Trial Lawyers and Unintended Consequences

Recently, I have been thinking about trial lawyers and economic value. Most people I believe don’t like lawyers. Although, if people don’t like shouldn’t they really hate law professors since they breed future lawyers? The major thing I have been thinking about is if trial lawyers really have any economic value. My own belief is that yes they do some function. Companies and people do cheat people. Companies deserve to pay for their mistakes I think the big question is how much and is the plaintiff at any fault. What is really interesting is that judges and jurors usually determine the verdict. However, judges are elected and can be republican or democratic. Judges to be shouldn’t have political affiliation since they are suppose to rule based off the law and facts. Trial lawyers can greatly influence the decision of the jury with anecdotes, stories, and pictures to convey the hurt and loss of their party. Trial lawyers are just doing their jobs. However, isn’t it a little bizarre that a jury can make a decision to award $x million to one party and they don’t suffer any consequences if they make the wrong decision?

The marketplace usually rewards people for innovation, entrepreneurism, and ideas. The court system seems to be more of a redistribution of wealth. What if a judge told a jury, “If your verdict turns out to be incorrect you will owe one year of your salary to the state”? Juries might spend more time thinking about their decision if they had something at stake. Currently, members of a jury really have no skin in the game which can lead them to suboptimal decisions than if they had to make decisions with something at stake. Trial lawyers have something at stake. Trial lawyers want to win to boost their egos, win the verdict, and convince themselves that they are doing something beneficial for society. Speaking of money some trial lawyers make lots of money. We can’t label them as greedy since they are helping the average harmed person. John Edwards is worth around $55 million. He made a lot of money claiming that women having a Caesarean delivery were more likely to give birth to infants with problems. However, time showed that in fact having a Caesarean delivery did not increase problems with infants but there was some other factor causing the birth defects. John Edwards got to keep his money though. I am no legal expert but it would only seem fair for him to pay back the money he won.

A few trial lawyers have become billionaires. In 1984, Pennzoil was trying to buy Getty Oil. Pennzoil made an offer and Getty Oil made a binding agreement to accept. However, Texaco came in and tried to bid for Getty. Joe Jamail defended Pennzoil and won a $10.5 billion verdict. The firm got around 1/3 of this ($3 billion roughly) and Jamail’s take was around $335 million. If you consider Jamail never took the LSAT, failed torts in law school, and barely passed the bar exam (he had to get a 75 and got a 76). In Forbes 400 list Jamail is worth $1.5 billion. I would argue that no one was really harmed with Texaco making a bid for Getty Oil. I agree that contracts have a role and Texaco can’t bid when two parties already have an agreement. However, I don’t think it’s worth $10.5 billion plus all the time and resources Pennzoil and Texaco had to spend preparing and endure during the trial.

Another lawyer that has made a name for himself is Mark Lanier. A graduate of Texas Tech law school Lanier won a verdict for $118 million for asbestos, $253 million for the Vioxx case, and $56 million against Caterpillar for a driver that was crippled. Clearly, Lanier is good at what he does. Lanier has extraordinary presentation skills and use to preach at his church while still in high school. For Lanier’s first case he called up already famous lawyer John O’Quinn who told taught him the O’Quinn system. The O’Quinn system was working over 100 hours per week (taking Saturday’s off). For the Vioxx case Lanier made a 253 PowerPoint slide. Lanier hosts an annual Christmas party that is as big as Texas. Usually Lanier and his wife host the party at their 24,000 sq foot estate in Houston with around 8,000 of their closest “friends”, with carnival rides, climbing walls, large moonwalks. Not only do they have games and enough food to go around but he has entertainment like Miley Cyrus, Dolly Parton, and Barry Manilow. The Lanier’s have been putting on this party since 1993 and it usually runs over a half million dollars per year. Clearly, Lanier is very good at what he does but also through litigation has raised the cost for the rest of consumers. Companies don’t want to go to court and have to pay out money. For this very reason companies have to have corporate counsels just in case of a lawsuit. Also companies usually buy insurance to limit their liability. This is money that could otherwise be spent on production, capital projects, or increasing efficiency.

No doubt that it can pay to be a trial lawyer. I also don’t doubt that these lawyers are extremely hard working and motivated. Although, I would agree that trial lawyers serve some purpose I think they are often overused. I am all for people, companies, and individuals paying for their mistakes but we can’t think that this doesn’t have a cost. Economics shows us that there are always unintended consequences even when it comes to trial lawyers.

Epstein Strikes Again

A recent podcast (August 30,2010) from the brilliant Richard Epstein. Epstein talks mainly about regulation mainly the FDA and what changes have taken place in the last few decades.

Link:
http://www.econtalk.org/archives/2010/09/richard_epstein_1.html

Hollywood and Capitalism

So I often have wondered if people in Hollywood need to create television shows, movies, and other media and all these things take capital why is Hollywood on average so liberal? I had some theories as to why this was true. One reason I thought people in Hollywood weren’t so capitalistic is because they have to playing a signaling game. If you are in Hollywood and you show (signal) that you only are concerned about money other artists will not take you seriously. When people in Hollywood donate money, participate in fundraisers, give their time, they are signaling that they care about something perhaps because they actually care about that cause or because they want people to perceive they care.

