The Cost of the Tort System

This estimates that "America's tort system imposes ... an annual "tort tax" of $9,827 on a family of four." That's approximately $2,457 per person:

The Tort Tax, by Lawrence J. Mcquillan and Hovannes Abramyan, Commentary, WSJ: Economists have long understood that America's tort system acts as a serious drag on our nation's economy. Although many excellent studies have been conducted, no single work has fully captured the true total costs, both static and dynamic, of excessive litigation.

The good news: We now have some reliable figures. The bad news: The costs are far higher than anyone imagined. Based on our estimates, and applying the best available scholarly research, we believe America's tort system imposes a total cost on the U.S. economy of $865 billion per year. This constitutes an annual "tort tax" of $9,827 on a family of four. ...

How does the legal system extract such an astounding amount from our economy? We applied the rent-seeking theory of transfers from economic science to pick up where past studies -- including the highly regarded Tillinghast-Towers Perrin study -- leave off. We began by examining the static costs of litigation -- including annual damage awards, plaintiff attorneys' fees, defense costs, administrative costs and deadweight costs from torts such as product liability cases, medical malpractice litigation and class action lawsuits. The annual static costs, $328 billion per year, are well in excess of previous Tillinghast estimates.

But $328 billion is only the beginning. After all, litigation doesn't just transfer wealth, it also changes behavior, and often in economically unproductive ways. Any true estimate of the costs of America's tort system must also include these dynamic costs of litigation -- the impact on research and development spending, the costs of defensive medicine and the related rise in health-care spending and reduced access to health care, and the loss of output from deaths due to excess liability.

Consider the impact of medical liability concerns on the health-care sector. It is a well documented fact that the fear of litigation prompts doctors to engage in expensive defensive medicine..., which must be added to any comprehensive estimate of litigation costs.

At the margin, higher health-care costs also reduce access to care for patients. We estimate that the additional $124 billion in liability-based health care costs adds 3.4 million Americans to the rolls of the uninsured. Uninsured people are more likely to suffer from a number of diseases and serious or even fatal conditions. Economically, the result is that more Americans are absent from the workforce and their productivity declines -- a total loss of output we estimate to be $39 billion per year.

Excessive liability also hampers innovation. ... As liability costs increase, companies respond by shifting funds from research and development into fighting litigation and withholding or withdrawing products from the market. Less R&D spending means fewer new products and less innovation. ...

An overly expensive liability system also increases the cost of many risk-reducing products and services, at the expense of human lives. ... Our analysis ... estimate[s] the human cost of a failure to enact reforms.

Based on data from previous studies, we determined that more than 77,000 people would have been alive today and contributing to the workforce, but are not because of a failure to enact comprehensive tort reforms in the states...

What we're left with, then, are annual dynamic costs of $537 billion resulting from our litigation system. Add that to the static costs of $328 billion and you arrive at the total of over $865 billion per year.

In this study we do not venture to propose a specific litigation-reform agenda. But we do provide all who are concerned with this issue some hard numbers to work with. And if you're wondering who the victims are of a tort system out of control, the answer today: almost everyone.

The tort law system and associated economics is not an area I know a lot about, but the opening sentence, "Economists have long understood that America's tort system acts as a serious drag on our nation's economy" brings up a question. What would the economy be like without a tort system at all? The tort system offers important protections and also offers the institutional structure needed to help capitalism function more efficiently (e.g. economic torts and competition law). I'm sure there are problems that could be fixed, i.e. eliminating the "excessive" part of litigation - as I said this is not a familiar area for me - but I find it hard to believe that the tort system itself imposes a serious drag on the economy or that most litigation can be classified as "excessive." If there was no system at all, I think we would be much worse off.

The authors say they are estimating "the true total costs of "excessive litigation." But it looks to me like they estimate the cost of all litigation, not just the excessive part, however excessive might be determined. That is, they assume that all costs are excessive in their estimates. Here's how the Council of Economic Advisors handled this in a 2002 paper (the CEA uses a much better methodology for estimating the costs as compared to the methodology outlined above and arrives at lower figures):

[R]ecognizing the controversy that exists about the incentive effects of tort liability in general, and punitive damages in particular, this paper will consider several scenarios. For our most cautious estimates of the size of the “litigation tax,” we make the very strong assumption that both economic (e.g., loss of wages, medical expenses) and non- economic (e.g., pain and suffering, loss of consortium, punitive) damages are currently set at an optimal level. We then consider an intermediate case that treats non- economic damages as essentially random and therefore part of the litigation tax. Finally, we consider the case in which all of the costs of the U.S. tort system are treated as economically excessive, which would result if both economic and non-economic damages were largely random and failed to provide proper incentives

That brings up a second point. The article concludes by reminding us of the $865 billion dollar cost estimate. In a part I cut, there's an attempt to magnify this number by noting that "It is equivalent to the total annual output of all six New England states, or the yearly sales of the entire U.S. restaurant industry."

