The New Republic

If you've been following domestic news in recent weeks, you've
probably heard about the "lipstick effect." As described in such
outlets as NBC, The New York Times, and The Wall Street Journal,
the idea is that, during a recession, women substitute small,
feel-good items like lipstick for more expensive items like
clothing and jewelry. And indeed, between August and October,
lipstick sales were up 11 percent over the same period last year.What you probably haven't heard is that, for a recession, this
year's lipstick sales may be somewhat disappointing. While women
have been buying lipstick in place of other goods since the economy
began heading south, many aren't buying as much lipstick as they
used to, regardless of economic circumstances. The reason is that
recent product innovations have created a lipstick capable of
staying on as long as eight hours--far longer than lipstick lasted
as recently as 1995. Thanks to the improved duration, many women
are using and replacing their lipstick less frequently than ever
before.

And that's not just a problem for Estee Lauder; it's a problem for
the entire economy. One reason analysts were optimistic that the
current recession would prove short-lived is that they assumed the
replacement cycle for many products--i.e., the time that elapses
before a product breaks, exhausts itself, or becomes obsolete--was
growing shorter and shorter as the rate of innovation in the
economy increased. As U.S. News %amp% World Report recently
observed, "today's [inventory] overhang could prove less enduring
than in the downturns of yore." In recent years, for example, the
standard replacement cycle for computers has been about three
years. With companies having spent a lot of money upgrading their
computers in early 1999 in response to Y2K fears, this would seem
to portend an imminent recovery in business spending.

Yet as the lipstick example shows, technological innovation can work
both ways. Some improvements make a product more powerful--personal
computers being the classic example--and thus increase the previous
version's rate of obsolescence. But other improvements make a
product more durable, and therefore decrease that rate. In the long
run, it doesn't really matter which effect predominates. But in a
recession, when people defer all but the most essential purchases,
the need to replace goods may be about the only thing that keeps
them spending. If that need is subsiding, we could be mired in
recession for longer than expected.

At first glance, it seems strange that companies would make their
products last progressively longer. Indeed, for years, conspiracy
theorists and armchair economists have peddled the theory of
"planned obsolescence," wherein companies deliberately introduce
flaws into their products to force consumers to replace them more
often. (Everyone remembers the kid in their freshman dorm who
insisted that Ford designed cars to last five years even though it
knew how to make them run forever.)

But professional economists have never entirely bought that logic.
They point out that companies can simply charge more for
longer-lasting products. A consumer who pays $1 for a light bulb
that lasts six months should be willing to pay $2 for a bulb that
lasts one year. Likewise, if a buyer knows she can sell her Escort
in five years for half the purchase price, there's no good reason
Ford shouldn't build it to last ten years and simply double that
price. As long as it's cheaper for GE or Ford to produce one
high-quality product rather than two inferior ones--and usually it
is--it would be irrational for them not to. As Slate.com's Steve
Landsburg has pointed out, just about the only time companies
actually engage in planned obsolescence is when consumers demand
it--for example, women who prefer to spend a couple of dollars on
panty hose every few weeks rather than buying one expensive pair
each year.

In fact, competition may compel companies to make higher-quality
products even in cases where they won't ultimately recoup their
costs. Go back to the lipstick example. When cosmetic companies
realized women wanted longer-lasting lipstick, they devoted their
research and development budgets to making it. After all, the first
company to score a breakthrough could expand its market share while
raising its prices. But, before long, almost every cosmetic maker
was producing longer-lasting lipstick, which should have lowered the
price and reduced profits for everyone.

And it's not just lipstick. The same thing has been happening with
many of the products that wear out or get used up over time. Take
automobiles. Thanks in part to competition from Japanese car
manufacturers, American cars now last longer than ever before.
Today it's not at all unusual for a car to last upwards of 200,000
miles. Americans have responded by keeping their cars longer. In
1989 the average age of cars in the United States was 6.5 years. By
2000, despite the economic boom of the late 1990s and the surge in
demand for brand new SUVs, the average age had risen to 8.3 years.

The auto parts and equipment market tells a similar story. Just
about every innovation in the tire industry over the last decade
has decreased demand: Tires last thousands of miles longer;
all-weather tires have made snow tires unnecessary; the fact that
many tires can now operate without air for 50 miles is making
spares obsolete. Replacement parts have been hit equally hard. Last
year an official from Tenneco Automotive, the company that
manufactures the Monroe and Walker brands of shock absorbers and
mufflers, told the Chicago Tribune that increased auto part
durability had shrunk the replacement market by 10 percent.

