Elizabeth Warren, the Flips, and the Fight.

• Author: Schansberg, D. Eric
• Position: Review Essay

When one of my sons does something unexpected, I like to joke: "Who are you, and what have you done with my son?" After reading Elizabeth Warren's three books on politics, I had the same question about her. Warren has had a prolific writing career, including many journal articles and academic books on her most relevant research interests in bankruptcy law and personal finance. Her first overtly political book, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (New York: Perseus, 2003), coauthored with her daughter, Amelia Warren Tyagi, is moderate politically and even conservative socially. Beyond that, some of her arguments on public-policy consequences are so well reasoned that it brings a tear to an economist's eye. But, really, the book seems like the sort of thing you'd expect from an academic--thorough work, thoughtful analysis, and careful conclusions.

With her newfound influence and fame, Warren became a politician--a senator and now a candidate for president. That's not necessarily a problem. One would hope that she would bring the best of her academic background to her new career. Unfortunately, she has turned over a new leaf. The second and third books are a combination of biography and political rhetoric--with notably little of the impressive analysis she displayed in the first book. And her political career can be summarized as a stunning example of hypocrisy against her first book that I share toward the end of this essay.

Murphy's Law, "Playing by the Rules," and Financial Woes

Warren's thesis in The Two-Income Trap (TT) is that when financial troubles come, life often falls apart for average people who "play by the rules." If they don't have enough money saved, they may not have the margin to get through the difficulty. They can't make payments; they borrow money; and they dig a hole that often ends up in bankruptcy.

If people live responsibly, then we hope that such occasions are rare and anecdotal rather than all too common and part of a trend. Of course, one can reasonably quibble with Warren by noting that a refusal to save enough money to deal with common problems is not exactly living responsibly or "playing by the rules" of the game of life--as life really works.

Warren's concerns, interests, and questions follow naturally from her research and her assessment of the problems: can the catalysts for financial trouble be mitigated through public policy? Should we use policy to restrict those who lend money to people, especially people in distress? And how can we encourage people to handle their personal finances more effectively?

If people are struggling with debt, it can only be an income or spending problem. Household incomes are generally higher, so there must be more spending, too. The title of the relevant chapter is "The Over-consumption Myth." But the "myth" is true, by definition. People in debt have necessarily overconsumed--spent more than they have. What she really means is that the spending is not "frivolous." (In a later chapter, Warren provides evidence that the problem is not a greater reluctance to pay one's bills--a drop in morality that might lead people to renege on debts.)

Warren presents data on changes in spending over time and reports that the bulk of the increased spending comes from housing. Houses are not much fancier, but they are bigger. That said, a larger issue is what Warren rightly (and impressively) sees as the connection between housing values, school quality, and neighborhood safety (TT, pp. 25,28). This leads her to advocate greatly expanded school choice--vouchers, charters, and so on--to break the link between housing and schools.

More spending and more income could leave budgets in the same place, on net. But Warren notes the growing prevalence of two working parents. And if trouble comes--for example, from job loss or health problems or both--families have less flexibility to fix their income or adjust their spending. (Warren's parents used this approach when her father struggled with health issues and the job market, and her mother slid into the workforce to help out.)

One of the ironies with housing is that it is not a frivolous cost. And as a fixed cost in one's budget, it creates much more strain if household income is compromised.

Housing is often sold as a responsible purchase, an investment, a middle-class ideal. But with income troubles, the monthly cost of housing can be an albatross to a strained budget.

Warren also notes other concerns. The problems increase with the instabilities of divorce and cohabitation--both of which have become far more prevalent. If two parents are working, it's at least twice as likely that one will lose a job. And if labor markets have more "churn" than in past decades, the likelihood of trouble increases further. As such, Warren laments the "two-income trap" of both parents working. She's careful to say that this lament is not opposition to women working per se. But the implication is that the second spouse working--usually the woman--does create much of the problem at hand. (On women entering the labor force, Warren critiques the Left and the Right--the Left for assuming that it is all benefit and no cost; the Right for underestimating the value of women at home [TT, p. 67].)

So...