Being 'Hood Rich: The Poor, Conspicuous Consumption, and Rationality

As W.E.B. DuBois observed, “To be a poor man is hard, but to be a poor race in a land of dollars is the very bottom of hardships.”

Given our conversation last week regarding wealth and race, the following piece from the Atlantic is quite timely. It argues that the poor spend money on consumer goods in order to signal their relative prosperity, a bit counter-intuitive, but likely correct. For me, the interesting part of the I live in the projects but own/lease a Mercedes or SUV is 1) the emotional component (as an American it makes me feel good to participate in our civil religion of credit and debt) which is by definition hard to quantify, and 2) how overspending on consumer goods is less money spent on education, and wealth accrual--investments which pay real dividends inter-generationally.

History provides a necessary context for our efforts to understand the spending logic of both the 'hood rich and the black middle class (this latter group also spends more money on consumer goods than white Americans in the same income cohort). For example, given the long standing forces that worked against wealth accrual in the black community (red lining of homes, discriminatory banking practices, unequal pay for the same work as whites) there were, and are, strong reasons to display one's status via clothes, jewelry, and cars. This is especially true in a society where status attainment is central to the American mythos and national character, but where that very society systematically devalues your personhood.

Yes, it may seem foolish, but these are items which signal status to one's peers, and perhaps, in the long term hindsight afforded by history, that these purchases seemed more stable than the other options on the table. For context, many other cultures valued liquid assets which were highly portable and that would allow one to quickly move to another community, or even country, if circumstances demanded.

Consider: traditional avenues for wealth accrual were denied black Americans (and isn't history ironic given that our real, physical selves once represented billions, if not trillions of dollars in wealth and property on the part of the societies invested, quite literally, in the triangular trade in black bodies). Black Wall Streets, with their investment houses, banks, and other businesses were destroyed by anti-black riots in the 19th and 20th century. The State and many white citizens exerted a great deal of energy to ensure that poverty was an all too common experience for Black Americans and other communities of color, our Native American "brothers" come to mind here--and yes, I am very disturbed, but not surprised, by how many tribes are systematically purging black members from their rolls in order to increase the casino profit pie by decreasing the number of slices.

The sad truth is, that while other groups have liquid "assets," the assets held by the 'hood rich are relatively worthless. Cars, bad jewelry, clothes, and big screen televisions are not investments because they immediately depreciate.

Question: how many folks understand this fact? Can a culture of savings and investment be instilled among the 'hood rich, or for that matter, Americans as a whole? Are the economists researching spending habits on the urban poor assigning a calculus, a rational utility maximizing decision-making process, where none exists? And what to make of black athletes and high school students turned professional athletes or emcees, are they making poor spending choices (e.g. 12 cars, millions of dollars in jewelry, diamond encrusted belt buckles) because they are celebrities, formerly poor and now rich, or because the Allen Iverson's, Mike Tysons, Lil' Waynes, and 50 Cents of the world actually believe these purchases are investments?

A saving grace, once race is controlled for, i.e. comparing black Americans in one state to black Americans with the same incomes in different states, that similar spending patterns between racial groups emerge. Apparently, new money tends to act like new money regardless of the racial group to which they belong. And yes, I hope that one day I will get to enjoy some of the excesses afforded to those with new money.

from the Atlantic Monthly

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Inconspicuous Consumption

by Virginia Postrel

About seven years ago, University of Chicago economists Kerwin Kofi Charles and Erik Hurst were researching the “wealth gap” between black and white Americans when they noticed something striking. African Americans not only had less wealth than whites with similar incomes, they also had significantly more of their assets tied up in cars. The statistic fit a stereotype reinforced by countless bling-filled hip-hop videos: that African Americans spend a lot on cars, clothes, and jewelry—highly visible goods that tell the world the owner has money.

But do they really? And, if so, why?

The two economists, along with Nikolai Roussanov of the University of Pennsylvania, have now attacked those questions. What they found not only provides insight into the economic differences between racial groups, it challenges common assumptions about luxury. Conspicuous consumption, this research suggests, 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.)

Of course, different ethnic groups could simply have different tastes. Maybe blacks just enjoy jewelry more than whites do. Maybe they buy costlier clothes to deter slights from racist salesclerks. Maybe they spend more on cars for historical reasons, because of the freedom auto travel gave African Americans during the days of segregated trains and buses. Maybe they just aren’t that interested in private colleges or big-screen TVs. Or maybe not. Economists hate unfalsifiable tautologies about differing tastes. They want stories that could apply to anyone.

