Lawsuit reform has dramatically improved the fairness and efficiency of Texas’ civil justice system. Just a few years ago, the Lone Star State held a position near the bottom of state rankings and was frequently a source of derision in the national media. Objective studies now place the state’s civil justice system in the upper tier relative to many measures (though some challenges remain). This notable turnaround, from a legal system that was poorly regarded in several areas to one that is widely recognized as an effective model worthy of emulation, has brought substantial benefits.
In the 1980s and early 1990s, Texas was known for the lack of fairness and balance in its civil justice system. The distortions caused by these problems significantly eroded the state’s competitive position. Fears of excessive litigation and outsized claims were a substantial disincentive for potential corporate locations and expansions.
In February 1995, The Wall Street Journal called national attention to the civil litigation environment in Texas, and the state became infamous as the “Wild West of Lawsuits.” Even internationally, Texas was recognized as a paradise for plaintiffs. The London Observer reported that businesses in Texas should consider moving elsewhere to avoid the problems of the state’s civil justice system.
The threat of litigation can significantly decrease product innovation. When businesses operate in a high-liability-risk environment, they respond by reducing investments in product innovation because new products have more uncertain safety characteristics and can leave them vulnerable to lawsuits.
Another vulnerable sector is health care delivery. Prior to tort reform, medical malpractice premiums were extremely high, discouraging some doctors from continuing to practice or to perform certain procedures. An increase in “defensive medicine” (when doctors’ decisions to order tests, avoid procedures, or suggest treatments based in part on a fear of legal liability) was also a problem. In addition, the supply of doctors tends to be restricted by the higher risk and costs associated with an excessive system, thus further reducing access to health care.
My firm, The Perryman Group, has studied the issue of tort reform in Texas and other states on numerous occasions and has consistently found that the misallocations of scarce societal assets lead to (1) a loss of economic efficiency; (2) increased risks of doing business; (3) cost increases unrelated to productivity; (4) escalating insurance rates, particularly in specific areas such as medical malpractice; and (5) other problems.
In a recent study, we developed an extensive and comprehensive assessment process to measure the incremental gains from civil justice reforms. We looked at factors such as cost savings (administrative costs, court costs, non-productive expenditures to avoid or take advantage of excessive litigation reward opportunities, and the inefficiencies in the redistribution process); gains from safer products (in terms of people in the workforce who otherwise would have died from faulty products); and benefits of new products and manufacturing in Texas stemming from research, development, and innovation in a less litigious environment.
The results clearly demonstrate the economic benefits of the more efficient and effective system. In fact, we found that the total impact of tort reforms implemented since 1995 includes gains of $112.5 billion in spending each year as well as almost 499,000 jobs in the state. The reforms related to asbestos/silica litigation, which were enacted in 2005, are already contributing $490.3 million in annual spending and 2,683 permanent jobs. Reforms limiting non-economic damages in medical malpractice litigation alone lead to increases of $55.3 billion in spending per year and more than 223,000 jobs.
Tort reform and the resulting benefits to the legal environment enhance the prospects for investment in expansions and relocations to the state. In addition, companies already in Texas enjoy an advantageous competitive position relative to other areas. Gains in productivity stemming from a more effective and efficient tort system further add to the positive outcomes.
Beyond these quantifiable measures, there are a number of other benefits such as growth in the number of doctors entering the state, the inclusion of almost 430,000 Texans in health plans who would otherwise be uninsured, a decrease in the volume of lawsuits with little real merit, and many more. Benefits accrue through multiple channels including the investment climate, business activity, insurance rates, consumer wellbeing, productivity, jobs, output, income, inflation, economic development, and fiscal soundness. In fact, State budget resources (enhanced revenue and reduced spending requirements) are almost $2.6 billion higher each year than they would be in the absence of these reforms. Benefits are spread across the state, positively affecting communities both large and small.
Numerous studies of the impact of reforms on labor productivity and employment have demonstrated that states which changed their liability laws to decrease levels of liability experienced greater increases in aggregate productivity and employment than states that did not. At the same time, states adopting measures which increase liability often see productivity and employment fall. Our analysis clearly confirms this result.
Despite the enormous progress to date, challenges remain, with some regions of the state being known as areas where justice is not fairly administered, and continued vigilance and improvement is warranted. Increasing the effectiveness and efficiency of the civil justice system has brought significant dividends to Texas, and ongoing efforts can help to assure long-term competitiveness, prosperity, and economic opportunity.
