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Cos
and Effect
Bill Cosby may be right about African-Americans spending a lot on
expensive sneakers
but he's wrong about why.
A
few years ago, Bill Cosby set off a firestorm with a speech excoriating
his fellow African-Americans for, among other things, buying $500
sneakers instead of educational toys for their children. In a recent
book, Come On People, he repeats his argument that black Americans
spend too much money on designer clothes and fancy cars, and don't
invest sufficiently in their futures.
Many in the black community have been critical of Cosby for blaming
poor people rather than poor public policies. Others have defended
Cosby's comments as an honest expression of uncomfortable truths.
But notably absent from the Cosby affair have been the underlying
economic facts. Do blacks actually spend more on consumerist indulgences
than whites? And if so, what, exactly, makes black Americans more
vulnerable to the allure of these luxury goods?
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sensitive question in a recent unpublished study, "Conspicuous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 factup 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 peopleblack, Hispanic,
and whitestrive for social status within their respective
communities.
Every society has had its equivalent of the $150 Zoom LeBron IV
basketball sneaker, and thanks to Thorstein Veblen, we have a pretty
good idea why. As the Gilded Age economist famously put it, "conspicuous
consumption of valuable goods is a means of reputability to the
gentleman of leisure," and "failure to consume a mark
of demerit." To consume is to flaunt our financial success;
it's how we keep score in life.
Economists refer to items that we purchase in order to reveal our
prosperity to others as wealth signals. But why use sneakers, as
opposed to phonics toys, as a wealth signal? First off, for a signal
to be effective, it needs to be easily observed by the people we're
trying to impress. This includes not just those near and dear to
us, but also the person we pass on the street, who sees our sneakers
but would have a harder time inferring how much we're spending teaching
our kids to read. For a wealth signal to be credible, it also needs
to be hard to imitateif everyone in your community can afford
$150 sneakers, those Zoom Lebron IVs would lose their signal value.
In general, the poorest people in any group are forced to opt out
of the conspicuous consumption arms raceif 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 explanationthat there
is simply a culture of consumption among black Americansdoesn't
quite cut it for economists. We prefer to account for differences
in behavior by looking to see if there are differing incentives.
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.
If signaling is just part of a deeper human impulse to seek status
in our communities, what's wrong with that, anyway? If a household
chooses to spend a lot on visible consumption because it gets happiness
from achieving high standing among its neighbors, why should we
care? To return to Cosby's concerns, if blacks are spending more
on shoes and cars and jewelry, they must be spending less on something
else. And that something else turns out to be mostly health and
education. According to the study, black households spend more than
50 percent less on health care than whites of comparable incomes
and 20 percent less on education. Unfortunately, these are exactly
the investments that the black families need to make in order to
close the black-white income gap.
In his controversial speech, Bill Cosby appealed to the African-American
community to start investing in their futures. What's troubling
about the message of this study is that Cosby and others may not
be battling against a black culture of consumption, but a more deeply
seated human pursuit of status. In this sense, Cosby's critics may
be rightonly when black incomes catch up to white incomes
will the apparent black-white gap in spending on visible goods disappear.
By Ray Fisman
Jan. 11, 2008
Slate.com
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