair, and their reaction is to oppose those trying to even the odds.

That doesn't seem entirely fair. I'm sure many of us can look at our lives and check the boxes:
- 2 income family.
- Middle class.
- Home owner.
- Parent.

But when we get to the 75% of earnings going to fixed costs part... we don't check that box. One of the reasons that we don't check that box is that we've made specific, conscious choices to have only one car, to not max out the mortgage the bank wanted to give us, to work during college (or pay down student loan quickly), to be aggressive about tax planning.

Often times, the choices we've made to reduce those costs weren't easy, convenient or popular. Sometimes those choices resulted in arguments with our spouses, who may have wanted cable TV and an SUV. Or our children, who didn't understand why they couldn't go to the expensive first-choice university.

So when "research" (and I use that term warily, because any politic-driven research should be approached with caution) emerges that says it's impossible for the middle class to do better, we stand here as living proof to the contrary.

But according to you, those things happened because life isn't fair.

BAM! I took an expensive vacation by accident, not because I went online and put it on my credit card. BAM! This Gucci purse appeared by magic, I certainly didn't mean to buy it. BAM! I meant to go to the pound to adopt a mutt, but somehow got tricked into buying a designer dog with medical problems! BAM! That SUV just dropped into my driveway from the sky! BAM! Big banks forced me to take out $150,000 in student loans for a music degree! What is the middle class to do against this onslaught?

Life isn't fair when you get cancer or your kid is born with a disability. Life is perfectly fair when you buy a house that you can't afford.

[Jessa]

I think there's a lot of truth in what she says. I think there's also a lot of truth in what MMM says. I believe most of us on these boards are probably using MMM type strategies to help offset the issues she presents. Because yes, high mortgages, high transportation costs, and high healthcare costs are part of the problem that the majority of people face today. That's true. People can also live closer to work, buy smaller, used, more fuel-efficient cars, and bike more often to save on all these costs. That's also true.

I think there's a also lot of grey areas in the middle. A lot of places, you can get good, affordable housing...but you're not going to find a lot of jobs in the area. Places where there are lots of good jobs within biking distance generally have much more expensive housing costs. Certainly there are places like Longmont that are the best of both worlds, but far more often people do have to choose between high housing costs and short commutes or reasonable costs and lots of driving. However each child does not need his/her own bedroom, my grandparents raised 7 kids in a 3 bedroom house. People don't need to drive gas-guzzling SUV's, they can find more fuel efficient cars that reduce transportation costs. Being thoughtful about the compromises we make as spenders - including spending on housing and transportation - can help to take the edge off a lot of the points she is making. I don't think any level of MMM planning and saving will really be able to offset a serious medical problem like cancer or ALS...but making good choices can help you weather a job loss or other temporary setback.

[iris lily]

Thanks for this article!  It was very interesting.  You used to be able to file bankruptcy over medical debt & now you can't.  Even with decent insurance a serious illness could wipe someone out.   It does seem that many of the case studies are people living above their means but of all my friends only one couple I know does this. Both my parents & grandparents were frugal so the example was set.

Medical debts cannot be discharged by bankruptcy?

On the other point, almost all of our friends near retirement age and past it are in hock and do not have their houses paid for. To me that indicates "living above their means." The standard back in my parents' day was that when you reach retirement age, you have no more mortgage payments. I was just talking to DH about this today because I am sending a friend $300 for something that is a necessity for her dogs and she's out on a crowd sourcing website, begging for money.

We talked about all of the people 60+ we know who are still flogging mortgages and in several cases, more than one mortgage. BAM! that second house just jumped up into their portfolio through no action of their own, what bad luck! :)  But a mitigating factor is that here in flyover country real estate is cheap, so while East and West Coast dwellers struggle with their single mortgage, we have to take on two mortgages to get to that level of debilitating debt. Damn, we have to work so much harder to get into debt, so unfair.  :)

[Captain and Mrs Slow]

@ Jessa I understand where you are coming from but her books are more about policy than personal finance. She starts off by asking why if family incomes (due to Women entering the work force) have more than double why are families still struggling and it's because the vast majority of the income went to housing and college costs. I do agree her solutions are a bit lame (2 income trap) and even she kinds of mentions that. She then devotes about half of The Two Income Trap to the bankruptcy and why it has very little do with over consumption and much more to do with when one income disappears. She saves most of her vile for the banks (she goes into more on that in her latest book) who have fought hard to tilt the bankruptcy law in their favour.

