President Bush has been pushing “tort reform” in some of his recent speeches. He claims that lawsuits hurt businesses by costing them money, and that they drag down the economy. To understand why his claims are incorrect, it is necessary to understand a little bit of standard economic theory.

     Under standard economic theory, an efficient market system requires that each business bear the full costs of its business operations. Only then will the true cost of production be included in the price of the products or services produced by the business. Costs of a business operation which are not paid by the business are called “externalities” and result in inefficient use of economic resources. A business which does not pay the full costs of its operations is subsidized by the persons who do bear the costs of the externalities. This results in an inefficient overproduction of the goods and services of the subsidized business, and a competitive advantage for that business.

     When a delivery truck runs over a pedestrian, or pollution from a factory poisons a family next door, the resulting injuries are costs of the business operations, and should be paid by the business so that the market system can work as it was intended and allocate resources efficiently. If the guilty business is not willing to pay those costs on a voluntary basis, and it seldom is, we rely upon the legal system to force it to cover those costs.
Like any human institution, our legal system is not perfect. Sometimes it makes businesses pay costs which they did not cause. In a vastly greater number of cases, however, it fails to make businesses pay for costs which they did cause. Large numbers of injuries are caused every day by business operations. Only about 2 percent of injured people even file a lawsuit. Of those, many never receive any compensation from the business, either because they do not see the case through to its end, or because they fail to prove their case in court, or because the business does not pay the judgment.

     Because so many business caused injuries are never paid for by the businesses which caused them, our economy is already distorted in a way which subsidizes businesses which injure people, and which penalizes victims of business operations. President Bush’s tort reform proposals seek to make this distortion worse, by giving even more protection to businesses which injure people. As a result, the market will funnel even more resources into businesses which injure people, because their products and services will not be bearing the full costs of their operations. Even more people will be injured by business operations without being compensated. The injured people will be subsidizing the business operations to an even greater extent than they already do. Those injured people will also become a drag on the economy, because they will not be as productive as before.

     While businesses which injure people will benefit from President Bush’s tort reform proposals, conscientious businesses which spend money to avoid injuring people will be at a competitive disadvantage. President Bush’s tort reform proposals will create additional economic pressure for conscientious businesses to cut their safety expenses, to avoid being at a competitive disadvantage. More people will be injured, and our entire economy will become less efficient. Tort reform of the type espoused by President Bush is nothing more than corporate welfare for inefficient businesses, paid for by injured people, by conscientious businesses which avoid injuring people, and by the economy at large.

     President Bush’s proposals for tort reform are bad for the economy, bad for the conscientious businesses who must compete against the irresponsible ones, and bad for the people who will be hurt by business operations.