Trickle-Down Consumption: Do The Rich Cause The Non-Rich To Overspend?
| June 6, 2012 | Posted by Roshawn Watson under Uncategorized |
Image Credit: Joachim S. Müller
By: Roshawn Watson
Versace, Manolo Blahniks, Christian Louboutins, Jimmy Choos, Tiffany’s, Bergdorf… oh my! We’ve been indoctrinated with a culture of excess. “Everything,” or at least everything “worth” talking about, is glamorous if you are to believe the ads on TV, a sampling of popular shows, and many of the songs on the radio. Even if you read some of your friends’ Facebook statuses, you may be surprised by just how often they go to great concerts, dine at the fanciest restaurants, and purchase designer labels and the latest gadgets. I remember observing that an ex had more pictures of her posing with celebrities than pictures of her posing with people she actually knew. Data shows that people tend to selectively highlight their best when sharing with their virtual world, and that apparently makes their haters friends sad. Perhaps no one possesses more of the best than the wealthiest among us, so does their spending induce malcontent and drive Americans to overspend?
All That Glitters
My initial thought was no: it is not the rich at all who are causing average American families to overspend. After all, some of the most conspicuous consumers are the brokest. The sad truth is that it is a lot easier to purchase artifacts denoting financial superiority than it is to actually be financially superior. Moreover, large homes in affluent neighborhoods are more highly correlated with large mortgages than with high net worth. Typically, owning the latest artifacts and toys is inversely related to wealth accumulation. For example, think about how many of the cast members of the Real Housewives, a show dedicated to depicting “affluent” lifestyles, have financially struggled. Unfortunately, just last week, the engagement ring of Taylor Armstrong, from the Real Housewives of Orange County, was auctioned on eBay for $250,000 to satisfy creditors. Be careful when you covet someone else’s life because behind the glittering facade lies a financial reality you may not be ready to deal with.
Related Article: The Phony Rich
Nonetheless, that’s exactly what marketers want you to do: they specialize in stimulating desire for things that you don’t have. Creating discontent is a proven marketing strategy and is highly effective. Since credit is still readily available, despite lending criteria being more stringent , a large number of Americans have opportunities to obtain what they covet with borrowed money, even if it is to their own detriment.
“If you don’t have no money, take your broke [butt] home” Fergie
Related Article: Credit Cards Companies Tightening Lending Criteria
Funny Data
Another consideration is that if the rich really are driving Americans to overspend, then why has American overspending supposedly decreased since 2007 while the spending by the top American households has increased? Household debt-to-income (DTI) ratios have declined from 115.2% (last quarter of 2007) to 98.7% (second quarter of 2011), according to the New York Federal Reserve. 1 Assuming at least some of the lower DTI ratios are due to increased American austerity, it is confounding that luxury spending by the top 10% of American households is expected to increase . Their “overall spending on luxury goods and services will rise by 3% in 2012,” and those in the “top 1%…will spend 4 to 5% more than the prior year” according to Forbes.
Have Things Changed That Much
The more things change, the more they stay the same.
Spending by the “Joneses” is NOT the real culprit. After all, the Joneses are not new to the neighborhood, and they are broke anyway. We’ve known them for a long time. According to Susan J. Matt, the Joneses arrived on the scene between 1890 and 1930. During that time, there was a shift from envy being condemned “as a destructive emotion and a sin” to being socially acceptable. According to the New York Times, “we couldn’t be a nation of consumers until we were given public license to envy.” In some respects, it’s covetousness and envy that drives our economy. Still, the fact that overspending (i.e., as evident by increased debt) of typical American households is expected to decrease around the same time spending amongst the top households will likely increase suggests that American envy may have temporarily loosened its grip on our wallets a bit… for now.
Classic Victim Mentality
While spending by more wealthy households influencing all American spending behavior is an interesting hypothesis (a.k.a. Trickle-Down Consumption), at the end of the day, I’m not sure how much it matters. The rich don’t “make” Americans overspend because it is very difficult to “make” another adult do anything without his or her compliance. Seriously, how does someone’s spending “make” you overspend? Short of someone holding a gun to your head and saying “spend or else,” you have viable alternatives.