But as noted above, that's only around $2,457 per person. And there is no estimate whatsoever of the benefits from the legal protections offered by the tort system. Certainly there are some benefits, and I can easily imagine that if there were no legal protection at all that we would each incur costs higher than (likely too large estimate of) $2,457 as people took advantage of the lack of legal protection.

For these reasons, I don't think this tells us a whole lot about the net social value of the tort system. We don't know the cost of this system relative to an optimal system, e.g. if the optimal system costs $2,350 per person then the cost of the present system isn't so large, and we don't know the benefits of the present system relative to the optimal system or or relative to having no system at all (which would be optimal for some). It is also not as thorough as the CEA paper in covering the range of possible estimates due to variations in the assumptions about tax incidence, calculation of deadweight losses, the degree of excessive litigation, and so on. I don't mean to imply the CEA document is the final word, for example the EPI sees things quite differently ("[M]ost commonly alleged economic costs and impacts and ... have little or no basis in reality"), but it does appear to be on much firmer methodologically footing. But even it makes no attempt to estimate the benefits.

Comments

[reason]

There is a clear alternative to litigation, regulation. Make laws defining what is acceptable business practice and enforce them. It also has costs and these could be compared to litigation (beaurocrats cost less than lawyers but are perhaps less flexible?).

But yes it would also be easy enough to make an international comparison of litigation costs and processes. I'm sure the American system could be improved.

But hey, contract enforcement and handling externalities are a fundamental part of capitalism. I have read somewhere that there is an alternative to the legal system - the mafia. I often think, that if we followed the extreme Libertarian recipe we would end up with modern Russia.

[reason]

Ah I missed the source WSJ (opinion?). Shouldn't have wasted my breath.

[Mark Thoma]

Yes - WSJ Opinion section. Forgot to add that in the link, but it's there now.

[ajay]

But yes it would also be easy enough to make an international comparison of litigation costs and processes. I'm sure the American system could be improved.

Ah, but a measurement of the benefits would be far harder to make. Take professional malpractice, for example. Let's say that building contractors in the US have to pay a lot more to the tort system than building contractors in Spain - both in damages and legal fees, and in malpractice insurance.

But maybe Spanish builders, because they are not so afraid of being sued, tend to build houses that fall down more frequently (or, rather, are more likely to fall down; a house can't really fall down more than once) - that is the cost of the absence of a US tort system, and I think it would be almost impossible to measure.

[ilsm]

Like Ajay said:

If there were no tort, young engineers would not have to be told to do a good job designing things because if someone is killed you get "torted". That was a subject of a lecture sophomore year, many years ago.

The congress has killed torts against military vendors who build to MIL SPEC. The result is not so pretty.

A GI's family killed because the MV 22 goes into SW shutdown due to a failed design gets only the GI insurance, despite the fact the bugs existed.

There are few incentives to quality, why not add tariffs to make it painless to produce trash?

[Lafayette]

reason: "I'm sure the American system could be improved."

In France it is illegal for lawyers to accept payments based upon the tort damages imposed. Many do, but the amounts, compared to the damages, are derisory. Which is fine, the claimant pays the lawyer in cash, meaning the payments are never hallucinatory.

Also, the law that allows class-action suits is also mired by the fact that, in its current version, it could lead to massive tort damages imposed upon French companies. The association representative of corporate interests is lobbying against the law.

Still, the class-action suit is necessary. France will get it, but it wont be anything like the American variety. More than likely, claimants will get damages based upon their perceived loss (which is a fairly exact calculation, for instance, disability over a lifetime in terms of salary loss) - but not punishment.

Punishment payments may go, however, to the state - meaning, effectively, to all. That payment could be in terms of average profits, meaning it is commensurate with the corporations ability to pay and it could be strung out over a period of time to weigh sufficiently importantly on company performance. Management is more likely to learn the lesson that way.

[evagrius]

Universal health care would result in a lowering of costs.
After all, quite a bit of the damages paid in many cases are meant to pay for medical costs. With universal health care those costs are already taken care of.

[Lafayette]

MT: "I don't think this tells us a whole lot about the net social value of the tort system."

This depends upon what one wants out of a justice system. If you want punishment, then go after the person/entity having committed the crime and seek penal retribution.

If we want tort reparation, then the guilty must pay reparations, but based upon what? Based upon whatever the claimant must undergo in terms of loss. Damages must be fixed in fact, and not fiction. For example, loss of ability by a worker results in reparation in terms of salary. But, how does it affect their well-being (aside from financial).

This latter, loss of well-being, is the key issue. American juries think that repairing that damage requires humongous sums of money. If one's ability to have sex is impaired, how does money repair the loss in well-being? Or, if a woman's inability to have children is the consequence. Or, the loss of a loved one to smoking or accidental death.

