The Tort Tax

Apparently, the total cost of the US tort system continues to grow. Relative to GDP, the “direct” or “static” costs of litigation — including damage awards, plaintiff attorneys’ fees, defense costs, administrative costs and deadweight costs from torts such as product liability cases, medical malpractice litigation and class action lawsuits, grew from 2.04% of GDP in 2001 to 2.44% of GDP in 2006. However, the total cost of tort is quite a bit higher than this because of the manner in which the tort system creates incentives for economically unproductive behavior. Yesterday’s Wall Street Journal article entitled “The Tort Tax” outlines various “dynamic” or “indirect” costs related to tort, and concludes that once these costs are taken into consideration, the actual total costs of tort are more like 6.4% of GDP; in 2006 dollars this comes to $865 billion (2006 GDP is estimated to be $13.45 trillion). This amount is equivalent to the total annual output of all six New England states, or the yearly sales of the entire U.S. restaurant industry. On a per capita basis, this comes out to $2,883 per year per American (note that the population of the United States is approximately 300 million).

It would be interesting to see what total tort costs (including both the direct and indirect costs as described above) are in countries other than the United States. The direct costs of tort are already very well documented. For example, the 2004 Economic Report of the President, notes that the direct costs of the U.S. tort system (as a percent of GDP) are more than 3 times greater than tort costs in the United Kingdom, and are also significantly higher than tort costs in most other industrialized countries.