Poor spending habits explain the persistence of the wealth gap

Sunday, July 22nd, 2018

There is arguably no racial disparity more striking than the wealth gap, Coleman Hughes argues:

While the median white household earns just 65 percent more income than its black counterpart, its net worth is fully ten times as high. And, unlike income, which individuals earn in their own lifetimes, wealth accrues over generations, and whites are more than three times as likely as blacks to inherit money from their families. In the public debate on racial inequality, the wealth gap is among the sharpest arrows in the progressive quiver.


Although it is true that the median income of white men more than tripled between 1939 and 1960 (rising from 1,112 dollars to 5,137 dollars), the median income of black men more than quintupled (rising from 460 dollars to 3,075 dollars).9 Black women, too, saw their incomes grow at a faster rate than white women over the same timespan.10 Baradaran makes the same mistake in her description of life for blacks in the 1940s and 50s: “poverty led to institutional breakdown, which led to more poverty.”11 But between 1940 and 1960 the black poverty rate fell from 87 percent to 47 percent, before any significant civil rights gains were made.12


If wealth differences were largely explained by America’s history of favoring certain groups over others, then it would be hard to explain why Asian-Americans, who were never favored, are on track to become wealthier than whites.

Nor can historical racism explain wealth disparities between groups of the same race. A 2015 survey of wealth in Boston found that the median black household had only 8 dollars of wealth. Newsweek reported this fact under the heading “Racism in Boston.” But the 8 dollar figure only pertained to black Bostonians of American ancestry; black Bostonians of Caribbean ancestry had 12,000 dollars of wealth, despite having identical rates of college graduation, only slightly higher incomes, and being equally black in the same city.

Similar disparities emerge when people are grouped by religion. A 2003 study found that Jewish households had a 7-to-1 wealth advantage over Conservative Protestant households, despite the fact that Protestants have been favored over Jews for most of American history. Because facts like these discredit the assumption that government favoritism drives wealth accrual, they don’t make it into the progressive narrative. When all the facts are included, the story changes: wealth is not handed from the top down. It is produced by a bottom-up process involving millions of individuals bringing their skills, habits, and knowledge — attributes which vary from group to group — to bear on valuable tasks.


No element of culture harms black wealth accrual more directly than spending patterns. Nielsen, one of the world’s leading market research firms, keeps extensive data on American consumer behavior, broken down demographically. A 2017 Nielsen report found that, compared to white women, black women were 14 percent more likely to own a luxury vehicle, 16 percent more likely to purchase costume jewelry, and 9 percent more likely to purchase fine jewelry. A similar Nielsen report from 2013 found that, while only 62 percent of all Americans owned a smartphone, 71 percent of blacks owned one. Moreover, all of these spending differences were unconditional on wealth and income.

To what extent do poor spending habits explain the persistence of the wealth gap? Economists at the University of Chicago and the University of Pennsylvania asked this question after analyzing 16 years of nationally representative data from the Consumer Expenditure Survey. Consistent with the Nielsen data, they found that blacks with comparable incomes to whites spent 17 percent less on education, and 32 percent more (an extra $2300 per year in 2005 dollars) on ‘visible goods’ — defined as cars, jewelry, and clothes. What’s more, “after controlling for visible spending,” they concluded that the “wealth gap between Blacks and Whites, conditional on permanent income, declines by 50 percent.” To be clear, that 50 percent figure doesn’t pertain to the total wealth gap, but to the proportion of the gap that remains after income is taken into account — which was 40 percent. The upshot: the fact that blacks spent more on cars, jewelry, and clothes explained fully 20 percent of the total racial wealth gap.

To make matters worse, spending patterns are just one part of a larger set of financial skills on which blacks lag behind. Researchers at the Federal Reserve Bank of St. Louis followed over 40,000 families from 1989 to 2013, tracking their wealth accumulation and financial decisions. They developed a financial health scale, ranging from 0 to 5, that measured the degree to which families made “routine financial health choices that contribute to wealth accumulation” — e.g., saving any amount of money, paying credit card bills on time, having a low debt-to-income ratio, etc. At 3.12, Asian families scored the highest, followed by whites at 3.11, Hispanics at 2.71, and blacks at 2.63.

Next, they asked if education accounted for the differences in financial habits by limiting the comparison to middle-aged families with advanced degrees. Surprisingly, they found that the racial gap in financial health-scores didn’t shrink; it widened. Highly-educated Asian families scored 3.49, comparable whites scored 3.38, comparable Hispanics scored 2.94, and comparable blacks remained far behind at 2.66. Thus, the study authors concluded, neither “periodic shortages of time or money” nor “lower educational attainment” were the driving forces behind the differences in financial decision-making.


  1. Bob Sykes says:

    A long windy article without a mention of the prime cause, genetics.

  2. Lu An Li says:

    “it would be hard to explain why Asian-Americans, who were never favored, are on track to become wealthier than whites.”

    NOT on a track. Have been on a track for some time and have surpassed whites a long time ago.

    1. Japanese-Americans.
    2. Chinese-Americans.
    3. Indian-Americans.

    The safest place in the USA to live is a neighborhood where the predominant population is Japanese-Americans.

  3. Kirk says:

    Why… It is almost as if those ethnic groups with the lengthiest experience of civilization are better adapted to success within such civilizations, or something… How very… Odd.

  4. Charles W. Abbott says:

    This was provocative and I don’t doubt there’s an element of truth to the article.

    Real estate markets are an obvious factor as well–both being hoodwinked into buying houses “on contract” and the tendency to buy in “ghetto” areas going downhill. Anecdotally, a lot of Black families owned the brownstones in Bedford-Stuyvesant. I’m not sure if that’s still true.

    Also, there is the fact that many Black Americans have been in the urban cash economy only two or three generations. But yes, fecklessness and lack of fiscal restraint will take their toll.

    If you read Supreme Court Justice Clarence Thomas’s memoir, he discusses being trained in consumer restraint by his grandfather, who would jingle the coins in his pocket and say “I’ll have these same coins in my pocket at the end of the week.”

    Henry Louis “Skip” Gates Jr. wrote of being from Black American ancestors who were market savvy and middle-class or with aspirations to be so by the 1880s. He says they had a horror of debt, and avoided it like the plague.

  5. Kirk says:

    A Nigerian I knew in the US Army had very little good to say about American blacks, as his parents had been run into bankruptcy trying to run businesses here in black communities here in the US. His take on black America was that there had been good reasons his ancestors sold their ancestors to the white man, and that most of the sold-on blacks that became the rootstock for American blacks hadn’t even been very good slaves…

    Having him express these opinions in a racial diversity/sensing session was probably the closest I ever came to dying in a racial incident while in the Army, but most of the participants were, I think, just too confused by it all to grasp what was going on. Totally surreal experience.

  6. Charles W. Abbott says:

    Natural experiments might help. This is provocative, but partly just a thought exercise.

Leave a Reply