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Collaboration and Friendship

Erik Hurst and Kerwin Charles have been colleagues and close friends since they met at the University of Michigan in 1997, when Charles was a new assistant professor and Hurst was finishing his PhD. They spoke with Chicago Booth Magazine recently about how their friendship shapes their research.

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Behind the Bling

THE TRUTH ABOUT RACIAL STEREOTYPES ON SPENDING

By Patricia Houlihan
Published: February 29, 2008

Bling Guys
Image by Chris Strong

 

When comedian Bill Cosby excoriated black parents for buying expensive sneakers instead of “Hooked on Phonics” tapes for their kids, he touched off a firestorm. Critics accused him of reinforcing the stereotype that poor blacks—a group he clearly did not belong to—spent money on high-status goods instead of investing in their children’s future. Others said Cosby’s charge was legitimate. New research by Erik Hurst shows the stereotype is true. But the reason behind it is probably not what people think.

 

The anecdotal evidence seems to be everywhere. “There’s a perception that if you go into poor black neighborhoods, the value of cars is much higher there than in comparable—even white, middle-class—neighborhoods,” said Hurst, professor of economics and Neubauer Family Faculty Fellow. And, in fact, he found supporting data eight years ago with Kerwin Charles, Steans Family Professor in Education Policy at the university’s Harris School of Public Policy Studies and visiting professor for 2007–08 at the Becker Center on Chicago Price Theory at the GSB. They stored the idea away while they worked (together and independently) on other studies about racial wealth differences.

When Cosby made his remarks in 2004, Hurst, who is white, and Charles, who is black, had been focusing on conspicuous consumption and the signaling value it communicates. The resulting study, “Conspicuous Consumption and Race,” shows that blacks and Hispanics spend 30 percent more than whites on clothing, cars, and jewelry—an amount that averages out to around $2,000 per year per household. What’s more, blacks and Hispanics are spending less on education and health care and saving less money.

The reason? Status, according to Hurst and Charles. Because blacks and Hispanics have lower income on average, they’re more likely to be perceived as poor. Wearing nice clothes, driving a flashy car, and sporting fancy jewelry, they hope, shows other people that they are not poor.

What’s more, white people do it, too, their research shows.

In comparing spending data for whites in southern states with that of whites of comparable income in the Northeast, they discovered that southern whites outspend northeastern whites when it comes to highly visible, highly portable consumer goods that denote status. “People do care about their position in society and will work hard to signal their relative rank,” Hurst said. “If people don’t know your income and you want to show them, the way to do it is to consume visible goods. You see it among blacks, whites, and Hispanics.”

Statistical Support

To document the differences, Hurst and Charles looked at the Consumer Expenditure Survey (CEX), a detailed survey of what people consume that the U.S. Department of Labor uses to compute the Consumer Price Index. They chose data from 1986 to 2002. With Nick Roussanov, PhD ’07, they also ran their own survey to see which consumer goods denote higher income; respondents said clothing, cars, and jewelry—items that are easy for strangers to see.

Holding income constant, Hurst and Charles found a racial gap in overall total spending of around 30 percent. What’s more, it held constant no matter how they subdivided people: by age, gender, marital status, and education. The biggest share of additional spending—around 40 percent—went for clothing. Although clothing is less expensive than cars or jewelry, people buy it more often, Hurst said.

To support their model, the researchers sought an explanation beyond taste-based preferences. “It could be just a preference story,” Hurst said. “Lots of different subgroups and cultures like different goods. But we thought it might not be the right explanation in this case, given all the other sociological work on how visible consumption has a role in signaling status to others.” So the researchers examined the CEX data among each state and found that within each racial group, residents of states with lower incomes spent more on clothing, cars, and jewelry than residents of higher-income states.

When we realized that white people are doing the very same thing,” Charles said, “we saw what that implies—that racial difference is a fact, but it obscures the other mechanism that explains the behavior. Blacks spend more, on average, because they belong to reference groups that are so much poorer than white reference groups.” And, as Hurst added, “If you’re high income but belong to a poor income group, all else equal, people are going to think you’re poor. The benefit for you is high to distinguish yourself from the poor group.”

