Fixing The Financially Fragile US Household Forever.
American families are economically fragile. If we look into the rear view mirror, here’s what went wrong.
In the 1970’s most families had a single wage earner. The median income in the 1970’s was about $38k a year (in 2000 dollars). The cost of a home and other fixed expenses (mortgage, taxes, car, etc.) were about $20k a year. That left $18k a year in disposable income.
Today’s family has two incomes. The median family income is now about $67,000 (in 2000 dollars). The cost of a home and other fixed expenses are about $50k a year. That leaves $18k a year in disposable income (the same as the family in the 1970’s).
Here’s a chart that depicts it (via Elizabeth Warren’s analysis in the The Two Income Trap — a great book btw).
The key to this analysis is that the amount of fixed expenses relative to income. That ratio puts today’s family at grave risk since even a minor financial shock can cause financial ruin. For example:
- If either spouse loses a job, the family bleeds red ink as fast as if the single wage earner lost a job in 1970.
- It takes a modern family nearly 4 times as long to save enough money to cover fixed expenses as in the 1970’s, assuming the same percentage of discretionary income was saved. That means financial reserves are much lower today than they were.
- A financial disruption — health to stock market fiasco — can wipe out more years of savings faster in today’s scenario than in the 1970’s.
In short, an American family is financially fragile (the opposite of resilient).
That reasons we became fragile
Lots of reasons. First off, it’s not due to overspending on homes or consumables. All of the data shows that this isn’t the case. The size of the median American home only grew by about 0.5 rooms (half a room) since the 70’s and we collectively pay quite a bit less for nearly all consumables (from clothes to food) than we used to. Instead, the big reasons are:
- Incomes stagnated. The median income is less than it was in the 70’s despite a more than doubling of American worker productivity (which means we produce more than twice as much as we did in 1970 per worker, but all of the gains from that extra production went to companies instead of salaries). Even if only half of that productivity gain was plowed into salaries as it did in the past, we’d see median family incomes well over $100k now, and the economic outlook for the US would be considerably different now.
- The cost of housing skyrocketed. Why? US families bid up the prices of homes that were towns that were safe and had good public schools, in order to launch their kids with as much of an advantage as possible. Simply, when it comes to housing, you get much less (60% of American households live in homes that are more than 25 years old) for much much more today.
- The costs of sending two people to work are very high. Everything from a second car to daycare. Extra costs = extra stress.
So, what’s the best way to fix this disaster?
There aren’t an patches or small fixes that will do the trick despite what Washington and Wall Street tell us (they are dinosaurs, dangerous and due for eventual placement in a living museum like european royalty).
There is one major change in approach that would fix everything. A change that hits at the heart of the problem and fortuitously is in line with nearly every tech, social, and economic trend that’s headed our way.
The change is to turn the American home into a place that pays for itself. A place that isn’t a black hole of expenses, but rather a place that helps us along economically and in new ways yet to be found.
Assuming that we can do this, it should be possible to return fixed expenses to the levels they were in the 1970’s. If that occurs, the stagnant $67k family income generates $47k in discretionary income. 3 times what it was in the $70’s. It would also make it possible to bounce back from nearly any and all financial and economic shocks, from the loss of a job, health issues, and worse. Finally, it would make retirement possible, since the home would not be a draw on income, but a source.
Is this possible? I think it is more than possible, it’s inevitable.