Either money or justice repairs the loss. But, monetary repair is not cost-free to the rest of the population simply because we think an insurance company (or any company) will pay the "damage" to well-being.

The consequences of huge reparations are detailed monetarily in both studies you mention. And, insurance will likely pay the damages, but it will recuperate the costs elsewhere. So, it is the insured clients who will pay higher premiums (than otherwise) to recover the cost of punitive damages.

I am not sure the economic cost is worth the damage done to well-being, though it is worth the cost done to impairment of ability to work, if such is the case. Maybe justice should repair the loss to well-being.

The negligent should not walk away guilty from a trial. They should repair damages to the person by having in some way to pay personally for their negligence ... and a jail term or some other self-sacrifice would seem appropriate.

Perhaps the same interpretation of the law as in accident cases should apply? The seriousness of the negligence determines the retribution, both personal and financial.

[bakho]

What evagrius said and Reason's first post. The tort system is one mechanism of adjudicating external costs. Regulations are commonly adopted as a pro-active approach. Often, prevention is cheaper than remediation with better overall outcomes for the system.

If tort costs are too high, then one solution is to adopt additional regulations that internalize more of the external costs.

Good examples are environmental pollutants and pesticides regulated by EPA. The regulatory rules set standards and remove much of the uncertainty from the process. Industries have goals they must meet and can plan processes to meet the fixed regulations. Leaving external costs to the tort system exposes companies to uncertainties that defy planning and unncessarily harm people. Asbestos lawsuits come to mind.

Excess medical testing is a bad example because not all of the excess testing is due to malpractice avoidance. A lot of medical equipment comes with very high fixed costs, but low operating costs. The high fixed costs can be recovered by increasing the numbers of patients (with insurance) that receive the testing. In this case there is little benefit to doctor and patient, but net loss to the system and the insurance company. Unfortunately, the medical care system in the US does not require maximizing outcomes and minimizing costs as the operating environment for maximizing profits. Instead, it maximizes profits for some players by shifting responsibility for outcomes to others (often the government). Much of the medical litigation is to assign responsibility for costs, not to maximize outcomes or minimize total costs.

[Lafayette]

aj: "But maybe Spanish builders, because they are not so afraid of being sued, tend to build houses that fall down more frequently"

Any professional working in the public domain, meaning offering a product for public consumption, knows that there are norms/standards to be observed.

The norms are typically established to protect life and limb of the public. If the housing is sub-standard, then the contractor is expected to pay both damages and a fine.

I am not sure this makes Spanish contractors any more or less afraid than American builders - where public standards exist. Where they don't exist, yes, your example would seem correct.

BTW, when flying, in case of an accident, the surviving spouse will not get any more than that predetermined by the signed convention - despite whatever negligence the airline may have committed. The individual must take out individual insurance to cover accidental death.

[crack]

The WSJ Opinion page does not want more regulation, it just wants less torts.

I prefer Common Law to Civil Code. They prefer having neither.

[Paul]

Damage awards are a transfer between parties. They are not part of the net cost of the system to society. Lawyers fees are part of the net cost, but only to the extent they reflect the opportunity costs of the lawyers. (If lawyers earn economic rents, then the costs to society are lower than the lawyer fees.) Of course, if damages are not set at the proper level, they will give improper incentives and impose costs. However, these costs do not equal the level of the damages.

[save_the-rustbelt]

Having managed radiology units, I would say that at least 1 of 4 MRI scans is pure defensive medicine.

If you go into an emergency room with an sort of head injury you will get a CT scan almost automatically.

Would I want a system with no malpractice lawsuits? No. Can we devise a better system? Yes.

On another note, the last time I bought a wooden stepladder, it had 7 idiot labels, like "don't stand on the paint shelf" and "don't lean this ladder against a power line." I'm guessing no American company makes stepladders these days, I may be wrong.

We need a tort system, but one that returns to the old concept of proximate cause.

[jm]

Having spent most my adult life in work related one way or another to Japan*, nearly a quarter of it actually living there working for Japanese companies, and being fluent enough in the language to be far more aware than most Westerners as to what's really going on, I must opine that I'll take the US tort system almost any day.

Since Japanese society in various ways "free-rides" on the beneficial effects of the US tort system, a comparable study to quantify the societal costs its lack of a functioning tort system would impose in the absence of American influence cannot be done. But I have no doubt that, if it could, it would show the costs higher.

*I take it for granted everyone knows Japan has, for all practical purposes, no tort system.

[Get Real]

What Paul said. All the WSJ is interested in is that there not be transfers away from profit-making companies.

In any case, they are estimating the size of dynamic effects whose actual vales are in the nature of things little more than educated guesswork (not to mention the definition of "excessive" problem pointed out in the original post) and reporting the results to four significant figures. How can anyone take this seriously?

