Prevailing Wage Requirement Hinders Affordable Housing

The Los Angeles Business Journal (original)
Monday, May 21, 2007
By Hovannes Abramyan

Last November, voters approved Proposition 1C, a $2.9-billion bond aimed at increasing affordable housing in California. Though well intentioned, the bond does not address the manageable factors contributing to the high price of housing in the Golden State. A true solution requires tackling the regulatory cost drivers.

According to data published two weeks ago in the Business Journal, the median price of a home sold in L.A. County in April was $575,000. In some ZIP codes in the county, the median was more than $2 million. Though consumer demand plays an obvious role in determining the price of a home, a number of man-made supply-side factors contribute to high home prices in California.

Construction costs have increased, due in part to prevailing-wage laws currently on the books. California’s Code of Regulations requires that prevailing wages – the wage paid in the largest city in the county to a majority of workers in that profession – be paid to workers on publicly funded construction projects, including nearly all affordable housing projects.

A study by the California Institute for County Governments found that prevailing wages are typically 36 to 55 percent higher than market wages. These higher wages cause higher construction costs, which then result in fewer affordable homes. A 2004 study from the UC Berkeley Program on Housing and Urban Policy estimates the additional cost imposed from paying prevailing wages on a final home price to be between nine to 32 percent. The paper also estimates that more than 2,600 homes that otherwise would be low-income units are priced too high to be considered such, thanks to prevailing-wage requirements.

Repealing SB 975, the bill that requires the payment of prevailing wages on publicly funded projects, would significantly reduce high construction costs that discourage developers from building more affordable housing.

Environmental costs

Also driving costs are environmental regulations such as the California Environmental Quality Act. Labor unions often use these complex regulations to leverage developers into signing Project Labor Agreements to use only higher-paid union labor in construction, increasing building costs. Developers often accept PLAs in order to avoid endless litigation and red tape challenging compliance with onerous environmental requirements.

California Unions for Reliable Energy recently tried to deploy this “greenmail” tactic to prevent the construction of two power plants. Had this been successful, the added costs would have been passed on to consumers in the form of higher electric bills. Used to require affordable housing be built with only union labor, greenmail increases the cost of construction and reduces the supply of affordable housing.

Housing prices, however, aren’t determined solely on the basis of construction costs. A recent study by the National Bureau of Economic Research found that construction costs represent half, or less, of a home’s price in high-cost cities. The remainder is due in large part to zoning regulations that seek to curb development and control growth but force up land values.

Even inclusionary zoning laws – requiring a certain share of construction go to housing for moderate to low-income families – contribute to the housing shortage. Inclusionary zoning laws, best thought of as another form of rent control, discourage developers from building in areas most in need of low-income housing. In the average city, new construction decreases by 31 percent in the year after the adoption of inclusionary zoning.

Eliminating harmful zoning and growth-control regulations would increase the supply of housing and make prices more affordable. Numerous studies measuring the impact of zoning and growth regulations on prices in California have confirmed this effect. One recent study examined the effect of moving from less stringent to more stringent regulations and found rents increased from nine to 26 percent.

The $2.9-billion bond of Proposition 1C won’t lower housing costs as long as regulatory hurdles stand in the way. Californians should demand that lawmakers remove these costly man-made problems rather than open their pocketbooks every time there is need for a public bailout. The only practical long-term solution is to remove intrusive government regulations and let developers help people who need affordable housing.



Hovannes Abramyan is a public policy fellow in business and economic studies at the Pacific Research Institute in San Francisco.

Medical liability still causes problems for Michigan and America

The Detroit News (original)
Friday, May 4, 2007
By Lawrence J. McQuillan and Hovannes Abramyan

A report released earlier this month by the Michigan Medical Physician Coalition estimates that in three years the state will have a shortage of up to 6,000 critically needed doctors. Among the causes of this shortage are costs associated with medical liability.

The basic facts about America's medical liability crisis are well known -- doctors are being forced to relocate or retire, hospitals and clinics are closing, medical services are being slashed, and patients are being deprived of vital care.

It's also well known who's profiting from the situation -- personal-injury lawyers. Less understood, however, are the financial burdens caused by abuses in medical liability litigation. Exactly how much are these abuses costing our country?

