Levitt argues that the "Peltzman effect" is theoretically possible but trivial, empirically. He concludes:
If, however, I’m wrong and compensating behavior on the part of drivers
really does undo or reverse the benefits of seat belts, there is an
easy public policy solution: the government should mandate the
installation of a razor sharp knife on every steering wheel aimed
directly at the heart of the driver. Just think how carefully we would
all drive then.
This reductio ad absurdum doesn’t prove what Levitt thinks it does. There’s an easier public policy solution if the goal is to reduce deaths from automobile travel: ban cars. But the goal of public policy isn’t (and shouldn’t be) to minimize the death toll from cars. The goal should be to set the safety level of driving to correctly take into account trade-offs between the risk of travel and the benefits of travel. People want safe cars and they also want to be able to drive quickly in order to see friends and family more often and do whatever else they accomplish and benefit from via car travel.
The question is whether the private choices of manufacturers and car buyers can be expected to correctly set those trade-offs. Certainly the trend before government regulation was that increases in income and the demand for safety on the part of car buyers created safer cars and driving behavior and fewer deaths per mile traveled. The importance of Peltzman is in noting that making cars safer than people want is going to induce offsetting behavior. If that offset is complete so that drivers exactly compensate for safer cars by driving more recklessly, then it appears that the regulations merely incur the waste of monitoring and paperwork on the part of manufacturers by complying with the regulations.
But if Peltzman’s original paper is correct, the costs and benefits of the regulation don’t just fall on drivers, they fall on pedestrians and cyclists. If that’s right, then automobile safety regulation creates a grotesque externality.
Listen to Peltzman here.