Conspicuous Consumption and Race: Who Spends More on WhatPublished: May 14, 2008 in Knowledge@Wharton
Fashionable clothes, jewelry, flashy cars.... They are all items of conspicuous consumption that give their owners status on the street.
Some groups, such as blacks and Hispanics, seem to spend more on such emblems of success than others. Or is that just a stereotype?
Comedian Bill Cosby has long condemned his own black community for spending too much on flashy goods at the expense of children's education. He has been roundly criticized by some and praised by others, but there hasn't been much evidence to show whether his claims are true. Those who believe spending patterns vary among racial and ethnic groups typically invoke cultural differences, but there hasn't been much solid evidence of that, either.
"Blacks do spend more on these things -- jewelry, clothing and cars -- that have something to do with visibility," says Wharton finance professor Nikolai Roussanov. "Is it just taste? Or does it have to do with a social status component?"
Economists have long accepted the explanation for conspicuous consumption presented by Norwegian-American economist Thorstein Veblen, who coined the term at the end of the 19th century. Valuable possessions visible to all are a signal of one's wealth, success and status, Veblen said. Today, most people recognize that spending decisions are influenced by the desire to "keep up with the Joneses."
In looking deeper at the subject, Roussanov and his collaborators, Kerwin Kofi Charles and Erik Hurst of the University of Chicago, found some truth to the ethnic stereotypes on spending, but they concluded that the explanation lies in economics, not culture. Their work is described in a paper titled, "Conspicuous Consumption and Race."
"If you're a middle-class black, it seems like in order to be perceived by whites and other blacks as relatively well off, you have to show you have money," Roussanov says. "You have to spend more on things that are observable."
To examine spending by racial groups, Roussanov and his colleagues studied data collected from 1986 to 2002 for the Consumer Expenditure Survey conducted by the federal Bureau of Labor Statistics. Blacks and Hispanics spend up to 30% more than whites of comparable income on visible goods like clothing, cars and jewelry, the researchers found. This meant that, compared to white households of similar income, the typical black and Hispanic household spent $2,300 more per year on visible items. To do that, they spent less on almost all other categories except housing, and they saved less.
Visible items are those others can see when one is in public. The researchers found that blacks and Hispanics do not spend more than whites on items, such as home furnishings, that could serve as status symbols but aren't seen by as many people.
Alabama vs. Massachusetts
While Roussanov and his colleagues acknowledge that cultural preferences may play a role in these spending choices, they tested that theory by subdividing blacks, Hispanics and whites by income level and state of residence. This caused the differences in spending patterns to disappear. What really matters, Roussanov, Charles and Hurst found, is not one's race but one's economic situation relative to the "reference group" -- people in the immediate community. "This is not really about race in the end. It is simply about what we observe about you and what peer group you belong to," Roussanov says.
Poor blacks and poor whites both spend more on visible goods if they live in poor communities, because such spending gives them more status relative to others in the community. But poor blacks and poor whites living among wealthier people do not devote extra portions of income to visible expenditures, since they are too far behind to get more status from the extra spending they can afford. Moreover, the very fact of belonging to a particular group provides observers with information about one's likely income (e.g. blacks are on average poorer than whites).
A low-income white person in Alabama, for example, is likely to spend more on visible goods than a low-income white person in Massachusetts. That's because white people are generally poorer in Alabama; in wealthy Massachusetts, spending more on visible goods is a waste of money, since it does not boost one's status.
Blacks and whites appear to have different spending habits only because blacks tend to be concentrated in poor communities more than whites, Roussanov says. Nationally, the poor white is likely to be surrounded by many whites who are not as poor, so he or she cannot afford to use conspicuous consumption to compete for status. But a black person of the same income is more likely to be surrounded by others of similar income, making this competition feasible.
In all races, people of a given income become less and less likely to emphasize conspicuous consumption as they get farther and farther behind their neighbors financially. "The overall predominance of conspicuous consumption between blacks and whites is really not a black-white phenomenon; it is simply an artifact of the environment," Roussanov says. "Blacks are poorer in this country, and so are Hispanics."
The research suggests that Cosby and others are wrong to blame cultural reasons for spending priorities -- or are oversimplifying the matter. But that does not mean these critics are wrong about the consequences. Money spent on conspicuous consumption must be diverted from other uses, and many studies have shown that blacks and Hispanics save less toward goals like college expenses and retirement than whites with the same income.
Roussanov and his colleagues find that blacks and Hispanics spend 16% and 30% less, respectively, on education than whites of similar income. They spend 50% less on health care. Spending on health and education is not as visible to as many people as spending on cars and clothes, so it does not contribute as much to one's status.
Status vs. Fashion
The research indicates that spending habits are heavily influenced by a deep-seated yearning for status rather than transient fashion following. That could make the behavior harder to change, assuming that education, health and savings should come before shoes and jewelry.
Roussanov notes that spending on conspicuous consumption is not entirely counterproductive. In many communities, he says, it may be necessary to present a more affluent image to compete for jobs and to have a social life.
This may explain the chief exception the researchers found in the data: Older people don't spend more on visible goods, even if their incomes are the same as those of younger people who do. Perhaps it's the wisdom of age, or the fact that older people grew up in different times. But it's more likely, says Roussanov, that older people, regardless of their community, don't need status symbols as much because they're not out hunting for jobs and mates.
That reinforces the conclusion that spending for status is a deeply entrenched habit among those who do it. "It seems like health and education should receive more funding by individuals, but we can't simply force that on people and think it will make them better off," Roussanov says. "How do we promote going to an expensive college rather than buying an expensive watch? There's no simple fix to it."
The research, he notes, may have some practical implications for government policy and marketing.
This spring, for example, millions of American households are receiving government checks as part of the economic stimulus package approved earlier in the year. Policymakers' predictions about how people will spend the money may turn out to be far off the mark, given what this research shows about spending incentives among different income groups, Roussanov suggests. "We cannot just assume that the same money is going to be spent the same way by people in different groups."
Marketers advertising cars, clothes and jewelry have long known of the higher demand for flashier products in poorer communities, Roussanov says. But the new insights might be useful, he notes, to companies marketing mutual funds or other financial services products that have yet to catch on in minority communities. The fact that saving and stock market participation is lower among minorities could be potentially linked to their greater spending on cars and other visible items.
A mutual fund investment is not the kind of possession that can be displayed on the street, making sales difficult for a company trying to sell funds to people who prize visible emblems of prosperity but are less tempted by the financial rewards far in the future. Perhaps one (although costly) way to overcome this problem, according to Roussanov, would be to set up branch offices in poorer communities. One could then gain status by being seen visiting a financial advisor. "If you want to make [investing] behavior more prominent," he says, "you have to make the behavior more visible."