|
Event Transcript
January 23, 2003
Understanding Asbestos Litigation: The Genesis, Scope, and Impact
MR. WOOTTON: My name is Jim Wootton and I am the President of the Institute for Legal Reform here at the U.S. Chamber and on behalf of the Chamber we want to welcome everybody for coming today and engaging in this very important conversation about the sources and perhaps some of the solutions to the asbestos problem that is facing American industry today.
The subject of asbestos is a very complicated one for people who are in the legal reform business because on the one hand, unlike almost any other substance perhaps except lead paint, it is a substance that is no longer used in any way that would make it a continuing problem. But it is a continuing problem because of either exposure during the time that it was used or what has now become more troubling, it has become part of sort of litigation industry that is prolonging the life of the asbestos compensation puzzle, beyond what most people expected. Most people expected that the demographics of asbestos would mean that there would be an end, because people who were exposed, they would age, they would be out of the work force, whoever had a latent problem would be discovered and they would be compensated. And now with new litigation techniques and new recruiting techniques, this problem seems to be expanding at a time when a lot of people predicted it would not be.
It has become such a crisis for some companies that their stock price has been very adversely affected. The future of some companies has been placed in doubt because of what they can expect to be demanded of them in a compensation system that is operating in the tort system today.
And so there is a very concerted effort on the part of policy makers and now I think appreciated by both sides of the aisle and all political persuasions that needs to be some reformation of how we compensate people who have a disease that is associated with asbestos.
Lots of people are in the midst of trying to find that solution, it is illusive, there have been plenty of press reports about how difficult a search for that solution is, but I think it is fair to say that this conversation here today should contribute to that debate.
One of the things that I think a lot of people are experiencing is that they don’t even really understand the issues involved in the problems that have to be solved and this kind of conversation is going to support that search.
We are particularly grateful for people from the hill joining us today. You all are hearing from lots of different people about what you might be asked to do in the coming months in this area and it will, I hope, benefit you to be better informed about the issue and about what needs to be dealt with to solve the problem.
I am always grateful for Judy Pendell who makes putting these programs together seem effortless. I know it is a little bit like watching the duck go across the top of the pond, it looks very serene on the surface, but there is an awful lot of activity under the water. Judy is responsible for that activity and I think her credibility with the academic community and the policy making community is what makes her involvement in our program here at the chamber so productive.
She is currently a senior fellow at the Manhattan Institute, dealing mostly with legal reform and she is a help to us here at the chamber in shaping our research program.
Judy is going to be the moderator of the panel and she is going to do the introductions and without further adieu, Judy. Thank you all.
MS. PENDELL: Thank you. I will just say before we begin, that I have been working on legal reform since 1982, and this is an interesting issue because it has had a life in many stages of that 20 year time span, where it has been high on people’s screens, it has been addressed by the congress and then it has sort of taken a back burner because of expectations that it was nearing resolution. But now it definitely has a new life and I am hoping that for those of you that are new to this issue, some of you are here who I know who have been working on this issue for a long time. This will be a useful perspective on what is happening in the courts today and out of the courts, relative to asbestos.
A couple of words about format. Each one of our speakers representing the research organizations will present their findings and then we will take questions only relative to that study. The bigger question, like how did this happen, we would like to have you hold to the end of the presenters.
I would like to also say that Dr. Steven Carroll, who was to be part of this program from Rand was taken ill and he will not be participating today, but Deborah Hensler will be doing all the Rand presentation.
After the three studies have been presented to you, our two experts from the bench and from the law schools will give some opening comments, they will join us here on the stage and then we will open it for broad discussion.
I would like you to identify yourself, there will be roving hand mikes here, I would like you to identify yourself and feel free to ask any specific panelist or generally so people can dive in if they have something to say in response to your question. We would prefer you to keep it to questions, a little commentary is fine, but we would like for the benefit of all the people who are attending to hear the good questions and hear what our panelists have to say in response.
This program is being webcast on the Chamber web page. There is an event page on that. So, there are some people who are in front of their computers who are watching this. If they have questions, there is an email address, AsbestosConference@USChamber.com, that’s AsbestosConference@USCHAMBER.com. You can email your questions, they will be presented to me and I will raise the questions with the panelists.
Having told you all of that, our first speaker will be Dr. Deborah Hensler from Rand. She I currently the Judge John W. Ford Professor of Dispute Resolution and Director of the Stanford Center on Conflict & Negotiation at Stanford Law School.
She is continuing as a consultant with Rand, having been with Rand for twenty-eight years. For six of those years she was Director for the Institute for Civil Justice and she was founder of Rand’s Survey Research Group.
She has been conducting research on public policy issues in the civil justice area since 1979 and is without dispute one of the most noted experts in the field of civil justice today.
Her empirical research on dispute resolution in ordinary and complex litigation and tort liability has won her national recognition. She is the recipient of a very long list of honors and awards. Last year she received the Robert P. Kay Law Professor award from the American Bar Association. That’s just one example.
She is a fellow of the American Academy of Political & Social Science. She is on the Editorial Board of the Law & Society Review and is a consulting editor of Psychology – Public Policy & Law. She has a Bachelor’s degree from Hunter College and PhD in political science from MIT. Dr. Deborah Hensler.
DR. HENSLER: Thank you, very much for that gracious introduction, Judy. One of the very positive things of working on civil justice issues over the last quarter of a century now has been the opportunity to get to know and work with Judy Pendell.
I was struck coming into this session by the poster and the title for the conference, Understanding Asbestos Litigation, and I thought to myself, what would I tell somebody in a few words that they needed to know to understand the litigation. So, here is my list, it is big, it is growing, it costs a lot of money and under any scenario it will cost more in the future and most importantly there are significant questions about whether the dollars that are being spent are serving the purposes with the tort system it is supposed to serve.
What I am going to do this morning, hopefully quite quickly is summarize for you the findings of a Rand study on the state of asbestos litigation that has now been ongoing for about two years.
Rand first studied asbestos litigation in the early 1980’s and for many years the Rand figures from our early studies, particularly figures on the cost of asbestos litigation, figured prominently in public policy debates about asbestos litigation and to some extent in case law and judicial opinions on asbestos litigation. But it was not until a few years ago, as concern about asbestos litigation mounted, that Rand was able to raise sufficient funds to take a new look at the asbestos litigation issue.
And even for some of us, like myself, who had been tracking the litigation in the interim, some of our findings have been quite surprising.
A quick profile of asbestos litigation, comparing the figures that we collected in 1982, just after Johns Manville had petitioned for Chapter 11 reorganization and the status of the litigation today, although these figures on the right hand column are already somewhat dated, they are good through the year 2000 when we collected these data. 600,000 claimants and growing, close to 8,500 defendants and growing, total cost to date that we estimate in nominal dollars of $54 billion. Total bankruptcies attributed to asbestos as of our last count, 67. And estimates of future costs by experts who have tried to these estimates, ranging from $145 to $210 billion.
And an important thing to note as you look at this chart, that is to date no one has ever got the estimates of the scope of asbestos litigation right, everyone, including us, has underestimated the scope.
The data that we used in the briefing that I am about to present to you come from a myriad of sources. Some of it is date that we have collected in previous research including research on other mass torts, we have used publicly available data as well as data that we acquired under confidentiality agreements and we have conducted interviews with many of the leading participants in the litigation on the plaintiff’s side as well as on the defense side.
What I want to talk about this morning is what the numbers are behind these profiles, get down a little into the details, speak briefly about why we are in the situation we are today and then end by highlighting some of the consequences that have grabbed the attention of people here in Washington and around the country.
Well, there are a lot of different ways we could talk about the numbers with regard to litigation. We need to think about a lot of different aspects of the litigation, although among the people sitting in this room, you probably focus on one aspect, more than on other aspects, depending on whose interests you represent. So, I want to give you a picture that speaks both about the people who filed claims, who have injuries and about the companies that they filed those claims about. I want to talk about the money that is being spent by the defendants and who that money is going to.
6,000 claimants plus sounds like a huge number of people flowing through the civil justice system, but these numbers in asbestos in asbestos litigation are actually amplified many times over because the typical claimant files against several dozen defendants and courts and those defendants and the plaintiffs’ attorney who represented the plaintiffs, are dealing, therefore, with a massive litigation that really in some respects represents something more than the 600,000.