So the researchers went back to Thorstein Veblen, who coined the term conspicuous consumption. Writing in the much poorer world of 1899, Veblen argued that people spent lavishly on visible goods to prove that they were prosperous. “The motive is emulation—the stimulus of an invidious comparison which prompts us to outdo those with whom we are in the habit of classing ourselves,” he wrote. Along these lines, the economists hypothesized that visible consumption lets individuals show strangers they aren’t poor. Since strangers tend to lump people together by race, the lower your racial group’s income, the more valuable it is to demonstrate your personal buying power.

To test this idea, the economists compared the spending patterns of people of the same race in different states—say, blacks in Alabama versus blacks in Massachusetts, or whites in South Carolina versus whites in California. Sure enough, all else being equal (including one’s own income), an individual spent more of his income on visible goods as his racial group’s income went down. African Americans don’t necessarily have different tastes from whites. They’re just poorer, on average. In places where blacks in general have more money, individual black people feel less pressure to prove their wealth.

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. Veblen was right.

But he was also wrong. Or at least his theory is out of date. Given that the richer your group, the less flashy spending you’ll do, conspicuous consumption isn’t a universal phenomenon. It’s a development phase. It declines as countries, regions, or distinct groups get richer. “Bling rules in emerging economies still eager to travel the status-through-product consumption road,” the market-research group Euromonitor recently noted, but luxury businesses “are becoming aware that bling isn’t enough for growing numbers of consumers in developed economies.” At some point, luxury becomes less a tool of public status competition and more a means to private pleasure.

In Veblen’s day, the less affluent scrimped on their homes in order to keep up appearances in public. “The domestic life of most classes is relatively shabby, as compared with the éclat of that overt portion of their life that is carried on before the eyes of observers,” Veblen wrote, noting that people therefore “habitually screen their private life from observation.” By contrast, consider David Brooks’s observation in Bobos in Paradise that, for today’s educated elites,

it’s virtuous to spend $25,000 on your bathroom, but it’s vulgar to spend $15,000 on a sound system and a wide-screen TV. It’s decadent to spend $10,000 on an outdoor Jacuzzi, but if you’re not spending twice that on an oversized slate shower stall, it’s a sign that you probably haven’t learned to appreciate the simple rhythms of life.

Virtuous or vulgar, what all these items have in common is that they’re invisible to strangers. Only your friends and family see them. Any status they confer applies only within the small group you invite to your home. And the snob appeal Brooks pokes fun at corresponds to the size of the audience. Many friends may see your Jacuzzi or media room, but unless you’re on HGTV, only intimates will tour your master bathroom. A slate shower stall may make you feel rich, but it won’t tell the world that you are. As peer groups get richer, the balance between private pleasure and publicly visible consumption shifts.

Russ Alan Prince and Lewis Schiff describe a similar pattern in their book, The Middle-Class Millionaire, which analyzes the spending habits of the 8.4million American households whose wealth is self-made and whose net worth, including their home equity, is between $1 million and $10 million. Aside from a penchant for fancy cars, these millionaires devote their luxury dollars mostly to goods and services outsiders can’t see: concierge health care, home renovations, all sorts of personal coaches, and expensive family vacations. They focus less on impressing strangers and more on family- and self-improvement. Even when they invest in traditional luxuries like second homes, jets, or yachts, they prefer fractional ownership. “They’re looking for ownership to be converted into a relationship rather than an asset they have to take care of,” says Schiff. Their primary luxuries are time and attention.

The shift away from conspicuous consumption—from goods to services and experiences—can also make luxury more exclusive. Anyone with $6,000 can buy a limited-edition Bottega Veneta bag, an elaborately beaded Roberto Cavalli minidress, or a Cartier watch. Or, for the same sum, you can register for the TED conference. That $6,000 ticket entitles you to spend four days in California hearing short talks by brainy innovators, famous (Frank Gehry, Amy Tan, Brian Greene) and not-so-known. You get to mingle with smart, curious people, all of whom have $6,000 to spare. But to go to TED, you need more than cash. The conference directors have to deem you interesting enough to merit one of the 1,450 spots. It’s the intellectual equivalent of a velvet rope.

As for goods, forget showing off. “If you want to live like a billionaire, buy a $12,000 bed,” says a financial-planner friend of mine. You can’t park a mattress in your driveway, but it will last for decades and you can enjoy it every night.