@ Spork and Another Reader have either of you actually read any of her books or looked at her policy platforms?

@ iris Lily on this issue I'm more familiar with CND than American statistics (but I'd imagine that the numbers are the same). And this the baby boomer effect, after spending a life living large they're not about to cut back just cause it's time to retire. But that's another whole issue.

[fallstoclimb]

I have pretty much pidgeonholed Ms Warren as the complainypants in chief (way before MMM coined the phrase and before she became a politician.)

If you approach every problem with the idea that you cannot win and that everyone is against you -- then you're already at the conclusion.  You won't win (unless possibly someone saves you.) 

I prefer the MMM way of looking at things:  We are living in times where we have more stuff and more opportunity for far less money.  Yes, we can overspend: but we have control over that, so it's totally solvable.

There are certainly outliers that have just really stupid bad luck.  But they are in the extreme minority.

Wow we have developed very different opinions of her.  I see her as someone who is willing to question the system in a thoughtful analysis-driven and productive way.  It sometimes may come off as grand-standing, especially when interrogating executive bankers, but she's got a pretty good understanding of the industry. 

I'm finding that there is a subset of people who label any examination or criticism of systems/society as complaining.  I can only assume this is from people who have motivation to maintain the status quo and therefore blame everything on 'personal responsibility.'  I have a background in sociology and find it fascinating to explore all the ways our society promotes the success of rich white men over everyone else, and hope by talking about this we can help change it.  But apparently that is just complaining (and everyone pulled themselves up by their bootstrings).

I don't think MMM and Elizabeth Warren are fundamentally at odds.  They are both trying to help people find ways to succeed in our current society - one with a micro view, and one with a macro view.  Macro doesn't = complaining. 

I hope I'm not responsible for another thread locking, but with a thread about Elizabeth Warren it's probably just a matter of time.....

[hybrid]

I find it hilarious that the MMM community would laugh at the notion that over-consumption is a myth, while at the very same time the MMM community is overwhelmingly socially liberal. This sums up nicely why I have a hard time voting for Democrats these days. Their values and mine may align on some issues, but on too many others, particularly economic, they play the whiny victim card. It is hard to get excited about Elizabeth Warren.

From my perspective some costs have indeed risen dramatically. Child care and health care costs get significantly worse with each passing year. Higher education has skyrocketed. But when it comes to meeting the very basics of food, clothing, and shelter, we have never lived in more abundant times.  Food was quite expensive, relative to budget, in the early 1960s when the American poverty line was developed. Food is a much smaller part of the budget today. The mostly unnecessary services in the middle that have become part of the middle class "norm" in the past two decades are what I feel separate an average household from acquiring wealth over time or just treading water.  These days the middle class "norm" includes things like

Cable TV
Cell phones with data plans
Eating out multiple days per week
Multiple gynormous cars
Doggie day care
Manis and pedis
A closet stuffed full of clothes
Travel sports teams
....and so on
   

[Prairie Stash]

I see that if I live my lifestyle like I live in 1970 then life is less expensive.  Cheaper food, clothes, car (no 2nd car, she says its actually cheaper than 1970 nowadays). Its reasonable to me that a 40% larger house costs more, maybe I'll buy an average 1970's house. With my wife at home childcare will be nothing.  Luckily I'm Canadian so healthcare hasn't increased here. 

I'd like to see the costs presented if I had a 1970's lifestyle in todays dollars.  No cells, cables, smaller house, 1 car etc. I agree that improving quality of life is important. I disagree that it's more expensive to live a similar lifestyle as the 1970's (which I wouldn't really want).

[anisotropy]

lol no myth about it.

The ones that skyrocketed over the years: housing prices, health care costs, child care, and tuition. These are all choice based expenses. Yes, even health care costs.