What has grabbed attention in recent years is that the number of claims filed annually has risen sharply which was not consistent with previous estimates and also that the average severity of the diseases claimed by those people who are filing claims has declined sharply.
This chart shows you graphically the pattern of annual claims filings against five major defendants. They are defendants with very different postures in this litigation. You can see that the size of the caseload varies dramatically for the very largest of the defendants and a defendant down at the bottom of the charge that is only seeing several 1,000 claims filed annually, but the important thing to note is without regard to the posture of these defendants in the litigation, the general trend has been upward and there was a particularly sharp surge towards the end of the 1990’s and on into the year 2000-2001.
An important aspect about the debate about litigation is that it is non malignant claims, and I am going to speak more in a few moments about the nature of claims in this litigation, but it is the non cancer claims that account for the growth in claims in asbestos litigation and among these non cancerous claims are by virtually everyone’s agreement, a large proportion of claims of people who have signs of asbestos injury, they have legally cognizable injuries in most jurisdiction but in ordinary person’s parlance, they are not currently functionally impaired, meaning they are not work disabled and their ability to carry out the functions of daily life is not restricted.
In addition, asbestos litigation which was originally seen as a litigation that came out, of course, the asbestos industry and asbestos products has now moved beyond that industry to a set. In fact, a growing number and growing variety of sectors of the economy. And much of the increase in recent years was indeed outside the traditional purview of asbestos defendants.
The number of defendants has increased sharply. We have been keeping track of firms putting together various lists and we are now up, as you can see, to more than 8,000. Perhaps more important than the sheer number of firms is the fact that we have now identified firms in virtually every sector of the economy that is involved in the litigation.
Now, I want to emphasize that some of the firms in the list of 8,400 have only had a few claims filed against them, whereas some of them have had tens of thousands of claims filed against them and some sectors of the economy have been much less affected than other sectors of the economy. But there has been this steady spread across the economy.
Various people have tried to estimate the cost of asbestos litigation over the last now more than 30 years. We have used these variety of estimates and other data that we had available to us to do our estimates and as you can see we come up with an estimate of about $54 billion. That is money coming directly from insurers, directly from defendants in the form of self insurance or if they have maxed out their insurance company, and we note on this chart that there is an involvement of insurers outside the United States as well.
And for some companies, the amount of money that has been spent on asbestos litigation is now more than a billion.
Where is this money going? Transaction costs have consumed more than half of this money. A famous number in the early Rand study in the 1980’s was that less than 40 cents on the dollar was actually going to asbestos plaintiffs. As we moved into the 1990’s, both defendants’ and plaintiffs’ attorneys with the help of judges were able to develop much more efficient of dealing with asbestos litigation. We will see in a moment what some of the consequences of that efficiency have been. But one consequence that everyone thought they would see as that transaction costs would drop dramatically and we at Rand also expected to find that when we went back to take this new look at asbestos litigation.
Indeed what we have seen is that plaintiffs are taking home somewhat more of the dollars spent than they were in the 1980’s, but not a heck of a lot more. Defendants’ expenses have gone down as they have reutilized their handling of asbestos litigation and as at least in the 90’s they coordinated their defense instead of spending lots of money fighting among themselves, which was what they were doing in the 80’s.
But plaintiff’s attorneys contingent fee arrangements, to the best of our knowledge, have not dropped and so that portion of the money is going to the attorneys leaving plaintiffs, as you can see, with less than half the money.
Now, with the rise of bankruptcies we have seen the development of what are called claimant bankruptcy trusts, as monies or transferred as a part of reorganization plans to plaintiffs and plaintiffs who appear in the future are, therefore, then ordered to claim against a trust. The trusts have done a remarkable job, particularly the Manville Trust of building very efficient procedures and so plaintiffs do collect the lion’s share of the money that is flowing through the trust, but the cost of that for plaintiffs have been that they are collecting pennies on the dollar in terms of the liquidated value, as it is called, of the claim, that is the value of the claim by comparison with what they would get if it were being liquidated in the tort system before the bankruptcy.
And most of the dollars that are being paid out are being paid out to claimants who are not claiming cancer. Now, let me point out on this chart, because I didn’t before, mesothelioma is a truly dreadful cancer. It is a signature disease for asbestos. There is some debate about whether there are ever any causes for it, but generally if you are exposed to asbestos and you have mesothelioma, that’s because of your asbestos exposure.
Other cancers may also be caused by asbestos. Many of those cancers, like lung cancer, do have other causes and so there many be some dispute about whether it was asbestos related. Those cancers together with mesothelioma, as you can see, represent about 10% of the claims that have been resolved to date.
The large group of non malignant claims includes claims of people with asbestosis. Asbestosis is a respiratory disease. It can be severe and its most severe state it can be fatal. In the early years of asbestos litigation, where many of the claims were from shipyard workers who had had very close and long exposure to asbestos, asbestos claimants were seriously ill people who badly needed compensation.
As regulation of asbestos finally kicked in under OSHA, we began to see a decline in exposures in the workplace and the levels of exposure the later workers had to asbestos generally have not produced the kind of severe asbestosis that we saw in previous periods and that is why there is this widely accepted, although we have not be able to come up with statistical data to break down this loose sector, but it is generally accepted that in recent years most of those claimants do not have severe asbestosis.
As you can see the allocation of compensation reflects to some degree the severity of the diseases and so properly the mesothelioma and other cancer claimants do receive more of the compensation dollars then the less seriously injured people. Notwithstanding that, the magnitude of the non malignant claims is so great that the lion’s share of the money that has been spent to date has gone to those people.
How did we get here? This is a very long story, there is lots of reasons, I am going to try and whip through this very quickly, this is the class on sort of asbestos 101. I am going to go through the reasons on this chart.
First of all, asbestos is in many respects a great product, okay, it is versatile, it protects against fire, it was widely used, it was widely used all over the world, it is particularly used in heavy industry. It is estimated that 27 million U.S. workers were exposed to asbestos in industries where there was great exposure between 1940 and 1979.
An unknown number of workers were exposed in other industries in occupations, we do not have good data in the United States, much to my dismay, for exposures outside the so-called high risk industries. And one of the reasons the litigation estimates are so uncertain, is because we are working off these data on exposures from 1940 to 1979. Although we know that there have been exposures since then, from asbestos in place, and in other industries and occupations. And for those of you who are here from the business community, I want to note to you that while Jim Wootton probably talked about the decline in asbestos use and exposure in the United States, that asbestos is still be widely used in other parts of the world. And so those of you, I am teaching my students now in civil procedure, that litigation is global, not just something that arises and occurs in U.S. courts. We ought to be thinking about what is going on in the rest of the world with regard to asbestos exposure as well.
Epidemiologists have estimated close to a quarter of a million of premature deaths through 2009, as a result of this exposure. As I have already indicated, there are a variety of diseases that associated with this exposure. I do want to note that the epidemiologists’ predictions show us having cases identified, cases of asbestos related disease at least through the year 2030 in the United States. So, when Jim talked about expectations about the litigation declining or perhaps even disappearing, the expectations were really that the litigation would stabilize and that defendants who face the litigation would be able to project what their risk would be.
Those who were faced with this litigation and people in the medical system knew that there would be cases appearing for many decades because asbestos related diseases typically are so-called latency diseases. You are exposed now, you may not actually show an injury until forty years from now. And that’s been one of the problems in terms of projecting the diseases.
So, we know there are going to be diseases coming forward. We have some notion as to what the distribution of the diseases will be, what has surprised people is the distribution of the claims.
So, let me move on to telling the story of the litigation, because that’s the key story here. In the beginning, asbestos litigation, in the beginning, the beginning was in the 60’s and 70’s, in the beginning the litigation was very difficult to win from a plaintiff’s perspective. Plaintiff’s face serious obstacles in terms of statutes of limitation. How can you come forward with a disease that you had actually incurred 30 to 40 years ago. The answer in many jurisdictions was that you couldn’t.
And there we key issues about the litigation, what did the defendant know, what was the state of the art at the time that the person was exposed and defendants, of course, used every aspect of the substantive and procedural law to advocate vigorously their case. And plaintiffs lost lots of cases.