The answer is shocking. Lawsuit abuse raises health-care costs in the United States by a staggering $124 billion a year. That's the same size as the Iraq war supplemental bill just passed by Congress. In other words, the constant threat of medical liability lawsuits exerts a monetary cost to our country comparable to sustaining a war.

And that's just the health-care cost. The total cost of the tort system is about $865 billion a year. To put this number into perspective, it's a staggering 30 times what America spends through the National Institutes for Health to find treatments and cures for the most deadly diseases.

In Michigan, the situation is a little more positive. The state has model damage caps and relative liability costs that are lower than in most other states. However, state legislators sympathetic to the trial bar have been trying to repeal medical malpractice tort reforms since their enactment more than 10 years ago.

If successful, these changes would worsen the impending shortage of physicians and cause remaining doctors to behave in economically inefficient ways.

Fearing litigation, doctors across the country have resorted to defensive practices. They order far more costly tests and procedures -- and make more specialist referrals -- than their expert training would deem actually necessary.

The needs and interests of their patients aren't driving doctors to perform these extraneous services. They're simply protecting themselves from potential lawsuits brought on by predatory tort lawyers.

Here's a typical case: A patient in the state of Washington suffered a broken jaw while working at a construction site. Despite a clear and straightforward diagnosis to that effect, emergency-room doctors ordered a battery of tests, including CAT-scans and MRIs, to cover themselves from potential liability.

In all, the additional costs of these "lawsuit-prevention" tests came to about $20,000. Multiply the cost of this single case across the entire country, and it's easy to see how $124 billion can be wasted in a single year -- to say nothing of the time and energy of medical professionals that is squandered on needless procedures.

A further result of reckless litigation directed at America's doctors is to make health insurance prices unaffordable for millions of citizens. America's extra $124 billion in yearly liability-related healthcare spending translates to an additional 3.4 million uninsured people.

There are significant costs associated with the addition of 3.4 million uninsured. The uninsured are more likely to let diseases and conditions go untreated, resulting in needless sickness and premature death. There is an economic effect as well, through an overall decline in worker productivity.

All told, the total lost economic output from Americans deprived of insurance due to liability risks comes to about $39 billion each year.

Remember all of this next time you hear personal-injury lawyers posturing as the defenders of patients' rights and professional accountability. Far too often, tort attorneys are serving only their own interests at the expense of others. And everyone else is left to pay the bill.



Lawrence J. McQuillan is director of business and economic studies at the Pacific Research Institute, where Hovannes Abramyan is a public policy fellow. They are the authors of the PRI study "Jackpot Justice: The True Cost of America's Tort System."

Ambulance chasers bad for our health

The Providence Journal
Thursday, April 26, 2007
By Lawrence J. McQuillan and Hovannes Abramyan

The basic facts about America’s medical-liability crisis are well known — doctors are being forced to relocate or retire, hospitals and clinics are closing, medical services are being slashed, and patients are being deprived of vital care.

It’s also well known who’s profiting from the situation — personal-injury lawyers. Less understood, however, are the financial burdens caused by abuses in medical-liability litigation. Exactly how much are these abuses costing our country?

The answer is shocking. Lawsuit abuse raises health-care costs in the United States by a staggering $124 billion a year. That’s the same size as the Iraq war supplemental bill just passed by Congress. In other words, the constant threat of medical-liability lawsuits exerts a monetary cost to our country comparable to sustaining a war.

And that’s just the health-care cost. The total cost of the tort system is about $865 billion a year. To put this number into perspective, it’s a staggering 30 times what America spends through the National Institutes for Health to find treatments and cures for the most deadly diseases.

Fearing litigation, doctors across the country have resorted to defensive practices. They order far more costly tests and procedures — and make more specialist referrals — than their expert training would deem actually necessary.

The needs and interests of their patients aren’t driving doctors to perform these extraneous services. They’re simply protecting themselves from potential lawsuits brought on by predatory tort lawyers.

Here’s a typical case: A patient in the State of Washington suffered a broken jaw while working at a construction site. Despite a clear and straightforward diagnosis to that effect, emergency-room doctors ordered a battery of tests, including CAT-scans and MRIs, to cover themselves from potential liability.

