Torts Flim-Flam

In an era of great economic flimflams, “tort reform” is one of the greatest. “Lawsuit abuse” has become one of just a handful of issues that the Bush administration and its business allies say must be addressed in order to generate more growth and jobs. Yet, it turns out, there's not a shred of evidence anywhere that the proposed changes in the tort system have anything to do with either economic growth or job creation.

Let me be clear about what I can and cannot tell you. I have no expertise to judge whether our tort system could be reformed so as to reduce frivolous lawsuits -- while still preserving strong incentives for companies and others to avoid non-frivolous lawsuits -- and to reduce the cost of compensating victims of wrongful actions. Likewise with respect to the utility of various medical malpractice reforms. What I can tell you is that this entire hullabaloo about litigation has very little to do with our economic future.

Let's go back to the sales pitch. President George W. Bush sponsored an economic summit last month that profiled “lawsuit abuse” as one of the “key economic issues” alongside tax and regulatory burdens, health care, and fiscal policy. Bush, in fact, said that the “cornerstone of any good [economic] program is legal reform” and that “the high costs of litigation in America makes it more difficult for us to compete with nations in Europe.” U.S. Secretary of Commerce Donald L. Evans weighed in, saying lawsuit abuse “threatens our competitiveness and innovation in the world.” Greg Mankiw, the administration's chief economist, noted in early December: “The president's economic agenda involves removing obstacles to growth. One such obstacle is the considerable burden placed on everyone by excessive lawsuits.” These statements echo the National Association of Manufacturers' statements that “frivolous lawsuits” are among the major “structural costs” that impede manufacturing competitiveness.

Hearing all this, one might conclude that adopting the administration's restraints on lawsuits would be very helpful in generating the much-needed jobs that have been all too rare in the United States, especially in manufacturing. One might even think there was evidence that tort reform would generate jobs. One would be wrong.

What's missing is a study that estimates the cost savings expected from “legal reform' and the number of jobs that will, thereby, be generated. No such study exists. So, the argument that tort reform will lead to any notable increase in growth or jobs is not a house of cards -- because there are no cards to begin with!

Instead of actual evidence, what's been offered instead are some (wildly wrong) estimates of the costs of the entire tort system, rather than any expected change in costs. In effect, proponents of tort reform are discussing the issue as though they are going to eliminate the tort system (in other words, eliminate the costs from all lawsuits).

Making matters worse, in the studies done for tort reform advocates -- conducted by Tillinghast-Towers Perrin (TTP), a company whose clients include most of the world's largest insurance companies -- the estimate of the cost of the whole tort system is not based on actual litigation expenses and the costs of administering awards. Rather, TTP uses the costs of the entire insurance industry as its measure of tort costs. Are we to conclude that the insurance industry is a parasitic industry? That we would have more and more jobs if we made the insurance industry smaller and smaller? To consider the insurance industry's costs as the costs of the tort system is amazingly misleading if for only one reason: Auto insurance and fender-bender claims comprise a large part of the insurance industry's costs. Much of the costs of auto insurance are irrelevant for legal reform, because they reflect car owners' claims against their own insurance company and many claims against other drivers that are never brought to a lawyer, let alone to a court. As a measure of our purported “lawsuit abuse” problem, these automobile matters are beside the point.

The administration argues that “lawsuit abuse” is a competitiveness problem, because tort costs (as mismeasured by TTP) in the United States are the highest among 12 countries. A simple examination of the relevant data, however, finds no connection. The most straightforward measure of competitiveness is a nation's level of productivity: the amount of goods and services produced, per hour worked. A comparison of tort costs and productivity levels is revealing. The four countries (United States, Germany, Italy, Belgium) with the highest productivity (i.e., most efficiently translating work effort into economic output) also have the highest tort costs. To be sure, there are also some countries with relatively low tort costs and high productivity, such as France and Denmark; but, overall, there is no reason to believe that tort costs are a major driver of a country's efficiency or productivity level.

There are reasonable cases to be made for restructuring our tort system, including the medical malpractice system. Do not make the mistake of thinking this issue has much to do with the serious jobs problems we face or our prospects for future growth. There's just no there there.

Lawrence Mishel is the president of the Economic Policy Institute (EPI).

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