But then plaintiffs began to win cases, there were some key substantive law decisions, many states changed their statutes of limitation, so the statute didn’t start to run until you discovered the injury and plaintiffs’ attorneys who brought those first successful cases, learned something very important that has colored all of tort litigation since. And that is the way for plaintiffs, who, generally speaking, have less resources than large corporations to succeed in litigation against corporations, is for attorneys to identify many, many claimants who have the same type of claim, arguably identical, similar, etc., and to bring those claim en masse, and when you bring those claims en masse, you change the risk profile between plaintiffs’ attorneys and defendants.
Plaintiffs’ attorneys who learned that lesson early became the successful leaders of this litigation. And once they learned that lesson, of course, they needed to find more plaintiffs and the way they found more plaintiffs was by helping unions and others support mass medical screenings to see who actually showed signs of exposure. Once those people came forward with signs of exposure, arguably in injury, arguably the statute of limitations started to run and they had to bring those cases.
Since it was a small number of firms that learned these lessons fast, a small number of firms came to represent a very large proportion of plaintiffs in most parts of the country.
Much of the litigation was concentrated initially in jurisdictions where there had been a heavy exposure, jurisdictions, for example, was shipyards, judges tried to get their arms around that litigation and they used the tools of case management to do that. Defendants, looking at their litigation costs in the late 70’s and early 80’s tried to come up with programs that would restrict their litigation exposure risk and offered settlements that reduced their own litigation costs.
And as the first bankruptcy trusts came on line, as I have already said, the bankruptcy trusts tried to control transaction costs, because that was in the interests of the trustees and the beneficiaries of the trust and so we had a set of efficiency efforts and they were successful and they did reduce transaction costs somewhat and they made it a lot cheaper to bring more litigation and in our American free enterprise system, plaintiffs’ attorneys got that message and began to bring more litigation.
The number of law firms with large caseloads of asbestos, think of these, these are product liability claims, allegedly very complicated claims to bring. This chart shows you the number of firms with 100 or more new filings. That number of firms began to grow as other people, other firms began to see that this was a litigation in which you could represent people who arguably needed compensation and you could make a considerable amount of money doing so.
Well, by the 1990’s, courts and parties and plaintiffs’ attorneys have learned that the way you deal with this kind of litigation is to do so-called global settlements. And, so, not surprisingly, the courts and the defendants and at least some of the leading plaintiffs’ attorneys tried to achieve those settlements under the rubric of multi district litigation in the federal courts and ultimately under rule 23. And those attempts to do global settlements failed and failed most spectacularly when the U.S. Supreme Court overturned two settlements that had been seen as models for perhaps bringing about a resolution of this litigation.
And during this period, as federal courts began to act to collect these cases, okay, and when it became clearer that the federal courts were not going to succeed in resolving the cases, filings moved out of the federal courts, where about half of the cases had been during the 1980’s, into the state courts.
And so today, although we are sitting here in Washington talking about this litigation, this is primarily state court litigation.
State courts adopted different procedures, different interpretations of substantive law, different interpretations of venue rules that had affects on asbestos litigation and, not surprisingly, in our federal system where plaintiffs’ attorneys get the first shot of where to ring their case, the cases move to states that were perceived as being the most jurisdiction and to venues within those states that were seen as being most favorable to plaintiffs.
Obviously, defendants get their shot at deciding jurisdiction, they can try and remove cases and they have and they did, but in general this litigation has become increasingly state court litigation through the combination of substantive and procedural rules and judicial practices.
As state courts found themselves facing lots and lots of cases, they use the same tools that the federal courts had used earlier, they used judicial case management, which includes the ability to consolidate cases for pre-trial and sometimes for trial and to handle them as if they were all one humungous thing. And these efforts by judges were often pointed at trying to get control of their own caseload and ignored the effects that they were having on litigation dynamics, which was namely to grow the litigation and the effects more controversially on outcomes which defendants, at least, argue is that the risks to the defendant of facing these huge collection of cases is so great, that they settled the cases for more than the cases would be worth individually and, of course, that simply invites more litigation.
As the attraction of consolidation grew, okay, we had more and more consolidated trials. Now, people sometimes ask, how any trials have there been in this litigation, you are telling us about hundreds of thousands of claims, did any of them ever go to trial. We have actually been trying to track what has been happening at trial as part of the Rand study. You have about 1,600 plaintiffs whose cases actually reach trial in this period 1993 through 2001, this is when we have a good database for doing that, because about two-thirds of those claims were tried in groups. Those 1,600 plaintiffs actually represent 527 trial verdicts, verdicts that cover multiple plaintiffs.
Now, this whole question of consolidated trials has attracted a lot of attention in the last few years. I think it is important to note that when I say two-thirds of claims were tried in groups, when we look very carefully at the data, what we see is that mostly these are small numbers of plaintiffs. These are four plaintiffs, six plaintiffs, who cases arise out of the same work site and these are not class action trials. There are no absent plaintiffs involved. The jury is being asked to decide the fate of the plaintiffs before them. However, when a jury is looking at a set of plaintiffs whose injuries are different from each other, those – the injuries of one plaintiff may shape the jury’s sense of what is gin got happen to another plaintiff. And so we may get verdicts that are different that the verdicts we would have gotten if those plaintiffs were tried individually. Some plaintiffs may be at a disadvantage as a result, and defendants may be at a disadvantage. And, in fact, we could have both things going on in the same trial.
Now, it is the very large trials that have attracted attention. So, far we have really just found sixteen of these during the period, just, I say in quotes, because sixteen is a small number, but altogether it looks like these were procedures that were intended to bind close to 60,000 plaintiffs. Those trials had different outcomes, including some cases that were consolidated and then dismissed and in the report that we are currently working on we will have more to say about those.
In addition, the average verdict, the mean verdict, which includes the effect of the extreme verdicts, rose quite dramatically in the period 1998 to 2001. The increase in the value of asbestosis cases has attracted particular attention in the business community, because these are the cases where there is more debate about the nature of the injury or indeed, whether there is any kind of functional impairment, but it is important to note that the value of mesothelioma cases tripled on average in this period and that although those were a small fraction of the cases, that has contributed to the increase of the costs of this litigation in this period and is one of the things that has grabbed defendants attention.
Well, what are the consequences of all this. I think we are going to speak the rest of the morning about the consequences, so I am just going to highlight some briefly, as I have already said, bankruptcies are becoming more frequent. There is also additional economic impact on defending companies that is sometimes lost in the debate on bankruptcy and perhaps most importantly from a social policy point of view, the compensation for future claimants who, as I have said, are going to appear for several decades more, is at risk.
This just shows the trend in the bankruptcy numbers, the total number doesn’t really convey to you now much growth there has been. Twenty nine of these bankruptcies have been from January 1, 2000.
One of the pieces of the Rand study that my colleague, Steve Carroll, who couldn’t be with us this morning, has been working on is trying to understand what the economic consequences of this litigation is. And it is important when we think of the economic consequences to recognize that defendants who were not in bankruptcy have consequences because of the dollars that they are paying out to asbestos claimants and to their own defense counsel. And economists have different ways of modeling the effect of these kinds of costs on the level of investment and on jobs, and you can see these estimates here on this chart. They are quite substantial numbers.
However, these estimates are an attempt to understand what the effects are on specific defendant companies and economists tell us that if one company doesn’t create jobs, another company may move in and create those jobs, or another company may invest in a product.
And so what we are seeing in the economy may be some shifts in the successes and failures of different companies, and the bottom line is that it is really hard to get a handle on the indirect economic affects of this litigation, but there is reason to believe, certainly, that that’s significant.
Now, why do I say future claimant compensation is at risk? At some point one has to ask the question with this kind of litigation is, is there going to be enough money left to pay these litigants. And to the extent that defendants response to large scale litigation is to go into Chapter 11, we need to look at what has been the experience in the Chapter 11 bankruptcies.
And I think that many people would say that that story has been a success story in the sense of the flexibility with which parties and courts with the help of Congress in this case have used the bankruptcy system to try and deal with asbestos litigation. And we do have working trusts and many of these bankruptcies that represent relatively new petitions are now working towards reorganization plans.
