Culver v. Slater Boat Co. (688 F.2d 280, 1982)

ON REHEARING EN BANC

Before GODBOLD, Chief Judge, BROWN, CHARLES CLARK, RONEY, GEE, TJOFLAT, HILL, FAY, RUBIN, VANCE, KRAVITCH, FRANK M. JOHNSON, Jr., HENDERSON, REAVLEY, POLITZ, HATCHETT, ANDERSON, RANDALL, TATE, SAM D. JOHNSON, THOMAS A. CLARK and WILLIAMS, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

This case comes before us on rehearing en banc to consider whether the holding of this Court in Johnson v. Penrod Drilling Co., 510 F.2d 234 (5th Cir. 1975) (en banc), that neither proof, nor argument, nor jury instructions concerning inflationary factors may be considered or used in maritime, Jones Act, and FELA personal injury and wrongful death actions, should be overruled. After careful consideration of this singular issue, we overrule Penrod and remand this case to the District Court.

I.

Bound by Penrod

The facts leading up to this appeal have already been outlined by this Court in the panel’s opinion, 644 F.2d 460, 462-63 (5th Cir. 1981). Briefly, Curtis Culver was killed while working on a vessel owned by Slater Boat Company. The vessel upon which the accident took place was engaged in moving the drilling barge OCEAN QUEEN from its location on the Outer Continental Shelf to a new location. The fatal injury occurred before the barge was actually moved. Culver’s widow and children brought suit under the Jones Act, 46 U.S.C. § 688, the Death on the High Seas Act (DOHSA), 46 U.S.C. § 761 et seq., and the general maritime tort and negligence theory. The jury found negligence on the part of Gulf Overseas Marine Corporation (Culver’s employer), Euro-Pirates International (the charterer of the vessel), and Ocean Drilling & Exploration Company (the owner of a barge involved in the fatality), and no contributory negligence on the part of Culver.

On the issue of damages, the District Court allowed testimony concerning discount rates and the earning power of money invested in low risk bonds. The jury was instructed to “discount the total amount” of any award by a percentage that represented an appropriate rate of interest. In answer to the special interrogatory submitted asking what discount percentage rate was applicable, the jury filled in “25%”. The trial judge, on the basis that the jury obviously misunderstood the interrogatory, substituted 9.125%, the only other rate put into evidence by the defendant. In accordance with Penrod, the District Court did not allow testimony, charges, or interrogatories to be submitted on the effects of inflation on probable loss of future income.

In short, Culver was not permitted to show any likely increase in future earnings due to inflation. But the award was to be discounted by an interest factor reflecting anticipated inflation.

Culver initially appealed the judgment, raising five issues: (i) should Penrod be overruled?; (ii) if Penrod is not overruled, should evidence of probable non-inflationary future wage increases (e.g. merit raises) be prohibited?; (iii) can a District Court disregard a jury finding regarding the discount rate and apply one based on opinion testimony?; (iv) was the testimony of Culver’s adverse witness sufficiently clear that the court could apply that witness’ opinion of the discount rate?; and (v) can a District Court enter a final judgment for damages applicable to all beneficiaries in a maritime death action that is incapable of apportionment among the various beneficiaries? Cross-appeals were brought by all of the defendants raising several additional issues.

Oral argument was heard by a panel of this Court, and the District Court judgment was affirmed as slightly modified. Specifically, the panel considered itself bound by Penrod’s holding that “the influence on future damages of possible inflation or deflation is too speculative a matter for juridical determination,” 644 F.2d at 643, quoting Penrod, 510 F.2d at 241. And in accordance with Byrd v. Reederei, 638 F.2d 1300 (5th Cir. 1981) (rehearing en banc granted), the panel rejected Culver’s argument that the Supreme Court overruled Penrod in Norfolk & Western Railway v. Liepelt, 444 U.S. 490, 100 S.Ct. 755, 62 L.Ed.2d 689 (1980). Likewise, the panel found no error in the trial judge’s refusal to allow Culver to argue likely future wage increases on the basis of merit, because no evidence was offered to show that such an argument was warranted and, in addition, such evidence was “merely an indirect way of putting inflation factors into evidence before the jury [which is] not allowed under Penrod.” 644 F.2d at 464.