As for:

"The negligent should not walk away guilty from a trial. They should repair damages to the person by having in some way to pay personally for their negligence ... and a jail term or some other self-sacrifice would seem appropriate.

Wow. If you think *money* damages created disincentives... Not to mention tossing mens res into the trash bin. This is overboard in the other direction.

[Lafayette]

jm: "I take it for granted everyone knows Japan has, for all practical purposes, no tort system."

I thought "tort system" was translated into Japanese by "hara-kiri". ; ^ )

[Lafayette]

GR: "This is overboard in the other direction."

I think of it as "symmetric justice". If you cause personal damage to others, the reparation should be personal as well.

Monetary repair is necessary but not sufficient for the offense committed to the individual. In fact, paying treble damages is unfair, since it is the collective (all of us) who pay through higher insurance premiums (and as the studies show other economic costs).

What did we do to deserve that punishment?

[Bruce Webb]

This was interesting. Because if you break it down it applies equally well to executive pay. That is American boards of directors think compensating CEOs requires humongous sums of money.

"This latter, loss of well-being, is the key issue. American juries think that repairing that damage requires humongous sums of money. If one's ability to have sex is impaired, how does money repair the loss in well-being? Or, if a woman's inability to have children is the consequence. Or, the loss of a loved one to smoking or accidental death."

Lafayette is arguing that under the American tort system the monetary liability is out of proportion to the actual loss. Well a lot of us believe the monetary compensation paid to CEOs is out of proportion to the actual productivity contributed.

The logic involved breaks down to "markets rule, juries drool". Well color me unconvinced, I kind of like the jury system.

I find it interesting that some people (and I don't include Laf necessarily) can live in a world where the death penalty is justified on the basis of deterrence, whereas the tort system is just dead economic weight.

Personally I support the death penalty. If it is done right, and lots of places it isn't. So I wouldn't cry if the Supreme Court outlawed it again. But the facts are pretty clear that if you took the following paragraph and recalculated it for the costs to the average family of carrying out the death penalty the numbers would be equally shocking. Imagine if we recast it as such"

"The Cost of the Death System

This estimates that "America's death system imposes ... an annual "death tax" of $9,827 on a family of four." That's approximately $2,457 per person:"

I don't know what the real numbers are. I do know it is expensive to have the State kill people. Those of us who willingly or reluntantly support the death penalty understand that those are the costs required to kill willing child killers. And I suspect most people on the Economic Right reject the argument from efficiency when it comes to the Death Penalty.

Yet when you examine the details of the famous MacDonalds spilled coffee incident or the Edwards swimming pool accident settlement you find some horrific actual results that were deliberately and knowingly results of policies and products implemented by business. I am not suggesting implementing the death penalty for deliberate corporate torts. But having it hurt doesn't seem irrational.

The MacDonalds settlement was in my mind particularly clever. The dollar total, while large was deliberately set at the amount of coffee revenue MacDonalds make worldwide daily. Whether that was out of proportion to the fact that an elderly woman had her genitalia burned off is a question of values. But clearly it sent a message to MacDonalds and the rest of the restaurant business. Increasing your margins on coffee by requiring your restaurants to serve it at temperatures that can cause third degree burns maybe wasn't the right business decision. In that context the judgement amount was only a slap on the wrist.

You don't turn a supertanker on a dime. The tort system is a part of how we keep American industry and American professionals on the right course. Because it is in nobodies interest to have them drift onto the rocks. Certainly it is difficult to quantify 'damage not done'. That the writers of this piece were willing to discount that quantiy to zero says something, just maybe something they are not willing to hear.

"For what will it profit a man if he gains the whole world and loses his soul?"
http://bible.cc/matthew/16-26.htm

Too many fervent believers in the Church of Milton tend to turn to each other and answer "Dude, you gain the whole world! This Matthew guy must be nuts!"

Corporations understand dollars and cents. The tort system and its punitive awards is just one way of tramsmitting messages in a form they comprehend.

[fiskhusjim]

So the WSJ, house organ of those who have benefitted from Bush's redistribution of income schema, doesn't like tort law.

That's not news - what is news is that they don't want regulation, or legislative oversight, either. These folks expect to be able to perpetrate whatever dangerous fraud they want on the American Taxpayers, so long as they are doing so profitable.

Only after the profit disappears are they willing to accept what eveyone else knew, a priori, or, at least, as a matter of . Which inefficient distortion is, of course, the Holy Grail of Uncle Milty and the other enablers of the very rich and the very criminal.

[Uwe Meller]

I live in Mexico a country without tort laws. Simply said tort laws keep people honest and safe (at too high a price I might add.) Mexico would be a much better country with tort laws.

[Sam Thornton]

"The good news: We now have some reliable figures." -- WSJ

Baloney. If I had a nickel for every time this bogus claim was made for some contrarian political or economic goal by right wing apologists I estimate my family would be richer by $9,827.

