Saturday, July 19, 2008

The Lower Your Income, The More Bling You'll Buy

Conspicuous consumption is not an unambiguous signal of personal affluence. It’s a sign of belonging to a relatively poor group. Visible luxury thus serves less to establish the owner’s positive status as affluent than to fend off the negative perception that the owner is poor. The richer a society or peer group, the less important visible spending becomes.

On race, the folk wisdom turns out to be true. An African American family with the same income, family size, and other demographics as a white family will spend about 25 percent more of its income on jewelry, cars, personal care, and apparel. For the average black family, making about $40,000 a year, that amounts to $1,900 more a year than for a comparable white family. To make up the difference, African Americans spend much less on education, health care, entertainment, and home furnishings. (The same is true of Latinos.)

But the same is true for whites. Controlling for differences in housing costs, an increase of $10,000 in the mean income for white households—about like going from South Carolina to California—leads to a 13 percent decrease in spending on visible goods. “Take a $100,000-a-year person in Alabama and a $100,000 person in Boston,” says Hurst. “The $100,000 person in Alabama does more visible consumption than the $100,000 person in Massachusetts.” That’s why a diamond-crusted Rolex screams “nouveau riche.” It signals that the owner came from a poor group and has something to prove.

So this research has implications beyond race. It ought to apply to any peer group perceived by strangers. It suggests why emerging economies like Russia and China, despite their low average incomes, are such hot luxury markets today—and why 20th-century Texas, a relatively poor state, provided so many eager customers for Neiman Marcus. Rich people in poor places want to show off their wealth. And their less affluent counterparts feel pressure to fake it, at least in public. Nobody wants the stigma of being thought poor.

From "
Inconspicuous Consumption" in this month's The Atlantic

From the abstract of the cited article "Conspicuous Consumption and Race":

Using nationally representative data on consumption, we show that Blacks and Hispanics devote larger shares of their expenditure bundles to visible goods (clothing, jewelry, and cars) than do comparable Whites. We demonstrate that these differences exist among virtually all sub-populations, that they are relatively constant over time, and that they are economically large. While racial differences in utility preference parameters might account for a portion of these consumption differences, we emphasize instead a model of status seeking in which conspicuous consumption is used to reflect a household's economic position relative to a reference group.

12 Comments:

At 7/19/2008 5:23 PM, Blogger Sophist said...

Right observations, wrong conclusions -- or I should say -- another failure to understand reality and appply common sense.

From the article: "African Americans not only had less wealth than whites with similar incomes, they also had significantly more of their assets tied up in cars."

Good, this simply means that African Americans spend more money and help others being employed and not being deprived of the things they once did not have.

I simply do not undewrstand the emotive approach this article takes on this issue. Example:

"Rich people in poor places want to show off their wealth."

What a silly statement. Rich people in poor places, the majority of them I would say, spend their money to get the businesses of fellow citizen going. Most do not do it to show off.

I think this study/article takes a very negative view of people and spending. Do not forget that circulation of money is what keeps economy going, people keeping their jobs and GDP growing.

It is the Massachusetts attitude of wearing the same A&F T-shirt all year around with the same Brooks Brothers paints that hurts economy and it is basically motivated by a complex towards society and fellow citizens, a complex of superiority, which IMO is the main driving force behind not spending money.

Spending money is good, even on blings, and whoever does is doing good to economy, that's it. The rest of the analysis shows the psychological problems of the authors.

 
At 7/19/2008 6:18 PM, Anonymous Dr. T said...

“Take a $100,000-a-year person in Alabama and a $100,000 person in Boston,” says Hurst. “The $100,000 person in Alabama does more visible consumption than the $100,000 person in Massachusetts.”

This is a very stupid argument. The cost of living is so much higher in Boston than in Alabama that an income of $100,000 in Boston barely supports a family of four living in a modest suburban home. There's no money left for 'bling.' That same $100,000 in Alabama will go much further, and the family can engage in some conspicuous consumption to show they are 'better' than their neighbors earning only $90,000.

I don't know who Hurst is, but he definitely does not know economics.

 
At 7/19/2008 6:40 PM, Blogger Walt G. said...

sophist,

What the article is implying is that poor people are poor because it is their own fault. Wealth cannot be created if money is spent on objects that do not appreciate—especially if the objects are paid for with money that is borrowed at high interest rates.

I’ve attended a lot of financial and retirement seminars the last few years. Most of them start out educating people that if it is on your ass, it is not an asset.

I don’t believe that many people are altruistic enough to spend money with other people in mind. In fact, I think, as does Adam Smith, that is why a capitalistic economy works so well.

