Monday, June 01, 2009

Tort Reform -- Past Its Time


Last month we wrote about tort reform in New Zealand (Reasons to Love New Zealand, Part III: Tort Reform), which concluded that "the reason that the US will never adopt the New Zealand system, because too many lawyers make too much money from the current system; the power rests not with the people but with the tort attorneys." Is that really true?

To the extent that 'special interests' drive the agenda of lawmakers, it seems so. But, what if we could cast aside the tort bar objections and adopt tort reform in the United States? What would happen? Ted Frank argues that it would be the real economic stimulus we need.
The direct costs to the United States of tort litigation are $252 billion a year, 1.8 percent of GNP, twice that of a typical industrialized nation. But the indirect costs caused by excessive litigation far outweigh the direct costs of paying attorneys and the occasional jackpot justice verdict. Businesses incur nonlegal expenses to comply with the tort system, from document management systems, to executive time lost in depositions and pretrial preparation, to activities foregone because of legal risk. Businesses and individuals change their behavior in inefficient ways because of the misaligned incentives of the tort system.

With the expansion of employment litigation, every hire of an employee (and every decision not to hire) is a potential lawsuit. Employers are rational economic actors and factor in these additional costs by reducing wages and substituting more capital for labor in their capital-labor mix. Fear of liability causes doctors to engage in defensive medicine, manufacturers to refrain from innovation, and pharmaceutical companies to cut back on R&D.

Economists have studied all of these effects. As I discussed in recent testimony on Capitol Hill, if one takes conservative estimates from these economic studies and adds it all up, the total cost to the economy from excessive litigation can be estimated to be between $600 billion and $900 billion a year, the vast majority of which is simply wealth destruction. That is between 4 and 6 percent of GNP, a tort tax of between $8,000 and $12,000 a year for an average family of four.

In other words, without spending a dime of taxpayer money, comprehensive tort reform could do more for the economy every year than the entire stimulus package would. In fact, we could still come out ahead if the government spent half of the increased tax receipts on bailing out the trial lawyers who would lose income from real tort reform.

He underscores important points which echo my beliefs:
  • Our nation’s tort system is the most expensive in the world. Yet there is no evidence that it provides benefits superior to those of other nations.
  • The total cost to the economy from excessive litigation is an estimated $900 billion a year.
  • Fear of liability causes doctors to engage in defensive medicine, manufacturers to refrain from innovation, and pharmaceutical companies to cut back on R&D.
  • ...we have a litigation brain drain: many of the best and brightest college graduates choose to become attorneys rather than join professions where people produce or invent things rather than work to promote or prevent wealth transfers.
How many times have you heard people say "thank God for that class action suit it really saved my bacon"? I sure have not, but I do have a stack of coupons I will never use sitting in my desk drawer. In the comments on our article on New Zealand, TrialDog argues that class action torts provide a societal benefit:
Now, there are reasons why class action cases are important. Suppose your internet provider is charging some small $1 fee fraudulently. On a grand scale, they make millions off the scam. No individual can do anything about it. A class action lawyer can. Thus, the class action suit provides a great social benefit. Can such cases be abused? Sure, especially when the government gets involved as they did in smoking cases. Can the lawyers be overpaid? Yes.

Not to pick on TrialDog who is a regular reader; this perspective underscores the typical tort bar argument -- they provide a service to the community. In the same comments, I argued benefit to the consumer in this case is de minimus, while the benefit to the attorney is presumably moderate to very great. I argue further now that in the case of fraudulent charges by service provider, we have criminal laws that can be enforced.

Other than put a bunch of attorneys to work in another profession (which most of them clearly are capable of adapting to) what are the downsides of tort reform? The only one that I can think of is it will never happen. I just don't see anyone going to Washington on that bandwagon. No matter how truthful or beneficial tort reform might be... the road to Washington is well lit only for bleeding hearts.

4 comments:

OBloodyHell said...

> In other words, without spending a dime of taxpayer money, comprehensive tort reform could do more for the economy every year than the entire stimulus package would.

Oh, come now. The stimulus package is going to not only put a solid gold Cadillac (gotta be American, y'know) in my garage, it's going to give me a three-car garage to put it in. With a 5,000 sqft house attached!


I know that's true. Obama said so, and Pelosi and Reid both confirmed it.

How can you go wrong trusting Democrat promises?

:oP

suek said...

>>Suppose your internet provider is charging some small $1 fee fraudulently.>>

If you notice this and object to it, then you switch to a new internet provider. Maybe you can't - I think there are laws that designate specific territories...so remove those laws and let the free market compete.

In other words, less government and caveat emptor. Let the free market work. So what if the provider makes millions - buy stock in the company! Get the government out of the way.

suek said...

>>fraudulently>>

Just noticed this...

So...if this is fraud, why isn't it being prosecuted? Ok...it's only one dollar, but if you have enough for a class action suit, you have enough for a criminal case. I think it's in the wrong court.

Carl said...

suek:

I agree with your first comment, but not your second: the standard of proof is lower in civil fraud (preponderance of the evidence) than in criminal (beyond a reasonable doubt).