But the history of the trust is sobering and I am showing you here the example of Johns Mansville because it as the leading asbestos producer and bankruptcy trusts and the story very quickly told is that at the beginning of the history of the trust, the trust thought, based on its estimates, it could pay out full value of claims just the way they were being paid in the litigation system with a reduction in transaction costs because it was an administrative scheme and by 2001, the trust was paying 5 cents on the dollar.
I have worked for a long time as many people in the room have on issues having to do with tort litigation, the tort reform wars, etc., and often in those debates, particularly in Washington, but often in state capitals as well, there is as lot of disagreement about the numbers.
One of the things that I find interesting about asbestos litigation and the current policy debate is I believe that there is wide spread agreement about the current state of the litigation as I have described it. Most, if not all of the numbers that I have showed you on these charts are not in dispute.
The only thing on this chart that is somewhat in dispute is the issue about whether future claimant prospects are as certain as I put it here. That is whether they are at risk because some plaintiff attorneys have told me, there are lots of other defendant companies or potential defendant companies out there and, therefore, sixty odd bankruptcy while sobering is not the end of the story. However, other plaintiffs’ attorneys are seriously concerned about whether there will be any money left on the table when future claimants come forward, having discovered their diseases.
What the disagreement is about in my mind is whether the system that I have described is a system, whatever its warts may be, that generally should be a system that is endorsed and supported or whether it is a system that calls for reform. And if it is a system that calls for reform, there is wide spread disagreement currently about what reform would best remedy the problems and how we get to those reforms. And with that, I will end.
MS. PENDELL: Why don’t you stay there. We will take questions now. Are there questions from the audience? I will start with one. Deborah, your next to the last slide said in talking about whether or not there will be enough money there for future claimants and you commented that the plaintiffs bar in many cases feel that are lots of other defendants out there. Legitimate defendants?
DR. HENSLER: Well, I think the issue is how far can you reach under substantive court doctrine to defendants. There are cases, as you know, in which an attempt is being made to sue some insurers directly on the theory that the insurers knew that the defendants were exposing their workers to asbestos, are those legitimate claims or not? The court is going to decide that. Clearly if they were judged legitimate that would have very substantial import.
What about defendants who are in the chain of distribution? What about the whole notion of premises liability, this growing component of the caseload in which workers are suing the property owners in a premise on the grounds that there was exposure to litigation? These are real battles and as plaintiffs’ attorneys look to new defendants, they have new theories and those theories will be tested in the courts.
(End of Tape 1, Side A)
(Start of Tape 1, Side B)
…in the interests of their workers or maybe they will decide that their risks are too large and maybe they should seek the protection of Bankruptcy Court.
So, I think that there are questions that ultimately in our system will be decided by law. You have a product and this is one of the things that distinguishes asbestos litigation from other mass torts is that this is not a product that was manufactured or incorporated into products manufactured by a very small number of companies. It is really a ubiquitous product and that sets up a very special sort of litigation dynamic that I don’t think we have seen to date in any other litigation in the United States.
MS. PENDELL: Question?
MR. FESTER: John Fester with the American Forest & Paper Association. Are there any estimates to the quantity of asbestos that is still out there in buildings and structures, etc.?
DR. HENSLER: You mean in the United States?
MR. FESTER: In the United States.
DR. HENSLER: I think they are actually some estimates, but I can’t give them to you today. And the whole issue about what to do about asbestos in place, of course, has been something that has been argued fairly vigorously. There is asbestos in all residences. There was in my old house in Los Angeles, there was asbestos around the heating ducts and I assume that was true in al of the other houses that were from that era. So, there is a fair amount of it.
I can’t tell you in terms of actual bulk of the product. And, of course, knowing how much out there doesn’t give you the answer to the question of how much of exposure is there and then the question, how much injurious exposure is there, because exposure up there, you know, if there were asbestos in a very high ceiling, very well protected, I am not an epidemiologist, by that is clearly quite a different matter from talking about asbestos fibers dripping off an open duct in a factory somewhere.
MR. BRICKMAN: Lester Brickman, Cardozo Law School. Did Rand collect any data that would enable an estimate from a medical point or medical science point of view of the actual numbers of asbestosis current in the United States as compared to the hundreds of thousands of current claims?
DR. HENSLER: My understanding is that no one knows the answer to that question. I have been asking that question. In the report that we are working on currently, the follow on to the report that we issued a couple of months ago, there is going to be a chapter written by an epidemiologist, an epidemiologist who has not been involved in the litigation on either side, who at our request has reviewed the state of the epidemiological literature. And in preparing the September briefing, I asked her that question. I said, well, all right, you know, we know, we think we know what the projection is for mesothelioma case, but that’s not what is in dispute. What is the projection for asbestosis cases? And we don’t seem to have one in the United States. It is not a reportable disease the way mesothelioma is, so we can get the mesothelioma stats from the Center for Disease Control.
And there are other cancer stats but, of course, the problem with the other cancers is that virtually all the other cancers have other causes, and so we don’t necessarily have those data.
And then for this huge number of cases that are non malignancies, we seem to be at a loss. It seems to me and this is not a Rand judgment but a personal judgment, that given the impact, both on people’s lives and on people’s pocketbooks of this litigation, that it is kind of shocking that there hasn’t been any attempt by the public health agencies in the United States to get a better handle on this.
MR. BRICKMAN: A quick follow up. Is it possible the number approach is zero?
DR. HENSLER: Anything is possible. So, that’s a trick question. I think the number, the fraction of non malignant cases that are serious asbestosis cases coming forward today by all reports that I have received from people is very small, including plaintiffs attorneys who represent cases of people who allege asbestosis or pleuroplax, etc. But I have not seen any statistical data and so I don’t know what it is.
While the mike is coming I will say, we tried to get that data from various people who are cooperating with us, with the student and one of the problems is that even those who are willing to share data, the data on the non malignancies have been categorized very differently by different parties and by those same parties, very differently over time. So that it is not clear to me that there actually are those data out there, okay. And my comment about the public health agency is a call for some research on the medical problem.
MR. BEITER: Terry Beiter with the Congressional Budget Office. I gather from the information you presented on the mega trials, that none of those sixteen mega trials reached a verdict. Have they all been dismissed? Are some of them still the courts?
DR. HENSLER: Some of them have reached verdicts. Typically when you have large consolidations, okay, what happens is there is a settlement, sometimes on the courthouse steps. And there is no kind of coherent story that I could tell you about those cases in a table and that’s why I haven’t done that here. And so what we are doing in the report is actually writing a narrative description of a page or so of each of those litigations. Each one of them is to some degree sue generous and I think you need to view those as abhorrent cases. I think it is important not to think that these mega consolidations characterize the system.
At the same time, you need to understand that outcomes of those cases or the prospect that one of those cases would actually go to trial with multiple defendants and thousands of plaintiffs, does have an impact not just on the litigation strategies of the defendants and the plaintiffs’ attorneys who are in that courtroom, but on plaintiffs’ attorneys and defendants who are contemplating whether this is going to happen to the litigation against them.
So, wrong to think that that’s the name of the litigation, as some people have asserted it is, but also wrong to think that litigation in a court in Canowa County, West Virginia is only affecting the outcomes of those cases and those parties.
MS. PENDELL: Okay, we will move on to our next speaker. You will have another shot at Deborah when we finish all of our presentations.
Our next speaker, Jonathan Orszag is the managing director of Sebago Associates, Inc. He previously served as assistant to the U.S. Secretary of Commerce and Director of the Office of Policy & Strategic Planning. Prior to joining the Commerce Department, he served as an Economic Policy Advisor on President Clinton’s National Economic Council.
For his work on individual development accounts, the Corporation for Enterprise Development awarded him its 1999 Leaders Award for forging innovative public policies to expand economic opportunity in America. That is one of a number of honors he has received.
He helped James Carville write his book, We are Right, They are Wrong, a handbook for spirited progressives. He held a number of very important advisory positions including assisting Senator Joseph Lieberman with his 2000 debate with republican vice presidential candidate Richard Chaney.
He has a BA from Princeton and a Masters from Oxford. Dr. Jonathan Orszag.
