Pacific Research Institute: Cost of American jackpot justice: $865 billion

by Ted Frank on March 27, 2007

I’ve long complained that the Tillinghast/Towers Perrin estimate of the cost of the tort system is a fundamental underestimate because of its lack of measurement of second-order effects.

I haven’t had a chance to analyze the PRI report in detail, but their figure of $865 billion/year (6.6% of the GNP), which includes the effect of the tort system on safety, employment, innovation, rent-seeking, and rent-avoidance, is around the right order of magnitude, though it’s a little much to expect three-digit accuracy from the estimates the study makes. (Cross-posted at Point of Law.)

{ 6 comments }

1 Deoxy 03.27.07 at 10:43 am

Ouch.

2 Peter Nordberg 03.27.07 at 2:03 pm

I haven’t “had a chance to analyze the PRI report in detail” either, so if that were a necessary condition for offering judgments in this space, I would say nothing.

But since preliminary impressions are apparently fair game, I can say from even a casual inspection of this so-called “study” that it shows little sign of being a neutral empirical investigation (or indeed of being an empirical investigation at all), and every sign of being a methodologically promiscuous pseudo-“study” stitched together for its potential value in supporting melodramatic press releases.

3 Tom T. 03.28.07 at 1:57 am

Very interesting. Lots of good points, but lots of soft spots, I think, too.

The international comparison overlooks the fact that healthcare in some of the countries cited is nationalized, which leads to a sharply different liability environment. I suspect that the authors are not arguing for single-payer health care. Also, the fact that US economic growth is consistently so much better than that of those other countries tends to blunt the criticism that our system is being dragged down more than theirs.

The deadweight loss and “tort transfer” analysis assumes that all tort damages constitute waste, that no plaintiff anywhere in the system has an injury genuinely worthy of redress. This is a big overstatement. If my tire tread separates and causes my car to crash, or if a peanut butter jar that wasn’t washed makes me sick, I’ve been harmed, and those are social costs even if they’re not redressed. In other words, that harm is deadweight loss to society even if the cost is imposed on the victim rather than the tortfeasor. This includes at least some level of noneconomic damages, too, unless one takes the position that pain should be completely uncompensated. (Of course, there are plenty of frivolous damage awards and settlements out there too; I recognize that).

Also, the administrative costs that they cite (basically insurance company costs, as I read Tillinghast) are never going to go away completely, because they are simply the cost of living in a crowded society. Indeed, if tort liability is restricted, people may react by buying more insurance against other people’s negligence, which will increase administrative costs.

They allude to the fact that noneconomic damages includes punitives as well as pain and suffering, but the fact that they didn’t break punitives out separately suggests that they may be a small portion of that total.

Looking at the charts that they cite, the correlation they rely upon between the percentage of GDP spent on health care and the number of uninsured does not hold for years earlier than those they highlight. This makes me wonder about the accuracy of their calculations of lives being lost to the tort system.

Claimant legal costs are indeed awfully high and frankly seem a bit cartelized to me. There ought to be a lot more price competition among contingency-fee lawyers, and I think that there are informational and other barriers that prevent that.

Defense costs are also awfully high, but keep in mind some of the driving factors. First, there’s simply the time value: if you’re facing $128 billion in liability, it makes economic sense to spend $59 billion to litigate for a few years and delay that payout. Also, there are the mismatched incentives of the hourly billing model (although I think insurance defense firms have moved away from that model to some degree). Also, at least at the Fortune 500 level, lists of go-to outside counsel are developed for lots of reasons that have nothing to do with cost savings. It’s in some ways less risky for a GC of a such a company to hire the expensive pre-approved large law firm and turn them loose to scorch the earth, than to hire a cheaper counsel with more selective tactics and risk being second-guessed if they lose.

I’m not qualified to judge the R&D effects, although they do seem to be equating “R&D” with “R&D spent on safety.” There also are a lot of assumptions here, and not much trend data, either to show a decline in R&D as liability costs rise or to show an increase in R&D in the wake of tort reform. Still, I’m prepared to agree that they are on to something here; this is interesting stuff. (Anecdotally, I have a hard time believing that the peanut butter company spent the money they saved from not washing their jars on safety R&D, but I know that’s just snarky and off point.)

4 William Nuesslein 03.28.07 at 8:45 am

Some years ago a lady drove through my hedges onto my front lawn. She was not hurt. The hedges were a deadweight loss that I accepted. The lady could have compensated me after she sobered up, but she didn’t.

The question is how much tort litigation is like my hedge story. Take the man who was awarded $55 million when his truck ran over him. The deadweight loss would be much less than $2 million, the lifetime earnings for an average guy. Less, because the dead do not require food, clothing or entertainment. What was the extra $53 million about.

The transaction cost of litigation – paying the lawyers, the judge, the bailiff, the jurors, etc. – is an additional cost. In the case of the truck there was an additional cost of unnecessary recalls as the theory of the case was in the same class as sudden acceleration classes. Do we get value for those monies?

The extra compensation in the truck case of roughly $50 million was just wealth transfer. Is that fair? When the robber takes your wallet at gunpoint, there is no deadweight loss at all, unless he shoots you, and there is just a transfer of wealth.

It took about 20 years for Dr. Alvarez’s asteroid theory to be completely accepted by the scientific community, but the evidence eventually prevailed. We had the repressed memories cases, the breast implant cases, the day care center cases, the Andersen case, and a Vioxx case where it was doubtful that the deceased ever took Vioxx. Something is wrong, very wrong with our legal system. The evidence has spoken.

5 David Wilson 03.28.07 at 2:23 pm

How about statutory limits on pain and suffering, and elimination of punitives altogether for civil cases? Maybe that would help. Also, has anyone poked around about what the effect on the PRI price tag would be if illegal aliens were not included in the mix?

But in general, I repeat my case that lawsuits are so culturally embedded that reform won’t come quickly, if at all. Even if the report is only half right, that’s nearly a half-trillion dollars going back and forth. Too many people are too vested in that to expect quick change (what else are the nearly one million lawyers in America going to do otherwise?) No legislative reform can restore a sense of shame, propriety or social responsibility that would make either plaintiff or lawyer say, “Now why would I want to stir up that kind of trouble, just to make some easy money?”

6 Peter Nordberg 03.28.07 at 6:00 pm

In my next complaint, I’m putting in an ad damnum clause for one trillion dollars. Even if it’s only half right, it’ll be a splendid recovery.

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