The cost of the legal system

Bruce Bartlett
|
Posted: Dec 12, 2003 12:00 AM

Everyone knows the old joke about the weather: Everyone talks about it, but no one does anything about it. Sometimes I think all of the concern about our nation's manufacturing sector falls into this same category. Across the political spectrum, politicians wail about the loss of manufacturing jobs and demand "action." But the only thing anyone ever seems to come up with is trade protection, which is a cure worse than the disease. The real reasons for manufacturing's woes are never addressed.

Last week, the National Association of Manufacturers and the Manufacturers Alliance (MAPI) published a study detailing the true sources of manufacturing's problems. They do not originate in Asia, but here at home. Relative to our trading partners, the U.S. imposes many costs on our manufacturing businesses that make it difficult for them to compete. Without these additional burdens, American firms would be far more cost-competitive, leading to increased employment and wages.

The NAM/MAPI study identifies four key areas where American manufacturing firms are significantly burdened compared to our principal competitors. It estimates that they add 22.4 percent to the cost of production here relative to there. These include corporate taxes, employee benefits, pollution abatement expenses and tort liability costs.

-- Corporate taxes are 5.6 percent higher here on average than among our competitors. Only Japan's corporate taxes are higher than ours; China's and Taiwan's are 15 percent lower.

-- Employee benefits, mainly for health, are 5.5 percent higher here. Only South Korea, France and Germany have higher benefit costs.

-- Pollution abatement costs are 3.5 percent higher in the United States. None of our competitors have costs higher than ours.

-- Our tort liability system is 3.2 percent more expensive. No country has a system more expensive than ours.

This last point is reinforced by a new study from Tillinghast-Towers Perrin, a consulting group. Last week, it estimated that U.S. tort costs climbed to $233 billion in 2002, or 2.23 percent of the gross domestic product. This is like an $809 per year tax on every American, paid in the form of higher prices for goods and services, higher insurance costs and a deterioration in living standards.

In its Dec. 15 issue, Newsweek details some of the ways in which lawsuits for personal injuries, medical malpractice and other things have reduced the quality of life in America. Children's playgrounds have been closed and sports tournaments canceled, ministers are afraid to comfort their parishioners, coaches fearful of suits when a child is not picked for a cheerleading squad, and on and on. Major cities like New York and Chicago have been forced to cut back services to the poor because of the cost of lawsuits. In 1999, the City of New York alone paid out $418 million to settle various suits.

Of course, legitimate personal injuries deserve compensation. But, less and less of each dollar awarded in tort suits actually compensates for injury. According to the Tillighast study, only 22 cents on the dollar compensate for actual economic loss. The rest went to lawyers or involved punitive damages or those for "pain and suffering" that went far beyond compensating actual loss.

Because juries are now willing to award absurd sums, the court system has become like a lottery, encouraging sleazy lawyers and greedy plaintiffs to take advantage of it. Newsweek notes that $28 billion was awarded by a jury to a woman who blamed the tobacco companies for her smoking habit and subsequent lung cancer. An Alabama jury awarded $12 billion to the state (which was known to be suffering a budget crisis) from ExxonMobil for violating lease agreements. The magazine details other multibillion dollar awards, as well.

If it were only a matter of money, the problem might not be so bad. Judges routinely reduce such awards on appeal. But because companies still have to worry about jackpot awards, they change their behavior in ways that are often injurious to everyone. For example, it is thought that $50 billion to $100 billion is wasted each year on unnecessary medical tests that doctors order just to protect themselves from a lawsuit. Pharmaceutical companies have cut back on the manufacture of vaccines in large part due to lawsuits, leaving many unprotected.

People are not unaware of the heavy cost they pay for an out-of-control legal system. A poll earlier this year for the American Tort Reform Association found that 76 percent of Americans believe that their health costs are higher because of excessive medical liability lawsuits. By a two-to-one margin, people believe that lawsuits are hurting the economy and discouraging the creation of jobs. Yet every effort to reform the system is blocked by the trial lawyers who have gotten rich off of it. And as the biggest contributor to the Democratic Party, they have the clout to do it.