The number of California homes in foreclosure surged 327 percent in the first quarter of this year, to an average of more than 500 foreclosures per day. The state unemployment rate is at a nearly five-year high of 6.9 percent. And the budget deficit for the upcoming fiscal year is $15.2 billion.
It seems as if things couldn’t get any worse for the state economy. But if California’s lawyers get involved, things will deteriorate further. Tort abuse has plagued the state for years, with disastrous consequences.
Sound overblown? It shouldn’t. Tort costs amount to $865 billion nationally each year — or 6.5 percent of the gross domestic product. That’s a lot of lost economic output.
California was responsible for nearly $20 billion in direct tort costs in 2006. That’s the highest monetary loss due to tort lawsuits in the country.
What effect do tort costs have on our economy?
For starters, consider health care. Thanks to a fear of medical-malpractice lawsuits, defensive medicine — that is, unnecessary tests and procedures to avoid lawsuits for “negligence” — is widespread.
Those extra procedures are pricey. Defensive medicine increases personal healthcare costs by $124 billion annually. Politicians wondering why people can’t afford health insurance ought to take a look at tort costs.
High medical-malpractice insurance premiums also result in a “brain drain” of good doctors, as many seek legal refuge in safer jurisdictions.
In 2003, for example, Texas capped monetary awards in medical-malpractice lawsuits. Doctors from across the country have flocked to the state as a result. In fact, California was the second largest source of out-of-state physicians seeking licenses to practice in the Lone Star State in 2006, according to the Texas Medical Board.
Practicing physicians are not the only businessmen subject to this poisonous legal environment. California-based businesses face the seventh-riskiest tort litigation system in the country.
A survey of executives by McKinsey, the consultancy, found that litigation risks were second only to the supply of qualified workers in deciding where companies base their operations.
Executives take litigation risks seriously because losing one lawsuit could put them face-to-face with bankruptcy.
Just ask Philip Morris.
A few years ago, the company lost a several-hundred-billion-dollar lawsuit and sought to appeal the decision. But the judge in the case ruled that the company could only do so if it posted a $12 billion appeal bond. That’s a steep price to pay for due process.
Court rulings like these have triggered an exodus of companies from high-risk jurisdictions such as California.
Texas, by contrast, reformed its tort laws several years ago by instituting common sense reforms like caps on tort payouts. It is now reaping the rewards — Texas had a higher rate of economic growth in 2006 than California.
Tort reform won’t just benefit businesses, either. Take consumer goods.
California has among the highest product-liability losses in the country. These losses are passed on to consumers in the form of higher retail prices. Tort reform would bring some relief to California shoppers.
California also ranks near the bottom when it comes to farm owners’ tort losses — that is, how much farm owners pay when an outside vendor sues them for an injury incurred on the farm owner’s property. These losses translate into higher food prices for consumers everywhere.
The costs of tort abuse are real — and substantial. Tort reform would lower these costs and improve the Golden State’s economy. If lawmakers are serious about boosting the state economy, they can’t afford to ignore the massive tort burden.
Lawrence J. McQuillan, Ph.D., is director of business and economic studies at the San Francisco-based Pacific Research Institute, where Hovannes Abramyan is a public-policy fellow.