ECONOMICS IS NOT FAIR!

–By Stan V. Smith, Ph. D. with Kyle Lauterhahn

“Life expectancy averages are blemished from the start – these tables rely on data from people who have already died.”

From the title of this Quarterly Comment, you might assume that I am going to discuss jarring income inequality or the double taxation of the Estate Tax. While these are important topics deserving thoughtful analysis, in this article I explore the potential shortcomings of straightforward and standard economic issues in litigation.

Statistical Failures

We joke that economists have predicted 9 of the last 7 recessions, but most missed the 2007-09 Great Recession. It is important to remember that forecasting and other practices of economics rely on statistical methods, but often statistical averages and likely reality are not in perfect resonance. For example, if an airline loses a passenger’s pair of running shoes, it makes no sense to send the passenger a replacement pair using an average male shoe size of 10 while failing to see that the address label on the box indicates they are being sent to a Mr. Shaquille O’Neal. The average shoe will not fit. Sometimes this is obvious, and sometimes it is not.

There is another economic joke about the inappropriate use of averages, involving three economists hunting in the north woods. They saw a 12 point buck across an open clearing. The first steadied his bow, took careful aim, and shot an arrow which unfortunately flew five feet to the left. The second took careful aim, but shot five feet to the right. Excitedly, the third threw his arms in the air and said victoriously, “We hit it! We hit it!” Statistically speaking the deer was hit – the average of an arrow five feet to the right and five feet to the left is a bullseye, but in reality the hunters are heading home with nothing to mount on the rec room wall, and no venison sausage for guests.

Yet economists regularly use averages equivalent to the hunting party example. Sometimes this works, but sometimes this does not. When showing the future career earnings for a nursing student wrongfully killed, should the average wages for nurses be considered from start through end of career? Or should an economist demonstrate the earnings starting at an entry level at the below average 25th percentile, and growing over time to an experienced level such as the above average 75th percentile? This is certainly how career earnings work in reality – growing over time as workers grow in experience. An average cannot succinctly summarize a lifetime of earnings, so an economist can instead illustrate how earnings grow throughout a career progression.

Another average which needs a grain of salt is life expectancy. Commonly used life expectancy tables show the average number of years of life for a statistical person, based on age, race, and gender. This calculation offers no consideration for the person living longer, which can have drastic consequences. Take the example of a 30-year-old male – his average life expectancy is 48 more years to age 78. If this man was injured and needed support from a heart and lung machine, presumably an economist would illustrate the cost of his extra-ordinary health needs for another 48 years. But what if he lives longer than average? What if he survives to the 90th percentile of his age group, which is to age 93. Using only an average life expectancy there would not be a provision for 15 years of additional needed care. Should someone be expected to live 15 years without necessary life-sustaining medical attention? Additionally, life expectancy averages are blemished from the start – these tables rely on data from people who have already died. Such backward looking data does not include the opportunities for longer lives which innovations in medical science promise us, along with other factors.

Even more ripe for potential misuse are statistics for average or “expected” work life. Again, this data only shows an average, and does not let one consider the workers who labor longer than average. Also, these tables not only look backward for the probability of being alive, but also look backward for the probability of being in the labor market. In an era where defined-benefit pensions are less common, and people have to rely on their own savings for retirement, current workers will want to work longer to ensure that they are not forced to eat ramen noodles and dog food in their retirement. The important news from the Social Security Administration is that current workers are not only retiring later than ever, they are retiring later than they planned to retire.

Further, these tables do not explain why people are not working. While some people are forced into retirement due to a disabling injury, for many people retirement is a choice. People with the capacity to work may choose not to, but instead voluntarily retire to spend time with family or doing leisure activities. Statistically speaking, the person injured and unable to work is treated the same as the able-bodied person who chooses not to work. Such a statistic does not represent the years of employment which one is capable of working, and thus undercounts the earnings capacity claim in court as provided for by Nevada Jury Instructions and caselaw.

Inequitable Damages

While economics is not always fair, sometimes economists and caselaw regarding economic damages are also not fair. If someone were to knock over a 16th Century Chinese vase at the art gallery in the Bellagio, the curator would quickly come looking for full payment for the destruction of a unique creation. But if that person were instead responsible for the fatal injury of person, another unique creation, under the law in Nevada and many other states the tortfeasor would only have to make payment for the destruction of life itself. They would be responsible for the tangible loss of earnings and services, but the intangible value of the human life would need no compensation. No one would disagree that human life has value, and economists have measured in the marketplace how much we value life, but in a courtroom, where juries are considering the damages in a fatal injury case, life itself has no recoverable value in most states.

Many forensic economists do not provide for a recovery of all losses sustained in injury cases. Aside from courts, a number of economists claim that calculating such intangible damages in fatal injury cases is outside the scope of the field. I find this thinking to be at best lazy, but more likely is intellectually dishonest. Economists measure (using statistics) the exchange of resources in society – this can mean the price of Apple stock, the price of an apple, the cost of time spent peeling an apple, and even the value of life of an apple consumer. The peer-reviewed economic literature on the value of life dates back over 50 years, but some economists who are not aware of this depth of research make false or misleading claims about loss of value of life damages. In fact, the Code of Hammurabi is a precedent for the compensation for the loss of life. Arkansas, Georgia and a few other states, and Section 1983 Civil Rights wrongful death cases also allows for compensation for the value of life itself in death claims. In non-fatal injury, the Nevada Supreme court however allows for the recovery of the partial loss of life in Banks vs. Sunrise Hospital (102 P. 3d 52 (2004)). However, it may be some time before Nevada and other states will allow plaintiffs a full recovery of the value of life in death cases.

Other damages are frequently not considered by economists, such as some of the services provided by a deceased loved one. What about the valuable advice and guidance we receive from family members? Or the value of having someone else present – prisoners receive solitary confinement as a punishment, so clearly time spent with even a stranger is valuable.

While an economist can calculate the value of actual time spent by a decedent performing household chores, what about the very valuable on-call presence the decedent provided when alive? Having a parent as an on-call caretaker to pick up a sick child from school or rush to the emergency room when their spouse is in a vehicle collision is very valuable, and not represented in an average number of hours doing household chores. Many widows tell me that they feel less secure in their homes without their husbands present at night. A husband can provide the services of an on-call resident security guard, and the value of this service can easily be calculated by the economic expert.

A Better World

These problems that I have discussed support that old adage that at times “life is not fair,” but this does not mean that we have to be ignorant and accept inequities. Let’s hope that the ruling adage is instead “The moral arc of the universe is long, but it bends toward justice.”

Stan V. Smith, Ph.D., is VLM’s Quarterly Economics Columnist and president of Smith Economics Group, Ltd., headquartered in Chicago. Trained at the University of Chicago (one of the world’s pre-eminent institutions for the study of economics and the home of the law and economics movement), Smith has also taught at the university and co-authored the first textbook on the subject of economic damages. A nationally-renowned expert in economics who has testified nationwide in personal injury, wrongful death and commercial damages cases, Smith has assisted thousands of law firms in successful results for both plaintiffs and defendants, including the U.S. Department of Justice. To that end, Smith also developed the first course in forensic economics at DePaul University, and pioneered the concept of “hedonic damages,” testifying about the topic in landmark cases. His work has been featured in the ABA Journal, National Law Journal, and on the front page of the Wall Street Journal. Kyle Lauterhahn is a Senior Economic Analyst at Smith Economics Group in Chicago. Smith Economics Group, Ltd., is located at 1165 N. Clark Street, Suite 600, Chicago, IL, 60610. Dr. Smith may be reached at 312-943-1551, and at Stan@SmithEconomics.com.