Both Congress and the Trump Administration are desperate to find ways to relieve the cost pressures currently stifling the U.S. economy, but their efforts thus far have done little to alleviate inflation, which surged this month. For instance, both want to pretend that a raft of price fixing or corporate greed has mysteriously accelerated in recent years, creating higher prices, and that more antitrust enforcement or selectively calling out companies that raise prices will bring down inflation and solve the problem.
Yet, there is no reason to think that such political theater will achieve much of anything.
However, the federal government does have a practical way to reduce price pressures, which is by tackling the unprecedented cost to U.S. firms of dealing with litigation pressures.
The trial bar has succeeded in protecting the ability to file frivolous lawsuits and pursue litigation that can impose ruinous costs on U.S. businesses. Tort lawsuit payments in the U.S. exceeded a half trillion dollars last year and are on track to reach as much as $800 billion per annum by the end of the decade.
But these payments alone greatly understate the cost of litigation on the U.S. economy since this number fails to include the indirect costs that result from the actions businesses take to insulate themselves from such lawsuits. While a well-functioning legal system should incentivize firms to take appropriate steps to reduce easily identifiable risks to workers or consumers, the current system rewards plaintiffs who bring forth meritless lawsuits. This results in businesses taking economically useless steps not to improve safety but to insulate themselves from future lawsuits.
The trial bar continues to have success in creating a fertile environment for lawsuits. For instance, Illinois recently passed a law that would make it easier for trial lawyers to transfer tort lawsuits to the state, even if the defendant and the injured parties are not from the state. The motivation for this lies in a single county in the southwest part of Illinois—Madison County—which has proven to be especially friendly to such lawsuits, and the law amounts to little more than a favor to the tort bar. The state legislators that introduced the bill did not even bother to come up with a defensible public policy rationale for the legislation.
While tort lawyers present their successes as a deserved windfall for the supposed victims of corporate malfeasance, the billions of dollars awarded in tort lawsuits each year amount to an effective tax on consumers and businesses in the country. There is an abundance of evidence that when the costs of lawsuits increase, businesses see their own costs increase in lockstep. My previous research found that states that have eliminated caps for non-economic damages have had insurance costs for businesses quickly rise to account for the higher liability of the typical lawsuit.
Both the number and size of lawsuits are growing across the country. For instance, the number of lawsuits with a decision greater than $10 million has exploded in the last ten years, and a growing number have exceeded $100 million, a level virtually unheard of in the 2010s. Furthermore, the cost of litigation—and litigation prevention—is not spread evenly through the economy, and it affects some industries more than others. For instance, prescription drug prices are nearly ten percent higher because of various costs imposed by dubious lawsuits.
State and local governments have contributed to the trend of higher lawsuits, and they have increasingly been inclined to join multi-jurisdictional lawsuits in an attempt to generate cash to fund their stretched budgets. (The $200 billion settlement that the states received from the tobacco industry in the late 1990s is the model that these governments hope to follow to generate more lawsuit dollars.)
For instance, the recent lawsuits against 3M and other producers of potentially carcinogenic “forever” chemicals like PFAS have been pursued vigorously despite the fact that the long-term hazards of exposure to the chemical is uncertain. The company eventually agreed to a payout of over $12 billion. While the money will help states to improve their water systems to filter these chemicals, I wrote that the low thresholds that have been imposed because of this will result in substantially higher costs to produce a wide range of soaps and detergents, which eventually gets paid by consumers. This implicit tax is not accounted for in most analyses of the issue.
The court system should not be used like a piggy bank, and that’s where our tort system is hurtling towards. We need more states to pursue sensible legal reform rules that protect both consumers and U.S. businesses alike.