Culver filed a petition for panel rehearing, and a separate petition for rehearing en banc, as required by our rules, raising two closely related issues: (i) should Penrod be overruled and (ii) does Penrod prohibit a trier of fact in this Circuit to receive evidence of non-inflationary factors, such as probable merit raises and productivity increases, in arriving at future losses? This Court, voting for rehearing en banc, determined that the time was ripe for reconsideration of the rule in Penrod pertaining to the “inflation factor” in damages awards. Although Culver’s brief to this court on rehearing en banc addressed primarily issue (i), whether proof and argument concerning inflationary factors should be permitted in this Circuit, issue (ii) is also involved since automatic exclusion of evidence of probable merit raises has resulted from a misreading of Penrod. The defendants argue that Pen-rod should be upheld, and, in addition, contend that Culver waived the right to relief on the inflation issue by failing to make an offer of proof regarding the likelihood of inflation.

A.

Briefly, we will address the defendants’ claim that Culver waived the right to raise the issue of inflation by his failure to make a formal proffer at trial. The defendants called as a witness an investment banker who specialized in bonds. On cross-examination, Culver’s attorney attempted to ask whether people earned more money over the years of their employment due only to productivity. An objection to the question was sustained. After several more questions, all counsel approached the bench where the judge made it clear that the type of evidence excluded by Penrod would not be permitted in court. The jury was then temporarily excused, and Culver’s attorney told the judge that he wanted to ask the expert whether the principal of a bond would be worth less in the future. The trial judge replied that deflation was as likely as inflation, and any testimony as to such factors would be pure speculation. The judge concluded that “I will not permit you to introduce any evidence before the jury relative to inflation in view of the present law that I am bound by which is the Penrod case.” Before closing argument, and before the jury returned, the judge explained that:

Plaintiff’s counsel will not be permitted to argue that the jury should take into consideration inflation, nor will it be permitted to make an indirect argument which would achieve the same purpose of permitting him to argue inflation by attempting to indicate that it could be expected that plaintiff would receive job promotions or merit increases.

Again, the judge mentioned the prohibitions of Penrod. Given this flat prohibition against introducing testimony (or making argument) as to future inflationary trends on the basis of Penrod, it makes no sense to argue that Culver may not raise this issue on appeal simply because he did not proffer an expert on inflation. Reading the trial transcript, it is obvious that a record was being created to challenge or at least find an exception to Penrod. We find that the matter was sufficiently presented to the judge at trial and that all parties understood the dilemma — Culver wanted the jury to consider inflation, and Penrod stood in the way.

B.

The most problematic issue on this appeal remains: Should Penrod be overruled so as to allow parties to present proof and argument concerning inflationary factors to the trier of fact? Our analysis will begin with a brief review of the Penrod decision. In order to illustrate graphically the implications of Penrod and why it has to be overruled, we will discuss many of the cases in this Circuit where Penrod’s prohibitions were effective. Next, we will summarize the criticisms of Penrod which come from other circuits as well as commentators. As our analysis proceeds, it will become clear that the problem is one of fairness to plaintiffs as well as defendants in the trial process. Personal injury awards, once they have been calculated on the basis of projected income and life expectancy, are paid immediately to the plaintiff. It is well-known that if a plaintiff (or his beneficiaries) receives a lump-sum award, totaling the income that the plaintiff would have received throughout the rest of his work life, that money can be invested so as to yield a far greater amount than the initial award. This would be unfairly liberal to the plaintiff. Consequently, the law traditionally permits introduction of testimony, usually by an expert in financial matters, that the lump-sum should be discounted by a factor equal to the interest rate which could likely be earned on a relatively safe investment by an unsophisticated investor. The total projected earnings are thus reduced to the present cash value. However, it will be demonstrated that in an inflationary economy, discounting an award in this manner results in unfairness to a plaintiff or his beneficiaries. When a discount rate is applied to an award in an economy where wage-earners typically receive cost of living increases each year due to inflation, the plaintiff will not be adequately compensated for his loss of future income — inflation will erode the value of the award, and no adjustment for cost of living can be made even though wages continue to increase throughout the economy. On the other hand, if courts respond to this dilemma by refusing to apply a discount rate, as some have, the result would be unfairness to defendants. Quite simply, plaintiffs are to be compensated, by a culpable tortfeasor, but should not be over- or under-compensated. Likewise, defendants found liable should pay no more or less than the amount a plaintiff lost because of the injury. Keeping in mind the goal of fairness to both sides of a controversy, this opinion will consider alternatives and possible guidelines for use in this Circuit. We will establish a flexible approach to the problem which should result in fairness regardless of the economic circumstances that exist at the time of trial. In the process, we overrule Penrod.