In all, the additional costs of these “lawsuit-prevention” tests came to about $20,000. Multiply the cost of this single case across the entire country, and it’s easy to see how $124 billion can be wasted in a single year — to say nothing of the time and energy of medical professionals squandered on needless procedures.

A further result of reckless litigation directed at America’s doctors is to make health-insurance prices unaffordable for millions of citizens. America’s extra $124 billion in yearly liability-related health-care spending translates to an additional 3.4 million uninsured people.

There are significant costs associated with the addition of 3.4 million uninsured. The uninsured are more likely to let diseases and conditions go untreated, resulting in needless sickness and premature death. There is an economic effect as well, through an overall decline in worker productivity.

All told, the total lost economic output from Americans deprived of insurance because of liability risks comes to about $39 billion each year.

Remember all of this next time you hear a personal-injury lawyer posturing as the defenders of patients’ rights and professional accountability. Far too often, tort attorneys are serving only their own interests, at the expense of others. And everyone else is left to pay the bill.



Lawrence J. McQuillan is director of business and economic studies at the Pacific Research Institute, where Hovannes Abramyan is a public-policy fellow. They are the authors of the PRI study “Jackpot Justice: The True Cost of America’s Tort System.”

Today’s tort system has life-threatening consequences

The Washington, D.C. Examiner (original)
Tuesday, April 10, 2007
By Lawrence J. McQuillan and Hovannes Abramyan

A diagnosis of non-Hodgkins lymphoma used to be a death sentence. Like many cancers, it was nearly untreatable and families were forced to wait out the days until a loved one died.

But new methods of chemotherapy in addition to drugs, like Rituxan, changed all that. One study found that a combination of the two treatments improved survival rates among patients to 70 percent, compared with 57 percent for those on chemo alone.

Similar situations exist for a wide range of diseases and treatments, from drug cocktails for AIDS to statins for high cholesterol.

But such novel treatments often do not make it to the market in the first place. For every 100 people helped by a treatment like Rituxan, there may be one patient who suffers serious side effects or even death. And sometimes the drug manufacturer can be held liable in court for those side effects, even when patients are properly warned ahead of time.

These liability risks — or torts, in legal speak — add enormous costs to the development and implementation of new technologies and treatments. Fortunately for lymphoma patients, Rituxan has proven effective enough to outweigh legal risks.

But because of legal threats and the potential for debilitating tort payouts, many life-saving or risk-reducing technologies are never brought to market or even invented. Numerous lives are lost through accidental deaths that could have been prevented.

According to data from a recent study by two professors at Emory University, America’s current tort system was responsible for 2,700 accidental deaths in 2004. By extending calculations back through 1981, we can project that 77,419 lives were lost in accidents that could have been avoided if tort reforms had been adopted.

This loss of life affects not just the families and communities of those who have died. It also impacts the nation’s economy.

Let’s think of this group of 77,000 individuals as a “ghost work force.” Had these folks not died needlessly, they would have been alive and working today.

It’s impossible to predict whether one of these individuals would have discovered the cure for cancer or written the great American novel, but the economic output these individuals would have produced can be measured.

The U.S. Bureau of Economic Analysis has concluded that the value of the average worker’s output is $90,236. If we apply this ballpark value to each member of our ghost work force, we can calculate that the U.S. economy lost $7.51 billion worth of output.

Most costs of today’s tort system are well-known. We see them in the form of higher insurance premiums, higher prices for goods and services, and even the destruction of entire businesses crippled by excessive punitive judgments.

But the concept of a ghost work force emphasizes another cost to society — that of what could have been. And with the sacrifice of more than $7 billion in economic output due to tort risks, these costs are far from hypothetical.

A thriving economy depends on an efficient tort system that provides just compensation for those who are injured, which facilitates trade and commerce.

But it’s critical that the tort system not increase the cost of risk-reducing advances that ultimately save lives, like new drugs.

The future costs of an unreformed tort system are difficult to fully calculate. But if the “ghost work force” were alive today, it would provide a boost to our nation’s economy. Today’s tort system takes away billions of dollars — and thousands of lives — each year. A tort system should operate to save lives, not cost lives.

That fact that the U.S. tort liability system is needlessly costing lives is stark evidence that tort reform is desperately needed.

