Amelia Warren Tyagi assumed that her freelance gig running numbers for her mother’s research project would be an interesting, if somewhat routine bit of work – a great way to ease back into the professional world after the birth of her daughter. Her mother, Harvard law professor Elizabeth Warren, was continuing an earlier research stream on personal bankruptcy in America and asked Tyagi to help her run some analyses of several federal databases.

But as Tyagi began working through 30 years of bankruptcy, U.S. Census and Bureau of Labor Statistics data, a pattern began to emerge that was anything but routine. “As we worked through the analysis together a story began to take shape that wasn’t just about macroeconomic trends,” says Tyagi, WG’96. “It was about how much things have changed for middle-class families with kids, from my mom’s generation to mine – a story of how these families are struggling, quietly, just to provide their kids the basics.”

Warren and Tyagi published their findings in the book, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, released last month to a flurry of attention from national media and presidential hopefuls eager to capitalize on findings that reveal that all, in fact, is not well.

Families with children, the book reveals, are nearly three times as likely to go bankrupt today than those without. The nation is now on a trajectory where one in seven families will go bankrupt by the end of the decade. And while the modern, two-income family earns 75 percent more (inflation-adjusted) than the one-earner family of a generation ago, it actually has less discretionary income and far more financial instability.

“We are talking about issues that are invisible,” says Tyagi. “When you tell somebody that more children will go through their parents’ bankruptcy than their parents’ divorce, people stop in their tracks. When you say that one in seven middle-class families will go bankrupt by 2010, people wonder how this can be.”

How this can be in fact has little to do with big screen TVs, weekly jaunts to the mall and too many family dinners at The Olive Garden, Tyagi and Warren demonstrate in The Two-Income Trap. What’s happened, they say, is that a decline in public education has bid up the price of housing in the best school districts. Parents overextend their mortgages to buy homes near good schools, a trend that’s flourished as deregulated lenders have continued to relax down payment standards from 20 percent a generation ago to 3 percent or less. And today, in a single year, more than five billion preapproved credit card offers, totaling $300,000 of credit per family, pour into mailboxes across America. Credit card debt has increased accordingly, Tyagi and Warren write, from under $10 billion in 1968 (inflation adjusted) to more than $600 billion in 2000, an increase of more than 6,000 percent.

But “there is no evidence of an increase in impulse buying or luxury acquisitions of the past 30 years,” the authors write. “If families aren’t buying more goods, then what are they using all that debt for? The bidding war (for housing) has inflated the cost of middle-class life to the point that once they have paid the mortgage and other fixed expenses, families have little discretionary income left – and less margin for error.”

The real spending increases, Tyagi says, are for housing, health insurance, a second car, preschool and college education. “Not very sexy stuff. And even when you add in all those dinners out, families are spending less on food when you adjust for inflation than they did a generation ago – more than 20 percent less. I find that pretty surprising.”

“It’s the same for clothing,” Tyagi continues. “When you look at the numbers, you see that the average family spends less on clothing than they did in the early 1970s. You forget that our mothers took us to Stride-Rite to buy a new pair of leather shoes every three months. We don’t do that for our children,” she says. “My daughter has one pair of sandals I bought at Target.”

How should families protect themselves from the two-income trap? Tyagi and Warren’s recommendations counter the penny pinching, cut-the-frills advice found in most financial planning books. Families with no extraordinary problems such as unemployment or illness who nonetheless find themselves struggling to meet their day-to-day expenses should take a hard look at cutting their fixed costs, however painful that might be. Managing a few more years without a new car, signing up for a less expensive HMO, choosing a lower-cost preschool or college for your child, or considering moving to a less expensive home are some of the difficult choices families need to make, the authors say. “We believe it’s okay to splurge on a few extras,” Tyagi says. “No one goes broke because of one too many dinners out or because they bought their kid a new pair of Nikes. As long as your fixed costs are low enough that you can manage during a crisis, then you can count yourself secure enough to go ahead and have some fun.”

The Two-Income Trap, called a “grenade of a book” in a recent, highly favorable BusinessWeek review, makes a number of other potentially controversial policy proposals, including a school-choice voucher system that would pay the entire cost of educating a child, allowing them to apply to any public school. “So much of the housing trap has to do with families struggling to buy a home in one of those few school districts that has held on to a strong reputation,” Tyagi says. “Zip codes have become the invisible fence around the educational haves and have nots.”

The book also argues for reviving usury laws. Federal law could be amended, the authors say, to close the loopholes that let one state override the lending rules of another, and enable states to impose a meaningful cap on interest rates. Or, Congress could impose a uniform rate to apply across the country.

