The direct costs to the United States of tort litigation are $252 billion a year, 1.8 percent of GNP, twice that of a typical industrialized nation. But the indirect costs caused by excessive litigation far outweigh the direct costs of paying attorneys and the occasional jackpot justice verdict. Businesses incur nonlegal expenses to comply with the tort system, from document management systems, to executive time lost in depositions and pretrial preparation, to activities foregone because of legal risk. Businesses and individuals change their behavior in inefficient ways because of the misaligned incentives of the tort system.
With the expansion of employment litigation, every hire of an employee (and every decision not to hire) is a potential lawsuit. Employers are rational economic actors and factor in these additional costs by reducing wages and substituting more capital for labor in their capital-labor mix. Fear of liability causes doctors to engage in defensive medicine, manufacturers to refrain from innovation, and pharmaceutical companies to cut back on R&D.
The total cost to the economy from excessive litigation is an estimated $900 billion a year.
Economists have studied all of these effects. As I discussed in recent testimony on Capitol Hill, if one takes conservative estimates from these economic studies and adds it all up, the total cost to the economy from excessive litigation can be estimated to be between $600 billion and $900 billion a year, the vast majority of which is simply wealth destruction. That is between 4 and 6 percent of GNP, a tort tax of between $8,000 and $12,000 a year for an average family of four.
In other words, without spending a dime of taxpayer money, comprehensive tort reform could do more for the economy every year than the entire stimulus package would. In fact, we could still come out ahead if the government spent half of the increased tax receipts on bailing out the trial lawyers who would lose income from real tort reform.
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