Showing Off
According to research by Kerwin Kofi Charles, Erik Hurst and Nikolai Roussanov (”Conspicuous Consumption and Race“), conspicuous consumption 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.
An African American family with the same income, family size, and other demographics as a white family will spend about 25% 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.)
The researchers 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 researchers 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. They found that, 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. 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% decrease in spending on visible goods.
This suggests why emerging economies like Russia and China, despite their low average incomes, are such hot luxury markets today.
Conspicuous consumption, then, is not a universal phenomenon. It’s a development phase that declines as countries, regions, or distinct groups get richer.
In The Middle-Class Millionaire, Russ Alan Prince and Lewis Schiff analyzed the spending habits of the 8.4 million 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.