California lawmakers must help economy with tort reform

The United States saw 324,000 jobs disappear in the first five months of the year – more evidence of a shaky economy. The news will surely prompt legislation intended to bolster jobs with “temporary” government programs. But the best jobs program for California is not more spending we can’t afford. Meaningful legal reform, on the other hand, will deliver results.

University of California-Berkeley economist Lisa Kimmel examined six common tort reforms adopted by states from 1970 to 1997 and found that instituting an additional tort reform increased manufacturing employment by 1.5 percent and construction employment by 1.4 percent. An additional tort reform increased total state employment by 1 percent. To put this in perspective, an additional tort reform in California would create more than 152,000 jobs. But, as the evidence shows, Sacramento politicians don’t care that the state’s tort system is costing jobs.

In the “U.S. Tort Liability Index: 2008 Report,” California ranks 34th out of 50 states in the quality of its tort-liability system. The ranking is based on the level of each state’s tort awards, attorney fees, administrative costs and litigation risks. California has the highest tort costs of any state, at nearly $20 billion in 2006. And California has the second-highest number of jury-verdict awards in the nation’s 100 largest awards. Tort costs are being passed on to consumers and health care patients in the form of higher prices, quashing jobs and cutting wages and benefits for working people.

The index examines tort rules and reforms in the 50 states and finds California has the 11th-worst tort rules. The state ranks dead last in half the areas tracked. California is classified as a “sinner” state because of its weak tort rules in the face of high tort costs and high litigation risks.

The Index notes that California remains particularly vulnerable to abusive asbestos and class-action lawsuits. Out-of-state lawyers and plaintiffs target California courthouses with asbestos cases – more than 1,047 in 2006 alone, according to the Civil Justice Association of California. Also, on average, four class-action lawsuits are filed in the state each business day.

The lack of reforms makes California ripe for exploitation, costing jobs. When deciding where to start a new business or expand operations, entrepreneurs opt for states with balanced tort systems that discourage excessive litigation. In 2006, for example, job growth was 57 percent greater in the 10 states with the best tort systems than in the 10 states with the worst. That same year, state-level GDP grew 25 percent faster in the 10 best vs. the 10 worst.

Fear of lawsuits also causes companies to withdraw or withhold beneficial products from California’s markets. Volkswagen had planned to sell a 46 mpg three-wheel vehicle in the United States that had qualified for California’s carpool lanes. This “green machine” would have cost only $17,000, but VW decided not to market it in the United States because of lawsuit fears.

Tort reform would also improve California’s health care system. One out of eight physicians gets hit with a malpractice suit every year. Medical-liability concerns prompt doctors to practice “defensive medicine,” ordering unnecessary tests and procedures in an attempt to avoid litigation. The resulting cost, $124 billion each year, needlessly adds 3.4 million Americans to the rolls of the uninsured.

The role of the tort system in compensating victims for their injuries is certainly valuable. But meritless plaintiffs and their opportunistic personal-injury lawyers clog courts with junk suits. Excessive litigation cost the U.S. economy $589 billion in 2006, equivalent to a yearly tax of $7,848 on a family of four. Much of that went to overhead since only 15 cents of each tort-cost dollar goes to compensate plaintiffs.

If Sacramento politicians are serious about jump-starting the economy, they cannot afford to ignore California’s massive tort burden. Commonsense asbestos and class-action reform would bring needed jobs to California.

LAWRENCE J. MCQUILLAN is director of business and economic studies at the Pacific Research Institute in San Francisco and co-author of the institute’s “U.S. Tort Liability Index.” He wrote this article for the Mercury News.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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