-------------------------------

Lawsuits consume more resources than national defense, charity and federal education combined …

» Annual cost of U.S tort liability system: $865 billion

» Annual Defense Department budget: $500 billion

» Total annual charitable giving in U.S.: $260 billion

» Federal expenditures for education: $ 65 billion

Source: American Justice Partnership


… But victims only get 22 cents on the dollar

“The U.S. tort system returns less than 50 cents of every tort-cost dollar to injured claimants, those it was designed to help.”

– “Jackpot Justice”


How tort dollars are spent:

» 24 cents: Noneconomic payments, including punitive damages

» 22 cents: Economic awards to injured parties

» 21 cents: Administrative costs

» 19 cents: Plaintiffs attorneys

» 14 cents: Defense attorneys

Source: “Jackpot Justice”


Tort tax weakens U.S. competitiveness abroad

Percentage of GDP spent on direct tort costs:

» United States: 2.2 percent

» Germany: 1.1 percent

» Japan, Switzerland: 0.8 percent

» United Kingdom, France: 0.7 percent

» Denmark, Poland: 0.6 percent

Source: Pacific Research Institute


Lawsuits take a big bite out of corporate, individual bank accounts

» Annual “tort tax” for U.S. stockholders: $684 billion

» Annual “tort tax” for each U.S. family of four: $9,827

Source: American Justice Partnership


Lawrence McQuillan is director of business and economic studies at the Pacific Research Institute, where Hovannes Abramyan is a public policy fellow. They are the authors of the PRI study “Jackpot Justice: The True Cost of America’s Tort System.”

Tort Tax

The Wall Street Journal (original)
Tuesday, March 27, 2007
By Lawrence J. McQuillan and Hovannes Abramyan

Economists have long understood that America's tort system acts as a serious drag on our nation's economy. Although many excellent studies have been conducted, no single work has fully captured the true total costs, both static and dynamic, of excessive litigation.

The good news: We now have some reliable figures. The bad news: The costs are far higher than anyone imagined.

Based on our estimates, and applying the best available scholarly research, we believe America's tort system imposes a total cost on the U.S. economy of $865 billion per year. This constitutes an annual "tort tax" of $9,827 on a family of four. It is equivalent to the total annual output of all six New England states, or the yearly sales of the entire U.S. restaurant industry.

How does the legal system extract such an astounding amount from our economy? We applied the rent-seeking theory of transfers from economic science to pick up where past studies -- including the highly regarded Tillinghast-Towers Perrin study -- leave off. We began by examining the static costs of litigation -- including annual 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. The annual static costs, $328 billion per year, are well in excess of previous Tillinghast estimates.

But $328 billion is only the beginning. After all, litigation doesn't just transfer wealth, it also changes behavior, and often in economically unproductive ways. Any true estimate of the costs of America's tort system must also include these dynamic costs of litigation -- the impact on research and development spending, the costs of defensive medicine and the related rise in health-care spending and reduced access to health care, and the loss of output from deaths due to excess liability.

Consider the impact of medical liability concerns on the health-care sector. It is a well documented fact that the fear of litigation prompts doctors to engage in expensive defensive medicine. PricewaterhouseCoopers calculates that medical liability concerns increase annual health care spending by $124 billion in 2006 dollars, which must be added to any comprehensive estimate of litigation costs.

At the margin, higher health-care costs also reduce access to care for patients. We estimate that the additional $124 billion in liability-based health care costs adds 3.4 million Americans to the rolls of the uninsured. Uninsured people are more likely to suffer from a number of diseases and serious or even fatal conditions. Economically, the result is that more Americans are absent from the workforce and their productivity declines -- a total loss of output we estimate to be $39 billion per year.

Excessive liability also hampers innovation. Ideally, product liability should induce companies to invest in safety-related improvements to products. But the ideal is not always the reality. As liability costs increase, companies respond by shifting funds from research and development into fighting litigation and withholding or withdrawing products from the market. Less R&D spending means fewer new products and less innovation.

Research by W. Kip Viscusi and Michael J. Moore suggests that 13 U.S. industries have tort costs that exceed this tipping point. Overall, we found that foregone R&D due to excessive liability results in lost sales of new products every year of over $367 billion.