 
At 7/19/2008 6:45 PM, Blogger juandos said...

Nice try sophist....ROFLMAO!

Is this your stab at trying to be multicultural?

On race, the folk wisdom turns out to be true. An African American family with the same income, family size, and other demographics as a white family will spend about 25 percent more of its income on jewelry, cars, personal care, and apparel. For the average black family, making about $40,000 a year, that amounts to $1,900 more a year than for a comparable white family. To make up the difference, African Americans spend much less on education, health care, entertainment, and home furnishings. (The same is true of Latinos.)

Are these the uninsured and the underinsured that Dems keep whining on and on about?

Regarding less being spent entertainment and home furnishings I think a perusal of the FBI's UCR info will give a good indication why that might be the case...

 
At 7/19/2008 9:45 PM, Blogger David said...

If I go to Fiji...and take pictures...and show the pictures to friends...is that visible or invisble consumption?

 
At 7/19/2008 9:52 PM, Blogger bobble said...

professor perry, this has to qualify as a "what exactly is your point?" post.

poor people don't like to appear poor? ok, that's a no-brainer.

poor people have lousy money management? knew that already.

poor people often make foolish monetary choices. not exactly man bites dog.

sooo, what should be my take-away from this little educational experience?

blog readers, please feel free to inform me as prof perry seems to ignore the comments.

 
At 7/20/2008 4:10 AM, Blogger Sophist said...

Juandos ROFLMAOing

Do Hispanics rap better than African Americans? Off topic I guess.

 
At 7/20/2008 4:22 AM, Blogger Sophist said...

Walt,

I agree with your statements but there is a catch. If nobody spends, nobody can get rich. So an additional observation should be that some get rich because some others spend.

Look, if everyone seeks income producing investments solely and does not spend on conspicious things and bling, economy is becoming a pure zero-sum game.

Thus, existence of rich entails existence of poor, and vice versa.

They are the sides of the same coin.

There is no coin with one side, at least in this universe. Your local priest will tell you there is one, in paradise.

When you try to become rich, if you are succesful, someone else turns poor unless there is a constant creation of wealth by your activities.

Morbid capital is the enemy of capitalism.

Hedge funds are the demise of free market economy.

Capitalism needs constant production of hard goods. Service economies will turn socialist sooner or later. There are so many ways to keep the pie and feed the dog at the same time.

At some point, the dog will bite your hand.

 
At 7/20/2008 5:57 AM, Blogger juandos said...

"sooo, what should be my take-away from this little educational experience?"...

That extorted tax dollars to prop up nanny state safety net programs are tax dollars wasted...

"Hedge funds are the demise of free market economy"...

Truly amazing!

Try a dose of this: Hedge Fund Definition

Let's see if an Obama election turns more New Yorkers into bling buyers: Tax Rates For New Yorkers Would Top 50% Under Obama

Let's see if an Obama election drives up the unemployment numbers in New York: Obama Capital Gains Tax Hike Would Hit N.Y. Hard

 
At 7/20/2008 10:19 AM, Blogger Sophist said...

Amazed Juandos: "Truly amazing!"


Try harder Juandos

 
At 7/20/2008 10:40 AM, Blogger Walt G. said...

sophist: There's nothing wrong with judicious spending. If you are in hock up to you eyeballs, and this includes the U.S. government, you have problems.

Contrary to your assertion, unless unspent money is in a mattress, it is working in the economy by providing investment capital. There is a balance here--money will always be spent on necessities. And, disposable income, if there is any, will be spent on whatever you want to call it today. Accordingly it is not one way or another of spend or not spend.

booble: You are correct, the topic is rather simplistic; however, any problem solving system teaches that it is the everyday mundane problems that are most difficult to solve. That’s because everyone is out looking for hidden complex problems instead of solving the ones staring them in the face.

You just can’t underestimate how difficult solving simple problems can be. That might sound like a contradiction, but it is not. Simple does not logically negate to easy.

 
At 7/20/2008 5:55 PM, Blogger Craig said...

Poor people are poor through their own fault. Yes, there are people who suffer catastrophes, and are poor for a while because of outside influences. But just as I'm not a millionaire because I didn't work hard enough to become one, the eternally-poor are no different.

Ditto on Boston vs. Alabama cost-of-living -- that one was just a slam at Southerners (full disclosure: I am a northerner, so didn't feel insulted personally).

As for the "sophist"ry that African-Americans' spending only helps the economy, I might suggest that their saving would help it -- and themselves -- more.

 

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