DR. ORSZAG: Thank you, it is great to be here today. I just want to walk through the findings of a study that I authored jointly with Joe Stigler that won the 2001 Nobel Prize in Economics and my brother, Peter Orszag, who is a senior fellow at Brookings as well as a partner of mine with our firm Sebago Associates.
A number of the facts that are presented at the beginning of my presentation have already been gone through, so I will go through those quite quickly.
As Deborah noted, asbestos claims have skyrocketed in the past decade. These claims are pushing many firms into bankruptcy or at least to the brink of filing for bankruptcy.
What I want to do is highlight that the costs, that the payments that are made claimants, some who are sick and most who appear not to be sick, are not free. And the purpose of our paper is to illuminate those costs that are imposed on workers. Those costs show up in terms of wages, in terms of future employment prospects and in terms of ability to save for retirement.
I am going to jump over the background facts, since you have already heard about them. In terms of the number of firms that have entered into bankruptcy, we compiled a list of all the firms that we could find that have ever been cited as entering into bankruptcy due to asbestos liabilities. We then impose three filters on those firms. We ask, could we find contemporaneous information from either press releases, from the bankruptcy filing, from news reports that suggested that asbestos liabilities played a significant role in the bankruptcy.
We also excluded all non U.S. corporations, partially for simplicity and partially for data issues. And we also excluded subsidiaries of companies to avoid double counting. So, there were some companies where a number of subsidiaries went bankrupt, we didn’t double count those, we actually just counted that as one bankruptcy event. Using these filters we estimated that 61 companies went bankrupt.
I should note that there is a slight discrepancy, but I think it is due to timing from the summer report. Rand actually had sixty bankruptcies so I think we are in line. And given the fact that they didn’t have access to our list of bankrupt companies and we didn’t have access to theirs, it is satisfying from a fact checking point of view that we are coming up with very similar results.
But I think the most important thing, and more important than the actual numbers is the trend. If you look at the trend, it is actually pretty stark here about how rapidly there has been an increase in the number of asbestos related bankruptcies. And if you look at one-quarter of all the firms that have filed for bankruptcies, have done so in the first – did so in the first ten months of 2002, and nearly 60% had done so in the past five years. So, there is a pretty sharp increase in the rate of the number of firms entering into bankruptcy.
It is also important that the firms, that the year before they entered into bankruptcy, employed about 200,000 workers and really the firms that have entered into bankruptcy in recent years, have tended to be larger firms, the 24 firms for which we have data, this is important, of this 60 plus firms that we estimate entered into bankruptcy, we could only obtain data for forty of those using a variety of public sources, including SEC filings, company’s websites and then there is a variety of Compustat and other data sources on employment, but it is important to note that we had data for just 40 of these.
And for the 24 companies for which we had data in the past four years, they employed more than 136,000 workers. So, there is a significant weight towards not only increasing bankruptcies in recent years but these tended to be larger companies as well.
It is also important to note that these are very diverse companies. They are spread out over a wide number of industries, as Debra noted. They are in a number of states that are headquartered in 19 different states, Pennsylvania being the one with the most companies. And then importantly they have facilities in 47 different states across the country. The only ones that we were unable to find, ones with facilities or without facilities were Hawaii, North Dakota and Rhode Island.
It is also important to note the bankrupt firms tend to be highly unionized. Johns Manville reported in its SEC filings that 42% of its workers were unionized in 1981, the year before it declared bankruptcy. Other firms report similarly high numbers. This is an interest factoid in terms of the characteristics of the bankrupt firms.
But the core of our study was about what the impacts were. And one of the impacts is on employment and what we did was for each company we compared their trend in employment to five years before they entered bankruptcy to the change in industry employment during that time period. And for the companies for which we had time series data we found that there were roughly 52,000 lost jobs in that five year period relative to the industry control group.
If you then scale that for the companies for which we don’t have time series data, we get a high end estimate of 60,000. I should highlight that his I just solely for companies that have entered into bankruptcy.
So, we estimate that the employment losses due to asbestos liabilities are roughly in the range of 52,000 to 60,000.
One important thing which Debra highlighted is that full employment in the economy is dictated by macro economic factors, it is not dictated by asbestos liabilities, but nonetheless there are significant transaction costs, transition costs for the workers involved in these layoffs. In particular, one of those types of transition costs is that workers have to go through unemployment spells during those periods of unemployment, they are losing wages and to the extent that those wages reflect their marginal product, it is a loss to the economy.
If you are assuming that the average displaced workers making $40,000 and they are displaced for about a month, the loss of economic activity is roughly in the range of $175 million to $200 million.
There is another cost though. Displaced workers tend to get jobs at lower wages than their previous jobs and they tend to be on a path of future wages that are lower than they otherwise would have been. And if you look at that in terms of net present value terms, we estimate that the loss there is between $1.2 and 2.8 billion. So, the entire costs of these layoffs translates into a $25,000 to $50,000 per laid off worker in that present value terms due to the layoff that is incurred because of the asbestos liabilities.
Another key impact is in terms of stock performance, and this is something Jim mentioned. I mean, this is, I think something that is intuitively obvious to a number of people here that if you look at the market index, that’s the red line that is at the top. The next line is an industry control group, so as you can see, that performed worse than the market as a whole, but much better than the bankrupt companies did. The bankrupt companies performed, obviously, very poorly over this period.
And this has an important effect, as a number of people realized with the Enron debacle that workers are often invested in company stock, the 401k plans are invested in company stock, so as the stock price of the company declines, due to the asbestos liabilities, that workers’ 401Ks also decline.
If you just look at the 401K plans and the per plan participant assets are invested in the company stock, we found that for the companies for which we had data, from five years before bankruptcy to the bankruptcy period, there is a loss of about $8,300 in the 401K. That’s about a 25% decline in the average 401K balance for such workers.
It is important to highlight here that this doesn’t include workers who may have a 401K at a different company that had invested in the company that entered into bankruptcy, who would have also lost retirement assets due to the bankruptcy occurrence.
This loss of assets has real affects on those workers. It is a reduction in ultimate retirement assets of roughly $24,000. This is for a worker who is making $45,000. In terms of how they could offset that, to make sure that they are not in that position of a reduction in retirement assets, they could increase their savings by $720 per year. But, remember, this is somebody making $45,000, so a $720 increase in savings is actually a pretty significant cut in consumption. For any amount of money, you can only do two things, you can save it or you can consume it. So, if you have to increase your savings, that’s a reduction in your annual consumption.
You could also take a reduction in your retirement income as well. You could say, okay, that’s fine, I will just have lower income in retirement. This would translate into a $1,250 loss of income in retirement for somebody who is 45 years old, which is a pretty significant amount for a retiree.
There’s other costs from bankruptcies. These are costs that have – actually the bankruptcy event itself – a number of academic studies have estimated that those costs are roughly between 3 and 6% of the market capitalization. Again, these academic studies are not based on asbestos bankruptcies, they are based on more general large firm bankruptcies. And I think there is a plausible case to be made that asbestos bankruptcies are far more complicated than a typical large firm bankruptcy and so, thus, these may be conservative estimates.
But if you run the numbers then, using this three to six percent of market capitalization, you end up in the range of -- an estimate of direct cost to bankruptcy in the range of $325 to $650 million.
Our study focused largely on the cost to workers at bankrupt firms, but there is also costs to firms that are non bankrupt firms that have significant liabilities. This is something Deborah noted in terms of that there are more and more firms that are being sued and these are more and more what you can call tangential firms, firms that were not hardcore asbestos manufacturers, and so our analysis does not capture the full affects of asbestos liabilities on defendants to date and it doesn’t reflect the future costs of ongoing litigation. And so that would add to whatever numbers.
Deborah presented some evidence that $10 billion in payouts translates into a loss of upper end estimate of 138,000 jobs. That includes both bankrupt and non bankrupt companies. We are looking at just bankrupt companies and coming up with something in the range of 52 to 60,000 jobs. So, again, I am comforted that we are coming up with using completely different methodologies. We used the bottom up methodology, they use a top down methodology and we come up with very similar results.