II.

Prolegomena

It is crucial to keep in mind that this is really an economic, and not a legal, problem. The likelihood of future wage increases, whether given on the basis of productivity, merit advancement, or inflation, or a combination of them, does not have anything to do with the law. The legal question whether such matters should be considered by the courts is a foundational policy question, the answer to which will be influenced by recourse to the financial and economic community. At trial, the issue may well be a legal credibility of witnesses or competency of evidence, but a pronouncement that inflation is speculative or that workers will or will not receive productivity and merit raises is essentially an economic statement, not a declaration of law.

If we consider, as an example, a person totally and permanently injured by a defendant’s negligence, the injured worker is entitled to the equivalent of his lost future earnings. The law decides that much, and the question remains how much money should be given to him now. Once a lump-sum determination- is made, it is clearly unfair to give him the whole amount, because even an unsophisticated investor could earn a great deal in interest. However, in predicting how much money this worker will likely receive throughout the remainder of his work-life, we must consider the likely increase in wages he would have received. These will include possible advancements from one position to another, any raises due to company productivity, or other merit increases. In addition, in an inflationary economy, we must consider projected cost of living increases which are given by an employer to offset in part the effects of inflation. Each of these factors must be carefully distinguished, since they arise from wholly different causes. Although these factors may not all be present in a particular case, each must be considered in computing the total amount of likely earnings before a discount rate is applied to reduce that amount to its present cash value because of investment potential. The goal, albeit ideal, is that if the injured worker has a 20-year work-life expectancy, and he invests his lump-sum award in relatively risk-free investments, he will receive in the nineteenth and in the twentieth year roughly the same amount as if he had worked each of those years. The goal is not, it must be made clear at the outset, to protect the lump-sum award from the effect of inflation. Rather, before determining how much now needs to be paid, the goal is to assure the plaintiff the equivalent of the total of all' of his future wages, including those likely to be given/received in the form of cost of living increases in response to inflation.

III.

The Prohibitions of Penrod

In Johnson v. Penrod Drilling Co., 510 F.2d 234 (5th Cir. 1975) (en banc), we recognized “the likelihood that inflation could become a predictable condition for the future,” but we were not able to “so surely discern the shadow of inflation as a coming event as to warrant requiring its inclusion in a present rule for calculating future damages.” 510 F.2d at 236. Quoting the full initial panel opinion in Penrod, we expressly disapproved “the district court’s attempt to take into account, in computing the plaintiffs’ future lost earnings, inflationary trends in this nation’s economy for the next several decades.” 510 F.2d at 241. The “influence on future damages of possible inflation or deflation is too speculative a matter for judicial determination.” Id. Therefore, triers of fact “should not be instructed to take into account future inflationary or deflationary trends in computing future lost earnings, nor should the jury be advised to consider such alternative descriptions of inflationary and deflationary trends as the purchasing power of the dollar or the consumer price index.” Id.

The defendants and others have suggested that Penrod could be “modified”, “explained”, or watered down by this Court, but not overruled, so that adjustments could be made in individual cases where the influence of inflation was not speculative. However, if fairness requires that we allow some evidence of inflation properly to compensate plaintiffs and avoid windfalls to defendants, any hope of “distinguishing” or “explaining away” Penrod crumbles in the face of Penrod’s own words — inflation and deflation are too speculative for judicial determination, triers of fact should not take into account future inflationary or deflationary trends, juries should not consider changes in the purchasing power of dollars or the consumer price index, and judges should not undertake to instruct juries on such ideas. The prohibition on such evidence could not be clearer.