And manufacturers of other big-ticket consumer items aren't faring
much better. The Association of Home Appliance Manufacturers
estimates that between 1990 and 2001, the average age of major home
appliances increased across the board: freezers from 10.7 years to
11.7 years, trash compactors from 7.2 to 11. 1, washing machines
from 7.3 to 7.7, dryers from 7.9 to 8.5, microwaves from 4. 9 to
7.7, and dishwashers from 6.6 to 7.2. That's especially remarkable
when you consider two developments that should have compressed
those spreads. First, as with other goods, people tend to keep
their appliances longer during a recession and to replace them
during an expansion--and we've just come off a ten-year expansion.
Second, people tend to buy appliances when they move into a new
house, something Americans did at unprecedented rates during the
late '90s.

In an effort to deal with these increasing life spans, executives at
companies like Whirlpool and GE recently decided to integrate
information technology into their products. In a couple of years,
for example, consumers will be able to purchase what Electrolux
Chief Executive Michael Treschow calls the "Smart Fridge," which
features a computer screen and Internet access right there on the
venerable refrigerator door. A former Merrill Lynch analyst named
Justin Maurer has even suggested that these high-tech knickknacks
could permanently winnow the replacement cycle for household
appliances to three years. But the sheer stupidity of this gambit
is tough to ignore--who wants to surf the Web from their
refrigerator? "The whole thing with Internet appliances is
far-fetched," concedes Nicholas Heymann, a veteran
appliance-industry watcher for Prudential Securities.

As it happens, it's not even clear that replacement cycles are still
shrinking for high-tech products like mobile phones, personal
computers, and hand-held digital organizers. That's because the
rate of improvement is so rapid that it has outpaced consumers'
ability to make use of it. Take personal computers, which have
become faster and more powerful every year for 20 years. For a
while, that improved performance made it worthwhile to replace a
computer every few years. But now personal computers are so fast
and powerful that the average user--someone mostly interested in
word processing and Internet access-- has little need to upgrade.
As a result, according to University of North Carolina marketing
Professor Barry Bayus, the rate at which computers become obsolete
isn't increasing, and may even be falling. Mobile-phone
manufacturers, who had also hoped technological obsolescence would
drive sales, have been equally disappointed: Features like
text-messaging and Internet service just haven't registered with
many consumers. As the Financial Times reported last month, because
most people initially purchased phones as "an essential business
tool or reassuring emergency means of communication ... [t]here are
few compelling services to encourage users to upgrade."

What does all this mean for the economy? The Department of Commerce
breaks down consumer spending, which stood at nearly $7 trillion
last year, into three categories: durable goods (like cars and
computers); nondurable goods (like food and clothing); and services
(everything from hospital visits to vacation travel). Services, at
about $4 trillion, is by far the largest category. But the
replacement cycle for services barely changes over time: People get
their hair cut when it gets too long, and there is very little
technology can do to speed up that process. Much of the $2 trillion
we spend on nondurables isn't particularly susceptible to changes
in technology either: People buy food-- about $1 trillion each
year--when the cupboard is empty. (Clothing expenditures, which
stood at about $275 billion last year, are a slightly different
matter, but they tend to be governed by fashion rather than
durability.)

That leaves the portion of nondurables we replace when they wear out
(think lipstick), and durable goods, which tend to break down or
become obsolete. In all, this amounts to almost $1.5 trillion in
spending each year, or about 15 percent of the economy. But it's
that 15 percent that drives much of the typical business cycle. As
Johns Hopkins University economist Chris Carroll puts it, changes
in durable spending tell "most of the story for spending in
recessions."

To be sure, there are some products in this group whose replacement
cycles are decreasing. According to an annual survey by Appliance
magazine, innovations in consumer electronics, like VCRs and CD
players, seem to be inducing people to upgrade more frequently. But
consumer electronics only make up about $70 billion of that $1.5
trillion. Much more imposing is the nearly $400 billion accounted
for by automobiles, parts, and household appliances-- that is, the
very products for which the replacement cycle is, in many cases,
growing.

Of course, consumers don't buy new products only when their old ones
are spent. Marketers have long exploited fashion consciousness as a
way of creating demand. And people will always be willing to
upgrade if the price is low enough. (Witness the recent surge in
car sales, where zero-percent financing effectively bumped
thousands of dollars off sticker prices.) But, as the pessimistic
projections for next year's auto sales suggest, replacement sales
are still an important factor in consumer spending, particularly
during a recession. As long as that's the case, anyone counting on
consumers to jump- start our sputtering economy may be in for a
wait.

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