Before I conclude, I just want to note from an economic perspective the implications that there are more and more tangential firms that are part of the asbestos litigation. From an economic perspective you want to create the incentives, the appropriate incentive affects. And economists generally believe that the costs of monitoring may be excessive and so it is important that the product liability system have the appropriate incentives for firms to monitor their inputs and to monitor to make sure that they do the right thing to provide a safe product.
And as you get more and more to these type tangential firms, the costs of monitoring become very high and that calls into question the current system that we have and pushes people in the direction of reform. And I think that’s very important as people think about reform options, is how do you create a system that creates the right incentive effects. Economists love to talk about incentive effects, but that’s a very important thing. So, when thinking about reform, the incentives for companies to have the right incentives, to create a safe product, to monitor their product appropriately is very essential.
So, to conclude, just with our three facts here, we estimate that the bankruptcies have led to a loss of an estimated 52,000 to 62,000 jobs, we estimate that each displaced worker will lose on an average an estimated $25,000 to $50,000 in wages over his or her career because of the period of unemployment and because of having lower wages for the rest of their working life and the average worker in an asbestos related firm will have lost roughly $8,300 in 401K assets, which represent on an average a roughly 25% decline in that balance.
Thank you, very much.
MS. PENDELL: Thank you, Jonathan. Questions?
MR. FESTER: John Fester with American Forest & Paper Association. You had a slide that showed a spike in bankruptcies over the last two to three years. To what extent is that increase due to the ancillary effect of the recession?
DR. ORSZAG: Well, certainly, I think, when we know – this is something that both Rand and our analysis looked at, we took into account that asbestos played a significant factor. Of course, other factors, the recession played a role. But remember, that chart went back to the 1970’s and we had a severe recession in 1981-1982 we had a recession and 1990-1991, and you don’t see anything close to the sharp increase during those recessions. So, that’s one important factor.
But, obviously, when a Board of Directors makes a decision to enter into bankruptcy, they sit there and they look at their liabilities, they look at future firm performance and the recession plays a part, but the asbestos liability clearly played a significant role for these firms in the increase.
PROF. ROTHSTEIN: I take it that underlying all of this, you might get a grip on the cost to the economy of compensating these claimants. And I guess in doing that, you would also have to add to your very excellent list the cost in products and services, that aren’t put out there because of the hesitancy of companies. But I think there is also something else left out when you are trying to tote up the cost in benefits. And by the way, I take it your assumption is the courts, and I agree with this, are not capable and not supposed to balance costs and benefits to society and that speaks toward having a global settlement from Congress.
But there is, I think, a benefit to society from compensating the claimants. I think it maybe doesn’t compensate for all this, but there is a benefit that you have not counted, and that is, yes, jobs are lost on one side of the equation, but the claimants are getting money and they are spending it and three is a multiplier effect on the economy. I don’t think that is a compensating effect, but it is an effect that should be measured and I wonder if you had looked at that.
DR. ORSZAG: We definitely thought about it and we had words to that effect in our paper. But it is also important to emphasize there, and it is a chart that Deborah showed about the transaction costs associated with those payments, which economists would call an economic loss. That a transfer from the company to the worker does not cause a real loss in economic output, because, you know, a company if it spent dollar and say paid a worker, that worker would go out and pay the dollar and buy clothes and food, etc. If it then pays it to a mesothelioma claimant, that mesothelioma claimant or their families would spend that money.
What happens in the asbestos liabilities though is that there are significant transaction costs. Remember, the plaintiffs are ultimately getting only roughly 40, 50% of the money and so that is a pure economic loss right there and that’s important to emphasize in the context of these costs.
But your more general point, that there are other costs and other benefits, that is absolutely true. We focus narrowly on the cost to workers and, you know, I will continue to emphasize this is solely on the cost to workers, there are benefits to claimants and there are costs that go far beyond this. And I believe the next presentation will get into the cost to communities and the costs in terms of health care, etc. and that’s important as well.
MS. PENDELL: One more question.
MR. BRICKMAN: Lester Brickman, Cardozo Law School. You indicated that you measured job losses up to the point of bankruptcy filing. My anecdotal experience is that job losses continue to occur after filing. Did you make any attempt to estimate job losses post filing?
DR. ORSZAG: The answer is, yes, we did. And I have some of that data which I can share with you, not right now, but I can ultimately share with you. But the key thing is that, remember, a lot of the big firms when bankrupt in the past few years and so much of the data that we had as only through the year 2000, so any – say half our firms, 60% of firms that went bankrupt in the last couple of years, we wouldn’t have data post bankruptcy for those firms. But if you look at the experience of the firms that went bankrupt in the late 1970’s and 1980’s and early 1990’s, they continue to experience a downward trend in employment relative to their industry control group in the years after bankruptcy.
MS. PENDELL: Thank you, John. Our next speaker is Dr. Jesse David, he is a senior consultant at National Economic Research Associates. He has developed economic impact and cost benefit studies of proposed legislation for government agencies including DOT, OSHA, EPA and the Consumer Product Safety Commission. He provided research for a number of projects associated with public utilities in areas including strategies in a restructured market, a metered services market and electricity pricing for forecasting.
He has extensive modeling experience, which he has applied to issues such as electricity market restructuring, rate design for publicly provided services and market definition for industries such as municipal waste disposal, pipelines and water distribution.
He has a Bachelor’s from Brandise and a PhD in economics from Stanford. Dr. David.
DR. DAVID: Thank you, Judy. I would like to thank the Chamber and the Manhattan Institute for inviting us here. We were asked to put on our thinking caps with regard to the information developed by Rand and Sebago and try to broaden the estimate of the impacts and the costs faced by the economy as a result of asbestos liabilities, in particular to address perhaps some of the questions that Prof. Rothstein just raised.
And the way I like to look at it is, in terms of primary effects, which we have just discussed, the obvious effects of asbestos liabilities on the shareholders of the firms and the workers of the firms who perhaps were laid off as a result of those liabilities, but then to look and to sort of the ripple effect throughout the economy, what we are calling secondary effects.
In particular, we are also going to identify some additional costs faced by the workers by firms that face asbestos liabilities and then we are going to look broader into the communities in which those facilities are located into the businesses that provide services to those companies, to business that provide services to the workers and to the local budgets of the state and local governments that may also be affected.
In particular I think it is important to recognize that in addition, as professor Rothstein was mentioning, in addition to the transfer of money between the shareholders or the firms, and the plaintiffs in these cases, there are net losses in economic output as a result of these lawsuits. And this is not just the transaction costs associated with hiring lawyer. Of course as much as we all enjoy being here today, this probably is a cost to the economy because we could be doing something else more productive perhaps, if asbestos lawsuits weren’t so prevalent.
So, it is those other types of costs that we are going to consider that really are a net loss to the economy, that have absolutely nothing to do with compensating the plaintiffs, whether they deserve it or not, that is just not an issue that we are addressing.
So, the starting point of our analysis is the same 50 to 60,000 workers roughly that have been estimated to have been displaced by asbestos related lawsuits, as Jonathan was describing. We wanted to put a face on these workers, try to understand a little bit more about their situation and the situation of the communities in which they were employed.
Largely these firms are in what we are calling non durables manufacturers. The firms that actually went bankrupt or have gone bankrupt to date largely, of course, asbestos manufacturers, insulation manufacturers, plastic manufacturers, but also there have been a number of firms that have been named significant defendants in durables related sectors such as steel mills and shipyards. So there is a pretty broad sector of the economy that has been affected, but really it has been focused, of course, on asbestos, mineral wool and insulation companies.
In fact, many, we went in and actually looked at the facilities that had been affected by the 60 or so bankruptcies, we identified roughly 100 facilities that had experienced mass layoffs for complete shutdown and identified the communities in which those facilities were located. The average population of the community was just over 100,000 people, but, in fact, there were a few in rather large locations. And, in fact, for the most part, these facilities were located in very small communities, under 25,000 people for the median facility.
So, we are talking about small communities where the effect of a large mass layoff could have rather larger effects than one might expect across the economy as a whole or in large cities.
Next we took a look at the workers in the manufacturing industries and in the durable manufacturing industries in particular and tried to identify what the typical worker was who had been displaced. Generally speaking, we are talking about blue collar trades, relatively low skilled workers with perhaps less than the average prospect for reemployment. The average salary of these workers was under $30,000 a year in those particular industries, roughly over the last ten years.