Sending a Signal

Economist and sociologist Thorstein Veblen coined the phrase “conspicuous consumption” at the end of the 19th century to describe the excess of the Gilded Age. The current equivalent is “bling,” a word created by rap artists who boosted themselves out of the ghetto with a new form of music and showed their improved economic status with flashy jewelry, expensive cars, and designer clothes. If you Google the word “bling” in a search for images, more than a million come up in less than a second. A word that didn’t even exist ten years ago is now shorthand for conspicuous wealth. The Oxford English Dictionary defines it as “ostentatious jewelry. Hence: wealth; conspicuous consumption.”

According to Charles, the word has caught on because it captures a real phenomenon. “In the black community, this particular kind of consumption is important in some way, especially for young people, because random, anonymous interactions are the ones that most concern them.” Young black men are the most economically disenfranchised social group; they also have higher incarceration and unemployment rates than any other group, he pointed out. Charles quoted a popular rap song. “In it, the guy says, ‘I’ve got a job.’ He’s 25 years old. Why would you say you’ve got a job? Who doesn’t?

“Here’s who doesn’t: people he knows. And so he says, ‘Unlike these guys, I have a job. You don’t believe me? Look at this gold chain I bought.’ If everybody around him had a job, he wouldn’t have to say it, and he wouldn’t have to signal it. It wouldn’t be a big deal.”

In fact, Charles and Hurst found that between black communities in different locations, an individual of a given level of income who lived in an area with a higher average community income spent less on clothing, cars, and jewelry than someone with a similar income who lived in an area where the community income, on average, was lower. Blacks with affluent peers have less need to signal high status, they said. Charles used his own experience to illustrate the point. “If a police officer pulls me over in a college town that has eight black residents, four of whom are professors, he’s already thinking, ‘This guy could be on the faculty.’ But when I’m pulled over while driving through the south side of Chicago, the cop is thinking exactly the opposite sort of thing. And so, anticipating that, our paper would suggest, I’d go to certain lengths in a preparatory way—by having a certain car or wearing a tie.”

The affect of the peer group holds true for whites and Hispanics as well, Hurst said. “When blacks of a certain income live around poorer people, they spend more than they would if they lived around richer peers. Whites do exactly the same thing. So do Hispanics,” he said. Given the racial sorting that’s typical of most neighborhoods, he added, “blacks tend to live in certain areas, whites in others, and Hispanics in others. The problem is that, on average, blacks live around poorer people, and whites live around richer people, so that on average, blacks spend more on visible goods than whites do.”

Hurst said the research makes clear that in this instance, blacks and whites are “exactly the same in what their preferences are. And both respond to the exact same kind of incentives. It just so happens that a black person of a given income has poorer peers than a white person of the same income, and that’s well documented. Because their peer groups are different, they do different things.”

Why It Matters

For Hurst and Charles, the black and Hispanic spending habits they document can be explained by rational economic behavior about signaling and reference groups; additionally, the habits are independent of race. Still, one of their findings may trouble policy makers—that funds spent on high-status items mean fewer dollars are set aside in savings, or spent on health care or education. Young adults in particular—those in their 20s and 30s—are more likely to spend money than those in their 40s and 50s on high-status clothing, cars, and jewelry because they’re more likely to be concerned with attracting a partner. “They borrow against the future because it’s important when you’re 25,” Charles said. “By the time people are 55, the signaling effect is gone.”

For policy makers who want to promote certain behavior—for instance, increasing savings among low-income people—it’s important to understand the type of mechanisms at play for people’s spending decisions, Hurst said. “If my goal is to increase health care spending among a certain group, and I give that group a direct transfer of dollars, they might not spend it on health care because there’s some other mechanism driving their spending decisions—their pursuit of status.

“That might then affect the optimal way I’d want to achieve my policy goal. I might not just give money for them to allocate to health care, I might set up health care clinics, for instance. However, if I do that, or I find some other way to subsidize health care, the group might reduce the amount they spend on health care and spend the additional money on this other status-seeking goal. That’s why you need to think about the optimal way to deliver policy objectives in a world where you have the status-seeking motive,” Hurst said. “We don’t have the solution. But we show that mechanism is important to think about.”


Last Updated 5/14/09