The Cost of Doing Business

Both common sense and academic research suggest a strong correlation between entrepreneurship and economic growth. Yet, the utilization of this important relationship seems to be declining.

Over the last four decades, data shows that fewer Americans are choosing to create their own business. According to the nonpartisan Cato Institute, the U.S. business startup rate – the number of businesses that are less than a year old as a share of all businesses in America – fell from 10 percent in 1980 to 8 percent in 2018. Furthermore, a 2022 Joint Economic Committee Republican report found that entrepreneurship has been declining since the 1970s, as measured by several key factors, including self-employment, productivity growth, and business formation. Unfortunately, the Committee also points out that this decline runs in parallel with a more than 2 point drop in average real Gross Domestic Product (GDP) growth over the same period.

I have discussed in previous articles that younger generations today are more risk-averse than previous generations of Americans. While it may be impossible to know the true extent of that influence on our marketplace, it is highly unlikely that this cultural shift has no impact on the rate of entrepreneurship in our economy today. It is also reasonable to conclude then that risks and uncertain costs in the market likely negatively influence young entrepreneurs to a greater degree than in previous decades.

Thus, uncertainty, red tape, and costs created by government can be a significant deterrent to innovation and entrepreneurial tendencies. Thankfully, the Trump administration and congressional Republicans are focused on removing the barriers created by our federal government that have plagued our economy under the previous administration. For example, the Trump administration is focused on repealing the Biden administration’s onslaught of burdensome regulations. The American Action Forum released a study last year finding that the Biden’s agency rulemaking cost American taxpayers nearly $1.4 trillion dollars. In addition, an impending event seems to be on the minds of many small business owners across country: the expiration of key provisions of the Tax Cuts and Jobs Act (TCJA) in December. The average American taxpayer will face a 22 percent tax hike if Congress does not act before the end of the year.

While these issues are necessary and important for Americans to consider, one risk small business owners face that gets less attention in the media these days is the cost of our tort system.

While tort law can by extremely complex, for the purpose of clarity in this discussion, a tort claim can simply be explained as a civil lawsuit alleging a wrong and harmful act. By making a claim, the injured party can pursue compensation for damages. For most of our nation’s history, our tort system has largely been driven by the common law (a system based on judicial precedent) rather than statutory law drafted by legislators. However, legislatures began to play a bigger role in the system over the latter half of the 20^th Century.

Our judicial system, both civil and criminal, is one of the reasons our economy has flourished. The ability for Americans to seek accountability and compensation when they are injured is critical to our society and our economic system. A fair and functioning court system ensures a safe, predictable, and steady legal structure for our marketplace to thrive.

However, over the last two centuries, tort law has expanded and evolved to not only include the recognition of more types of claims, but the amount of various kinds of damages awarded to plaintiffs have also increased significantly over time. While laws vary from state to state, due to these rising awards, most states have enacted at least some type of reform or limits on certain types of damages under state tort law.

One reason that tort law damages have drawn the attention of legislators around the county is the rising costs to Americans. In late 2022, the Wall Street Journal Editorial Board noted a U.S. Chamber of Commerce Institute for Legal Reform report which found that the total economic cost of the American tort system totaled nearly half-a-trillion dollars – that amounts to over 2 percent of our Gross Domestic Product (GDP) or over $3,600 per household. While these numbers are staggering when looking at the country as a whole, the impact on states and communities can be equally as exorbitant.

The State of Oklahoma is a great example of how the economic costs of an excessive tort system can accumulate. The Oklahoma State Chamber Research Foundation and the Perryman Group released an analysis of the fiscal and economic impacts of excessive costs in the state following the Oklahoma Supreme Court’s decision to strike down the state’s cap on noneconomic damages in 2019.

The report found that cumulative losses from excess tort costs in the state amounted to annual losses of more than $3.7 billion in gross product each year. From 2020 through 2023, following the Oklahoma Supreme Court decision, the excess tort costs translated to an estimated cumulative loss of $14.9 billion in gross product. The report also estimated that the cumulative losses over that period resulting from the elimination of noneconomic damages caps alone totaled almost $2.7 billion in gross product.

Ultimately, according to the study, these economic losses meant approximately 32,300 jobs were lost in Oklahoma, including multiplier effects. Plus, these increased business costs didn’t just mean losses for private sector businesses and workers, it also cost state and local tax coffers a loss of $1 billion in tax receipts over the same period. For comparison, the state’s all-time record for gross receipts to the State Treasury was $17.4 billion a few years ago. In other words, a billion dollars is real money for Oklahoma public budgets.

Americans certainly want a justice system where injured parties receive rightful compensation for their harm. However, any system can be abused. Plus, when dealing with awards for less tangible losses such as those generally associated with noneconomic damages, as opposed to more quantifiable financial losses generally associated with economic damages, the possibility for abuse seems to be heightened. Citizens deserve to have their elected policymakers pay adequate attention to these processes to identify any proper boundaries that should be implemented to achieve balance within our system.

Our economy is built on the ingenuity of individuals willing to take an idea and make it a reality in our marketplace. Without entrepreneurship, our economy will not only stagnate, but our world will lose the power of free enterprise to help solve today’s most pressing problems.

While it is easy for policymakers to say that they support free-market economics on a campaign flier, it takes much more diligence to identify areas for reform and make the tough decisions necessary to make them happen within our public policy process. However, that is exactly the resolve necessary to ensure that innovation and enterprise are not saddled by excessive costs and risks that stifle economic growth and inhibit a generation’s pursuit of the American Dream.