The Circles of American Financial Hell

More than a half-century ago, Betty Friedan set out to call attention to “the problem that has no name,” by which she meant the dissatisfaction of millions of American housewives.

Today, many are suffering from another problem that has no name, and it’s manifested in the  bleak financial situations of millions of middle-class—and even upper-middle-class—American households.

Poverty doesn’t describe the situation of middle-class Americans, who by definition earn decent incomes and live in relative material comfort. Yet they are in financial distress. For people earning between $40,000 and $100,000 (i.e. not the very poorest), 44 percent said they could not come up with $400 in an emergency (either with cash or with a credit card whose bill they could pay off within a month). Even more astonishing, 27 percent of those making more than $100,000 also could not. This is not poverty. So what is it?

As people move up the income ladder, they escape material shortages and consume more. They have “things”—goods, houses, and, most importantly, education—to show for their higher earnings, but they do not have healthy finances. Having those “things” is of course an improvement over not having them, but only for the very, very rich (or the very, very unusual) is there any real escape from the pressure-cooker of American household finances.

At its core, this relentless drive to spend any money available comes not from a desire to consume more lattes and own nicer cars, but, largely, from the pressure people feel to provide their kids with access to the best schools they can afford (purchased, in most cases, not via tuition but via real estate in a specific public-school district). Breaking the bank for your kids’ education is, to an extent, perfectly reasonable: In a deeply unequal society, the gains to be made by being among the elite are enormous, and the consequences of not being among them are dire. When understood mainly as a consequence of this rush to provide for one’s children, the drive to maximize spending is not some bizarre mystery, nor a sign of massive irresponsibility, but a predictable consequence of severe inequality.

There’s not a great term for this phenomenon and its consequences. Often, scholars and writers will use some variant of the phrase “financial insecurity” or “fragility” to describe it, but this does a disservice, implying that living paycheck-to-paycheck carries risks, that something bad could happen. But where would that show up in this measure? For millions of people without savings, those bad things have already come—they’ve had to make an emergency car repair or pay an unforeseen medical bill. They’d still answer a survey question about whether they had $400 on hand in the negative, and the survey would miss entirely that they had already experienced such a need. Risk is certainly part of the problem, but lots of families are facing issues that aren’t hypothetical and in the future—they are real and immediate.

Other existing terms fall short too. More colloquially, many refer to the speed of American life as a rat race, but that’s more of a reference to the hard and fast pace of work than it is to the broken finances many face at home (though surely the two are related, as the need for more money at least partially motivates that pace). Another, separate, phenomenon that people discuss is the “hollowing out” of the middle class, but that refers to the distribution of incomes becoming more polarized, leaving fewer in the middle, not the struggles faced by those still there.

Neal Gabler, the author of The Atlantic’s story on this problem, decides to go with the phrase “financial impotence,” which succeeds in capturing the powerlessness that many feel when confronting a financial abyss. There are ways in which this is apropos—men, in particular, have seen their earning power diminish in recent decades, and Gabler isn’t the first to draw a connection between financial power and sexual power. But this is an unfortunately narrow framing of a financial crisis whose casualties are so often women.

The failure to put a proper name on this dynamic is a part of a broader failure to understand it—and to see it as a problem at all. (Cognitive scientists have a great term for this—“hypocognition”—which refers to when, as linguist George Lakoff puts it, “the words or language that need to exist to frame an idea in a way which can lead to persuasive communication is either non-existent or ineffective.”) The most common and straightforward measures of households’ financial health look at income: Are incomes rising? How many people are earning less than $40,000? How many are earning more? But a measure of income alone completely misses the fact that few are getting off this earn-and-consume hamster wheel, even as they earn more. Wealth statistics do a better job capturing just how much trouble Americans have building up real assets and savings (and the answer is: a lot of trouble), but don’t capture at a week-to-week, month-to-month level how hard it can be to cover one’s bills.