An overly expensive liability system also increases the cost of many risk-reducing products and services, at the expense of human lives. A previous study we examined determined that the adoption of tort reforms over the past couple of decades has prevented more than 20,000 deaths. Our analysis goes further to estimate the human cost of a failure to enact reforms.

Based on data from previous studies, we determined that more than 77,000 people would have been alive today and contributing to the workforce, but are not because of a failure to enact comprehensive tort reforms in the states. The cost of foregone output from these lost workers is more than $7 billion each year.

What we're left with, then, are annual dynamic costs of $537 billion resulting from our litigation system. Add that to the static costs of $328 billion and you arrive at the total of over $865 billion per year.

In this study we do not venture to propose a specific litigation-reform agenda. But we do provide all who are concerned with this issue some hard numbers to work with. And if you're wondering who the victims are of a tort system out of control, the answer today: almost everyone.

Mr. McQuillan is director of business and economic studies at the Pacific Research Institute, where Mr. Abramyan is a public policy fellow. They are the authors of "Jackpot Justice: The True Cost of America's Tort System," which was released today.

Struggle for Shelter

Curb costs by scrapping onerous wage, environmental regulations
The Press-Enterprise (original)
Sunday, February 18, 2007
By Hovannes Abramyan

Last November, voters approved Prop. 1C, a $2.9 billion bond aimed at increasing affordable housing in California. Though well-intentioned, the bond does not address the manageable factors contributing to the high price of housing in the Golden State. A true solution requires tackling the regulatory cost drivers.

According to the California Association of Realtors, the median California home price in 2006 was approximately $560,000. In certain areas of the state, the median price approaches $1.5 million. Though consumer demand plays an obvious role in determining the price of a home in a given area, a number of man-made supply-side factors contribute to high home prices.

Construction costs have increased, due in part to prevailing-wage laws currently on the books. California's Code of Regulations requires that prevailing wages -- the wage paid in the largest city in the county to a majority of workers in that profession -- be paid to workers on publicly funded construction projects, including nearly all affordable-housing projects.

A study by the California Institute for County Governments found that prevailing wages are typically 36 percent to 55 percent higher than market wages. These higher wages cause higher construction costs, which then result in fewer affordable homes. A 2004 study from the UC Berkeley Program on Housing and Urban Policy estimates that the additional cost imposed from paying prevailing wages ranges from 9 percent to 32 percent.

The study also estimates a loss of more than 2,600 low-income housing units each year from prevailing-wage requirements. Repealing SB 975, the bill that requires the payment of prevailing wages on publicly funded projects, would significantly reduce high construction costs that discourage developers from building more affordable housing.

Another cost driver is environmental regulations, such as the California Environmental Quality Act. Labor unions often use these complex regulations to leverage developers into signing project labor agreements to use only higher-paid union labor in construction, increasing building costs.

Developers often accept project labor agreements in order to avoid endless litigation and red tape challenging compliance with onerous environmental requirements. California Unions for Reliable Energy recently deployed this "greenmail" tactic to prevent the construction of two power plants. Had this been successful, the added costs would have been passed on to consumers in the form of higher electric bills.

"Greenmail" increases the cost of construction and reduces the supply of affordable housing. Housing prices, however, aren't determined solely on the basis of construction costs. A recent study by the National Bureau of Economic Research found that construction costs represent half, or less, of a home's price in high-cost cities.

The remainder is due in large part to zoning regulations that seek to curb development and control growth but force land values to increase. Even inclusionary zoning laws -- requiring a certain share of construction to go to housing for moderate to low-income families -- contribute to the housing shortage.

Inclusionary zoning laws discourage developers from building in areas most in need of low-income housing. In the average city, new construction decreases by 31 percent in the year after the adoption of inclusionary zoning.

Eliminating harmful zoning and growth-control regulations would increase the supply of housing and make prices more affordable. Numerous studies measuring the impact of zoning and growth regulations on prices in California have confirmed this effect. One recent study examining the effect of moving from less-stringent to more-stringent regulations found that rents increased by 9 percent to 26 percent.