Life is not fair and it never will be. It's up to each and everyone of us to buy what we can afford. Yes even healthcare costs.

[Malaysia41]

It is a thought provoking piece.  As she is concerned with policy, one glaring culprit is the federal policy to encourage home ownership, which has been entrenched in Congress for decades. 

Between federal policy, the tax code, conventional wisdom, and rising house prices, young people feel obligated to buy houses as soon as they can.  This sets up trouble when banking policy is so lax that banks are allowed to loan to people with little income, low financial literacy, and 0-5% down, and then get bailed out when they make too many of these bad loans.   No wonder housing prices are high.

In this forum, the conventional wisdom is different, to do what makes sense economically.  For many people that means renting.  Yet, in the US some people feel that renting is socially akin to not owning a car: you find yourself in loser-ville. People on this forum worry less about what other people think of them and more about their balance sheets, so I imagine many rent in high price areas.

2008 illuminated the structural problem with banks loaning too much money for housing, and then getting bailed out.  While bank loaning policies have tightened since then, I don't think we've corrected the problem.  I like that Ms. Warren tackles the moral hazard bankers face.  One hand encourages them to loan too much, and the other bails them out when they do.  The banks make massive profits no matter what. They have an interest in keeping things lax.  She wants to fix that. 

And for the consumer - the title of her piece is more of a hyperbolic grabber, for one of her main points is that over-consumption in housing is a problem.  People should be deciding whether they can afford a house for themselves, not letting the bank decide.  But when you have a population who has been taught calculus but not financial literacy, you have a population who does just that! 

There are many actors and this problem requires multiple solutions.  I think we can do better to educate our kids about money.  Financial literacy should come before calculus.  Ms. Warren is tackling the policy front: she thinks the government should make banks accountable for bad loans when they give more than they should to people who are acting this way, and policy makers should wake up from the lotus flower the banks have been feeding them.

[Scandium]

Sneaky calling car a "fixed cost"? Yes a method to get you to and from work is a fixed cost, but I'd wager that 90% of the cars are so much more than that. What is the average cost of car these days? How much "equity" does a middle class family have in cars? $30K? 40? How much do they need? Same goes for house.

Money spent on childcare in the 70s, when many more women where stay-at-home is higher than today, when many aren't? Wow what a shock!

[4alpacas]

I find it hilarious that the MMM community would laugh at the notion that over-consumption is a myth, while at the very same time the MMM community is overwhelmingly socially liberal.

I don't think over-consumption is a myth, but I think people frequently inflate their "fixed" costs (car payments, house payments, etc.) to an unsustainable level.  "The Two-Income Trap" focuses on the costs expanding to spend all of the money brought in by the two earners.  "House poor" is a real issue.  With entire channels touting your home as an investment, it's not surprising.  There is a lot of extras tossed into the mix when both spouses are working, but the problem highlighted by Warren is the loss of one of the jobs.  Even if the couple cuts back on the extra spending (dinner out, clothes, stuff, etc.), the "fixed" costs are too large. 

TL;DR People file bankruptcy because of the big things, not Starbucks.

[Vilgan]

I personally don't struggle from the issues that Elizabeth Warren mentions, and wouldn't even if my income were a lot lower. But that's because I have had the opportunity to read and educate myself on a lot of things and understand far more about finance, budget, and how to spend effectively than most of the population. This isn't because I'm inherently a better human being or because I worked hard at this while these other people sat on their ass and watched tv, its because I've had a lot of opportunities and advantages in life including parents who encouraged learning, got technology in the home early, and helped me to be the person I am today.

I see a lot of criticism of her being a complainypants or people criticizing people in this position, but I don't think that's fair or particularly helpful. The average middle class person has NOT had the advantages I have had. Heck, English might not be their first language. They might not have a computer at home and not have ever heard of MMM because they've been out trying to make money the best they know how.

Do people spend in a less than perfect manner? Could they avoid a lot of their problems if they followed an MMM way of life? Sure, but how exactly are they going to think of it? While I can sit on Mint and worry about retiring at 43 vs 45, they are being told to spend 200 bucks on a car seat or they will be bad parents that will likely kill their kids, while working longer hours with less of a safety net than was available a generation ago.

