In the pickup basketball games played at the University of Chicago, Sam Peltzman was known for being all enthusiasm and elbows. No one’s idea of one of the starting five, he’d come off the bench when someone needed a break and he’d scrap passionately for every loose ball that would come his way – even when playing into his 60s.
A lack of talent and height may have stopped Chicago-born Peltzman from realizing any basketball dreams he may have held, but the energy and enthusiasm evident on the courts translated into fame and influence elsewhere. In the sphere of economics, he is a major-league player.
Indeed, the professor of economics at the
University of Chicago Booth School of Business belongs to that exclusive club of economists to have an effect named after him, namely the “Peltzman Effect.” His research in the 1970s also inspired the deregulation movement of the 1980s and 1990s in a number of markets, prompting The New York Times to christen him the “ intellectual godfather of deregulation.”
Peltzman’s rise to fame followed a 1975 article he published in the on car safety regulations showing that wearing a seatbelt encourages people to drive faster and more aggressively. This caused more accidents, counteracting the intended safety effect of the introduction of seatbelt laws. Journal of Political Economy
Booth’s rule #2
In skydiving, the Peltzman Effect is known as Booth’s rule #2. Attributed to skydiving equipment inventor Bill Booth it states, “The safer skydiving gear becomes, the more chances skydivers will take, in order to keep the fatality rate constant.”
SEATBELTS CAN KILL
“The protection afforded by the seatbelt was completely offset by the extra risk taken, and I found that it was offset in a particular way,” Peltzman told PROJECT M in an interview. “The people that were in the car were actually better off in terms of mortality risk, but people outside the car, pedestrians, were worse off. They were the victims of a more aggressive kind of driver behavior.”
The logic behind Peltzman’s theory is that safety regulations often achieve consequences that were not intended, such as prompting us to take more risks because we feel safe. “A big fraction of the promised effect is offset,” he says. This offsetting behavior became known as the “Peltzman Effect.”
What I did 40 years ago wouldn’t even get you a passing grade on a term paper in undergraduate economics nowadaysPeltzman is disarmingly modest about his fame. “You know, if they want to put my name on this effect, I’m not going to argue with it,” he self-deprecatingly jokes. “What I did 40 years ago wouldn’t even get you a passing grade on a term paper in undergraduate economics nowadays. It was very primitive stuff by today’s standards, but it led to other people looking at this same phenomenon.” Not everyone was so relaxed when “Seatbelt Sammy” Peltzman argued down the benefits of seatbelt regulation. The safety lobby, in particular, was outraged. On hearing that Peltzman’s paper was going to be published in the Journal of Political Economy, one group, The Insurance Industry for Highway Safety, demanded that the journal halt publication while they prepared a refutation.
“They had already made up their minds that I was wrong before they even looked at any data,” Peltzman recalls. They even claimed the editor ‘would be killing little children’ if the publication were to go ahead. The editor ignored their remarks and published the provocative paper. Peltzman, meanwhile, shrugged off any hostile remarks. “I have a thick skin and a small ego. It helps,” he quips.
But by then, Peltzman was already becoming used to a level of notoriety. In a 1973 study, he claimed that by slowing down the rate of approval of new drugs, regulations were actually costing more lives than they saved. Following the
1962 drug amendment act in the United States, pharmaceutical companies were required to prove that their drugs were actually “effective” as opposed to simply “safe”. This created a longer and more costly testing procedure that reduced the introduction of new drugs from an average of 43 annually in the decade prior to the new regulation’s introduction to just 16 annually in the 10 years afterwards, he points out.
“I do have a reputation of preferring less regulation to more and that’s probably because many of the unintended consequences are negative. When you weigh them in the balance, the costs are often greater than the benefits. That’s certainly the case with the first study I did on drug regulation. I get worked up over stuff like that, where regulation ends up killing many more people than it saves and nobody cares.”
I get worked up over stuff like that, where regulation ends up killing many more people than it saves and nobody careThe Peltzman Effect and the law of unintended consequences have since been applied to a variety of fields, such as the introduction of more protective body armor for American football players. “Now the league is living with concussions and lawsuits by players. As they look back, they can see that clearly what happened was that the introduction of body armor for greater player protection led to more aggressive play,” Peltzman explains.
Financial regulation is not immune. “What’s generally true about regulation is that it tries to make people do something that they otherwise have incentives not to do. In the financial arena, there are tremendous incentives to take risk. So you try to sit on people and say you can’t take risk. Well, there’s an incentive to find a way to take the risk they wanted to take. A lot of the financial crises can be written with that script.”
Ultimately, Peltzman is not against regulations, but believes that governments fail to account for changes in behavior following their introduction. “You have to have a much broader view of what the effects are in the world before you make policies,” he stresses.
Safety is, after all, partly demand-driven, he points out. “You attribute greater benefits to regulation, but they were benefits that the market would have generated in time as well. Not all but some part of what’s going on is demand-driven, and the regulation is just supplying it or forcing the supply a little earlier.”
Peltzman’s favorite book, he reveals, is
by the Scottish economist Adam Smith, because it includes “very simple principles that once you grasp them, you’re going to think about problems in a different way.” That is probably Peltzman’s greatest gift: causing us to challenge our assumptions and think a little differently. Is that so risky? The Wealth of Nations