Crunch Time

I heard an interview with author Jared Bernstein about his new book, Crunch: Why Do I Feel So Squeezed? (And Other Unsolved Economic Mysteries). Mr. Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C. and his book attempts to offer an explanation for why so many Americans feel insecure and uncertain about their standing in the economy.

This topic often engenders knee-jerk explanations -- Bernstein notes that “economics has been hijacked by the rich and powerful, and it has been forged into a tool that is being used against the rest of us.” Talk about class warfare—en garde! He also cites plenty of statistics supporting the fact that only a small percentage of American workers have participated in the post-dot-com recovery of 2002-2007. The chasm between the very rich and the middle has been widening during this time period and as a result, politicians have picked up on the theme of regular people in economic distress.

But there is something else at work here. Bernstein’s ability to accurately describe what so many are feeling is important, but in my experience, he is not inclusive enough. I speak to people all the time, who may actually be defined as “rich” in Bernstein’s eyes, but who also feel the weight of an economic crunch. These households often earn up to $300,000 per year, but complain that there is not much left over after the bills are paid. I know that those who earn $50,000-$60,000 may roll their eyes at this lament, but take a walk with me in the shoes of these “semi-affluent” to understand how the crunch can impact many more than those considered “the middle class”.

“John” and “Jane” have a household income of $200,000. They live in an affordable house in a nice neighborhood, but the schools have been in decline since they moved in. As a result, they decided to send their three kids to private school. The annual after-tax cost of tuition has been approximately $60,000 for the past couple of years and with this added expense, the only savings they can manage is the contribution to employer-sponsored retirement plans. Jane exclaimed, “It’s crazy to think that we earn $200,000 and can barely meet our day-to-day expenses!”

But is it really crazy? Here is the math: they earn $200,000 and after accounting for their retirement contributions, benefits and taxes, they take home approximately $120,000 per year. Now remove the tuition and they are living on $60,000 per year. For some, this might seem like a lot, but I’m telling you that it is not easy for these people. They are anxious about money all the time and are feeling the “crunch” that Bernstein describes in his book. You might say, “Just send the kids to public school and that would solve the problem.” I took a slightly different approach. When they raised the issue of sending the kids to private school, I responded that the kids would likely have to pay their own way in college so that the parents could fund their own retirement.

Everyone agreed to that game plan but there is still is a pretty healthy dose of stress that lingers. That’s why when I hear the details of real-life stories like these, I caution all of us not to assume that we know who the “rich and powerful” are that Bernstein talks about, and instead try to remember that a lot of folks are experiencing crunch time in their own significant ways.