Tag Archives: DOT

Delaying the Rearview Camera Rule is Good for the Poor

A few weeks ago, the Department of Transportation (DOT) announced it would delay implementation of a regulation requiring that rearview cameras be installed in new automobiles. The rule was designed to prevent backover accidents by increasing drivers’ fields of vision to include the area behind and underneath vehicles. The DOT said more research was needed before finalizing the regulation, but there is another, perhaps more important reason for delaying the rule. The costs of this rule, and many others like it, weigh most heavily on those with low incomes, while the benefits cater to the preferences of those who are better-off financially.

The rearview camera regulation was expected to increase the cost of an automobile by approximately $200. This may not seem like much money, but it means a person buying a new car will have less money on hand to spend on other items that improve quality of life. These items might include things like healthcare or healthier food. Those who already have access to quality healthcare services, or who shop regularly at high end supermarkets like Whole Foods, may prefer to have the risk of a backup accident reduced over the additional $200 spent on a new car. Alternatively, those who don’t have easy access to healthcare or healthy food, may well prefer the $200.

A lot of regulation is really about reducing risks. Some risks pose large dangers, like the risk of radiation exposure (or death) if you are within range of a nuclear blast. Some risks pose small dangers, like a mosquito bite. Some risks are very likely, like the risk of stubbing your toe at some point in your lifetime, while other risks are very remote, like the chance that the Earth will be hit by a gigantic asteroid next week.

Risks are everywhere and can never be eliminated entirely from life. If we tried to eliminate every risk we face, we’d all live like John Travolta in the movie The Boy in the Plastic Bubble (and of course, he could also be hit by an asteroid!). The question we need to ask ourselves is: how do we manage risks in a way that makes the most sense given limited resources in society? In addition to this important question, we may also want to ask ourselves to what degree distributional effects are important as we consider which risks to mitigate?

There are two main ways that society can manage risks. First, we can manage risks we face privately, say by choosing to eat vegetables often or to go to the gym. In this way, a person can reduce the risk of cardiovascular disease, a leading cause of death in the United States, as well as other health problems. We can also choose to manage risks publicly, say through regulation or other government action. For example, the government passes laws requiring everyone to get vaccinated against certain illnesses, and this reduces the risk of getting sick from those around us.

Not surprisingly, low income families spend less on private risk mitigation than high income families do. Similarly, those who live in lower income areas tend to face higher mortality risks from a whole host of factors (e.g. accidents, homicide, cancer), when compared to those who live in wealthier neighborhoods. People with higher incomes tend to demand more risk reduction, just as they demand more of other goods or services. Therefore, spending money to reduce very low probability risks, like the risk of being backed over by a car in reverse, is more in line with preferences of the wealthy, since the wealthy will demand more risk reduction of this sort than the poor will.

Such a rule may also result in unintended consequences.  Just as using seat belts has been shown to lead to people driving faster, relying on a rearview camera when driving in reverse may lead to people being less careful about backing up.  For example, someone could be running outside of the camera’s view, and only come into view just as he or she is hit by the car.  Relying on cameras entirely may increase the risk of some people getting hit.

When the government intervenes and reduces risks for us, it is making a choice for us about which risks are most important, and forcing everyone in society to pay to address these risks. But not all risks are the same. In the case of the rearview camera rule, everyone must pay the extra money for the new device in the car (unless they forgo buying a new car which also carries risks), yet the risk of accident in a backup crash is small relative to other risks. Simply moving out of a low income neighborhood can reduce a whole host of risks that low income families face. By forcing the poor to pay to reduce the likelihood of tiny probability events, DOT is essentially saying poor people shouldn’t have the option of reducing larger risks they face. Instead, the poor should share the burden of reducing risks that are more in line with the preferences of the wealthy, who have likely already paid to reduce the types of risks that low income families still face.

Politicians and regulators like to claim that they are saving lives with regulation and just leave it at that. But the reality is often much more complicated with unintended consequences and regressive effects. Regulations have costs and those costs often fall disproportionately on those with the least ability to pay. Regulations also involve tradeoffs that leave some groups better off, while making other groups worse off. When one of the groups made worse off is the poor, we should think very carefully before proceeding with a policy, no matter how well intentioned policymakers may be.

The DOT is delaying the rearview camera rule so it can conduct more research on the issue. This is a sensible decision. Everyone wants to reduce the prevalence of backover accidents, but we should be looking for ways to achieve this goal that don’t disadvantage the least well off in society.

Why Matching Formulas Don’t Make Sense

Politico reports:

As part of the economic stimulus, the DOT allocated $3.3 billion to California’s planned high-speed rail line, which has become bogged down in a high-stakes fight over its price tag and location. California risks losing those federal funds if the state Legislature doesn’t approve $2.7 billion in bonds by mid-June.

To understand the incentives of a state legislator, consider a hypothetical example. Imagine there is a new restaurant in town. It is called “matching formula.” The restaurant has fifty tables and offers a special deal: no matter what you order, you get to split half of your bill with the rest of the restaurant’s patrons.

Now think about the value you would derive from a nice steak meal. Let’s say it is worth $26.00 to you. Unfortunately, at this restaurant, the meal costs $50.00.  Normally you wouldn’t pay that kind of money. But given the matching formula, it is only going to cost you $25.50 (that’s half the price, $25.00, plus one-fiftieth of the other half, $0.50). Since you derive $26.00 in value from the meal and since it only costs $25.50, you go ahead and order it.

But there’s more. The other patrons at the other 49 tables face the exact same incentive. If they too value the meal at $26.00, they too will order it. That’s another 49 meals, half the cost of which will be split 50 ways. Your share of their meals works out to $24.50 (that’s $25, times 49, divided by 50). So your final bill is $50.00 (that’s $25.50 for your meal, plus another $24.50 for everyone else’s).

Remember, you only valued it at $26. So on net, you are down $24 ($26 value, minus $50 cost). You might be thinking that it would be better to just order nothing. But if you do that, you still end up paying $24.50 for everyone else’s meal, but in this case you get nothing at all. It is better to be down $24 than $24.50.

Given the incentives of the restaurant, it is completely rational for you to order your meal and it is completely rational for everyone else to order theirs. The system as a whole, however, is nuts.

You could try convincing everyone else in the restaurant to order nothing. In that case, you would all be out $0. This is a winning strategy, but it can be very difficult to convince everyone. If 49 tables agree not to order anything, the 50th can get a GREAT deal: one steak valued at $26.00 that will cost them only $25.50. Once others see that the hold-out is profiting, they will refuse to abstain and the agreement will fall apart.

Strange as this story seems, this is exactly the way the federal government structures a number of federal-state programs. According to the story cited above, for example, California legislators can foist 55 percent of the cost of their high-speed rail on to federal taxpayers. And presumably other states’ legislators can do the same.

Under normal circumstances, the average state can export 58 percent of the cost of its Medicaid program on to federal taxpayers and some states can export up to 74 percent of the cost. But the stimulus bill temporarily enhanced these matching formulas so that now the average state can export 71 percent and some states can export up to 81 percent.

Notice that you don’t have to dislike steaks, trains, or Medicaid to find fault in these formulas. You just have to understand that there are costs and benefits to everything and recognize that these formulas bias cost/benefit calculations in favor of spending more than these things are worth.

The great 19th Century French economist Frédérick Bastiat once defined the state as, “that great fiction by which everyone tries to live at the expense of everyone else.”

Matching formulas institutionalize this fiction.

My apologies to Russ Roberts who once told a very similar story far better than I.