Mike Carter owns Monroe Rubber & Gasket Co., a small family business based in Louisiana that employs about two dozen people. He’d like to add at least four new employees, but he can’t right now.
Why? As he told a House subcommittee hearing examining fraud and abuse in the asbestos compensation system in September: “I can’t bring new staff on … until I’m certain that my company’s future is secure. We’re currently facing hundreds of asbestos claims, and asbestos litigation may force us to close our doors.”
While America’s leaders struggle to get our economy growing again and help the 14 million unemployed Americans find jobs, fear of lawsuits like the ones Carter faces hinders their efforts, discouraging economic growth and suppressing innovation.
A new study, conducted by National Economic Research Associates Inc. and commissioned by the U.S. Chamber of Commerce’s Institute for Legal Reform, examined the link between a state’s lawsuit climate and its economy. The study, “Creating Conditions for Economic Growth: The Role of the Legal Environment,” found that states with a good litigation system have measurable economic dividends that can produce tangible benefits, including adding jobs in the state.
The study incorporates a variety of factors into a benchmark of an ideal state legal environment, including the perceived fairness of the legal system, the concentration of lawyers in the state, the number of civil lawsuits filed per year and the number of major verdicts in the state.
Using this benchmark, the study shows that some states could realize cost savings in the billions of dollars and reductions of more than 20 percent in legal costs by taking steps to improve their legal environments. Eliminating the unnecessary costs of our legal system, which could be viewed as a form of a “tort tax,” could produce real dividends in new business activity and job creation.
For example, if California were to improve its legal environment to the level of the report’s benchmark, the state could reduce tort costs by 16.4 percent ($5.3 billion) and potentially increase employment by 0.65 percent to 1.76 percent, which translates to 104,000 to 283,000 new jobs.
Texas created about 265,000 jobs in the past two years while California lost 11,400 during the same period. When asked how Texas accomplished this, the president of the Federal Reserve Bank of Dallas, Richard Fisher, said that Texas’ recent legal reforms and resulting record-low litigation costs were some of its biggest competitive advantages for creating and attracting jobs.
Clearly, lawsuit abuse is one ingredient in a toxic mixture of conditions holding back job growth, such as over-regulation and a complex tax system.
While the litigation benchmark focuses on how states can achieve a dividend from an improved legal environment, certainly the United States can also benefit from federal legal reform measures.
More than a third of small-business owners have been sued or threatened with a lawsuit. If targeted in a lawsuit, 71 percent of them say, like Carter, that they would have to hold back on hiring new employees. Small businesses employ two-thirds of the private workforce, so this could add up to quite a few jobs lost to lawsuits or the threat of lawsuits.
For at least four people in Louisiana, legal reform could mean the difference between moving from unemployment benefits to a paycheck. Imagine how many business owners like Carter are out there ready, willing and able to hire if they could escape abusive lawsuits.
This article first appeared in Roll Call.