Trickle Down Consumption

I was driving to a kickball game the other day, when I heard a cool story on Marketplace about those little white oval stickers with two big letters that people sometimes put on their bumpers. You know, "GB" for Great Britain, or "F" for France, stating the places the driver has visited, or where he's from. The stickers were created by the UN back in the 1940s, in Europe.

There were so many drivers from other parts of the world that the United Nations created the stickers as an easy way to identify the country the driver was from. The reporter notes that, "in the US, they became a status symbol: EH for East Hampton, or AK for Nantucket. Secret codes that said the driver of this car lives or vacations in America's most elite resorts."

These days, the stickers are a way to brag about the cool places you've been, or a flag you can send up as a beacon, hoping others from your home town might be living in this new place with you.

Still, there's a bit of an elitist attitude with these decals. When we tell every passerby where we have visited or lived, that says a little something about our economic status, too. We can afford to vacation in this sort of place. We have the means to live in this city. The stickers themselves, the reporter believes, are not a huge deal. But they are indicative of an economic trend, says Cornell Economics Professor Robert Frank: outward, unashamed displays of wealth are becoming more common. The very rich are building much larger, more grandiose homes that tell any passerby a little something about the denizens' lot in life. Expensive jewelry that would have seemed gaudy or in ill taste in decades past might now be completely acceptable. And, of course, it's pretty common brag to anyone who cares to see about the prestigious school your child was able to get into via a bumper sticker, too.

The bragging might not be a huge deal, but Frank notes that this outward display of wealth "shifts the frame of reference" for the class right below them. What passes as a normal house for someone of this income level has just gotten a bit bigger. So when an upper middle class homeowner sees someone in a nicer part of town build a newer, bigger house, he is now more likely to end up buying a bigger, showier home, too. The people just below that economic class then do the same, and so on down the income ladder. The net impact is that everyone ends up spending more of their income (and saving less) as a result of the visible consumption of the very wealthy. While the show doesn't use this term, the trend they are describing is "trickle down consumption", coined by Marianne Bertrand and Adair Morse. All across the income spectrum, when we see people just above our economic group spending more, we spend more, too.

From Chrystia Freeland's article: "There has been extraordinary growth in the 1 percent," Frank said. "Ordinary people don’t want to emulate them, but what happens is that the people who are next to them want to emulate them, and so on. That social cascade ultimately explains why the middle-class home got 50 percent bigger in the past three decades."

At first I was dismissive of the findings. Sure, the spending of the wealthy might result in additional temptation for all the rest of us to spend more too, but it's just one more systemic driver for over-consumption. There are myriad temptations to spend out there in the world already -- what's one more? And if I can fight daily against an army of marketers trying to separate me from my money, can't I do the same when I see my neighbor building an addition? Aren't we all responsible for our behavior, financial or otherwise?

But then I remember that we are not completely rational beings. We might consciously choose a certain fraction of our behavior (I still remember that day in 2006 when I said "no" to that extra slice of pizza) but a lot of our behavior is on autopilot, driven by habit, or emotion, or desire, and maybe the actions of those around us, too. We are impacted by our coworker's decision to buy a new car, or our cousin's 4,000 square foot home, or our friend's latest trip to Europe. We hang out with these folks so, at least on some level, they are our peers. If we really are the average of our five people we spend the most time with, I wonder if we can just average their spending, too.

But let's not end this post on a powerless note. I bet this trickle down consumption might work for other behavior as well, like saving or investing, if only the subjects were less taboo. For whatever reason, it's a lot more acceptable to show off a $500,000 home to total strangers who happen to be driving by, than it is to talk about how you amassed $500,000 in retirement savings to close friends and relatives. If we shared our investing behavior with our peers as openly as we share our consumption, I wonder if good financial behavior might trickle down, too.


**Photo is from amelienadine33 at Flickr Creative Commons.