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Monday, June 1, 2009

The Fallacy of Suing the Government

There was an interesting story in the mainstream media recently. A man claims that he was improperly beaten by police. He is now suing the NYC government for millions of dollars.

Normally, police get at worst a slap on the wrist when they are caught committing misconduct. In this case, there were some criminal charges filed against the policeman. Even if convicted, the penalty will be far less than if the roles were reversed and the man had beaten a policeman.

Notice that the man is not suing the individual police officers. The man is suing the NYC government. Suppose the case goes to trial, and the man wins a verdict of $2M, or he settles the lawsuit. In that case, everyone else living in NYC pays higher taxes to compensate for the verdict. Using the example of a $2M verdict and 10M people living in NYC, then everyone living in NYC would pay $0.20 in higher taxes to pay for the verdict.

You might say "Big deal, $0.20!", but when you add up all the abuses of the State it's a substantial amount of money. Stealing $0.20 from everyone living in NYC is only practical when the theft is backed by State violence. If you had to go door-to-door and violently demand $0.20 in tribute, then the theft would be impractical.

Saying "The NYC government should pay $2M to compensate the victim!" is logically equivalent to saying "Everyone living in NYC pays $0.20 to compensate the victim!"

Even if the man did sue the individual police officers, their union contract probably specifies that the NYC government reimburses them for any losses. In this manner, suing a State agent for misconduct is impossible. Even if you sue and win, the State is able to pass the cost on to the cattle in the form of higher taxes.

Alternatively, suppose the people working in the NYPD had to personally pay the $2M via a payroll deduction. In that case, there would be a real incentive for the police to crack down on misconduct. In the present, the cost of the lawsuit is paid by the NY government's general budget. If you're a policeman, and one of your coworkers does something wrong, you aren't adversely affected.

In a true free market, when a worker commits negligence or misconduct while on the job, then he and his employer are personally liable for the loss. If you are working for a free market business or you are the owner, and someone commits misconduct, then you might lose your job or your business. When a State agent commits negligence or fraud, the cost is paid by the taxpayers/cattle. The cost of the fraud/theft is paid by the people who were robbed in the first place!

Similarly, a large corporation is a branch of the government. When executives commit misconduct and get caught, the corporation reimburses them for the loss. Executives only face personal liability when their misconduct is so bad that the corporation goes bankrupt, as occurred with Enron. When shareholders sue executives for misconduct, the executives defend themselves with the shareholders' money! Unless the misconduct is truly egregious, executives usually get away with it. For recent high-profile failures such as Bear Stearns, Lehman Brothers, AIG, GM, etc., the executives faced no personal liability at all. They merely claim "We made a mistake. We didn't mess up on purpose. We followed the laws (which our lobbyists wrote)." The rules of the monetary system guarantee periodic severe crises.

Corporate executives typically purchase liability insurance. In many ways, the outcomes of the legal system are random, so this is considered to be an insurable risk. The insurance is paid by the corporation, so the cost is borne by shareholders and customers. All large corporations purchase such insurance, and the cost is paid by customers in the form of higher prices.

In a true free market, you would be unable to purchase insurance protecting yourself in the event of fraud or misconduct. You can purchase insurance to guard against accidents or small mistakes, but not deliberate fraud or gross negligence. The punitive damages would be so high to make such insurance unprofitable.

Further, corporate executives have successfully lobbied for "tort reform", further limiting the corporate liability. The argument for "tort reform" is "Corporations pass on the cost of lawsuits to their customers anyway. Therefore, damages in lawsuits should be limited." This is only a problem because large corporations have a State-licensed monopoly/oligopoly. There is no place in the market for a small well-run business to compete, due to the massive subsidies that large corporations receive.

When the State or a corporation is sued and loses, that merely provides the illusion of justice. The cost of the lawsuit is passed on to taxpayers or customers, in the form of higher taxes or higher prices. The victim receives a windfall, but everyone else pays the cost. The executives responsible for the misconduct almost always keep their high-paying jobs. In this manner, there is no incentive for a State agent to peform his job well, because he is immune from the negative consequences of failure.


Colin D said...

The way I see it:

If John Doe sues the city for $2M and wins, the taxpayers should be pressuring the city to prevent these lawsuits. If there's no pressure, there's no incentive for the city to curb the lawsuits, as the city will simply continue to pass the costs on.

The same is true of companies. When someone sues a company and wins, the company usually must raise its prices some or even perhaps microscopically in order to offset the cost of the lawsuit. If there is no pressure from the other customers, then the company has little incentive to prevent the behavior again, other than perhaps media attention or cause organizations (PETA, EFF, PTC, etc.).

The people who are affected by the tax or price increases must apply pressure or the taxes and prices will just keep going up!

Fivemileshigh said...

A greater underlying fallacy is that the state runs the justice system, and thus rendering a just verdict is unlikely simply because of the conflict of interest. The degree of unlikelihood is directly proportional to the "depth" of the issue, for example you would never get a verdict of "Taxation is immoral" from the state, whereas you are quite likely to get a "FSK was speeding 63 mph instead of 67, therefore he shall pay a $100 fine, not $200" Everyone will say, wow, justice was done, he was charged the correct $100 and not the abusive $200. Nobody will stop to ask hey, exactly who did FSK hurt by doing 67 in a 55 zone on an empty road in the middle of nowhere? Nobody will see that you are asking the robber for justice.

Anonymous said...

@ColinD: Humans are naturally individualistic and do not organise. Taxpayers and shareholders alike have no mechanism by which to apply pressure.

Phone, letters and email? When their daily routines are extremely full there is no recourse. All forms of communication are ignored.

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