Little did I know Larry Ribstein of the University of Illinois had already written a paper on this very subject. In his paper “Wall Street and Vine: Hollywood’s View of Business”. Professor Ribstein makes some good arguments for why people in Hollywood are probably not as capitalist as they should be. The goal of an artist is different than the goal for a capitalist. A capitalist is trying to maximize wealth while an artist is trying to show the quality of their work which has little if no relation to creating value. The interesting though is that artists need capitalists but capitalists don’t need artists. The capitalist usually has other alternative investments but the artists can usually only get financed by the capitalist. Usually investing in the production of a movie is not wise since very few movies actually make money. Only about 5% of movies make a net profit. This means when we take revenue- costs 95% of the movies we see are in the red. Economics would tell us that clearly this could not be sustained for a very long period of time.

In recent time The Hollywood Stock Exchange has got attention. This is an exchange where people can bet on whether or not movies will make or break their office receipts. The exchange can also predict who will win the Oscar (although I think Intrade is better). The exchange makes Hollywood more honest because it communicates information about the reality of the situation. Imagine if actors and actresses had Hollywood Exchange options along with getting paid for movies. They would have incentives to make sure people saw their movie. Similar to how employees are given stock options for people in Hollywood would allow actors, actresses, and directors to see how markets actually work instead of demonizing them. Are there any movies that portray businessmen in positive ways? Usually if there are any that show businessmen in the positive light they show that it is nobler to be charitable then to create more wealth (A Christmas Carol). The banker Mr. Potter in “It’s a Wonderful Life” is portrayed as a similar Scrooge. In theory Mr. Potter should have never gone to jail. Since Uncle Billy threw a newspaper and $8,000 into Mr. Potter’s lap this is considered mislaid property. Mislaid property is intentionally deposited property but the owner doesn’t remember where they placed it. Technically mislaid property is owned by wherever the property was placed if the owner doesn’t come back within a reasonable time to claim it. Since the property was placed in Mr. Potter’s lap at the bank (and Mr. Potter owns the bank) then it is in theory Mr. Pottery’s property. Also how do we know Uncle Billy wasn’t trying to gift Mr. Potter $8,000?

At any rate, the point is that Hollywood almost always portrays capitalists, businessmen, and corporations in a negative sense. One of my favorite quotes in the paper is from former director Sydney Pollack who said “economics is the most inhibiting factor for a mainstream director making a film”. Maybe one day Hollywood and capitalism will be meant for each other.

Link to paper:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=563181

Estate Tax and Impact On Economy

In a recent paper written it estimated that the estate tax could have consequences for the economy as a whole. The paper written by Dr. Doug Holtz- Eakin shows that the keeping the estate tax will cost jobs. Some of the major findings show that if the estate tax were to come back in 2011 (no estate tax for 2010 so far) a modest rate of only 2% would cost 24,000 jobs. A rate of 45% would be a loss of around 1.1 million jobs. It is important to consider that these are only estimations and use models to predict behavior. I would agree that bringing back the estate tax will decrease future economic growth. Consider this: If you are rich you only have a few things to do with your money. The first would be to spend it. A survey from Moody’s Analytics found that the top 5% of income earners were responsible for 37% of consumer outlays (consumer spending, interest payments, and transfer payments). From 2007-2009 the top estate tax rate was 45%. Clearly, it is cheaper to spend that money then have to pay taxes on it. Although, one could argue heirs would rather get 45% of something rather than 100% of nothing. The second option is to give the money away. Giving money away has a tax rate of 0%. Lastly, rich people can invest and or save their money. I think the common idea of rich people is to imagine Scrooge McDuck (yes, the one from Duck Tales). Scrooge McDuck likes to jump in his pile of coins, counts his coins, and generally doesn’t like paying for anything. People seem to think that the rich just sit around count their money, have luxurious, and led extravagant lifestyles. However, in order to stay rich, the rich have to continue earning money. Remember money is a finite resource. MC Hammer once had $30 million. So how do people earn money? People have to invest in people, resources, and equipment. By their nature rich people don’t usually sit around and waste their time (unless they inherit their fortune). The vast majority of rich people made the money on their own and did not inherit it. So when there is an estate tax the government confiscates that money that could have been used more wisely. Someone should ask “What has government done for me lately?”

The New Millionaire Jobs

The Los Angeles controller this week released a report showing that out of the $111 million of stimulus money only 55 jobs were created. This is a little over $2 million per job created. What this demonstrates is how little of a multiplier government spending is. Keynesian economics are concerned about aggregate demand to create jobs. One problem I have with this is the way they create jobs. For instance, if we wanted to build a road and create the most jobs we could have people building the road using outdated technology. Instead of using modern equipment to get dirt out of the ground workers could use spoons. This would easily decrease unemployment but it would be clear that productivity would be very low. Keynesians feel that if the private sector can't create jobs we should just throw money at the problem and try to create jobs. However, what they don't realize are all the jobs lost because we took $111 million from taxpayers and are subsidizing public works projects. Could you imagine what entrepreneurs or even consumers could do with $111 million? Although, $111 million seems like a lot of money it is just a drop in the bucket when we compare it to the $800 million in total stimulus. My point is that I suspect that there will be more stories like this, with few jobs created and government trying to throw good money after bad. This one quote sums it up perfectly

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."- F.A. Hayek

Bryan Caplan on Immigration

FFF Economic Liberty Lecture Series: Bryan Caplan from The Future of Freedom Foundation on Vimeo.