Limiting lawsuit abuses lowers costs from litigation, creates jobs in long run

The nation is going through difficult economic times, which will prompt calls to “bolster jobs” with “temporary” government spending programs. The best long-term jobs program for America, however, is not more spending we can’t afford. If we want results, we need meaningful legal reform.

University of California-Berkeley economist Lisa Kimmel examined six common tort reforms adopted by states between 1970 and 1997 and found each reform increased employment in manufacturing 1.5 percent, construction 1.4 percent and 1 percent overall. To put this in perspective, one of these tort reforms in California would create more than 152,000 jobs; more than 87,000 jobs in New York, and more than 82,000 jobs in Florida.

Some states, as the evidence shows, have done a better job than others in containing tort or lawsuit costs and enacting meaningful reform.

The newly released U.S. Tort Liability Index: 2008 Report ranks the 50 states on the quality of their tort-liability system. The ranking is based on the level of each state’s tort awards, attorney fees, administrative costs, litigation risks and tort rules.

Twenty-one states qualify as “sinners,” meaning they suffer from weak tort rules plus high tort costs and high litigation risks. The sinners include Alabama, California, Illinois, New York, Pennsylvania, Washington (which has the highest product-liability tort costs) and West Virginia (which has the highest commercial tort costs).

Another 15 states are “salvageable.” Although they have high tort costs and risks, these can be curtailed if they fully implement and defend their tort reforms, and if they continue to enact reforms. Colorado, Florida, Michigan, South Carolina and Texas lead the way toward sanity among the salvageables.

Michigan, for instance, has a 1996 law that limits lawsuits that can be filed against the makers of pharmaceutical drugs approved by the Food and Drug Administration.

The five “saints” — Alaska, Mississippi, Ohio, Tennessee, and Utah — reap the rewards of strong tort rules with relatively low costs and low litigation risks.

Finally, there are nine “suckers.” Their tort costs are relatively low in these states, but they lack the laws to keep it that way. Suckers include Iowa, North Carolina, Virginia and Wyoming. They could be exploited by personal-injury lawyers.

When deciding where to start a new business or expand operations, manufacturers and entrepreneurs weigh heavily the legal environment. They 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 gross domestic product grew 25 percent faster in the 10 best versus the 10 worst.

Fear of lawsuits also causes companies to withhold beneficial products from markets, costing jobs. Volkswagen had planned to sell a 46 miles-per-gallon, three-wheel vehicle in the United States. It had qualified for California’s car-pool lanes. This “green machine” would have cost $17,000, but VW decided not to market it in the United States because of lawsuit fears.

Tort reform would also improve employee health care. Every year, one out of eight physicians gets hit with a malpractice suit. Medical-liability concerns prompt doctors to practice “defensive medicine,” ordering more tests and procedures than they would otherwise deem necessary in an attempt to avoid litigation. The resulting cost, $124 billion each year, unnecessarily adds 3.4 million Americans to the rolls of the uninsured because of higher health-insurance costs, and it reduces access.

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 that stick Americans with a massive bill. 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 money went to overhead since only 15 cents of each tort-cost dollar goes to compensate plaintiffs.

Tort costs get 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 United States lost 63,000 net jobs in February. Common-sense tort reform should remain a top priority to create jobs and improve benefits for workers.

John Engler is president and chief executive of the National Association of Manufacturers and a former three-term governor of Michigan. Lawrence J. McQuillan is director of business and economic studies at the California-based Pacific Research Institute and co-author of the U.S. Tort Liability Index.

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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