Energy Efficiency Standards for Clothes Washers:
New evidence that prices are higher and performance is lower than government regulators predicted
16 May 2007 in Regulatory Economics
Consumer Reports says that new clothes washers do not perform as well as their predecessors. This is not normally observed in markets. Quality improves over time, as manufacturers constantly work to improve their products to satisfy what consumers want.
Why is quality declining? CR says the culprit is federal energy efficiency regulations. Clothes washers that achieve equivalent levels of cleanliness are much more expensive, and according to CR's testing, most machines perform worse than the products they replaced.
CR's review (subscription required) is in the June 2007 issue. Here is the summary from the online version, with the specific models CR recommends redacted to preserve the organization's intellectual property:
Lower prices have helped traditional top-loaders outsell better-performing front-loaders. But the differences in washing ability have become more dramatic this year because of stricter energy standards. Indeed, for the first time in years, we can't call any washer a Best Buy because models that did a very good job getting laundry clean cost $1,000 or more. If your budget is limited, consider waiting for prices to come down. If you need a washer now and can live with mediocre washing results, consider the [ ... ].
CR recommends three models for consumers who want "better performance and efficiency," and they range in price from $1,000 to $1,200 (mean and median: $1,100).
In the Department of Energy's Regulatory Impact Analysis, the retail price for the "baseline" clothes washer meeting the new energy efficiency standards was approximately $400, with precision estimated to the nearest five cents (see, e.g., Tables 6.1 and 6.2). Allowing for inflation from 1997 to 2007 yields a price forecast of about $515. Of the 21 top-loading models reviewed by CR, 11 have retail prices at or below this level. All of the 26 front-loading models reviewed are priced above 515. It is possible (but unlikely) that DOE's price forecasts turned out to be valid and reliable. They appear to have been severely downward biased.
Last fall, Public Citizen was critical of Susan Dudley, who was recently installed as administrator of the Office of Management and Budget office that reviews draft regulations before they are published for comment or promulgated. Dudley had opposed DOE's energy efficiency regulations for appliances on the ground that no market failure had been demonstrated, and that the practical effect of DOE's regulations would be to restrict consumer choice and reduce consumer welfare:
Even a clear economic case supported by a cost-benefit analysis will not be enough for Dudley. Dudley opposed Department of Energy efforts to set energy conservation standards for appliances, claiming that “[i]n the absence of a significant market failure (which DOE does not identify to justify its regulations), it is implausible that restricting consumer choices will increase net benefits.” She put the matter more plainly last year: “Even policies supported by the best benefit-cost analysis are not likely to be socially optimal substitutes for market forces unless they correct a market failure (p. 19, footnotes omitted).
DOE's estimated net benefits also may be overstated to the extent they did not account for the reductions in performance that CR observed in its testing. To achieve the same level of cleanliness that previous washers achieved, consumers apparently have to pay about twice as much.
This vignette helps explain why those who advocate regulation often dislike benefit-cost analysis. Properly performed, benefit-cost analysis makes benefits and costs transparent and helps people understand the consequences of the alternative choices available. It also can reveal when proposed regulations probably won't generate net benefits, and that makes it harder (but certainly not impossible) for advocates to justify regulation. Oftentimes, advocates will abandon (or simply reject) economic efficiency and argue that regulation is justified by an equity concern.
That's a problem in the case of clothes washers because there isn't an equity argument for energy efficiency standards. There could be some high-income households that care a lot about energy efficiency, perhaps as an expression of their commitment to environmental protection. (Environmental protection is probably a luxury good whose appeal rises faster than income. Consumer Reports' ratings show that the most energy efficient clothes washers also tend to be the most expensive.)
But there's little evidence that low-income households place a high value on energy efficiency. Their primary focus is on purchase price. The economic inefficiency of DOE's standards harms them the most.
Returning to Consumer Reports' quick recommendations, it's interesting to note that the organization recommends that price-sensitive consumers hold on to their energy inefficient clothes washers "until prices come down" for the same level of performance. Whatever the benefits might be from energy conservation, they would be much smaller if consumers followed CR's advice.
Economists routinely predict that consumers often respond to regulations that restrict choice by delaying product replacement. Extending the service lifetimes of products that otherwise would have been replaced delays the date by which old, inefficient products are removed from the market. A properly performed benefit-cost analysis takes this into account by reducing estimated benefits.
Recently there was been revived discussion of raising standards for motor vehicle fuel efficiency. This would undermine other attributes consumers care about, including performance, comfort, size and safety, It also will slow down fleet turnover, as consumers will hold on to older, less energy efficient cars and trucks rather than pay higher prices and bear these other costs.
It will be interesting to see if Consumer Reports advises its readers to wait "until prices come down" for the same level of performance before purchasing cars and trucks that meet the new fuel efficiency standards.
