Tort system costs amount to more than 2 percent of GDP

Rob Luke Mar. 27, 2007, 12:10pm

SAN FRANCISCO -- The economic cost of lawsuits on the United States economy towers over the amount spent federally on disease prevention and homeland security, according to a study released today.

The San Francisco-based free-market think-tank Pacific Research Institute (PRI) has calculated the American tort system's economic cost at over $865 billion annually, or $2.4 billion every day.

That's 30 times more than the annual budget of the National Institutes for Health and 27 times more than the federal government spends on homeland security.

The PRI's study, entitled "Jackpot Justice: the True Cost of America's Tort System," also estimates that lawsuit costs represent 2.2 percent of GDP, more than double most other western countries. It also imposes a yearly "tort tax" of $9,827 per U.S. family of four.

The study's authors claim it is a more accurate reflection than previous studies of the true costs of what it refers to as "America's out-of-control legal system." That's because it factors in both direct and indirect impacts, lead author Dr. Lawrence J. McQuillan stated in a press release.

As well as damage awards and attorney fees, "Jackpot Justice" also includes costs like so-called "defensive medicine" and losses to research and development. "America's legal system ... changes behavior in economically unproductive ways," McQuillan said.

One prominent commentator agrees with the authors that such an approach is more realistic. Ted Frank of legal blog Overlawyered posted today that, by including what he calls "second-order effects," PRI's $865 million estimate is "around the right order of magnitude."

Frank says one rival estimate of lawsuit costs "is a fundamental underestimate because of its lack of measurement of second-order effects." He says the PRI study considers "safety, employment, innovation, rent-seeking, and rent-avoidance" when figuring tort costs.

"Jackpot Justice" also estimates that "defensive medicine" practiced by litigation-fearing physicians adds $124 billion yearly to health care costs. Companies bankrupted by asbestos litigation, it adds, have shed 51,000 jobs and $559 billion in pension benefits.

Lawsuits in the U.S. also cost shareholders $684 billion in lost stock value and companies $367 billion in lost sales due to curtailed investment, the study claims.

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