Elizabeth Warren is a person that not only works to identify what has changed, but actually backs it up with data. Some of the stuff she's uncovered has genuinely surprised me, and anyone that has had much exposure to wall street or financial services has likely seen some seriously greedy and messed up things. Exposing that and trying to make stuff better for the middle class person who likely does not have the education or experience to navigate all the deception and marketing that is thrown at them is a good thing IMO. I hope the situation not only gets better because of altruistic reasons, but I hope things get better so that the middle class still has money to throw at apps and smartphones so I have a good job and can look at Mint and feel smug and impressed with myself for having a high savings rate.

[Malaysia41]

I personally don't struggle from the issues that Elizabeth Warren mentions, and wouldn't even if my income were a lot lower. But that's because I have had the opportunity to read and educate myself on a lot of things and understand far more about finance, budget, and how to spend effectively than most of the population. This isn't because I'm inherently a better human being or because I worked hard at this while these other people sat on their ass and watched tv, its because I've had a lot of opportunities and advantages in life including parents who encouraged learning, got technology in the home early, and helped me to be the person I am today.

I see a lot of criticism of her being a complainypants or people criticizing people in this position, but I don't think that's fair or particularly helpful. The average middle class person has NOT had the advantages I have had. Heck, English might not be their first language. They might not have a computer at home and not have ever heard of MMM because they've been out trying to make money the best they know how.

Do people spend in a less than perfect manner? Could they avoid a lot of their problems if they followed an MMM way of life? Sure, but how exactly are they going to think of it? While I can sit on Mint and worry about retiring at 43 vs 45, they are being told to spend 200 bucks on a car seat or they will be bad parents that will likely kill their kids, while working longer hours with less of a safety net than was available a generation ago.

Elizabeth Warren is a person that not only works to identify what has changed, but actually backs it up with data. Some of the stuff she's uncovered has genuinely surprised me, and anyone that has had much exposure to wall street or financial services has likely seen some seriously greedy and messed up things. Exposing that and trying to make stuff better for the middle class person who likely does not have the education or experience to navigate all the deception and marketing that is thrown at them is a good thing IMO. I hope the situation not only gets better because of altruistic reasons, but I hope things get better so that the middle class still has money to throw at apps and smartphones so I have a good job and can look at Mint and feel smug and impressed with myself for having a high savings rate.

All the more reason to require financial literacy education in middle and high school.  I think it should be part of an exit exam.  Perhaps kids' scores on the financial literacy exam could be used in figuring the kinds of loans they qualify for.  Fail the exam?  You don't get to borrow much money.  Ace the exam?  You can borrow as much as the bank is willing to loan. 

[golden1]

All the more reason to require financial literacy education in middle and high school.

I've been saying this for years, before 401k plans replaced pensions.  With that change it is even MORE critical. 

I sat in a 401K meeting at work the other day and I was ASTOUNDED at the lack of financial knowledge, just even the basic stuff, of the average employee that has a college degree!  If you spend 16+ years in school, you should at least have the basic knowledge of how our economic system works and how the math of personal finance works.   People can't properly have "personal responsibility" if they aren't educated properly in the first place.   I teach my kids this stuff, but not everyone does, and it puts a burden on all of us.  Everyone benefits from an educated populace, and personal finance is a huge gap in most peoples basic education. 

Elizabeth Warren is my senator, and I was a fan before she was a senator.  She is now caught in the political machine, which is unfortunate, because she has done a lot of research and does have a good understanding of systemic financial pressures on families, and has an interest in protecting the consumer from the practices of predatory banking.   Her being a politician tends to keep people from reading and respecting the decades of good work she has done. 