“Everybody knows that Americans’ debt is spiraling out of control, but it’s generally viewed as a symptom of moral decay,” Tyagi says. “But it didn’t happen in a bubble. Usury rates that used to keep mortgage companies and credit card companies in check effectively disappeared. In the last 25 years, credit card companies have fallen all over themselves flooding all of us with credit card offers, as we all know. But what most people don’t know is that the bankers are most aggressively targeting people who are already in trouble. We could fix all that with one very simple regulation that wouldn’t cost taxpayers a dime by simply reinstituting the usury rates, which have been in effect in America since the Colonial days. We could just call deregulation a failure and move on.”

How likely is such a move, given the financial services industry’s powerful political ties? Tyagi is idealistic. “I believe that this is the great, hidden populist issue today,” she says. “Ultimately, it’s one that millions of Americans can relate to. I believe that at the end of the day, the voters will win, and that not everyone is beholden to the lending industry.”

A Seating Chart at Dinner

In the past three years, Amelia Warren Tyagi has given birth to a company, a book, and a baby.

She grew up trailing her law professor parents, attending nine public schools between kindergarten and 12th grade, and fighting every move along the way. “If it doesn’t kill you, it makes you stronger,” she says. “My mom says I resisted from the very first move when I was five and determined not to be separated from my next door neighbor, right up until I went to college. And of course, once I got to college all I wanted to do was travel the world.” The family settled in Philadelphia in 1987, where Elizabeth Warren and Bruce Mann became the first married couple on the faculty at Penn Law School. (Bruce Mann is still a professor at Penn Law today).

Her status as the daughter of two attorney/professor parents brought with it some inevitable teasing. When Tyagi was in 11th grade, the Law School Follies created a skit poking fun at what they imagined dinner must be like at the Warren/Mann household. “It started with my mom taking out a seating chart,” says Tyagi, laughing. “Then she conducted dinner conversation using the Socratic method, ‘So, Ms. Warren, what did you learn in 11th grade today?’ And then she turned to the man playing my kid brother and said, ‘Mr. Warren, what can we learn from Ms. Warren’s comments? What might we do to improve her analysis?’” Tyagi, who’d always assumed her family life was completely normal, began to wonder when she saw the audience laughing. “We didn’t have a seating chart, but we did have napkin rings with our names on them that made it clear who was supposed to sit where.”

Warren and Tyagi, WG’96

Tyagi, 31, says she never felt overshadowed by her high-profile mother, who began her career as a public school teacher, graduated from law school years later while pregnant with Tyagi’s younger brother and went on to become the first female chaired professor at Harvard Law School. Warren, the author of several nationally known books on the plight of the American family, “started her career as a law professor later in terms of her family cycle than a lot of women do today. She had two kids in tow as she took on her early teaching jobs,” Tyagi says. “My mom was always my hero. I looked up to her as someone who succeeded professionally and was there for her family. But mostly, mom is just my mom.” Today, her daughter Octavia a bright and active two-year-old, Tyagi is working to similarly balance her life, working from home with a daytime babysitter’s help.

Tyagi graduated, with honors, from Brown University with a degree in history. She came to Wharton so naive, she says, that she thought her interest in consulting was an unusual path for a Wharton alum to take. Along the way, she met husband Sushil Tyagi, also WG’96, who now runs a Los Angeles film production company.

Before coming to Wharton, Tyagi took a post negotiating contracts for a managed care company in Rhode Island, a job that exposed her to the rough underbelly of managed care. “It was in mental health,” she says, “And it was important to see up close and personal the struggle over the fundamental issues that America has to come to grips with – finding a way to provide access to and pay for decent health care that people need.” After Wharton she went to McKinsey in Los Angeles, where she worked as an engagement manager specializing in health care and public education.

Tyagi decided to leave McKinsey in 1999, when she and a group of other McKinsey alums co-founded a health benefits firm called HealthAllies in the guest cottage of her 1920s Los Angeles beach house. “The company was about getting people better rates – getting access to the care they want at the same rates that the insurance companies pay,” she says. “It was a thrill.” HealthAllies continues to operate today, working with thousands of businesses to help their employees save money on healthcare services.

Tyagi, who admits her young career has taken a circuitous route, is at work on another, completely different project with her mother – a novel set at Harvard Law School. “Writing The Two-Income Trap has changed the way I think about everything, from raising children to corporate ethics and the American political process,” she says. “I suppose it has broadened my perspective, helping me to see the forces at work in the larger economy rather than just the problems of one company or family. I’m grateful for that.”