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October 28, 2011

New Study: States Can Realize Economic Savings by Improving Their Legal Environments

States can substantially reduce tort costs by improving their legal environments, according to a new study unveiled at the U.S. Chamber Institute for Legal Reform’s 12th Annual Legal Reform Summit.

The study, Creating Conditions for Economic Growth: The Role of the Legal Environmentincorporates a variety of factors into a benchmark of an ideal state legal environment.  These factors include the perceived fairness of the legal system, the concentration of lawyers in the state, the number of tort cases filed per year and the number of major verdicts in the state.

It then uses a first-of-its-kind econometric model to establish a legal environment benchmark to identify excessive tort costs.

Using that benchmark, the report shows that some states could realize cost savings in the billions of dollars and reductions of over 20 percent in legal costs by taking steps to improve their legal environments.  This reduction in the “tort tax” could in turn produce significant increases in business activity and job creation. 

For example, if Illinois, long recognized as a home for abusive lawsuits, were to improve its legal environment to the level of the report’s benchmark, the state could reduce tort costs by 23.3% ($2.4 billion) and potentially increase employment by between .92% and 2.50%, which translates to 54,000-147,000 new jobs.

The potential impact of a state’s legal environment on employment and business activity was brought to light earlier this year by the president of the Federal Reserve Bank of Dallas, Richard Fisher. 

When asked how Texas created 37 percent of all net U.S. jobs since 2009  – adding 265,000 jobs while California lost 11,400 during the same period – Fisher said that Texas’s legal reforms and resulting record-low litigation costs were one of its biggest competitive advantages for creating and attracting jobs. 

This new study highlights this phenomenon and shows that, at a time when states are struggling with tight budgets, stagnant economic growth, and high unemployment, improving their litigation climates can produce real economic dividends.   You can read the study here.

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