Advances in communications and related technologies have spurred economic growth and created tens of thousands of jobs in Texas. The past few years have seen enormous advances in the availability of broadband across the state as communications companies have invested billions in infrastructure. One reason for this trend, especially in rural and remote areas, is the support provided by the Texas Universal Service Fund (TUSF).
During the long period of telephone regulation, service to high-cost areas was partially funded through the rates that were set for other, more densely populated areas and for long-distance calling. This phenomenon was almost completely hidden from the typical customer. Once the market became more open to competition, such implicit subsidies were no longer possible. Thus, in order for universal service to be maintained at affordable prices, an explicit subsidy was required.
The issue of affordable service is particularly problematic in Texas because of its vast geographic territory and wide dispersion of population. In some parts of the state, the cost of providing basic service exceeds $600 per month. The TUSF, which is funded by a fee that is assessed on all basic telephone customers, provides a mechanism to reduce charges in high-cost areas, as well as programs for low-income and hearing-impaired individuals.
If you go back to the origins of the concept in the 1930s (and similar initiatives with regard to electricity and transportation), the idea was to keep rural areas integrated into the economy and society in a way that would not occur based on traditional or market criteria due to expense, remoteness, lack of density, and related factors. In today’s environment, broadband access is in effect analogous to that of basic telephone service in past decades. Areas which are not able to have such services are likely to be left behind in future economic expansion, access to modern health and educational options, and many other opportunities. This phenomenon is sometimes referred to as the “digital divide.” In essence, broadband is the new infrastructure of the country (and the world). If the TUSF were to be drastically reduced or eliminated, the incentives to invest in new technologies in the high cost, rural regions of the state would be substantially diminished.
Some critics have suggested that the TUSF should be eliminated, allowing market forces to determine telephone service. It is certainly true that markets are extremely powerful and achieve remarkable things in a seemingly invisible and effortless manner; however, they are not perfect barometers of optimal social outcomes. Markets are, in essence, a mechanism to allocate resources. If left unfettered, they do so with great efficiency. They do not, however, honor social policies and priorities beyond efficiency, and they do not capture social benefits or costs that extend beyond private transactions.
To the extent that universal service at affordable prices is still a significant social priority, a mechanism such as the TUSF remains an appropriate public policy initiative. In the absence of some type of specific provisions, market forces will compel that all users pay the full amount of service costs (with some potential allowance for collateral sales opportunities) and affordable rates in many areas will be eliminated.
In an analysis last year (which reflected 2006 funding levels and data), my firm estimated the annual spending losses associated with the elimination of the high-cost elements of the TUSF to include almost $949 million in economic activity each year (as measured by total expenditures), $535 million in annual economic output, and 7,416 jobs. Because the telephone system forms a vital communications linkage across the entire state, a substantial portion of this loss would occur in the most populous areas of the state.
More recently, we completed an analysis which revealed a net loss to rural Texas as of 2030 associated with inadequate broadband investment of 65,800 to 92,100 jobs, $13.85 billion to $19.39 billion in personal income (by place of work in constant 2007 dollars), and $17.97 billion to $25.16 billion in gross product (in 2007 dollars). In order to avoid these shortfalls, there is little doubt that continuing incentives such as the TUSF will be necessary.
Another recent study suggested that the state as a whole could gain 173,117 jobs through more aggressive broadband adoption. This analysis compares various states and their efforts. A reasonable TUSF policy would need to be a part of such a strategy, although it would not be the sole determinant.
In response to recent legislation, the Public Utility Commission of Texas (PUC) analyzed and considered policy alternatives to update this important program. After much input and debate, effective solutions were crafted which both reform basic telephone rates and preserve the critical concept of universal service. The Commission is to be congratulated for its effort in this little noticed, but critically important area.
The entire state of Texas benefits from the availability of affordable telephone service to rural areas, and there is a compelling need to assure rapid broadband deployment. The investments can only occur with an appropriate cost-return balance, which requires a vital and significant universal service mechanism.
It has long been a goal of the PUC and the Texas Legislature to ensure that rural Texans have access to affordable telecommunications services. The recent resolution ensures that all of Texas has the economic opportunities afforded by modern communications infrastructure and that no areas are denied this essential resource. To do otherwise would be to limit the economic potential of the Lone Star State. The TUSF benefits Texans across the state as well as the state economy. Preserving it will help maintain a bridge across the digital divide.