The Red Queen’s Race
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
By every measure, US households are worse off today than four decades ago. It’s gotten so bad that even households with two incomes are worse off than households with one income in the seventies.
A big part of it is that the median income of today is actually less than it was four decades ago, and that is for men. It’s even worse for women. The median income for women is ~78% that of a man. The situation is even worse given the fragility of the American household.
The Fragile American Household
The best analysis I’ve found on this situation is from Elizabeth Warren (Harvard Law School and a US Senator for the state I live in) in her seminal book The Two Income Trap. Although this book came out in 2004, it’s still the best single source of insight into the finances of the American household available. In the book, she dissected three decades of US census data on American households. This data showed that it had become increasingly costly for a household to stay on the path to the American Dream:
- Mortgages. UP 76%
- Cars UP 52%
- Taxes. UP 140% (corrected from Warren’s presentation)
- Health Insurance. UP 74%
Further, just to keep up with the rising costs of pursuing the American Dream, both parents were required to go to work full time. However, that wasn’t all she found. She found that even a dual income household couldn’t absorb the increasing costs of pursuing the Dream, and they were going bankrupt with increasing frequency.
This increase in bankruptcy wasn’t due to frivolous consumer spending or runaway consumerism as the media has claimed. The numbers just don’t back up that claim. In fact, households spent 32% less on clothing and 52% less on appliances in 2004 than they did in 1974. Even the size of the American home isn’t that different. The square footage of homes were only 5% larger in 2004 than it was in 1974, although the average age of the home was 50% older.
The actual reason is more interesting than this. The real reason is that the rising costs levels of merely staying in pursuit of the American made the two income household of 2004 much more fragile than it was in 1974 with only one income. You can see why in this chart from the book:
The amount of discretionary income available to the family in 2004 is the same as it was in 1974, yet it takes much more effort to attain it (much more cost and two incomes). Worse, it creates a fragility that makes the household extremely vulnerable to inevitable disasters or reversals. For example:
- It takes a lot longer to save enough money to cover expenses than it used to.
- The loss of either income (due to divorce, illness, layoff, etc.) will wipe out any savings very quickly.
- The chances of losing one of two incomes is higher than losing one (with a spouse in reserve to enter the workplace if needed).
In sum, the American household has become fragile. Unable to get ahead. Unable to save for big event or retirement due to frequent financial reversals. Increasingly unable to pursue the American Dream and it’s getting worse by the year.
How so? Incomes are lower the costs higher (particularly health care and education) than when Warren wrote her analysis. However, the worst part is that the volatility of the economic system is much higher, radically increasing the chance of the economic reversals that wipe out savings and force families into bankruptcy.
The Red Queen’s Race
The path we are on is clear. The competitive dynamic like this is a sign we’ve entered the Red Queen’s race.
The Red Queen’s Race is a concept used in biology to describe the evolutionary arms race between predator and prey in an inter species struggle (or host/parasite). For example, if a predator develops a new and better offense, its prey needs a defense that is even better in order to survive. This process of competition goes on until one of the species is driven to extinction.
However, in this specific instance, it’s not competition between predator and prey. The competition we’re seeing between US households is fratricide. The kind of intra-species struggle that occurs when a habitat is shrinking or in failure.
In our case, the habitat that is in decline is our economy. Our economy is becoming hostile to the pursuit of the American Dream, and Red Queen’s Race is the fast track the dustheap of history.
“IN American, it takes all the running you can do, to keep in the same place. If you want to achieve the American Dream, you must run at least twice as fast as that!”