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At this week’s “White House Conference on the Economy” President Bush and his top advisors hosted a series of panels to discuss the economic challenges facing the United States and the steps needed to ensure our economy will continue to grow, create jobs, and meet the needs of American workers. President Bush sat on two panels, including one titled “The High Costs of Lawsuit Abuse,” bringing national attention to this important issue.
President Bush made it clear that reforming the legal system is a high priority, adding that, “if we can achieve legal reform in America it'll make it a better place for people either to start a business and/or find work.” He went on to note that the “cost of litigation in America makes it more difficult for us to compete with nations in Europe, for example” because, according to Yale Law and Economics Professor George Priest “we're by far the most litigious society that there has ever been.”
The panel of experts went on to discuss America’s runaway legal system and the burdensome costs it imposes on workers, consumers, small and large businesses and health care. The numbers were startling.
According to Secretary of Commerce Don Evans, tort lawsuits cost over 2 percent of our Gross Domestic Product (GDP), or over $250 billion in tort costs to our economy. He broke that down to the individual level, saying this amounts to a “tort-tax” of $809 per person per year, a number confirmed by a study from Tillinghast-Towers Perrin The panelists were in agreement that a civilized society must have a way to compensate those injured by medical mistakes and harmful products, but questioned whether the current system is providing Americans this service in the best way possible.
With the cost of torts rising from just over 1% of GDP in 1973 to double that today, one might expect to see a similar increase in causes for such suits, such as doctors making more mistakes or businesses making more dangerous. But this is not the case.
Instead, trial lawyers pushing questionable suits and winning exorbitant awards from juries are the driving force behind this cost increase. In one famous example of class action gone awry, a settlement against the Bank of Boston awarded $8.64 to each class member, but then charged each of those members $90 in trial lawyer fees. Similarly, in a case against Blockbuster, the attorneys took home over $9 million in fees. The harmed plaintiffs each got a $1-off coupon for future video rentals. And the list goes on.
In addition to the tort-tax this puts on consumers from Rhode Island to the Hawaiian Islands, it also costs jobs. Secretary Evans pointed out that the manufacturing sector is hit disproportionately hard, where 4.5 percent of the sectors costs now come from lawsuits. To put that in perspective, wages and salaries amount to just 17.5 percent of total manufacturing costs. A study by economists Joseph Stiglitz, Jonathan Orszag, and Peter Orszag finds that asbestos lawsuits alone have caused 80 businesses to declare bankruptcy, and 60,000 workers to lose their jobs.
Lawsuit abuse also has damaging consequences for the health of Americans. Sec. Evans told a story of a visit with David Carpenter, CEO of North Kansas City Hospital, who told Evans of 30 doctors moving from Missouri to Kansas after Kansas passed tort reform. Another panelist, Dr. Barbara Coen, an obstetrician/gynecologist from Ohio, explained why she had to tell 110 pregnant women they had three weeks to find a new doctor. Dr. Coen had seen her insurance premiums shoot from $60,000/year to $118,000/year and decided she could no longer afford to serve her customers. Dr. Coen went on to say that 80 percent of lawsuits against physicians are thrown out and wondered what it would be like if she, like the lawyers, was only right 20 percent of the time.
A recent study in Rhode Island looked into the lawsuit problems, as concern in the state grows about a Missouri-like exodus of doctors. The study, according to the Providence Journal, found that “one in four doctors intends to leave the state or leave medical practice within the next three years.”
Putting all these lawsuit-related pieces together makes for an ugly picture. A family in a state like Rhode Island first pays a $809 tort-tax each year, then potentially sees the company providing jobs in the town close shop, quickly followed by the family doctor leaving town, looking for a state where his or her services are more welcome.
This scenario is happening in states around the country. It will happen in more if Congress and state legislators do not follow the president’s lead in returning our legal system into one that protects us from those who do us wrong in a reliable and equitable manner, instead of the piggy bank it has become for trial lawyers.