It is time to talk about the Joneses and why we bother trying to impress with them. I am of course talking about the effect known as “keeping up with the Joneses” or the tendency to ‘spend money you don’t have to buy things you don’t need to impress people you don’t like’.
Economists sometimes try to explain spending and savings decisions with this urge to compare ourselves to friends, neighbours, colleagues, etc. The idea is that if we think our peers are richer than we are or make more money than we do, we increase spending to seem to the outside to be just as well off. Unfortunately, there is mixed evidence as to whether this concept really works in practice. In general, the effects found in the past range from relatively small to significant and it is typically not possible to prove causation.
This is why new research among Dutch households is interesting. That research used randomized control trials (the gold standard of economics experiments) to examine both correlation and causation. In a series of experiments, people were made to believe that they have more or less debt than their peers and then asked about a range of decisions, not just about spending but also about their willingness to spend time with friends and families, their political views on redistribution or their willingness to volunteer for charitable organisations.
Making people compare themselves on the debt they have is a bit unusual and may lead to different results than the more common approach of making people believe they are richer or have higher income so take the results as one more piece in the puzzle rather than the definitive word on consumer behaviour. Besides, asking Dutch people about keeping up with the Jones’s is bound to result in small effects, since they are famously relaxed about life and don’t have a reputation for frivolous spending like, say, the Americans.
So, when it comes to consumer spending, this study does not find a significant impact. Or rather it does not find a significant impact on overall spending. What the study finds is that when people are told they are 1% less well off than their peers, they increase spending on durable goods like cars by 1.3% but cut spending on nondurables by 1.5%. The net effect is a statistically insignificant decline in spending of 0.2%, but there is definitely a small impact of frivolous spending to impress peers that are perceived to be better off.
Where things become interesting, though is in the impact of perceived relative wealth on other behaviours. To nobody’s surprise, people who are made to believe they are poorer than their peers become more in favour of wealth and income redistribution. But they also become less willing to spend time with friends or volunteer for a charity.
People who are made to believe they are better off than their peers, on the other hand become more social and more willing to volunteer. They aren’t willing to share their wealth, but they are willing to share their time. Shame though, that the people who are worse off won’t be there to meet them.
I can only speculate here, but it seems to me if this experiment would be repeated with Americans, the effects on consumption and prosocial behaviour would likely be bigger. Americans not only are well-known victims of conspicuous consumption, but volunteering has a much bigger tradition in the US than in the Netherlands and is more common there. Hence, my guess is that Americans who are made to believe they are worse off than their peers will likely increase consumption more than the Dutch. And Americans who are made to believe they are better off than their peers are will likely volunteer more than the Dutch.
I generally like the Dutch more than my German compatriots because I find them more relaxed, more egalitarian, and blessed with a better sense of humor. That said, who would ever think of studying the subject of conspicuous consumption among the notoriously stingy Dutch? I mean, these folks are rather unpopular in southern Europe as they go on holiday with their mobile homes fully packed with foodstuffs, so that they never need to set a foot in a local restaurant. You get an invite to coffee in a home in the Netherlands and then they bring out a tin of pastry, which is opened quickly so that everybody can take exactly one cookie, after which the tin is quickly packed away. Calvinist frugality is so much a religion that you'd be shunned if you didn't have your curtainless ground level living room lit every evening, so that the neighbors can see if you bought a new TV set or some other extravaganza. Who knows, volunteer work might have some special status as a secret way of breaking out of the confines of the strict middle-class mindset.
This is very interesting, especially as I've long thought that cultural traits driving spending propensities are under-studied in economics, perhaps because uncomfortable cultural stereotypes inevitably emerge.
How much of the suspected divergence between Dutch and American households could be that it's harder to actually show off one's conspicuous consumption in the former? In Amsterdam, rich people lash antique cargo crates on the bikes they use to pedal heir children to public school. In America, rich people park huge power boats in their driveways and send their kids to private school. Similarly, more Americans go to church, which is a philanthropy outlet preferred by many possibly because it's more conspicuous than, say, volunteering at a local soup kitchen. And do the Dutch even have soup kitchens at which to volunteer? One thing I've noticed living in Germany is that volunteering and charitable giving appears lower than in America because people are a) a bit tapped out from high income taxes which already assumed (and expected) to pay for a lot of social services, and b) there's lower perceived social utility (even generously funding a Stiftung is probably viewed more as a tax dodge than selfless generosity).
I also wonder how the expected divergence might be less the result of behavioral differences (although it's important to remember that it's not "Going American" https://en.wikipedia.org/wiki/Going_Dutch ;-) ), and more about the latter starting at a higher wealth level and/or living in a more dynamic economy shown to grow faster in the past and expected to continue growing faster in the future.
Almost 20 years ago, Citibank put out a report that was so controversial it resulted in the author being fired https://1drv.ms/b/s!At9od58qwtRejLZlRb06p5ClkiJ1ag , which concluded:
"Outlandish it may sound, but examined through the prism of plutonomy, some of the
great mysteries of the economic world seem to look less mystifying. As we showed,
there is a clear relationship between income inequality and low savings rates: the rich
are happy to run low or negative savings given their growing pool of wealth. In turn,
those countries with low/negative household savings rates tend to be the countries
associated with current account deficits.
So why should we equity strategists care about this? Well simply, because the issue that
most consistently seems to vex our equity client base, from a top down perspective, is
the U.S. current account deficit, the associated lack of savings, and the build-up of debt.
It is both intellectually fashionable and elegant, apparently, to attack “the crazy
American consumer, and his/her overspending”.
This has of course, from a portfolio perspective, been a costly trade to run-with, over the
last 10 years. Those “crazy American consumers” seem to be in rude health. Their
imminent demise has been a long time imminent.
If we are right, that the rise of income inequality, the rise of the rich, the rise of
plutonomy, is largely to blame for these “perplexing” global imbalances. Surely, then, it
is the collapse of plutonomy, rather than the collapse of the U.S. dollar that we should
worry about to bring an end to imbalances. In other words, we are fretting unnecessarily
about global imbalances. In turn, the risk premium on equities is probably too high.
Secondly, we hear so often about “the consumer”. But when we examine the data, there
is no such thing as “the consumer” in the U.S. or UK, or other plutonomy countries.
There are rich consumers, and there are the rest. The rich are getting richer, we have
contended, and they dominate consumption."