Matt Zeitlin

Tort Reform is one of those discussions that provides some great anecdotes.  On one hand you have clearly ridiculous lawsuits, like the DC area man suing Korean drycleaners for 58 million dollars because they lost a pair of pants, on the other hand you have John Edwards’  heart wrenching tale of “people like Valerie Lakey, who was the young girl I represented–5 years old, severely injured for life, on a defective swimming pool drain cover. It turns out, the company knew of 12 other children who had either been killed or severely injured by the same problem. … They didn’t tell anybody. They could have fixed it with a 2-cent screw.”  So, some empirical studies that actually calculate the cost of torts on the economy might be a helpful antidote to all these anecdotes.

The Ecnonomist’s Democracy in America blog, a big fan of tort reform, after having a great time making fun of the drycleaner (law)suit, mentions the oft cited Pacific Research Institute study that purportedly shows that torts cost the American economy 865 million dollars a year.  This seems like a huge number, yet also somewhat plausible.  Too bad that known hater of free market capitalism Richard Posner thoroughly debunked the study in his blog with Gary Becker. I won’t recount the entire thing here, you should read it yourself, but here are some highlights:

The $128 billion figure is a transfer, not a cost. But as the authors point out, the opportunity to obtain a wealth transfer can generate a cost–a cost incurred to obtain the transfer (incurring costs to obtain a wealth transfer, when socially unproductive, economists call “rent-seeking”). They assume, without analysis or evidence, that the entire $128 billion is translated into a cost {…}

They add to their new total of $200 billion the $128 billion transfer, for a grand total of $328 billion. The addition is improper, since the transfer is not a cost. They are adding apples and oranges [...]The sum of $328 billion and $359 billion is $687 billion, which is almost $200 billion short of the authors’ grand total of $865 billion. The excess malpractice costs and accidental-death costs they estimate at less than $50 billion, so there is still a big gap. I can’t figure out how they fill it.[...]So far in the report, there is nothing about the benefits of the tort system…

[And now for the knockout punch!]

The authors’ estimate of the benefits (= costs) of the average foreign tort system, when subtracted from the $865 billion “cost” of our system, results (with some further adjustments) in an estimate of an annual excess of costs over benefits of almost $600 billion. The figure, however–the authors’ estimate of the net social loss created by our tort system–is, as I have tried to show, fictitious.