Trickle-Down Consumption: Do The Rich Cause The Non-Rich To Overspend?
|June 6, 2012||Posted by Roshawn Watson under Uncategorized|
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.
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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
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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.
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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