[dogfacegeorge]

"77,000 people would have been alive today and contributing to the workforce, but are not because of a failure to enact comprehensive tort reforms in the states"

Ho, ho, ha, ha, ha, ha, ha!

[anne]

Sam, that was wonderful :)

Uwe brings up a question though, how is tort law developed in a legal system such as France since the law is built not from cases up but from legislation down? What is tort law like in France?

[James Killus]

I didn't see whether or not lawsuits by one corporation against another corporation or individucals was considered as "torts." I've seen plenty of those, and I'll bet dollars to doghnuts that "tort reform" would not limit such lawsuits.

[spencer]

The economic theory is that massive tort settlement would make it so expensive that companies would refrain from doing the thing that causes damages -- i.e. building a Pinto without exploding gas tanks.

But since the tort system does not seem to do a very good job of restraining firms willingness to cut corners -- witness the everyday examples like the recent killer pet food -- one must conclude that the economic profits from "cutting corners" must be greater then the cost of tort settlements. Consequently, the tort system must actually have a negative cost.

Of course if you are a libertarian you would argue that it is to firms advantage not to "cut corners" and we need neither the tort system or regulation, the natural workings of the unfettered free market would prevent product liability form ever arising in the first place

[kthomas]

Damn lawyers.

...they run this country.

[dogfacegeorge]

Perhaps we could expand the analysis to criminal laws. If we consider just the costs - e.g., the loss of output from all those incarcerated - and completely ignore the benefits, then it is manifest that the criminal law system is a drag on society and should be abolished.

[Bruce Webb]

"Of course if you are a libertarian you would argue that it is to firms advantage not to "cut corners"

Certainly. You just have to argue for transparent universal access to information.

It is astonishing how beautiful a logical system you can create if you just get to limit the variables.

I am no more a physicist than I am an economist. But I had delusions of adequacy back in the day. They even gave me scholarships. Until I ran into a mathematical wall. Stuff that came easy suddenly stopped being easy.

Economists from the outside seem often to be the equivalent of physicists who insist there is a solution to the Three Body problem and chemists who explain that just because they just haven't reached an adequate solution to the Schrodinger equation for Helium doesn't mean those solutions are impossible. Nope we'll get there. Someday.

Well maybe. But you don't want to proceed from that basis to posit that your limited solution proves your general solution.

If I was a smartass I would say that certain economists are all too willing to express confidence well outside the confidence interval. Yeah that Curve may be a valid explanation of the the economic phenomena it purports to explain. On the other hand your self confidence in the theory means nothing to me.

Over the last few years I have been extraordinarily rude. Bad me. I have suggested that academic consensus is not by that fact alone self-validating. Excuse me for reading Wittgenstein, Popper, and Kuhn. None of whom would actually tell you that their project was self-validation. In different and yet interlocking ways they argue that positive knowledge is impossible and in any case an inadequate description of how academic research proceeds.

Economists who are drawing on a logical framework derived from a Newtonian frame tend to get bewildered on this point. Who the hell is Wittgenstein? Or for that matter Popper? And why, oh why was "Structure of Scientific Revolutions" the number one citation in SSCI? And why would the Social Science Citation Index matter?

Lots of reasons. Grant me a tenured position and I will do my best to spell them out. I won't hold my breath. But there is a reason why there are faint resonances of derisive chuckles from outside the hermetically sealed chamber of Economics. Yep you have some acceptaible answers to that Two Body Problem. Doesn't mean Marek is dialed into Universal String Theory here.

[dogfacegeorge]

Perhaps we can extend the analysis to the WSJ itself. A subscription has a cost - $125/yr. If we ignore the benefit, then it is obvious that nobody should ever subscribe.

[Lafayette]

BW: "The tort system is a part of how we keep American industry and American professionals on the right course."

Oh? And, how many of those guilty have found their way to jail terms? How many get off with a fine, paid by the company. How many get away with damages, paid for by an insurance policy?

If they are guilty of fraud or bodily harm, they should do time. It is the only punishment that fits the crime.

Jail is a marvellous place to reflect upon which the right course is and which is not.

[Lafayette]

anne: "What is tort law like in France?"

Class action suits are not yet allowed in courts and reparations are based upon calculated damages and not punitive damages.

There are no treble damages as in the US. Also, it is difficult to get members of the same profession to testify in a tort case against another member of the same profession. One professional rarely betrays another. Besides the such cases are often heard by specialized courts composed of members of the profession in judgment.

A jury trial is only necessary in specific cases and these are mostly penal. I am not sure, but I do not think that tort cases are heard before a jury. It is likely heard before three supposedly impartial judges.

Common law has far more leeway for tort cases than civil law. It is far more interpretive. Civil law judges interpret strictly from the civil code and rarely from context. Precedent is far less important as well. It gets a lawyer nowhere to cite a precedent judgment by another court. Unless it is a judgment from a higher court, for instance the equivalent of the Supreme Court (which is, in fact, not constituted of judges but a council of "wisemen").

