Blacks and Whites, Investments and Consumption (Updated)

I notice that in his article in the Guardian pointing out that white families in the United States are five times richer than black families here although Chris McGreal demurs from including home equity because it’s hard to determine that doesn’t seem to stop him from proposing that the reason for the disparity is that African Americans have more demands placed on them by their relatives:

There were also social factors, the study found. “In African-American families there is a much larger extended network of kin as well as other obligations. From other work we’ve done we know that there’s more call on the resources of relatively well-off African-American families; that they lend money that’s not given back; they help cousins go to school. They help brothers and sisters, aunts and uncles, with all kinds of legal and family problems,” said Shapiro.

which is impossible to determine.

I found the article and, presumably, the study from which it was derived baffling because it ignores a well-known and undispited fact: at every income level in the United States blacks spend more on visible signs of affluence than do their white counter-parts:

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?”

When you look a little deeper into this phenomenon it turns out that blacks living in poor communities and whites living in poor communities tend to have similar spending patterns:

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.

However, investment and consumption are in a trade-off position, i.e. if you consume more, you invest less. Since over the last couple of decades financial instruments have grown enormously, anybody who invested in them has found their total wealth growing enormously (I think we should beware of the persistence theory here). That has tended to leave blacks in the United States behind. Roussanov and his colleagues have a solution for that, too:

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.”

I think it’s unlikely but it’s certainly an interesting proposal. Who knows? I think we’ll see the financial industry competing a lot harder for customers in the future than we have for many years. Maybe they’ll start opening branches in areas that are, shall we say, underserved now.

Update

I see that the same article caught James Joyner’s eye and it perplexed him as much as it did me, albeit for slightly different reasons.