Why Appliances Buck the Trend (or Economic Illiteracy)

So I was all ready to point to this article at the New York Times as an interesting and timely follow-on to my post below on incomparability.... but instead, I'm forced to write about economic illiteracy in the media.

The article starts off well discussing how "white good" prices have gone up while consumer electronic prices have gone down dramatically. The reason? The growth in sales of the high-end stylish models (aesthetic improvements) and the increased energy efficiency requirements mandated by the federal government. So it jibed pretty well with my post.

Then comes this unbelievable piece of journalism:

Let's say you are enamored with Whirlpool's Duet, the country's top-selling front-loaded washing machine. It is one of the more energy-efficient machines using about 227 kilowatt hours of electricity a year, according to a government rating that appears on the yellow Energy Guide sticker affixed to all new appliances.

You can find one at Sears or other appliance stores for about $1,400. (Of course, the cost won't end there. Unless you buy a matching Duet dryer at about $900 to sit next to it, your laundry room will look like a squinty-eyed pirate.)

The Duet washer would cost about $78 a year to operate compared with $161 a year for Whirlpool's $549 Ultimate Care top-loader, according to a downloadable calculator on the Department of Energy Web site (http://www.energystar.gov/index.cfm?fuseaction=find_a_product).

But because the Duet costs so much to buy, the total cost of the front loader over seven years is $1,946, or $269 more than the Whirlpool classic top loader.

Guess what? It makes economic sense to buy the more expensive machine. In theory, a dollar today is more valuable than a dollar in seven years. Therefore, you should be willing to pay $318 more for something that saves you $546 over seven years. (You can do this "present value" calculation at http://www.csgnetwork.com/presvalcalc.html). That calculation will be useful anytime you buy a product that promises future savings.

Can you spot the howler? Because the upfront cost of Duet comes first, it should have to save you that much more than the cheaper model over the seven years. In other words, because a dollar is "in theory" worth more today, the Net Present Value (NPV) calculation works against the expensive model... but they've presented it as working in its favor. Two seconds of thinking about this showed me it couldn't be right. How could this end up in the "Your Money" section of the New York Times and not be caught?

Update: I've been thinking about this a bit more and I just can't figure out what happened to get these paragraphs published in the NYT. Perhaps some radical last minute editing that accidently got rid of other sentences that would have explained it? I doubt it, but what in the world does the fact that "you should be willing to pay $318 more for something that saves you $546 over seven years" have to do with anything in the article? From the math I do, the Duet washer saves you $581 in energy costs over the seven years, but costs $851 more to buy. Where do the $546 and $318 come from? The closer I look the more this just seems like innumeracy on top of economic illiteracy. Posted by richard at March 11, 2006 11:30 AM