So, we are talking, like I say, about workers who may have more difficulty than average within the economy of finding further employment, both because of where they are located, perhaps isolated from other large employment opportunities and also because of a low level of training and education.
So then we used some data from the Bureau of Labor Statistics, the Displaced Worker Survey, to try to identify what the actual reemployment prospects were for these workers. We found that after two to three years, roughly a quarter of them had not found employment. We are talking about 10% and we are still searching after two to three years and another fourteen, roughly 14% that actually stopped searching and officially according to the BLS dropped out of the labor force entirely.
So the facts that these layoffs occurred, didn’t just necessarily cause temporary unemployment for a few weeks for everybody, there were some people who were facing significant long term unemployment.
Among the group that was reemployed after two to three years, the 75% or so, the average unemployment period was actually about 10 weeks. And, in fact, a large chunk of those workers were unemployed for longer than six months and when they weren’t reemployed, as Jonathan mentioned, they tend to earn less at their new jobs, at least for several years. These numbers are actually slightly different than those reported by Sebago because of our particular focus on a couple of industries. In fact, it appears that the workers in those industries are probably, like I said, less likely to be reemployed and when they do get reemployed, it will be at a lower rate than perhaps the typical adjustment that a typical worker in the economy is going to face.
So, this is a group of workers that we are talking about. Let’s now try to think of some additional costs that they are going to face, in addition to the loss in wages that Sebago reported and some of the other obvious costs that perhaps we could identify.
First off, because these are workers that are typically low skilled with relatively little training and a few years on the job, in many cases they are going to need retraining in order to find that employment. Roughly half, 42% of manufacturing workers who are displaced from their job, do participate in training programs, we found there have been a couple of recent studies published on this and the typical program costs roughly $2,000 to $3,000. So, we are talking about a net cost right there of about another $50 million to date based on the number of lost jobs in the 50 to 60,0000 range, as mentioned by Jonathan earlier.
Now, who is bearing these costs? These are probably going to be shared across the economy, the workers themselves in some cases pay for training, the companies sometimes offer training programs for reemployment and, of course, the taxpayer ends up picking up a large chunk of it.
Another impact that we examined was related to the effect on health care provision for workers who lose their jobs at these types of companies. We identified the cost of health care for a typical family served by their employer at about $160 a month. Once you move to an individual plan, if that’s what you are forced to take up after being unemployed, we are looking at an increase of over $300 a month in health costs. Now this, for example, would apply to anybody who was not able to obtain a COBRA plan after being unemployed. And, in fact, we found, I believe, only about 20% of displaced workers do participate in COBRA. And I would say also, a note, that this is compared to perhaps unemployment benefits, this is a large chunk of money, actually about over 50% of unemployment benefits could be spent on a health care plan if the family chose to participate in an individual plan.
In terms of the actual monetary cost to date for those 50 to 60,000 workers, we are not talking about necessarily a huge amount, given the participation rates in these health cares, maybe another $30 million on top of costs that we have already discussed. And, of course, now this is an actual net additional cost to the economy. But, perhaps, more importantly, we are talking about a lot of families, perhaps as many as 50% that don’t take health care at all during their period of unemployment and we want to consider what the impact that might have on the economy, including increased reliance on emergency care, increased incidence of illness due to lack of preventative care and, of course, any costs that they do incur typically will, again, tend to be passed on to taxpayers around the country. So, that’s something to consider.
Obviously a mitigating factor here is unemployment insurance, which we would be remiss if we didn’t discuss the average unemployment benefits, roughly about $200 a week for the workers that we are talking about here. As I mentioned, that’s, in itself, really only about twice what the cost of an individual health care plan is, so we are talking only very partial compensation, also only about half the offset of the lost earnings. So, clearly these workers are not made whole by unemployment insurance.
The net transfer from taxpayers for workers to date, we are looking at about $80 million and, of course, that’s all picked up by taxpayers again.
So, these were a couple of the types of costs and by no means, of course, is this list exhaustive, that may be faced by the workers themselves. But then we wanted to broaden the circle and examine how the sort of ripple effect moves through the economy.
And, in fact, three are certain types of models that economists have developed to identify the regional impacts of layoffs and losses of income. These types of impacts we generally group into two categories. We’ve got indirect impacts which are going to be the losses in income for businesses that supply the facilities in question, you know, construction trades, administration services, other types of supply and also a second type of effect called an induced effect or a multiplier effect which is as the income, as wages and income are lost to the workers, they are spending in the local economy decreases and that has a ripple effects throughout businesses within the region.
Three are a number of models that have been developed to identify these types of costs and impacts. We used two of them. We first used a model that I won’t really discuss much here to get a sampling of the 100 or so facilities that have been affected and attempt to identify sort of what an average affect was.
We then picked a location, which I will discuss in a moment as a typical location that was affected and applied a model known as REM, Regional Economic Model, which is a state of the art model that estimates these downstream impact from lost income and lost jobs.
Of course, the magnitude of that effect is really going to be very dependent on the community that is examined. Typically, smaller communities in some ways can be affected to a great extent because three may be some local services that are more dependent on the facility in question. In other cases, depending on the pattern of commuting and migration of the workers, they may be affected to lesser extent if most money is spent outside of that community, so it really is a idiosyncratic type of effect. But overall we found that for every ten jobs lost to the local economy due to a layoff, an asbestos related layoff, an additional eight local jobs were also lost in other types of services that provided support both for the facility in question and for those workers.
We then, as I mentioned, picked, and a particular example may hit home, I saw a couple of people here from Owens and from Corning, in 2000 Owens Corning laid off 275 workers in a plant in Ohio. We took Lincoln County Ohio and we found that that was fairly typical of the size and urbanization of the communities affected by asbestos layoffs and we used the REM model to understand what the overall effect was to Lincoln County.
Overall, as a result of these 275 layoffs, the REM model predicted an additional number of layoffs in lost jobs in other services. 77 lost jobs in local services, we are talking about medical services, financial services, local banks, local dentists, that sort of thing. Another sixty lost jobs in retail trade, we are talking about food and beverage establishments, local drug stores, that sort of thing and 48 jobs lost in local construction, electrical and carpentry trades that supply the facility and other types of services like that. Overall about 500 lost jobs in Lincoln County as a result of these layoffs. So, we are seeing this ripple effect. 275 workers at the firm in question, but they are not just the ones that are paying the price here. We’ve got another roughly eight jobs for every ten lost at the Owens Corning facility.
The REM model predicted that total output within the county would be reduced by approximately $60 million annually, and as a consequence of the reduction in total output and the reduction in jobs, in fact, about one out of every two workers is going to move out of the county, one of every two of the displaced workers would move out of the county. The net effect in terms of local income, a reduction of about $15 to $20 million for this county.
Now, we are talking about a county of, you know, 150,000 or so people, not a large community. This could be a significant effect.
So, in summary, to try to understand these questions, any reduction in local employment and income is going to be magnified by this multiplier effect. Trades and services that initially you think would have nothing to do with asbestos related liabilities will also suffer locally. In fact, if you take the roughly $1 to $2 billion reduction in income, due to just the temporary unemployment costs and the reductions in future earnings, we are talking about an additional half a billion to roughly two billion in costs due to the multiplier effect. So, essentially, you can take any loss and multiply it roughly by two, to understand what the total effect on the economy is going to be. That’s what these models are telling us.
However, I should point out that this $1 or $2 billion are the net costs due to this lost, temporary loss in employment. In fact, for the particular communities in question, they may be impacted much more severely while, of course, the economy as a whole, there may be an adjustment mechanism where jobs are generated somewhere else. So, it is important to identify the impact that you are trying to analyze or you are looking at the impact of a specific group of people or are you looking on the impact on the economy as a whole. It is really two very different questions.
Another effect on local economies will also be felt through real estate values. There has been a fair bit of economics research on the impact of population –
(End of Tape 1, Side B)
(Start of Tape 2, Side A)
- and income changes on local real estate. And, in fact, what the effect that mass layoffs might have on those owners of local real estate. Basically to summarize that type of literature, the average income effect, as we call it here, is roughly about .2, which basically means each dollar in local income lost in a small community, I guess you could say, I think most of the research is done on the MSA level, each loss in one dollar of local income will – excuse me, 1% reduction in local income will result in roughly a 2/10ths of a percent reduction in local real estate values. We are talking everybody, all residential and commercial real estate in the region.
