Tort Costs, a Competitive Disadvantage
The House Judiciary Subcommittee on the Constitution held a hearing Tuesday, “ Can We Sue Our Way to Prosperity?: Litigation’s Effect on America’s Global Competitiveness.” The testimony by Paul J. Hinton, vice president of NERA Economic Consulting, proved the answer to be, “No. No we cannot sue our way to prosperity. But we can sue ourselves into a global competitive disadvantage.”
One NERA study I directed on Tort Liability Costs for Small Businesses shows that tort costs are not borne evenly throughout the economy. Small businesses bear a relatively larger share of tort costs than larger businesses. For example, businesses with less than $10 million in revenues in 2008 represented
only 22 percent of U.S. business revenues but incurred 83 percent of tort costs. This is economically important because small businesses generate the majority of net new jobs, 65 percent over the past 17 years.The costs of the U.S. tort system may have effects on businesses similar to an implicit tax. The economic literature on the effects of taxes on business activity is instructive in identifying the effects of higher costs of business on economic development. This literature as well as surveys of business attitudes describe how business decisions on where to make investments and add jobs are sensitive to local costs of doing business. Tort liability costs may also affect the growth of existing businesses within the 50 states.
In another NERA study, I worked with colleagues to examine how relatively higher tort costs in the U.S. affect international competitiveness. We compared the growth of productivity in the manufacturing industries affected by asbestos litigation in the U.S. since the late 1980s to productivity growth of the same industries in other industrialized countries. We found that productivity growth in the U.S. industries affected by asbestos litigation was 0.5 percent per year slower than their counterparts in other countries. Over the period of study from 1987 to 2000, the lower U.S. productivity growth amounted to lost GDP of over $300bn, with $51bn of that loss realized in 2000.
Both these studies indicate that lowering the costs of the tort system could have a substantial impact on the promotion of business activity.
Hinton also cited a report from the Department of Commerce, “The U.S. Litigation Environment and Foreign Direct Investment, Supporting U.S. Competitiveness by Reducing Legal Costs and Uncertainty.” This report argued that a relatively costly tort system works to discourage foreign direct investment in favor of less litigious countries. All things being equal, “investment capital goes and stays where it is well treated,” Hinton said.
And when it comes to the costs of the U.S. civil justice system, all things are definitely unequal.
Video of the hearing is available here. For more, see the blog post by Rep. Randy Forbes (R-VA), “Can We Sue Our Way to Prosperity? Litigation’s Effect on America’s Global Competitiveness.”