Honestly, I find it empowering that we’re not held captive by the purchases of others. We wield a great deal of power over our financial futures. We determine whether we achieve financial solvency, financial comfort, or financial independence. Our fulfillment shouldn’t be determined by our possessing the latest doodads. We own our actions. Let’s not give that power away by assigning blame to others for our lack of self-restraint.
Who is Really Driving Increased Spending
If the rich are not “making” Americans overspend, then who is? Not surprisingly, it is us! We have to gain control of the person staring back at us in the mirror. The temptation to spend like the Joneses is sometimes the result of internal turmoil or ignorance. When we knowingly overspend to keep up with the Joneses, we are often doing so out of a sense of inferiority. Unfortunately, spending is a poor substitute for self worth.
Another group of people who are more likely to engage in this type of spending are the aspirationals. The brands cater to them. They spend beyond their means TO BE SEEN. Aspirations want to be affluent and generally earn good incomes but are often too busy looking the part to build significant wealth. Be particularly careful if you are friends with aspirationals. They may give you financial advice. Somehow they “afford” everything. Don’t be fooled. Their finances are generally a disaster and their advice…toxic.
Related Article: Broke People Stop Giving Me Financial Advice
Closing Thoughts
The irony is that the overspending by the non-rich creates wealth for the rich. That’s often how they got rich to begin with, catering to the needs of the masses. It is also ironic that most multi-millionaires are frugal anyway, and even the “glittering rich” (the true jet-setters) are still more frugal than most Americans. The same study that suggested spending increased among the top 10% of household also found that these families on average saved 23% of their income (34% in the top 1% of households) compared with the 3.7% national rate. Thus, if average Americans would emulate the spending habits of the typical multi-millionaires, they would actually have to decrease their lifestyles rather than spend more.
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1 The data is unfortunately somewhat convoluted because there is evidence suggesting that part of the debt decrease is not solely due to increased frugality: it may represent increased charge offs.
Image Credit: Joachim S Mueller
Agree with you! Always amuses me when I hear ‘stimulate the economy by hitting the mall’. Rich gets richer, poor gets poorer!
BTW, got a weird, annoying debt relief popup.Site Administrator: Resolved
Thank you so much! That’s the perfect example. Who are we trying to help here?
Thanks for this stimulating article; it made me think as usual. I was thinking that probably it is not the wealthy who who make the broke spend – I am not convinced we could blame them except in the broadest Marxist sense of being capitalists and getting rich by expropriating the surplus value of labour. It seems to me that the culprit is the media – particualrly the glossy, gossipy megazines and stuff. This is how people learn to crave stuff.
Do you know, I just about recognised the names at the begining of your post and I am a shoes woman :).
Maria, this was definitely a complex article, so I am glad that wasn't a hindrance to the flow. Sensational stories garner eyeballs, which are the bread and butter of the media business. Marketers are also another influence, as are family and friends. However, let us not forget though, you can bring a horse to a well, but you can't make him drink. At some point, people have to take responsibility for their own decisions…unpleasant or not. Thanks for the comment!
I believe in personal responsibility. Nothing will make me spend unless I want to. I find that poor people spend money on frivolous things so they will feel better. An iPod or iPhone makes you feel better even, if you cannot pay our bills. Why do people keep spending when they do not have money? The products they buy makes them feel better untill they have to pay for it. You would think that would stop them, but it doesn't!
I advocate personal responsibility as well. I think esteem-based purchases are horrible. I thin I first began to feel for these types of purchasers when someone was getting ripped on the Montel Williams show for purchasing new shoes when he really couldn't afford it. Montel came to his DEFENSE. His rationale was that those shoes were the only reason why he can hold his head up.Like you say though, the day of reckoning is inevitable, regardless of whether they have come to grips with the impact of their spending or not.
The best thing a poor person can do is to cut his/her cable. Seriously. They are targeted to spend money they don't have. You've said it rather nicely " The sad truth is that it is a lot easier to purchase artifacts denoting financial superiority than it is to actually be financially superior."
Shilpan, I never heard that the best the poor can do is to cut the cable, but I completely understand where you are coming from. Getting a hold on spending, as well as having more time to increase earning potential can be vital to helping the poor learn how not to be poor.
the poor try to overcompensate by looking rich.
love the rich guy who looks poor.