The $2.9 billion bond of Prop. 1C won't lower housing costs as long as regulatory hurdles stand in the way. Californians should demand that lawmakers remove these costly, man-made obstructions rather than open their pocketbooks every time there is need for a public bailout. The only practical, long-term solution is to remove intrusive government regulations and let developers help people who need affordable housing.

Hovannes Abramyan is a public policy fellow at the Pacific Research Institute in San Francisco.

Lawsuit Lunacy

The Washington Times (original)
Sunday, September 17, 2006
By Lawrence J. McQuillan and Hovannes Abramyan

Type "accident" into Google and you'll be barraged by personal injury lawyers advertising things like "Cash for accident victims." Whether you've slipped on your neighbor's doorstep or burned your tongue on a scalding pickle, money-hungry tort lawyers want to cash in on your injury.

A few weeks ago, a woman initiated a lawsuit after someone spilled flaming rum on her in a bar.

Instead of suing the person responsible for spilling the rum, the woman decided to sue Bacardi. The reason, she claims, is that the spirit-maker's product is defective.

A tort is a wrongful action by one party that results in injury to another. Tort law serves an important purpose -- to compensate victims for their injuries. But today, tort law is routinely abused by people just looking for a payday, often seeking damages far in excess of their actual injuries.

When the fiance of a Chicago attorney broke off their engagement, the jilted betrothed did what any tort lawyer would do: She sued him, claiming his caddish move cost her lost income, psychiatric expenses, and pain and suffering. A jury bought her sob story, and awarded her $178,000 in damages.

Even when juries don't award ridiculous damages, defending oneself against these silly suits can cost thousands or even hundreds of thousands of dollars. A death-row inmate in California sued a writer for $60 million for writing a book about him. Claiming he was not guilty of 16 murders, the inmate whined that the book's characterization "defamed his good name," causing him to be "shunned by society."

The case was thrown out after a record 46 seconds, but the writer's publisher incurred $30,000 in legal defense fees.

Some cases are settled for high sums, because the defendants don't want to spend the time and money in court -- or they don't feel completely confident risking larger awards in court, even if the odds are strongly in their favor.

Cases can take two to three years to be resolved, and much longer if appealed. That costs the taxpayers money, and it ties up court availability, meaning honest people with legitimate claims have to wait for compensation behind opportunistic plaintiffs and their mercenary lawyers.

And there's the dissuasion factor. People who practice professions like medicine, for example, where the possibility something may go wrong is ever-present, are especially vulnerable to lawsuit abuse. The risk of an excessive or meritless suit discourages many good, honest doctors from practicing.

When Hazel Norton of Mississippi read about a class-action suit filed on behalf of patients taking the prescription drug Propulsid, she thought, "I might get a couple of thousand dollars" though she "didn't get hurt by Propulsid." This led to her doctor being named in the suit, and ultimately his and his pediatrician wife's decision to leave their medical practice.

In some medical professions -- like women's health -- excessive lawsuits have created an outright crisis. The American College of Obstetricians and Gynecologists (ACOG) reports that more than 76 percent of ACOG Fellows have been sued at least once.

Even though ob-gyns win over 80 percent of the cases that go to trial, the fear of being sued is devastating the profession: 1 in 7 ACOG Fellows surveyed had stopped practicing obstetrics. Meanwhile, medical students choose other fields. The upshot? It's extremely difficult to find an ob-gyn willing to perform a high-risk procedure today.

In 2000, the President's Council of Economic Advisers estimated the excessive costs of the tort system nationwide were $136 billion -- equivalent to a 3 percent tax on wages. Using their methodology, excessive costs would today exceed $198 billion, representing a yearly tax of $2,654 on a family of four.

Fortunately, there is a way to curb the costs of these crazy cases. States can impose a monetary cap on impossible-to-quantify damages, like "pain and suffering." They can also create financial penalties to discourage lawyers from consistently filing frivolous lawsuits.

In the meantime, we taxpayers will continue to pay for people like Jerry Mersereau, who recently fell off a cliff in a national park while trying to find a place to urinate in the middle of the night. Mr. Mersereau is suing the U.S. government for the "mental anguish" caused by his fall.

Tort abuse would be funny if it weren't so costly for the rest of us.

Lawrence J. McQuillan is director of business and economic studies and Hovannes Abramyan is public policy fellow at the Pacific Research Institute in San Francisco.