Rich People Spend More

It is very satisfying when research corroborates naive intuition. We expect water to flow downhill and when research after much painstaking data analysis concludes that indeed water flows downhill, it is a valuable addition to human knowledge and understanding. Switching off sarcasm mode now. I entered that mode when I read “Rich People Are Great at Spending Money to Make Their Kids Rich, Too” in The Atlantic. (Hat tip: Rajan.) An accompanying graphic shows “Share of Spending on Certain Categories, by Income Group” —

richpeople


Naive intuition and a bit of introspection is sufficient for one to conjecture that relative to the non-rich the rich (1) spend more money on everything, and therefore (2) spend more on luxuries. The poor have to worry about keeping body and soul together. So most of their spending has to go into the essentials needed for present survival — food, clothing, shelter. The future is important to all but concern for the future has to be sacrificed for the present. That is, the poor have to heavily discount the future out of need, not out of myopia. Worrying about the future is a luxury when your present is precarious.

So here’s the concluding paragraph of the article:

It’s boring to point out that having more money affords you more food, more clothes, more housing, and more cars. But the richest families actually spend less on food, clothes, housing, and cars than the poorest families as a share of their income. The real difference between the rich and the poor is that the rich spend a larger share of their much larger income on insurance, education, and, when you drill into the housing component, mortgages—all of which are directly related to building wealth, preserving wealth, and passing it down in the form of inheritance of direct investments in the lives of their children.

Fact is that insurance, education, owing a home, etc, are luxuries. That the rich would buy more of those relative to the poor makes absolute common sense. So what’s the real difference between the rich and the poor? People are the same but depending on whether they are rich or poor, they behave differently in what they consume.

The rich are different from you and me (assuming that you, like me, are not rich), as F. Scott Fitzgerald remarked to Hemingway. Hemingway replied, “Yes, they have more money.”

(Digression: The wiki talk page explains that “this never actually happened; it is a retelling of an actual encounter between Hemingway and Mary Colum, which went as follows:”

Hemingway: I am getting to know the rich.
Colum: I think you’ll find the only difference between the rich and other people is that the rich have more money.

End digression.)

Human nature is comprehensible and universal. Consequently human behavior is to a large extent predictable but you need to know the circumstances. Differences in behavior is partly due to differences in circumstances. Circumstances are beyond the control of individuals, and even groups. (In economics, the term is exogenous — things that are external and that have to be taken as given and unalterable from within.) How people behave is not a reflection of their intrinsic nature but what any other human would do under similar circumstances. That’s the point of this little post.

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