by: Geoff Ficke
Scott Peltzman, an Economics Professor at the University of Chicago, has gained public notoriety for his “Peltzman Effect”. Professor Peltzman believes the benefits of well-intended safety regulations are negated because people adjust behavior in ways that counteract the intended effect of the regulation. They may drive more recklessly, or speed because they feel more protected by seat belts, guard rails, traffic lights, etc. The result may be that risk is redistributed to innocent bystanders.
We live in an ever more risk intolerant world. Government at all levels regularly passes statutes, ordinances and laws to protect citizens. They are always well-intended but often counter-productive. I believe that the Peltzman Effect is as intuitive in economics as it is in the area of government regulation.
We have just experienced the melt down of the United States automobile industry. The causes of this implosion were many and have percolated for decades. However, two of the main reasons are government meddling and the irrationality of the auto workers unions.
The government has legislated dozens of arbitrary safety, environmental and economy measures that car manufacturers have had to respond to. The result, while sometimes desirable, has not always resulted in the production of products that consumers wanted to purchase. Anyone remember the Cadillac Cimarron, or the Chrysler K-Car. This has distorted economic realities and keystone market principals.
The United Auto Workers union has enjoyed a particularly spectacular period of derision, suspension of economic reality and tone deafness rarely displayed in the Industrial Age. Mind numbing work rules and job classifications, paying workers to sit idle (Jobs Banks), work slowdowns and strikes and hostility to change doomed the auto companies, even while foreign makers were building and selling cars successfully right here in the United States.
This week the venerable motorcycle brand, the iconic American product, Harley Davidson, announced that it will leave its home for over 107 years, Milwaukee, if work rules and costs are not brought down by the unions. The Company’s management requested these adjustments in April. They have fallen on deaf ears.
This is a Peltzman Effect type of occurrence in economics. Workers demand, and often receive terms of employment that enhance their security and compensation in the short term. All the while they are roiling their industry and laying the seeds of their own destruction in the mid or longer term.
Harley Davidson has options. States and locales are falling all over themselves trying to lure the Company with tax abatements. How many options does a line worker for Harley really have? Also, consider the suppliers in Greater Milwaukee that feed the production chain at Harley. Their workers are at risk because of the great motorcycle maker relocates. The tax base will shrink. The risk to innocent bystanders is redistributed because of the reckless actions of others.
The Peltzman Effect and its application in business and industry can be seen in case after case. The following once thriving industries and job categories have been largely decapitated in the United States: production of shoes and garments, glaziers, ship building, stevedores, small electrics, sporting goods, toys, steel and autos have been decimated by well-intentioned governments and union contracts.
Capital deploys where it can be most productive. It is fungible. There are no longer barriers to the swift, sure movement of money to any place on earth.
It is time that government and labor realize the realities of this new world and respond with contemporary, creative new proposals to remain competitive in the face of global competition. As Professor Peltzman demonstrates in his theorem, no matter how well intended the regulation or contract, there can be a significant chance of unintended consequences that harm innocent bystanders.
