January 22, 2012
Recessions Lower Pressure For Status Spending

People who aren't made poorer by recessions spend less for status signaling when others have to cut back on their own status-driven spending. If others can't flash as many status signals then people feel less need to do their own spending to signal higher status.

"Even when their consumption budget is unaffected by a recession, consumers will change their expenditure patterns because some of these expenses depend on social standards that shift with economic conditions," write authors Wagner A. Kamakura (Duke University) and Rex Yuxing Du (University of Houston).

So a recession allows some people to voluntarily take a breather from status spending.

The authors analyzed U.S. household expenditure data for more than two decades, using a model that allowed them to separate budget and positionality effects. "As one would expect, we find that the share of consumption budget devoted to nonessentials (apparel, jewelry and watches, recreation, traveling) drops, while shares devoted to essentials (food at home, housing, utilities) increase during a recession due to the budget effect," the authors write.

Wealthy consumers don't necessarily spend less out of empathy for those who are less well off. Instead, they perceive a reduction in others' expenditures on positional goods and services and feel they don't need to spend as much to maintain the same status relative to their peers, the authors explain.

During hard times, visible luxuries are hit twice, because people generally have less to spend and those who can consume feel less compelled to show off. "Keeping up with the Joneses is less onerous when they are not keeping up," the authors conclude.

People with a lower instinctive (or even practical) need to flash status symbols are relatively more free to live the way they want to live. I am reminded of a piece that Marty Cortland wrote about 4 years ago on how he had to buy a Lexus because his wife thought they weren't rich enough to drive around in a mere Buick. The tyranny of upper middle classness: you've got to flash status symbols because you aren't known as a billionaire.

“I’m not driving a Buick,” she declared. “There is no way I’m showing up at playgroup at Brook Hollow in a Buick.”

“But what about Ross Perot?” I argued. “He drives a Crown Vic.”

“Ross Perot is a billionaire,” she shrieked. “He can afford to drive anything he wants!”

I bet there are genetic variants that cause different levels of desire to have status. A combination of a low desire for status and a high desire for savings would seem the best combination for a lower stress life. Though one might still feel stress about not having saved enough.

Share |      Randall Parker, 2012 January 22 09:19 PM  Brain Economics


Comments
not anon or anonymous said at January 23, 2012 1:51 AM:

This is a good argument for levying progressive consumption taxes and lowering taxes on labor and capital income. Raise hard-needed government revenue while discouraging wasteful competitive consumption at the same time.

LarryD said at January 23, 2012 8:53 AM:

They're called sumptuary laws

Instead of aiming these laws at the wealthy, who may well have passed beyond the need for status displays, aim them at the upper middle class, which is status-obsessed and thus will keep on spending on status displays even if taxed. However, we need to make is cheaper for the upper lower middle class to engage in status displays, to put the spur to the upper middle class.

bbartlog said at January 23, 2012 9:19 AM:

'a high desire for savings would seem the best combination for a lower stress life.'
Buddha says no. You don't want a high desire for *anything* if a lower stress life is your goal.

Bertie Wooster said at January 27, 2012 8:44 PM:

Yes, the government will raise consumption taxes because it wants to help you!

A better answer would be laws that reduce the amount of revolving credit banks can issue, for example by limiting interest rates or by changing bankruptcy laws. Easy credit can lead to unnecessary inflation in the housing market, even for renters. It makes it easier for people of lower income to live way beyond their means - AND THEY ALWAYS DO.

As a single man I felt a lot of pressure to keep up with friends and colleagues blowing money on expensive clothes, cars, boats, gadgets, and vacations - until I watched as several of them lost their homes and/or filed for bankruptcy, when I realized that I was keeping up with people who were buying on credit.

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