On racial stereotypes & spending

Bill Cosby has famously accused blacks of spend money unwisely, buying expensive sneakers rather than investing in their kids’ education and thereby reinforcing harmful stereotypes.

Research by Wharton’s Nikolai Roussanov, and Erik Hurst and Kerwin Charles of the University of Chicago has shown that what they’re doing is we all do — black, white, and hispanic — it’s called status signaling.

Knowledge@Wharton:

What really matters, Roussanov, Charles and Hurst found, is not one’s race but one’s economic situation relative to the “reference group” — people in the immediate community. “This is not really about race in the end. It is simply about what we observe about you and what peer group you belong to,” Roussanov says.

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.

So Cosby’s wrong on blame. But not on consequences:

Roussanov and his colleagues find that blacks and Hispanics spend 16% and 30% less, respectively, on education than whites of similar income. They spend 50% less on health care. Spending on health and education is not as visible to as many people as spending on cars and clothes, so it does not contribute as much to one’s status.

The article says that research suggests no simple fix. But as I read it (and that emphasis above is mine) one fix is to stop the concentration of blacks in poor communities! 

Note: I’m not among those picking on Cosby. He’s hit a wrong note from time to time and I don’t agree with all he says but on balance he’s a force for good. Like him or hate him the profile of him in the May Atlantic is well worth reading.