"The Two Income Trap" pointed out a lot of these systemic problems that are causing financial stress in families these days, and the crux of a lot of them is real estate prices inflated by differences in public school quality.  I see this BIG TIME in Mass.  It is a self perpetuating cycle.  People naturally want a good education for their kids.   There is a limited supply of houses in the school districts that have good schools so parents work two jobs to live in these school districts.  At the same time, that property tax money flows away from poorer towns, leaving the schools there underfunded, and the situation just keeps getting worse as even more people move out of underperforming districts.  If you read the book, she points out several solutions to these problems, and a lot of her solutions were actually very "Mustachian" -  one of the basic ones was to keep your expenses covered by one salary if at all possible.   Gee, that sounds familiar.   She also talks about ideas to fundamentally change our school system so that school funding and real estate are not entwined like they are now. 

Why is the idea of looking at systems and seeing what can be done to change them at odds with the idea of personal financial responsibility?  Both of these are vectors in the financial health of a nation.  Saying that there are things we can improve on structurally doesn't absolve people of all culpability in their own financial situation.

[chemgeek]

@golden1:

I'm in MA and my husband and I are looking to buy a house in the coming years ( ideally less than 2). And the jumps in housing based on school district is obscene. Where I have trouble though is determining if those school rankings actually mean anything. I grew up in Somerville. "failing" schools by standardized yardsticks due to a very high immigrant population. But I came out of highschool with a semester's worth of AP credits so I finished my bachelors in 3.5 years, saving my parents and myself some money. Most of my friend group from high school, myself included, have gone on to get advanced degrees ( md, phds, pharmacists). So how do you really interpret those numbers assigned to school districts on Zillow? What do they really reflect apart from spending per student and average test scores? My background makes it hard for me to understand people willing to stretch their financial security so thin to get the best school district for their kids.  A "good" school is only going to get your kid so far. If they're not pushed to learn and think by parents, what school district they're in doesn't matter. This comes up repeatedly when discussing what our upper limit for a house price is with my in-laws. They'll tell us , " you can afford more than you think you can". Yes, I know on paper we could afford a lot more than our personally set limit, but we don't WANT to spend more than that just for a supposedly better school district.

All this to say I'm annoyed at what real estate costs around here, particularly as we've been priced out of living anywhere near Somerville ( thanks to gentrification). Though after reading some case studies here, I thank the stars that I don't live in California.

*steps down off soap box*

[firelight]

Just wanted to chime in.... We are expecting our first kid in a few months and have already been told by friends to start thinking about preschool (private ones) so we can join the waiting list to have a seat in two or three years... And the current tuition is $15k per year plus other fees. I'm not sure if its worth it but almost everyone in my circle of friends is doing this 'for the child'. Heck! My grad school degree cost less than this..... We were thinking of a SAHP but tuition prices in bay area seem to eat up that dream

[firelight]

If we end up sending our kid to one of the 'better' schools, I'm sure we'll be a two income family for long. Definitely feels like a trap....

[golden1]

Where I have trouble though is determining if those school rankings actually mean anything.

I have the same problem.  The school rankings only measure performance of the school based on certain metrics like class size, standardized tests etc.....  I think they are driven up by demographics big time, and so the rankings are not representing the true quality of the schools and teaching.  Wealthy people that can afford to have their kids tutored and give them other advantages end up in the Weston/Lexington type areas, and kids who don't have those advantages who might drag down school rankings are priced out. 

I bought 15 years ago in a community in suburban MA that had school rankings in the bottom part of the upper third in rankings - so not bad but not the creme de la creme.  It was the best I could afford comfortably, and I figured I was smart enough to supplement my kids education where it was lacking if it was indeed a problem.  Personally, although our rankings are not as high as nearby towns, I think my kids are getting a top notch education and it is certainly not worth paying double for a similar size house to get what might be a very small improvement, if any. 

And remember, MA in general just has great public schools.    I grew up in a top ranking school district in MD until age 9, and when my parents moved up here, I was in remedial classes for a year just to catch up to the standards of a very middle ranked school in MA.  When they pull out MA schools and compare them worldwide, they rank up with Singapore and Finland. 

But the point is, according to Warren, it doesn't matter if the schools are really better or not.  Most parents believe that better rankings equal better schools, so that drives prices up. 

[buckeyecub]

lol no myth about it.

The ones that skyrocketed over the years: housing prices, health care costs, child care, and tuition. These are all choice based expenses. Yes, even health care costs.