An American lawyer is typically confused by the French system, but then so are the French. I've heard many people say that France's system is based upon the fact that one is considered guilty until proven innocent.

The outcome of this is that people try mightily to avoid a court trial.

[dogfacegeorge]

Maybe we should extend the analysis to the Iraq War. It has already cost us something like $400-$500B, and we will spend at least that much again before it's all over. If we ignore the benefits, which may, indeed, be non-existent, then we should get out now.

[dogfacegeorge]

"But we do provide all who are concerned with this issue some hard numbers to work with."

Here's some hard numbers: 84; 3,997; 69; 4,437,919. I'm providing these numbers so all concerned have some hard numbers to work with. I think my numbers are at least as relevant as those cooked up by the energy and tobacco-funded hacks who created this "study."

[klaus]

There is one aspect of this that gets overlooked. Companies routinely sue other companies, or individuals, or governments as an intimidation tactic.

Or, they force others to sue them. I know of a small business person who had done some consulting work for a big company. The bill he submitted was about $25k; the company paid $10k. Their attitude: take it or leave it, or take us to court.

Right now, in my city, a company is trying to build a concrete plant on a floodplain, very close to an established residential neighborhood. Now that the city is trying to stop the construction, the company's first move was to file suits against the city council, as a group and as individuals.

So businesses will force or file "frivolous" suits, well, whenever it suits them.

[Jim Harrison]

The American political system has become less and less democratic over the last thirty years. A large part of the electorate is essentially irrelevant to the electoral prospects of candidates and legislation that benefits working and lower class people automatically takes a back seat to laws that benefit wealthier people--imagine the prospects of a pro-labor bill, even in a marginally Democratic congress. For that mattr, imagine a Labor department that was on the side of labor. Juries are one of the very few democratic institutions left with some teeth, though their effectiveness is certainly questionable in an era of pro-business appeal courts and they offer at best a hit or miss answer to corporate irresponsibility.

The WSJ should be careful about what it wishes. If the tort system were abolished, the only way for the majority of Americans to remedy their powerlessness would be to turn to a truly populist politics. Do the powers that be really want to encourage democracy,that is, the old fashioned and highly dangerous form of democracy that actually empowers majorities to get even for the real or imagined injuries inflicted on them?

[paine]

reason

"I often think, that if we followed the extreme Libertarian recipe we would end up with modern Russia"

if by modern russia
you mean yeltsin's russia
you are on the right track

states exist for a very reasonable
set of reasons... reason

[paine]

guilty of fraud
go to jail ??

i was judged to have defrauded some one
in a civil proceeding
i'd gladly have taken jail time instead
of de facto bankrupcy

however its doubtful i'd have been convicted

the standard
makes the cash transfer work
in civil courts
in usa the standard boils down to

"who do you prefer wins here
...err within the law
as i ,the judge,
will explain it to you""

criminalize fraud
and the higher standard
won't allow so nice a flow

i say
even
as one of its unfortunate victims

never abridge
the admirable jury based
transfer of funds
from goliath to david

since the little guy
don't get many brakes elsewhere

[reason]

paine...
isn't Putin's Russia just a logical consequence of Yeltzin's Russia?

[baileyman]

There's no "net" in this piece. To calculate the net cost one must first find the total harm/externalized cost. Then subtract out the litigation costs and extensions. Anyone think lit cost exceeds externalities?

[Lafayette]

reason: "isn't Putin's Russia just a logical consequence of Yeltzin's Russia?"

Yes, but the pendulum has swung the other way.

Yeltsin let the oligarchs rip off the country's prime mineral assets. Putin rectified that gruesome error - a but too late by all accounts.

But, word has it that Putin will end up head of Gazprom. Nothing like a revolution to make millionaires out of paupers.

[Carolyn Kay]

reason: "There is a clear alternative to litigation, regulation. Make laws defining what is acceptable business practice and enforce them."

And that's exactly why the same forces lined up against tort suits are lined up against regulation.

They git us a-comin' and they git us a-goin'.

Carolyn Kay
MakeThemAccountable.com

[Lawrence J. McQuillan]

Response to Mark Thoma’s Comments on PRI’s “Jackpot Justice” Study

By Lawrence J. McQuillan, Ph.D.

[PRI’s responses are in bold and in brackets below.]

June 5, 2007

The Cost of the Tort System

The tort law system and associated economics is not an area I know a lot about, but the opening sentence, "Economists have long understood that America's tort system acts as a serious drag on our nation's economy" brings up a question. What would the economy be like without a tort system at all?

[We acknowledged on page 1 of “Jackpot Justice” that “a thriving free-enterprise economy depends on an efficient tort system that provides proper incentives to businesses to produce safe products in a safe environment and ensures that truly injured people are fully compensated for their injuries.” We did not advocate the elimination of the U.S. tort liability system or suggest that the U.S. economy would be better off without a tort system.]