The population effect is actually much stronger. For each reduction of say ten workers in an area that move out because of a mass layoff, you are going to get an effect that is about 10% greater than that or 1.1 times that effect on local real estate values. So, a 1% reduction in local population would lead to a 1.1% reduction in local real estate values, other things being held equal.
Just to go back to our example of Lincoln County, we took a look at what real estate values were there. Per capita income effect and population effect and how those would affect the real estate values. In this particular case the 500 lost jobs and the roughly 250 people leaving the area result in per capita income and population declines of roughly 1/10 of 1%. It may not sound like a big number but when you apply that to the value, now this is just residential real estate in this case, we are looking about a $5 to $10 million reduction in local real estate value. And, in fact, you are going to find that for smaller communities the effect would be even larger on a percentage basis.
In fact, that is a pretty good size reduction. We are talking about an additional $20 to $40,000 reduction in local real estate value for each worker laid off at that facility.
Intuitively, one might think the next cost that you might want to look at is how are these types of impacts going to affect local budgeting, state budgeting and even federal taxpayer issues. Now, we didn’t attempt to quantify these because there is so much disparity between the types of local tax structures. But it is clear that falling property values are going to affect local tax collections. On the other hand, there may be some offsets due to the reduced local population expenditures may fall clearly sales tax collections in those localities as well as the states as a whole will be reduced.
And I would point out that actually the bankruptcies themselves can actually impact the payment of taxes from the effected firms, usually temporarily, of course, but there can be some significant local budgetary impacts.
And, of course, obviously, the rest of us end up paying for a lot of these types of expenses, such as unemployment insurance, training and those sorts of things.
So, to conclude quickly here, it is important to recognize that asbestos liabilities impose costs, not just on the intuitively obvious shareholders and even the workers at the firm who perhaps one might say that they are the ones who ought to bear these costs, there are additional costs that generally don’t get considered, such as training and health care costs that might occur during the transition.
Local communities can also be hit very hard, depending on the size and makeup of the structure of industry within those communities. As local businesses are hurt, as people are moving out of town, and as jobs are lost and as local income is reduced, local property values are going to fall, and, of course, local governments may face declines in revenues and their ability to produce the services that they are here for.
And then, of course, as I mentioned, a big chunk of these costs are passed on in forms of, in the form of higher payroll and income taxes to the rest of us.
I would say, the numbers that we are talking about here, of course, are just the costs to date. It is estimated that we may have only seen roughly a quarter to a third or even less of the total cost as these law suits continue to escalate, so in any kind of economic analysis it is important to think about not just the workers and shareholders are going to be affected, but the communities and other businesses that are also going to be affected downstream of those affects.
MS. PENDELL: Thank you, very much. Questions?
PROF. ROTHSTEIN: To some extent (unintelligible) because (unintelligible), the cost of the asbestos compensation system is a tremendous cost to the economy. It is ruining the industrial base, especially it is hurting future claimants who might really be sick and that these costs far outweigh the benefits, especially today where we are compensating people who aren’t really sick. But I am interested in getting all the costs and benefits out on the table. And Deborah, Jonathan and Jesse have done a very good job of this. But I think a couple of things still have been overlooked.
Jonathan said to me that we have to count the transaction costs as a net minus, but somebody is getting that money, the lawyers primarily and they are spending it, buying Mercedes and things. So, I think that has to be counted. I don’t think it is going to make a huge difference, but I think it has to be counted.
And then, also, you have to count as a benefit of the compensation system the injured people, if there are still injured people in the system. Injured people are, by getting an award returned to working and being productive members of society and earning wages which they are then spending and buying things and buying real estate and paying taxes. They are spending their award which may be a windfall that they got in the big asbestos lottery, but they are spending that and stoking the fires of business that way, buying real estate and paying taxes.
So, I think to get the complete picture down, we have to count these. I have the feeling that still the costs are hugely disparate and outweigh any benefits. But I wonder if you have done any studies on that.
DR. DAVID: To address the issue of the transaction costs, I think, as you point out rightly, the money isn’t completely flushed down the toilet. But as an economist, I would say that those are still net losses to the economy because any lawyer that is doing asbestos litigation he could have been doing something else. Well, we won’t pass a judgment on how valuable that would have been. But I would have to assume that he would be providing some other service to the economy in the absence of –
PROF. ROTHSTEIN: (unintelligible)
DR. DAVID: Okay, perhaps that lawyer could have also been teaching in the law school instead of pursuing this type of thing, that’s right, so I would say those definitely are still losses.
MS. PENDELL: Thank you, very much. The information you just heard from Jesse, by the way, is being released for the first time today. And both his slides and the slides of both other speakers, in case you haven’t already discovered that, are available outside.
I am going to ask our two commentators to join us up here on the dais now. And while I introduce them. Prof. Paul Rothstein, who you have heard from twice today, teaches at Georgetown Law School. He is well known for his work in evidence on criminal lawsuits and the judicial process from the Supreme Court down. He is well known for his – he is author of Evidence, Cases, Materials and Problems, Evidence in a Nutshell, State & Federal Rules, Federal Rules of Evidence and several other books and over 100 articles.
He has engaged in numerous professional activities, including chair of the ABA Rules of Evidence & Criminal Procedure, board member and education chairman of the FBA and chair of the AALF Evidence Section of the ABA. He is a consultant to the National Conference of Commissioners of Uniform State Laws, the U.S. Congress and the National Academy of Sciences. He is contributing editor to Legal Times, New York Law Journal. And he is perhaps familiar to many of you as a frequent consultant and guest on the major TV networks.
He has a BS and JD from Northwestern and was a Fulbright Scholar at Oxford.
Our other commenter, Judge Dean Trafelet from 1984 to 1988 was a trial judge in the Circuit Court of Cook County Illinois from which he is retired. There he was on special assignment as he presided over a special calendar of numerous complex toxic product liability and environmental insurance coverage matters.
He presided of Inre Asbestos product liability litigation where for over fourteen years he disposed of in excess of 35,000 asbestos lawsuits. He is the court appointed legal representative for all future asbestos personal injury claimants and the Armstrong World Industries, USD Corp. and Flipa Company reorganizations. He is a trustee of the $5 billion American Home Products Phen Phen Trust and of the Amatex Asbestos Product Liability Settlement Trust.
He is the originator of the Asbestos Plural Registry, which has become a model for state and federal courts. He has served as a special federal mediator to the U.S. Bankruptcy Courts in the disposition of thousands of asbestos related claims by seamen. He is an active lecturer and he has taught at Northwestern Law.
With that I will ask Judge Trafelet and Prof. Rothstein to join us and provide us with comments. Paul, would you like to begin?
PROF. ROTHSTEIN: Well, you have heard from me a couple of times already. Should we let the judge start, because you are sick from hearing from me .
JUDGE TRAFELET: I don’t know about that. You may have me stirring the pot a little bit. I have a sense that obviously there is no ready solution and I think that the problems that have been created, there may be some guilt on industry and the solution to work ourselves out of that. I think there are some that are, in fact, in the making.
I think the most important thing is the lessons that we may learn from the asbestos litigation. I think that is particularly the most important. That filters al the way down to the judiciary, which I think there is a lot of fault.
One of the questions that I always like to ask in these symposiums and these discussions, is that, is there an axiom fault in the industry, the asbestos industry and those in manufactured products containing asbestos in toughening it out a little bit too long in taking that stance? Had they made decisions, management decisions earlier, rather than to fight to the bitter end, to realize the scope of the problem? To keep in mind what their corporate strategies would be or corporate strategies were and to fulfill those strategies to not only to the equity of the company but to the employees of that company, might not they have been better off?
I think the more recent bankruptcy, from what I have been able to discern from discussions and my experience currently, getting more involved, is that management has recognized these problems and has made very, very quick changes.
Another segment is the insurance industry and I ask the question to all of us here is, rather than toughening it out, did they not go into just absolute denial and did that obviously, that approach combine with toughening it out? These are questions that exacerbate the entire problem.
| 