Life is not fair and it never will be. It's up to each and everyone of us to buy what we can afford. Yes even healthcare costs.

While I agree that we have some control over healthcare costs there isn't always as much choice as with other things. Anyone will major health problems knows that there isn't that much control. 

You cannot control what diseases you are born with.  For example a T1 diabetic will not live very long or well if they choose not to take insulin (which their body can't produce) or have some type of health care.   

Yes, I can make choices to cut other expenses to afford the health care I need to manage my health but that doesn't mean that I have that much control.

[hernandz]

But when we get to the 75% of earnings going to fixed costs part

I haven't yet read her other books; I'm currently reading All You're Worth and she's advocating bringing your must-haves to 50% at a maximum! and counts that as some fixed and some variable.  Housing, healthcare, basic utilities, and basic transportation (although it does seem to assume a car). 
She advocates 30% for wants and 20% for savings, which includes debt repayment.  This seems very far off from the 75% quoted up-thread.

Is this 75% fixed costs something she is advocating in newer writing, or is she describing a current, yet unsustainable paradigm for folks who are in trouble? I'll grant you that 20% savings isn't mustachian, but she seems to be preaching to those having a single-digit savings rate in AYW by advocating 80% spending but not 75% fixed costs.

If someone could provide citation, I would much appreciate.

Warren, E., & Tyagi, A. W. (2005). All your worth: The ultimate lifetime money plan. New York: Free Press.

[domustachesgrowinhouston]

I figure when government officials actually care about over spending, public or private, it will be blatantly obvious in the form of financial education in public schools beyond balancing your checkbook. Until then it all sounds a lot like the usual "i care about you, hire me" stuff.

My 3 point plan for political reform:

Retire early
Quit paying taxes
Let em find a real job

[LalsConstant]

I have always looked at Warren's stuff as a macro level explanation of why my parents generation could afford more material trappings than mine can, and as an explanation for how the average person's lifestyle is economically maladaptive.

I do think she is somewhat misguided in trying to encourage policymakers to ensure a certain lifestyle pervades but not fundamentally wrong about the structure of the average person's financial woes.

Obviously the less your life resembles that of those who struggle even if some elements are the same the less likely you are to struggle.   The frugality culture is simply a group coping with the reality she has analyzed.

[hybrid]

I have always looked at Warren's stuff as a macro level explanation of why my parents generation could afford more material trappings than mine can, and as an explanation for how the average person's lifestyle is economically maladaptive.

I do think she is somewhat misguided in trying to encourage policymakers to ensure a certain lifestyle pervades but not fundamentally wrong about the structure of the average person's financial woes.

Obviously the less your life resembles that of those who struggle even if some elements are the same the less likely you are to struggle.   The frugality culture is simply a group coping with the reality she has analyzed.

Coping with, or simply adapting to? As MMM has pointed out and I wholeheartedly agree, on some levels we have never lived in more abundant times. Yes there are challenges, but challenges a great many can fairly easily overcome.

[partgypsy]

I have always looked at Warren's stuff as a macro level explanation of why my parents generation could afford more material trappings than mine can, and as an explanation for how the average person's lifestyle is economically maladaptive.

I do think she is somewhat misguided in trying to encourage policymakers to ensure a certain lifestyle pervades but not fundamentally wrong about the structure of the average person's financial woes.

Obviously the less your life resembles that of those who struggle even if some elements are the same the less likely you are to struggle.   The frugality culture is simply a group coping with the reality she has analyzed.

Yeah I think what she is writing about is essentially correct. On the whole, consumer goods have gotten cheaper over the decades (clothes, toys, electronics) but the big ticket items (in particular housing) have not and wages are stagnant. Doesn't mean you still can't save money, but you do it with the mindset of one's parents to get there. I also find the division between rich and poor becoming greater than when my parents were growing up. Doesn't mean that's not reality, only gives one more motivation to keep one's own house in order.