The tort system offers important protections and also offers the institutional structure needed to help capitalism function more efficiently (e.g. economic torts and competition law). I'm sure there are problems that could be fixed, i.e. eliminating the "excessive" part of litigation - as I said this is not a familiar area for me - but I find it hard to believe that the tort system itself imposes a serious drag on the economy or that most litigation can be classified as "excessive."

[Then, Mr. Thoma, you disagree with the conclusions of the Council of Economic Advisers’ (CEA) 2002 report that you claim later in your post is superior to my study. On page 17, the CEA concluded that “the [tort] cost to the U.S. economy is substantial. . . . $136 billion represents a large drain on the productive resources of the United States.” Are we to believe the CEA’s conclusion that the current tort system imposes a substantial drain on the U.S. economy, or the conclusions of Mr. Thoma who admits that this is “not an area I know a lot about”?]

If there was no system at all, I think we would be much worse off.

[I agree.]

The authors say they are estimating "the true total costs of "excessive litigation." But it looks to me like they estimate the cost of all litigation, not just the excessive part, however excessive might be determined. That is, they assume that all costs are excessive in their estimates.

[Mr. Thoma is confused and mistaken. We first estimated the total social cost and total accounting cost of the U.S. tort liability system. Then we estimated the excessive portion of the total costs. I do not see how Mr. Thoma could have actually read the study and missed this point since we have an entire chapter titled “Excess U.S. Tort Costs.” In my opinion, this puts into question the credibility of Mr. Thoma’s alleged “review” of my study.

Incidentally, the international comparative approach that we used to calculate excessive tort costs was also used in the 2002 CEA report. They stated on page 10 of their report: “Another useful perspective is provided by comparing the cost of tort liability in the United States to that of other developed countries.” The CEA then proceeded to look at this comparison. Our approach was neither new nor radical.]

Here's how the Council of Economic Advisors handled this in a 2002 paper (the CEA uses a much better methodology for estimating the costs as compared to the methodology outlined above and arrives at lower figures):

[R]ecognizing the controversy that exists about the incentive effects of tort liability in general, and punitive damages in particular, this paper will consider several scenarios. For our most cautious estimates of the size of the “litigation tax,” we make the very strong assumption that both economic (e.g., loss of wages, medical expenses) and non- economic (e.g., pain and suffering, loss of consortium, punitive) damages are currently set at an optimal level. We then consider an intermediate case that treats non- economic damages as essentially random and therefore part of the litigation tax. Finally, we consider the case in which all of the costs of the U.S. tort system are treated as economically excessive, which would result if both economic and non-economic damages were largely random and failed to provide proper incentives

[First, Mr. Thoma does not outline my methodology above; in fact, he misstates my methodology and leaves me with doubts that he even read my study. Second, the CEA did not use a “much better methodology.” In fact, for many reasons that I will now address, the CEA methodology is inferior:

• The three CEA assumptions above are clearly absurd and unrealistic. Economic and non-economic damages are clearly not at optimal levels (contrary to assumption #1); and all damages are clearly not excessive (contrary to assumption #3). Both of these top and bottom estimates, therefore, should be thrown out. The middle estimate, assumption #2, assumes that economic damages are set at optimal levels and all non-economic damages are excessive. This assumption is more believable; yet, I do not think it reflects the real world. I believe that my international comparative approach, stated as “useful” by the CEA, produces a more realistic estimate of excessive tort costs.

• The CEA assumed that only excessive tort costs impose a “litigation tax” on businesses. In other words, only the “wasteful” part of tort costs imposes a tax. This is contrary to standard tax analysis in public finance. When measuring the cost of an excise tax, for example, we do not call the part of the tax used to finance a “bridge to nowhere” a tax and the part that is used to finance national defense not a tax. All of it is a tax. It is perfectly appropriate to analyze the cost side of a tax, including the tort tax, independent of the benefits, if any, that the tax may finance or produce. We correctly took that approach, whereas the CEA did not.

• The CEA stated that “one can view the economic incidence of excessive tort costs as being similar to the corporate income tax in the United States” (see page 14). After listening and talking with actual business owners, however, I concluded that the tort tax is more similar to a sales tax than an income tax, and that is how we modeled it in “Jackpot Justice.”

• The CEA recognized that the total burden of a tax exceeds the revenue collected — there are also excess burdens, or deadweight losses, from taxation. They used a study by Professor Dale Jorgenson to estimate this deadweight cost. Using the CEA approach, the maximum amount that deadweight costs could total is $50 billion in 2002 dollars. The CEA used the Jorgenson approach to not only measure lost exchanges — which is how we used Jorgenson in “Jackpot Justice” and is the standard approach — but they also used it to measure lost output due to less innovation, and more output due to unnecessary medical expenditures, i.e., “defensive medicine.” So, they used a methodology intended to measure lost output to also measure excess output (defensive medicine). This is flawed and it led the CEA to vastly underestimate indirect costs of the tort liability system.

