There is a better path out of the Two-Income Trap. Give families some breathing room. As befits a society in which the safety net must be built one family at a time, money in the bank is still the first line of defense against any economic bump in the road. Any program that helps families save money is a program that helps keep the middle class secure. At the moment, the federal government offers a handful of programs that give tax breaks to families who put money aside for specific expenses such as retirement, medical care, or college tuition.
15
These programs certainly sound promising, but they ask families to do something that is almost impossible in a capricious world: They ask them to predict the unpredictable. To take advantage of these programs, families need to know in advance which expenses will hit them and when they will need extra cash.
What happens when an unforeseen disaster strikes—when Dad loses his job or when Mom asks for a divorce? Families face events that elude all that careful planning. The first line of defense is their all-purpose passbook savings account, an account that is tax disadvantaged. If things get really bad, many families find that the only way to survive is to cash out their retirement accounts. The huge penalty associated with that withdrawal—set in place as a disincentive to withdraw early—doubles the pain. Not only has the family just wiped out any chance for a comfortable retirement, the government just took a hunk of their only savings—at a time when the family was already under extreme financial stress.
If the standard government policies were turned sideways, instead of asking each family to carve its nest egg into separate little taxadvantaged slices, middle-class families could be rewarded for
all
savings. All savings—not just savings specifically designated for retirement or education—should be exempt from taxes. Many liberals
have opposed such a change for fear that it would disproportionately benefit the wealthy, who are the only ones with ample savings.
16
But this concern could easily be remedied. The tax change could be implemented on a sliding scale, so that those with modest means could save tax free, while the wealthy continued to be taxed. Or the government could compensate for the lost tax revenues by increasing other taxes on well-to-do households.
The fear of letting the rich off too easy should not overshadow the fact that middle-class families desperately need to build their own safety nets. America’s personal savings rate has plummeted in the past thirty years, so that it now stands effectively at zero.
17
Encouraging savings shouldn’t be about token programs for one or two specified uses. It should be a concerted government policy aimed at helping families build safety nets strong enough to see them through good times and bad.
Over the past generation, the Two-Income Trap has left the modern family in a position that is thick with irony. Today’s parents are working harder than ever—far harder than their single-income counterparts of a generation ago—holding down full-time paying jobs and still covering all their obligations at home. Yet, paradoxically, without the safety net once provided by the stay-at-home mother, they are
more
vulnerable to financial disaster. They have little money left to build their own safety nets, and government policies tax most of their efforts to provide for themselves. They are caught: can’t afford to work, can’t afford to quit, and can’t survive if something goes wrong.
If the risks of the world had remained exactly the same over the past generation—the same risk of getting laid off, the same odds of getting divorced, the same chance that Grandmother would grow too frail to live without assistance—then the Two-Income Trap would have imposed a moderate dose of hardship on American families as they struggled to survive in hard times. But, as we will show in the next chapter, the risks of the world did not stay the same. Families lost the stay-at-home mother just when they needed her most.
4
The Myth of the Immoral Debtor
T
here is a second myth about financial failure. This one is not about how families spend their money—in fact, it is not about dollars at all. This myth is about good and evil, ethics and righteousness. The Myth of the Immoral Debtor tells a story that begins in the past. In the good old days, goes the story, people paid their bills No Matter What. Not because they had more money, but because they had more honor. They paid their bills because it was the
right
thing to do; they would have died of shame rather than default. But today, the myth declares, the old morality is dead. We live in a time of easy virtue and decaying standards. To quote Republican Senator Orrin Hatch from Utah, large numbers of our fellow citizens “abuse the system” in order to “get around debts for which they are very capable of paying.”
1
The myth doesn’t really require any proof, just a pugnacious assertion that our neighbors are cheating the system and the rest of us are paying for it. The Immoral Debtor Myth trades on an easy cynicism that passes for sophistication. Only chumps believe that everyone else is playing by the rules. People who are in the know understand that cheating is rampant, that millions of Americans are bankrupt or near-bankrupt because, according to Senator Hatch, “they run up huge bills and then expect society to pay for them.”
2
When the creditors come calling, they stall, lie, and,
sooner or later, declare bankruptcy so they can walk out on their debts.
Is there any truth to this claim? Have Americans gone from an age of honor and decency to a state of moral squalor? One problem with the Golden Age of Bill Paying is that no one can agree on when it actually occurred. Republican Congressman Henry Hyde recently complained, “Bankruptcy no longer carries with it the social stigma that it did twenty years ago. . . . Bankruptcy is becoming a first stop for some rather than a last resort.”
3
Congressman Hyde wasn’t the first to make this claim. He put the decline in the early 1980s, but he joined a long line of those who complained about declining standards. In the 1930s, Thomas D. Thacher, then solicitor general of the United States, expressed the often-repeated claim that numerous industrial workers were “running up bills without intention or ability to pay, and then filing a petition in bankruptcy.”
4
Mr. Thacher, in turn, was preceded by nineteenth-century arbiters of public morality with similar complaints, who themselves were preceded by eighteenth-century critics, led by the venerable preacher Cotton Mather, who, in 1716, used his pulpit to decry the early American colonists who could not pay their debts, “for which they are to be Indicted, as Not Having the Fear of God before their Eyes.”
5
It seems that the Golden Age of Bill Paying was always in the past, and that previous generations always had higher standards and greater integrity.
6
Indeed, if we listened to the public moralists, we would be left with the impression that America’s moral fortitude has been rapidly disintegrating for at least 300 years!
