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The Wealth Gap: The Role of Conspicuous Consumption

The Wealth Gap

source: sidehike

The Pew Study reports a stark difference in wealth between black and white households. The median wealth of white households is 20 times that of black households. The study points to differences in home ownership as the culprit. In a previous post I suggested it is not the difference in home ownership that is the greatest contributor to the wealth gap, per se. Rather, it is the asset allocation of white households versus black households. Even when both groups owned homes, whites owned more liquid assets than did blacks and were wealthier.

In fact, the study finds all things equal – income, education, employment, age – black households still fall behind in terms of wealth. This unavoidably leads me to suspect some of the financial decisions in black households are not conducive to wealth building. Nikolai Roussanov examines one set of detrimental financial decisions black households make. In Conspicuous Consumption and Race: Who Spends More on What Nikolai Roussanov and his colleagues studied data collected from 1986 to 2002 for the Consumer Expenditure Survey conducted by the federal Bureau of Labor Statistics. Blacks and Hispanics spend up to 30% more than whites of comparable income on visible goods like clothing, cars and jewelry, the researchers found. This meant that, compared to white households of similar income, the typical black and Hispanic household spent $2,300 more per year on visible items. To do that, they spent less on almost all other categories except housing, and they saved less.

You can not have your cake and eat it too.

In this series I do not want to paint the picture blacks, having made many wrong moves financially, are somehow apathetic of or are somehow inferior in their acumen for figures. There are many factors at play in the decision making process in black households. In a New York Times survey a few years back, 81% of Americans said they felt pressure to buy high priced luxury items. In an article in the Times, “When the Joneses Wear Jeans”, Juliet Schor, a professor at Boston College says,

“In the last 30 years or so… as people have become increasingly isolated from their neighbors, a barrage of magazines and television shows celebrating the toys and totems of the rich has fostered a whole new level of desire across class groups. A ‘horizontal desire,’ coveting a neighbor’s goods, has been replaced by a ‘vertical desire,’ coveting the goods of the rich and the powerful seen on television. The old system was keeping up with the Joneses. The new system is keeping up with the Gateses.”

So it’s not just black households, It’s everyone. But this phenomenon seems to be more pervasive among black households. Perhaps it is that black households, typically starting further behind than white households financially feel the need not only keep up with the Joneses, but catch up to the Joneses. One can easily begin to equate and confuse ownership of a few luxury items with power over one’s fate, when in fact the opposite is true—the more of these items one owns, the less autonomy one enjoys and the greater the chance that one will one day meet a stone wall.

Although wealth among blacks in 1/20th of whites, household income among blacks is 70% of whites, for black households to acquire many of these luxury goods, they use unsecured credit in the form of credit cards and short term, high interest loans with greater incidence than white households. This is like a double or triple whammy against wealth accumulation. For every dollar spent on an item of really no lasting value, that’s one less dollar spent on stocks, bonds or other appreciating assets.

Is Warren Buffett and Bill Gates’s New Philanthropic Initiative Condescending? ” by Jamie Johnson, Vanity Fair

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