TCS Daily

A Texan's Two Step

By James K. Glassman - January 10, 2003 12:00 AM

President Bush announced an economic recovery plan built on tax cuts. A Democratic president, John F. Kennedy, also faced with national security threats and a big stock-market decline, came to the same conclusion.

On Dec. 14, 1962, JFK urged Congress to ''reduce the burden on private income and the deterrents to private initiative that are imposed by our present tax system.'' Corporate taxes were trimmed, and rates in the top personal brackets were sliced 21%. The economy and the market took off.

Today's federal tax code definitely needs fixing. It should be simpler, fairer and do a better job of encouraging work, saving and investing. Taxing dividends once instead of twice, for instance, would make long-term stock investing more attractive - which would mean that stock prices would rise, businesses would be able to raise more capital and create more jobs, and retirees would get to keep more of their dividend income.

But Bush's plan for tax relief - plus helping the states with rising costs and extending unemployment benefits - is not enough. There are two other steps he can take that would boost the economy even more. The first would tackle out-of-control court awards; the second would spur the economy by increasing safety.

· Tort reform. Most Americans know about such outrageous verdicts as $3 million for a spilled cup of hot coffee and $4 million for a repainted BMW. But it's getting worse. Asbestos lawsuits already have caused 52 companies to declare bankruptcy, and Forbes magazine reports ''liability will hit $200 billion, with literally thousands of firms paying out claims.'' Many of those companies have only a peripheral connection to asbestos-containing products and, as usual in these cases, much of the money ''will go either to lawyers or to plaintiffs who are not even sick, just worried about getting sick.''

Last year, two teenagers sued McDonald's for making them fat; a Los Angeles jury awarded $28 billion to a single plaintiff in a tobacco lawsuit; West Virginia surgeons went on strike to protest medical malpractice insurance premiums of $150,000 a year; and, after 60 Minutes aired a program that cited a Mississippi county for being a haven for ''jackpot justice'' in big-money tort cases, two former jurors filed a $6 billion lawsuit against CBS, claiming they had been defamed.

These stories may sound bizarre, or even funny, but the damage to the economy from runaway lawsuits is real and serious.

A study by the president's Council of Economic Advisers, published last April, attempted to put a dollar value on the devastation. The researchers found that the U.S. tort system ''is the most expensive in the world'' and ''represents a large drain on the productive resources of the United States.'' Torts cost about 2% of the gross domestic product, or triple the level in Britain, according to the study. Some of these expenses are justified; the threat of lawsuits gives businesses an additional incentive to make safe products. But the council noted that tort costs that can be identified as ''excessive'' constitute a tax that ''is ultimately borne by the individuals through higher prices, reduced wages or decreased investment returns.''

Using conservative data from academic researchers, the study's authors estimated that these extra expenses were the equivalent of a 2% tax on consumption, a 3% tax on wages or a 5% tax on income from investments.

Those figures don't count hidden costs. How many companies in recent years have decided not to conduct research or bring new products to consumers or even sell their shares on the public market for fear of massive, unwarranted lawsuits?

Tillinghast-Towers Perrin, an insurance consulting firm, says that tort costs are rising twice as fast as economic growth. From 1994 to 2000, according to Jury Verdict Research, the average wrongful death payment rose from $1 million to $5.7 million.
Imagine that tort reform could cut excessive tort costs merely in half. The savings to the economy would be well over $1 trillion over 10 years - dwarfing the effect of any conceivable tax cut.

The tort system can be fixed. For example, a proposal that was approved last year in the House but died in the Senate would have moved major interstate class action suits from state to federal courts. That way, tort lawyers could not go shopping for ''jackpot-justice'' venues in states such as Mississippi and Louisiana.

Another proposal would put a cap on gigantic punitive-damage awards issued by juries that want to sock defendants with a punishment in addition to normal compensation. You've probably heard of ''triple damages'' being awarded as such punishment. Well, according to the American Tort Reform Association, the U.S. Supreme Court is considering a case in which a jury hit a carmaker with a punitive award that was 145 times compensatory damages. Policies that simply bring common sense to bear on tort cases would save tens of billions of dollars annually.

· Safety of Americans. The link between national security and economic prosperity can't be underestimated. Faced with threats of nuclear and biological terrorism, businesses and individuals are reluctant to make long-term investments that ultimately would benefit the economy.

Bush needs to move quickly and aggressively to pre-empt Iraq, but he also has to show nations such as Saudi Arabia and Turkey that he's serious about his ''with us or against us'' rhetoric.

On the home front, a new economic policy should include major funding for bomb- and bacteria-detection technology, local law-enforcement equipment and training, and securing not just the air but our harbors and railways as well.

Don't get me wrong. Bush's new tax-relief proposals are fine. They don't really constitute a ''stimulus package'' - nor should they. The economy, which, after all, has grown a decent 3.2% in the past 12 months, is not in dire straits, and drastic surgery now could have adverse consequences later.

What the economy really needs are measured, long-term policies that will help it reach its true potential: consistent growth of 4% or more annually. Tax changes would help, but a sensible tort system and better national security would help even more.


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