Economists Kerwin Charles, Erik Hurst, and Nikolai Roussanov have taken up this rather sensitive question in a recent unpublished study, “Conspicuous Consumption and Race.” Using data from the Consumer Expenditure Survey for 1986-2002, they find that blacks and Hispanics indeed spend more than whites with comparable incomes on what the authors classify as “visible goods” (clothes, cars, and jewelry). A lot more, in fact—up to an additional 30 percent. The authors provide evidence, however, that this is not because of some inherent weakness on the part of blacks and Hispanics. The disparity, they suggest, is related to the way that all people—black, Hispanic, and white—strive for social status within their respective communities.
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In general, the poorest people in any group are forced to opt out of the conspicuous consumption arms race—if you can’t afford the signal, even by stretching your finances, you can’t play the game. I, a humble economics professor, don’t try to compete in a wealth-signaling game with the Wall Street traders whom I see on the streets of Manhattan. But this still leaves us with the question of why a black person would spend so much more in trying to signal wealth than a white person. The Cosby explanation—that there is simply a culture of consumption among black Americans—doesn’t quite cut it for economists. We prefer to account for differences in behavior by looking to see if there are differing incentives.
Kerwin Charles, Erik Hurst, and Nikolai Roussanov's original paper is somewhat opaque as to why. You can work it out, but their explanation is circuitous. Fisman is more clear.
Why would otherwise-similar black and white households have different incentives to signal their wealth? Charles, Hurst, and Roussanov argue that it’s because blacks and whites are seeking status in different communities. In the racially divided society we live in, whites are trying to impress other whites, and blacks are trying to impress other blacks. But because poor blacks are more likely to live among other poor blacks than poor whites are to live among other poor whites, poor black families are more susceptible to being pulled into a signaling game with their neighbors.
Consider, for example, a black family and a white family each earning $42,500 a year, the median income for a black household during the 1990s. This black family sees that other black families are buying cars, clothes, and other wealth signals that, while stretching this black family’s financial resources thin, are technically affordable for a family making $42,500. So, this family decides to buy them, too, in order to keep up with the conspicuous consumers that they compare themselves with.
Now take the white family making $42,500. The average household income among whites in the 1990s was much higher—$66,800. This white family looks around the neighborhood and is more likely to see white families spending on luxuries that are simply beyond their financial reach. The white family making $42,500 is thus too poor to participate in a signaling game with its neighbors, so they don’t. As a result, they’re spared the cost of competing, just as I am spared the expense of trying to compete with the Wall Street traders I see driving around Manhattan in their Mercedes sedans.
To test their theory, the authors look at how much a white family spends on conspicuous consumption when it is surrounded by white families making a similar amount of money. They find that this white family spends the same portion of its income on visible goods as a black family surrounded by other black families with similar incomes. They also find that the further a family of either race slips behind the average income of nearby households of the same race (becoming too poor to compete in the signaling game), the less it spends on these visible goods.
Once these effects are accounted for, racial disparities in visible consumption disappear. It’s not that black Americans are more inclined to signal wealth; rather, poor blacks are more likely than poor whites to be a part of communities where they are relatively rich enough to participate in the signaling game.
Fisman is clearer but if I am interpreting the research correctly, they are still not communicating the salient issue.
Put differently, whites are more likely to live in white communities which are more economically diverse and therefore a higher percentage of whites in those communities are classed out of the conspicuous consumption game. They can't afford to play.
Blacks on the other hand are more likely to live in communities which are more economically homogenous and therefore they are more subject to the standard social signaling mechanism of conspicuous consumption.
To their economic detriment, more blacks are participating in debilitating conspicuous consumption not because of some black DNA attribute, or due to some poorly articulated claim about faulty culture.
All races are similarly prone to conspicuous consumption for a given income level but whites have benefitted by living in communities which are more income heterogenous communities where conspicuous consumption is less frequently triggered whereas blacks are handicapped by living in communities which are more income homogenous communities where conspicuous consumption is more frequently triggered.
As both Fisman and the original authors note, the consequences of this are substantial. An excess percentage of blacks living in economically homogenous communities and participating in conspicuous consumption spending are:
Spend more than 50 percent less on health care than whites of comparable incomes.
Spend 20 percent less on education than whites.
60% of the unexplained racial gap in wealth holdings after controlling for permanent income and demographics is due to the costs of conspicuous consumption.
This is incredibly valuable but delicate research, touching on race as it does. However, we have spent some fifty years outlawing and regulating away known causal mechanisms of social gaps between races in the US (in terms of education attainment, health morbidity, wealth accumulation, etc.) And trillions of dollars on seemingly marginal impact social policies.
Aside from a 10% narrowing of education achievement in the seventies and eighties, presumably as a consequence of desegregation, very few social policies have had much significant or lasting impact.
I do not rule out a healthy role for the role of religion, family structure, culture, and particularly personal behavior patterns in driving differential group outcomes but this is rare research with a plausible causal mechanism which seems to have real and large effect sizes.
The question is, if the research is ever validated, what social policies might we pursue to address the core issues identified here, reducing the income homogeneity among blacks? More specifically, what policies might we pursue to achieve that goal (and thereby reducing harmful conspicuous consumption spending choices) while remaining consistent with our laws, spending constraints and Bill of Rights natural freedoms?
My assumption is that somehow this is likely somehow related to cities. However, I could not find the data I was seeking. While big cities have huge levels of income inequality, often, cheek-by-jowel, they are also highly stratified by income. In other words, IF you live in a major city, you probably are stratified to people of you own income and therefor induces conspicuous consumption as social signaling.
IF, on the other hand, you live in the suburbs, you are more likely, within a geographical space, to have much greater income diversity, and therefore a suppression of needless conspicuous consumption.
Given that blacks are much more urbanized than whites, then perhaps that is the causal mechanism.
But then you are left with the core issue - what role does or should the government have in shaping where people choose to live. There is plenty of literature speaking to offsetting benefits of elective residential choices and natural emergent order.
Lots of research yet to be done to even validate what the researchers think they have found. It will be touchy research owing to its possible interpretations or misinterpretations. On the other hand, those effect sizes are so large that the prize for threading the research and political needle to find an acceptable mechanism to increase economic heterogeneity among blacks and thereby subdue wasteful consumption signaling is so great that we can hardly ignore it either.
And what a boost to national unity if we can get off the track of searching for vestigial racism and focus on something possibly real, tangible and beneficial.
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