Is The Economy Strangled By Our Laws?

One of the greatest barriers to productivity is our tendency to sue one another.

Not long ago, an executive of Nippon Steel, the world's largest and most efficient steel company, gave a speech to a group of businessmen I was with in Japan. He started with the observation that Japan has one lawyer for every 10,000 people, while the United States has one lawyer for every 450 people. No wonder Japan is more productive, he said, only half joking.

The Japanese executive didn't realize that he had placed his finger on a real issue in the United States.The American legal system ties up a large part of our labor force -- 600,000 people at last count -- but its burden on our productivity goes well beyond that. America has the most cumbersome adversary legal system in the world.

Among industrial countries, America may have the fewest economic rules and regulations. Try to fire a worker anywhere else in the industrial world, for example. It's easier here. Japanese automobiles and steel mills must meet higher standards for emissions affecting air quality. And almost any factory in northern Europe has tougher standards on industrial workplace safety.

But the delays, uncertainties, and great expense of the American legal system weigh heavily on American industry. Economically, America can't afford to live with its current legal system.

Think about nuclear power projects, for example. If it is completed on its present schedule, which is highly unlikely, the Seabrook nuclear plant north of Boston will have cost $3.12 billion. But only $2.1 billion of that is construction costs. The other $1 billion is interest charges incurred during the course of constructing -- or more accurately, not constructing.

In America, it now takes 12 years to build the average nuclear power plant, and the time is increasing. In Japan it takes 6 years, and the time is decreasing. The difference is almost entirely due to legal delays. And the result is cheaper power and a cost advantage for Japanese industries.

The issue here is not whether nuclear plants should or should not be constructed. The issue is whether we should engage in expensive, lengthy legal battles about building them. The fights only raise costs, and in the end those costs will be paid by businesses and consumers.

The extreme form of the problem can be seen in the MX missile debate. Despite a widespread feeling that the country needed better military preparedness, the most conservative part of the country -- eastern Nevada and western Utah -- balked at locating the MX missile sites there. Claiming that the social and environmental damage would be too great, a tiny percentage of the population could have imposed enough legal delays to kill the MX plan -- whether or not it was the best plan for national security.

If our society can't find a place to put a strategic weapon because of the threat of legal action, how can it hope to locate less popular projects such as dirty industrial operations -- coal gasification plants, for example? For these the opposition will be even more numerous and intense.

Anyone with $200,000 for legal fees can delay any major industrial project for at least five years. The delays drive up legal expenses and the interest costs incurred during construction, but, more important, they dramatically increase uncertainty. No one knows when or if a project will be completed or how much it will cost. Is it any wonder that in the 1970s we quit building major new industrial facilities?

The problems caused by legal delays are often much worse for small businesses than for large ones. I recently sat on the board of directors of a small firm that was being acquired. When a third party intervened, the legal fees and delays ate up a significant part of the gains everyone had hoped to make from the merger.

The Reagan Administration's solution to the problem of delays caused by regulatory disputes is to put people who will do less regulating in charge of the agencies. The plan is unlikely to work. The groups who favor the goals of the regulatory agencies will go to court to have existing laws enforced. In the end, some judge could wind up running every industrial facility in the United States.

It is of course possible to repeal the laws that prescribe a clean environment and a safe workplace, but the legislative process of repeal is a time-consuming use of enormous political capital. Anyway, no one really wants a dirty environment or industrial accidents. What we do want is an economy that can compete with the Germans and the Japanese.

To reach our goal -- a strong, productive economy -- we need to develop nonlegal, nonadversary procedures for resolving disputes. Any such procedure must have four characteristics: speed, certainty, low cost, and finality.

In labor relations we have for years used mediation, arbitration, fact-finding, and other techniques to keep disputes both off the streets and out of the courts. The successes and failures of this process point out the direction in which we need to move.

Instead of relying on antitrust laws to produce a competitive economy, we should remove trade protection, such as that now being offered to the steel industry. This would produce more competition in the steel industry than antitrust legislation has ever brought about.

Instead of writing detailed safety rules, we could prescribe stiff financial penalties -- a large fine -- for every injury or death. This would give firms a strong incentive to operate safely, but allow them the freedom to determine the best ways of doing so.

We compensate coal miners for the risk of going underground, so perhaps we should settle the nuclear power dispute by compensating people for the risks of living near a nuclear plant. What would happen to opposition to nuclear power projects if those living within one mile of a plant were paid $200 a month, those between one and three miles $100 a month, and those between three and six miles $50 a month?

We could invent many ways to replace or modify our current legal system. But part of the problem is not the system, but ourselves. The Japanese environmental agency is not popular, but it has never been sued, by either industrial or environmental groups, because the Japanese have exercised restraint. In America we sue first and think later.

America is a litigious society, and litigious societies are not highly productive societies. We have to understand that we will only become poorer if we keep suing one another.

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