1%
You mean, you are not a fan of "big hat no cattle." I am with you! Overcompensating is a lame way to get self-confidence because it puts you in an even weaker position than to begin with.
And I thought I loved you before…
You were totally tap-dancing around Nietzsche's "inverse of morals" – which is, quite possibly, my favorite piece of philosophy ever because it is so utterly applicable. When we make something that shouldn't be ok (like envy) socially acceptable, we're inverting our morals in order to justify our otherwise less-than-appropriate behavior.
Ha! I'm glad you the slant.
That's really interesting stuff! The equivocation on envy is just amazing and sad. People sometimes do compromise for a desired end (stuff)… regardless of the means (dissolution of morals).
Hi Roshawn,
I have had the unique experience of befriending several multi-millionaires (i'm not bragging) over the past year and one thing they all have in common is the ability to manage their money and stick within their budget. Another one is that they are always creating passive income streams to make sure that they have a steady supply of money.
Jesse, those are fabulous observations. Millionaires are some of the most real people I know. Often, there is no pretense… I can't say that for their "people" and/or family members though. Anyway, I think you are on to something: accumulators of wealth are shrewd managers of their money and are proficient at developing income streams. These are definitely ways the rich get richer.
People try to emulate the 'rich' in all the wrong ways, imagine if people copied their savings patterns instead of the latest brand worn by Celebrity X. Crazy.
Yeah, I think it is unfortunate that the media doesn't highlight more of the typical rich. I know that doesn't attract the eyeballs, but highlighting the extremes gives us a very skewed perspective of how the 'rich' live.
I love this post. Well written, stimulating, challenging.
I have had the fortune of living in developing and newly developed countries. One huge difference between them and the USA is that you genuinely cannot judge a book by its cover. The street vendor dressed a bit shabbily might be the father of a Harvard grad (true story), or the lady serving as your caddie in Thailand have a son who was a medical doctor, having been put through university by his working mom (true story).
The moral being that when you do take responsibility for your actions, the outcome becomes radically different. When you begin to save 20% or more of your income, the outcomes change.
Ours may be the only country where esteem buying is believed to be something to emulate rather than ridicule.
Thanks so much Thad!!!!
Those are just fascinating stories. I think we can learn a lot from traveling abroad. I was riveted by the Jamaican economy, and how the locals adapted. I definitely count my blessings. Your point about personal responsibility is right on point. Sadly, it is a message that gets loss in the fray… it is so unpopular. It is always everyone else's fault.
Hmmm.. this is an interesting concept. Probably. All I know is that when I watch shows like Real Housewives of Vancouver (which is not often, but hey, they are in my city), I want all of the pretty things that they have.
Daisy, that's not a problem. We can still be friends. I have too many guilty pleasure shows! I tweet about them sometimes 🙂
Awesome article. I totally agree. When economic stimulus is the forfront, it focuses on consumerism and getting people to spend money. If you have the money great, but if you don't it just makes things worse.
Thanks so much Miss T. I agree. Sit out the economic stimulus unless your house is stimulated.
really good article, watson.. very well thought out.
i think that most people have an inaccurate vision of how the rich really live.. they see the real housewives on tv, and professional athletes with all of their bling.. but most of the wealthy drive $30,000 cars and shop at the same grocery stores that you shop at. personal responsibility is often a big part of both getting AND staying rich.
jefferson @seedebtrun
Thank you so very much!!!! I agree with you wholeheartedly Jefferson. Our societal vision of the wealthy is distorted by images that the media tirelessly projects. They train us to aspire to be like the cool kids, and the cool kids have this wonderful life because we're providing it. We directly or indirectly subsidize the their lifestyles because we want to live like them. The wealth they are generating is the wealth from us watching and purchasing products and services to emulate or be around these knuckleheads. It's ridiculous and circular. I would rather be subsidizing my wealth or the wealth of someone that is providing more value. Most rich people get rich by serving others not entertainment. I'm not entertained by some of their antics!
I don't know who is causing Americans to overspend, but I think you're right it is us. I don't overspend much and the Jones only influence me minimally. We rarely watch those TV shows.
Thanks Joe! It's amazing how much we pick up subconsciously. I certainly don't aim to be like those "broke" Joneses. However, I wonder how much they have influenced me.
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