[SisterX]

I don't see how it's inconsistent with MMM to point out that there are factors which are, definitely, making it harder for the middle class to get ahead or even stay even.  You say that the type of housing is a choice, but you're looking solely at the price of buying a house.  Rental prices are going up as well, due to those very same costs for land, but wages haven't been going up.  So it's harder and harder for poor people to find affordable rentals.  Many of them get pushed out of the urban areas which are closer to a greater variety of jobs, and out to where public transportation is crappy and takes a long time to get anywhere.  Thus, they depend on their vehicles to get to their job or jobs, get children to daycare (which is incredibly expensive and the most affordable daycares are almost certainly not anywhere close to the job/jobs), and get basic foods, since those places don't generally have grocery stores. 
It's all very well for us to sit here from a position of affluence and say, "Get a bike, slackers!" but we have options.  If you're having a hard time making ends meet every month and you've got $20 left with a week to go before you get paid again, are you going to use that money to buy a used bike off Craigslist, or are you going to use it to feed your kid?  Even if you do buy the bike, that doesn't solve the problem of how long it would take you to get to and from work--time cost--or the fact that it only transports you, not your child.  Buy a bike trailer!  Oh, wait, you don't have money for even a used one.  Whoops.  And neither do you have money for food now, so look into your hungry child's face and say, "Sorry, kid, looks like you won't get to eat."
It's the same with cooking.  Cook at home if you're so poor!  But, so many people lack the basic skills to know what to do with food.  It takes time to learn to cook, time which poor people frequently don't have, and having someone show you what to do is usually the best option.  If you tell someone who's never been shown the way to cook, "Saute that onion," they'll have no idea what the heck you're saying.  I'm lucky.  I've been baking on my own since I was 12, because I have relatives who love to bake and showed me how.  My mom showed me how to cook.  My husband's mom showed him how to cook.  Not everyone has that in their life, however.  Heck, telling people to cook even assumes that they have access to the means of cooking.  In my current apartment, the stove has a burner which died over a year ago and the landlord tried to fix but couldn't.  So, we've had to live without that one burner because buying a new stove is off the table.  Sucks to be us!  And our landlord is pretty decent.  What about slum lords?  Do they really care if their tenants have working ovens?  If you tell someone to buy a slow cooker, they might run into the same problem as the bike.  Yay, they've got a slow cooker!  And no money left to buy food to go in that slow cooker.
"Having kids is a choice", you say, but birth control fails, even when it's available and used correctly.  I personally know of several children who were part of the .1% improbability, and even a few kids who were assumed to be an impossibility after the couple was told that they were infertile.  "Get an abortion" is becoming less and less of a possibility thanks to the very same politicians who think it's "fiscally responsible" to cut services for the poor.  Besides, what's your advice after the kid is born, go back in time and not have the sex which created that life?  That's assuming that the woman in question even had a choice about the sex to begin with.
There are so many factors going into your financial circumstances that you never even think about.  Be grateful if you do have the skills to do what you do to save money.  Be grateful that you have options.  And try, if you can, to remember that you've had a lot of help getting to where you are.  Even better, support people who are trying to make the world a more equitable place, as Ms. Warren is.  Why is it so shocking, or so unmustachian, to point out that almost all of the economic gains in productivity over the past few decades have gone to the already rich?  Yes, there is over-consumption and we can all point fingers at people who were their own financial downfall.  But there are also a lot of good, measurable reasons why it's harder to get the basics of life now.  Again, how is pointing that out "unmustachian"?
There's a huge tendency on this forum to conflate "my life experience is X, therefore everyone else's experience must also be X and if they're not doing as well as I am then they're just lazy and/or stupid".  Your life and circumstances are unique to you.  Do not confuse your truth with universal truth.

[Helvegen]

I'm a huge fan of Elizabeth Warren, and was going to start a thread on her book The Two Income Trap That book changed my whole view of family finance. I think it should be top of the list of any aspiring Mustachian.

The basic premise of her book is that having two incomes makes one more vulnerable to economic shocks rather than less because you don't the back up earning power, in other words if the husband loses his job, in a 1 income house the wife can go back to work.

I didn't read the book, but my husband and I watched her lecture on YT about 5 years ago on the topic. It hammered home to both of us to NEVER become dependent on a second income. So far, I have to say it has been a very good lesson learned for us.