Spotlight: Sam Peltzman

To many people, economics appears to be a dull, drab academic field. To others, it is considered "the dismal science," since it focuses on the limited nature of resources in the face of essentially unlimited human wants. But to economist Sam Peltzman, economics is neither dull nor dismal. Indeed, to Peltzman economic analysis is a powerful tool for analyzing the effects of "public policy," i.e., the actions and programs of government. Thanks to Peltzman's careful research, we know (for example) that government-mandated auto safety improvements have led to a large increase in accidents and that the FDA's over-cautious drug approval procedures have cut in half the number of new drugs introduced each year. It is findings such as these that have made Peltzman a rather controversial figure in the academic world, and have led to his appearance before Congressional committees.

Sam Peltzman's economic approach is empirical and quantitative, like that of other members of the Chicago school of economics. Some defenders of liberty criticize this approach, but Peltzman's work is an excellent illustration of its value in today's political context. Most people today (including government officials, newscasters, and ordinary citizens) are skeptical of the free market and still tend to see government as a benevolent problem solver. Consequently, they are not disposed to listen to what appear to them to be the hypothetical arguments of non-empirical free-market economists. In effect, they need to be hit over the head with the facts on the counterproductiveness of government programs, before they will listen to arguments based on logic and values. Peltzman and his colleagues provide such facts, in a rigorous, quantitative form that cannot be dismissed as merely ideological.

In his study of the effects of the 1962 amendments to the Food, Drug, and Cosmetic Act, for example, Peltzman used a variety of statistical techniques to evaluate the differences in behavior of drug companies, physicians, and consumers before and after the amendments went into effect. (The amendments grew out of the Kefauver hearings on the drug industry, and were spurred to passage by the thalidomide incident of 1961-62; they imposed stringent new requirements on drug companies to document the effectiveness, not merely the safety, of new drugs before they can be allowed on the market.) Making cautious and reasonable assumptions where data were lacking (always giving the benefit of the doubt to the FDA), Peltzman came to some astounding conclusions. The amendments, and the FDA's procedures for enforcing them:

• Cut in half the number of new drugs introduced each year, but did not reduce the incidence of inefficacious drugs,

• Doubled the cost of new drug development,

• Increased drug prices by reducing competition among drugs, costing consumers $50 million extra per year, and

• Imposed a net cost of $300-400 million per year in terms of sickness and death that could have been prevented by drugs withheld from the market.

Needless to say, Peltzman's findings did not go unnoticed. Shortly after Milton Friedman presented them in a 1973 Newsweek column, Sen. Gaylord Nelson called hearings at which a parade of FDA officials and supporters attacked his study. Notified about the hearings by a reporter, Peltzman was belatedly given an opportunity to attend a subsequent hearing. This one was stacked with three pro-FDA economists, Nelson's staff economist, the minority counsel, and Nelson himself, all of whom attacked his results. Nonetheless, Peltzman emerged with his methods and results unscathed. "I had a lot of fun, given the odds," he recalls, "and Nelson ended up shouting, haranguing, and even turning off some of his witnesses." Since that time the FDA has begun conceding that a "drug lag" exists, and the 1975 Economic Report to the Congress cites Peltzman's numbers in urging a thorough overhaul of drug regulation. Other studies are beginning to appear, confirming Peltzman's case (see "Trends," this issue).

The auto safety analysis provoked a similarly hostile response, "mainly from highway safety and Nader types, rather than from bureaucrats." Using a similar type of statistical methodology, Peltzman compared accident incidence and seriousness before and after implementation of legislation requiring seat belts and other safety equipment. Although driver injuries and fatalities have indeed dropped, the total number of accidents and the number of pedestrian injuries have both soared above what might have been expected without the safety regulations. What seems to have occurred is that drivers, lulled by the presence of devices which reduce the risk of injury in accidents, have driven more recklessly, resulting in more accidents and greater harm to pedestrians and motorcyclists.

Peltzman's auto safety analysis was the focus of a 1975 conference sponsored by the Liberty Fund. Forty professors of law and economics discussed and critiqued the methodology and its results, but the only criticisms involved the general limitations of econometric analysis, not Peltzman's use of it. It was generally agreed that Peltzman's findings "represented the most reliable data available at present for making policy decisions in the area of safety regulation." The cost-effectiveness issues raised by the conference were the subject of a two-page article in Business Week (June 30, 1975) which focused heavily on Peltzman's work.

All of which is quite a tribute to this 35-year-old economist. Born in Brooklyn, Peltzman received his B.B.A. from CCNY and went on to a Ph.D. in economics at the University of Chicago. While there he was business manager and associate editor of the New Individualist Review, the leading classical liberal journal of the 1960's. He has taught economics at both UCLA and Chicago, and is currently a full professor at Chicago's Graduate School of Business and a research associate of the National Bureau of Economic Research. In addition, he was appointed editor of the Journal of Political Economy in 1974.

Peltzman's involvement in public policy questions dates back at least to 1970-71, when he served for a year as a staff economist on the President's Council of Economic Advisors. Working closely with Harvard's Hendrik Houthakker and UCLA's George Hilton, he drafted a plan for deregulation of surface transportation that was a precursor of current efforts to overhaul or abolish the Interstate Commerce Commission (see "Working Within the System: An Interview with Sam Peltzman," REASON, June/July 1972).

Seeing his work pay off in this fashion proves to Peltzman the value of empirical economics. "Without this academic research," he relates, "I doubt that the current receptivity to deregulation in Washington would be nearly as great, and I am sure the increasing skepticism about regulation among the economics profession would never have gotten off the ground." Thanks in part to Sam Peltzman and his colleagues, the myth of government as the universal problem-solver is finally being debunked.