In “Jackpot Justice,” we measured standard lost output, lost output from less innovation, and defensive medicine separately, since different processes are at work for each. Whereas the CEA approach yielded maximum indirect costs of $50 billion, our estimate of the cost of defensive medicine alone based on independent scholarly research is $128 billion. This helps explain why the CEA arrived at a much lower number than we did. Their approach, using their very unrealistic assumption #3, arrived at an upper estimate for total excessive tort costs of $230 billion, in 2002 dollars ($258 billion in 2006 dollars). Our excessive tort cost estimate was $664 billion in 2006 dollars.

• From a methodological point of view, the CEA report could have been written in the late 1950s. It demonstrates a complete ignorance of the public choice revolution in economic science. The CEA report assumed that market participants are passive sheep that do not attempt to use the political process to change the economic incidence of the tort tax. Contrary to Mr. Thoma, this is not a superior methodology; in fact, it would receive an "F" in any introductory microeconomics class on tax analysis at a good university today. The CEA report either ignored all the political activity in tort reform at the state and federal levels or it assumed the cost of such activity is zero. Either way, the CEA did not include any “rent-seeking” and “rent-avoidance” costs in its estimate. This is another methodological flaw with the 2002 CEA report that helps explain why the totals in “Jackpot Justice” are higher.

The CEA did not use a “much better methodology.” “Jackpot Justice” is methodologically sounder, more comprehensive, and constructed with more realistic assumptions than the 2002 CEA report, yielding a more accurate estimate of the costs of the U.S. tort liability system.]

That brings up a second point. The article concludes by reminding us of the $865 billion cost estimate. In a part I cut, there's an attempt to magnify this number by noting that "It is equivalent to the total annual output of all six New England states, or the yearly sales of the entire U.S. restaurant industry."

[How is putting the costs into perspective by stating equivalencies an “attempt to magnify”? An equivalency is not a magnification! This is a very misleading choice of words by Mr. Thoma. By the way, the 2002 CEA report displayed its results using equivalencies as well. I direct Mr. Thoma to pages 16-18 of the CEA report.]

But as noted above, that's only around $2,457 per person. And there is no estimate whatsoever of the benefits from the legal protections offered by the tort system. Certainly there are some benefits, and I can easily imagine that if there were no legal protection at all that we would each incur costs higher than (likely too large estimate of) $2,457 as people took advantage of the lack of legal protection.

[My “Jackpot Justice” report quantified the costs of America’s tort system and stated very clearly on page 2 that it does not explore the benefits, “of which there are many.” I encourage researchers, who are so motivated, to quantify the benefits. Once again, it should be noted that “Jackpot Justice” does not suggest the economy would be better off without a tort system.]

For these reasons, I don't think this tells us a whole lot about the net social value of the tort system.

[I never claimed that “Jackpot Justice” provided an estimate of the *net* social value of the tort system – nor does the 2002 CEA report, by the way. It is inappropriate to criticize a study for not doing something it never sought to do.]

We don't know the cost of this system relative to an optimal system, e.g. if the optimal system costs $2,350 per person then the cost of the present system isn't so large, and we don't know the benefits of the present system relative to the optimal system or relative to having no system at all (which would be optimal for some).

[The international comparative approach used in “Jackpot Justice” provided an estimate of the cost of the U.S. tort liability system, expressed as a percentage of GDP, relative to an optimal system, characterized by the average cost for comparable, highly developed countries with liability systems that have many fairness-inducing rules not used in the United States.]

It is also not as thorough as the CEA paper in covering the range of possible estimates due to variations in the assumptions about tax incidence, calculation of deadweight losses, the degree of excessive litigation, and so on.

[I could not disagree with this statement more. For the many reasons stated above, “Jackpot Justice” is a more comprehensive, methodologically sound, and realistic estimate of the costs associated with the U.S. tort liability system than that offered by the 2002 CEA report. The CEA’s assumptions were absurd and its deadweight calculations flawed and incomplete, and, as a result, it vastly underestimated excessive litigation costs.]

I don't mean to imply the CEA document is the final word, for example the EPI sees things quite differently ("[M]ost commonly alleged economic costs and impacts and ... have little or no basis in reality"), but it does appear to be on much firmer methodological footing. But even it makes no attempt to estimate the benefits.

[For the reasons previously stated, I believe “Jackpot Justice” was constructed on a sounder, more realistic, methodological foundation than the 2002 CEA report and clearly Mr. Thoma does not fully understand my methodology or the limitations/flaws in the CEA approach. He is advised to take another look at both reports.]

Posted 6/05/2007 06:45:00 PM by Mark Thoma | Return to Main Page