Forbes, May 19, 2008
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.
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.”
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.
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.
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.