What about today? Have Americans become cunning financial manipulators, ready to walk out on their debts without a moment’s hesitation? Has the failure to repay or the decision to file for bankruptcy lost its sting? Once again, we turn to the numbers.
No Shame in Failure
The conviction that filing for bankruptcy no longer carries the stigma it once did is so widespread that it requires no proof. Whenever a commentator
tries to verify the argument, the logic is usually circular. People would not file for bankruptcy if they felt stigmatized by it; therefore, if bankruptcies are up, stigma must be down. Impossible to disprove, and it sounds pretty good if no one pushes too hard on the logic.
A few economists have written about stigma, but the results are pretty much the same. They focus on a few economic measures—the unemployment rate, the GDP level, the inflation rate, and so forth—without ever actually talking to families, either those who file for bankruptcy or those who do not. These researchers then declare that a decline in stigma accounts for anything and everything that the bare numbers don’t explain.
7
For example, if bankruptcy goes up while inflation goes down, it
must
be that stigma diminished because no other explanation presents itself. By this logic, the rise in bankruptcy filings might as well have been attributed to the number of SUVs on the roads or the number of burritos consumed—with exactly the same result.
Despite all the harrumphing, there is plenty of evidence that stigma is alive and well among families in financial trouble. One long-term study of family economics found that fully
half
of bankrupt families were unwilling to admit—even in an anonymous survey—that they had filed for bankruptcy.
8
Economists have calculated that there are millions of families who, after they took account of the legal fees and other costs, would be better off financially if they sought the protection of the bankruptcy courts. According to one estimate, about 17 percent of
all
households in the United States would see a significant improvement in their balance sheets if only they were willing to sign a bankruptcy petition.
9
That’s 18 million households that would profit from a bankruptcy filing, compared with the 1.5 million that actually filed, suggesting that at least 16.5 million families are still trying to pay their debts for some reason that has nothing to do with the legal rules. It would seem that bankruptcy may look like just another “financial planning tool” to the economists who study it, but it is very different for the families who actually have to file the petitions and show up in court.
10
Many commentators seem concerned that the families who file for bankruptcy are not sufficiently contrite. Democratic Senator Patricia
Murray from Washington argues that the Senate should make it a priority “to recapture the stigma associated with a bankruptcy filing.”
11
The idea that they do not feel bad enough about their bankruptcy filings would have come as a shock to most of the families who filed. In her discussion of the psychology of bankruptcy, Constance Kilmark describes the people she has counseled to file for bankruptcy: “The anguish, shame, and embarrassment they experience over their situation is real and compelling.”
12
In our own research, several mothers were willing to talk with us only on the condition that we not use the word “bankruptcy” during the telephone interview for fear that a child might pick up the extension phone and hear the dreaded word. Some said that just hearing the word still makes them cry, and they asked us to refer simply to “the event.” More than 80 percent of the families we interviewed reported that they would be “embarrassed” or “very embarrassed” if their families, friends, or neighbors learned of their bankruptcy.
13
So why would families file for bankruptcy even if they felt ashamed?
Because they believed they had no other choice.
By way of analogy, consider the stigma against nudity. Pretty much anyone over the age of three feels extremely embarrassed about getting naked in front of a stranger. But when people come down with a serious illness, when they are frightened by odd lumps or unexpected pains, they willingly shed their clothes in front of a bevy of medical professionals. They don’t bare their bodies because they feel no stigma about nudity; they take off their clothes because it is the only way to get some help.
So it is for more than a million families each year. When given the choice between losing their homes or filing for bankruptcy, they chose bankruptcy. When faced with a choice between
never
paying off credit card debts and getting a chance to start fresh, they chose bankruptcy. It was embarrassing, it was humiliating, and they tried to hide it from their friends and families—but they did it. One California woman filed for bankruptcy after she lost her job and was on the brink of losing her home. She got her second chance, but the blow to her sense of self-worth was deeply painful. “I will
never
file for bankruptcy again. I will let them take my home or I will go without health
care and food, and die and stand before Jesus before I do it again. It’s a matter of self-worth and pride.”
The Easy Way Out
The Myth of the Immoral Debtor has its variations. Some critics claim that families have gotten sneakier. Federal Judge Edith Jones, rumored to be a potential Bush appointee to the Supreme Court, asserts that “[b]ankruptcy is increasingly seen as a big ‘game,’ with the losers being those who live within their means, while the bankrupts pursue more interesting and carefree lives.”
14
In the good old days, families would work their fingers to the bone to pay off their debts. But today, according to Judge Jones, “bankruptcy more and more is looked at as an option of ‘first,’ rather than ‘last’ resort.” Families
could
pay their bills, but would rather take the easy way out.
Before we evaluate this claim, we should fill in a few basic facts about what it means to file for bankruptcy. Bankruptcy offers a one-time get-out-of-jail-free card. Although the specifics vary, the basic ideas are the same for both corporate and personal bankruptcies. When someone has gotten into serious financial trouble, he may seek protection from his creditors by filing for bankruptcy. The bankruptcy judge will supervise the case to ensure that creditors are repaid to the extent possible, while the debtor gets a chance to recover from disaster and make a fresh start.
15
For a business that is failing, the court takes legal jurisdiction over the company’s assets and makes every effort to treat the various creditors equitably, which usually means only partial repayment of the outstanding debts.
16
In some cases, such as the high-profile dot-com failures of the early 2000s, the business is shuttered and the assets are sold off piecemeal, with all proceeds parceled out to the various creditors. In other cases, such as K-Mart and United Airlines, a portion of the debt is written off, and a leaner, “restructured” company is allowed to continue its operations.