In the absence of a good understanding of what is going on, people frequently disparage those who are suffering. There are two common reactions to The Atlantic’s May cover story. On the left there seems to be a lot of, “Boohoo, a rich person who spends too much. We have real poverty to worry about.” On the right there was more of, “He made bad decisions and blames the system, our glorious system, for it!”

Yes, it’s not real poverty, and, yes, Gabler made bad decisions. But Gabler’s straits, and the straits of millions like him, demonstrate gross dysfunction at the core of the American system. If millions of people with healthy incomes are in Gabler’s situation, something is very wrong.

What is that something that is preventing people from turning their earnings into prosperity? Many have pointed to wage stagnation as the culprit, arguing that of course Americans can’t get ahead—they don’t have enough money to get ahead! And making more money would certainly help Americans afford better quality goods, housing, services, and so on—all of which are incredibly important. But there is little reason to think that higher wages would enable families to build up a financial cushion that would allow them to sleep easy at night. In fact, even the very richest largely do not put away what economists would consider a healthy retirement savings. For the vast majority of people, higher wages do not seem to translate into financial security.

So it stands to reason that the problem—insofar as it is in any real sense a definable, single problem—is driven by something that is happening on the spending side of the equation. Why can’t people live below their means, save up some money, and kick up their feet?

The place to start is by looking at what they are spending their money—and particularly their loans—on. The biggest expenditure? Housing, by far. (Transportation is next, but a good portion of that—gas—is in some ways a housing cost as well, since it’s a function of one’s commute.) And the biggest sources of debt? Housing and education. The average loan burdens for mortgages and student loans dwarf auto loans or credit-card debt, the other major types of debt that Americans tend to carry.

Housing and education appear to be two distinct categories of spending, but for many families they are one and the same: For the most part, where a family lives determines where their kids go to school, and, as a result, where schools are better, houses are more costly. This is both cause and effect: Where houses are expensive, the tax base is bigger and schools have better resources, and where schools are better, there is more demand for housing. Zoning restrictions exacerbate this dynamic, because many rich municipalities with excellent public schools oppose the density that would allow more people to access their schools, which in turn drives housing prices up further. So in a sense, for many people, housing debt is education debt.

It’s all too clear why parents will spend their last dollar (and their last borrowed dollar) on their kids’ education: In a society with dramatic income inequality and dramatic educational inequality, the cost of missing out on the best society has to offer (or, really, at the individual scale, the best any person can afford) is unfathomable. So parents spend at the brink of what they can afford. By contrast, non-parents are far more likely to actually build up savings. (In cases where parents do manage to find affordable housing in a district with good-quality schools, it can make all the difference.)

It’s possible to imagine a country where the schools are good everywhere and prosperity is widespread. In such a country, parents don’t pour their resources into maximizing their kids’ educational quality, because their kids will have basically the same outcome anywhere. That’s not the country America is.

Gabler, for his part, sent his daughters to private school—an enormous expenditure, but one that many families prioritize at the expense of financial well-being for fear of missing out on the winnings in a winner-take-all system. As Gabler writes, “We resolved to sacrifice our own comforts to give our daughters theirs.” Considering the stakes, this is not a mistake (despite what many commenters have insisted) but a rational response to the unequal distribution of America’s good schools and its prosperity more generally. And there’s reason to think this may yet pay off for Gabler. True, he has no savings. True, he lives very meagerly. But he has two very well-educated and successful daughters. They are, in a sense, his retirement plan: Most likely, they will be in a position to care for him and his wife in their later years. We should all be so lucky.

In a sense, the people who say rising wages would help are on to something, but the key is not getting households more money—it’s about building a different system, one in which the upside to getting ahead isn’t so high, and the downside to falling behind isn’t so low. Better wages are a symptom of such a system, but they don’t themselves bring one about. That would require systemic changes—changes to the tax code, changes to corporate-governance practices, changes to anti-trust law, changes to how schools are funded, to name a few. Such reforms are far off, or may never come at all. So for the foreseeable future, Gabler’s problem may be yet unnamed, but millions will know it all too well.