To argue, as the defendants do, that Pen-rod forecloses only consideration of future economic trends, while it allows evidence of past inflation, is to miss the point. The significant basis for predicting future inflation or deflation is past inflation or deflation. And the effect of past inflation alone, under a rule forbidding consideration of likely future inflation, leaves economically eclipsed a significant portion of the amount of money the wage-earner may receive in the future.

Even if it were possible to isolate Penrod and analyze its terms in an academic vacuum, to reach the conclusion that evidence of inflation is permissible in the Fifth Circuit so long as the jury is not permitted to “speculate” as to the “influence” on future damages of “possible” inflation or deflation, the result of this exercise would be unworkable as a practical matter. For in practice, Penrod has placed a prison-like wall between any evidence of likely inflationary or deflationary trends (and argument or instruction thereon) and the courtrooms of the Fifth Circuit. Our decisions since 1975 on this issue have merely served to place barbed wire on top of the wall. Moreover, it is likely that in other cases, as in this one, evidence of probable increases in wages due to merit or productivity has been kept out of the jury room unwittingly because of Penrod’s prohibitions. Economic data is readily available concerning past average annual wage increases of workers in the United States, and such data is often broken down into particular professions and geographic areas. But it is difficult to determine the percentage of those increases given for merit-productivity and distinguish the percentage representing cost of living increases in response to inflation. Many plaintiffs have thus been unable to scale Penrod’s wall and introduce evidence of non-inflationary wage increases, even though such increases are theoretically unaffected by inflation, and thus evidence of such increases should not have been prohibited.

IV.

Penrod in Practice

In our determination of whether Penrod ought to be overruled, it is important not only to consider what Penrod says, but also what this Court through the years since 1975 has said it says. We will look first to the recent cases arising in this Circuit applying Penrod. In Davis v. Hill Engineering, Inc., 549 F.2d 314 (5th Cir. 1977), this Court reduced the District Court’s award of $628,991 to $425,321 for the total loss of the plaintiff’s future earning capacity, because the District Court increased the basic damage award, prior to discounting to present value, to offset wage and price inflation. The plaintiff’s expert was unimpeached, and the defendants had no opposing expert. The trial judge was thus free to rely on the expert’s testimony, and was apparently convinced of the need to allow over $200,000 to offset expected wage increases due to inflation. 549 F.2d at 331. Nevertheless, we held that until Penrod is overruled,

an inflation element cannot be included in damage computations, either in the form of [i] calculating loss of future earnings without discounting to present value or of [ii] increasing the basic damage award, prior to discounting, with a figure representing the projected inflation rate. The former [i] is the Beaulieu [v. Elliott, 434 P.2d 665, 671 (Alaska 1967) ] method, the latter [ii] the District Court’s method in this case.

549 F.2d at 332 (brackets added). Judge Wisdom acknowledged that other circuits consider inflation as a factor in computing future earnings damages, an approach that “more accurately [reflects] loss of future earnings than does a discounted figure because it prevents inflation from eroding the damage award.” 549 F.2d at 332. Alas, he conceded, his hands were tied by Penrod. Id.

In In the Matter of S/S HELENA, 529 F.2d 744, 753 (5th Cir. 1976), this Court remanded for recalculation the District Court’s damages award because an inflationary rate was assumed and applied. In determining the damages for loss of support payable to the wives of deceased crew members of a vessel, the trial judge stated:

I have to some degree offset discount to present value by the effects of inflation and a likely rise in decedent’s earnings resulting from increases in the general wage level. I have assumed a discount rate of 5%, and a three per cent inflationary level thus making the net discount rate 2%.

529 F.2d at 753, quoting 329 F.Supp. 652 at 660. Other calculations of the damages for loss of support also “seemed to be based on the inflation and present value factors, the expert testimony of an economist as to expected future earnings, and the present cost of annuities that would pay monthly amounts increasing at the estimated rate of inflation.” 529 F.2d at 753. Quoting Pen-rod, we remanded to District Court for a more detailed calculation of the damages. On remand, the District Court filed supplemental responses heeding our instructions, and Penrod was again faithfully followed. Matter of S/S HELENA, sub nom. Sincere Navigation Corp. v. United States, 547 F.2d 255, 256 (5th Cir. 1977). The element of inflation was eliminated and the damages recomputed. Id.

In Higginbotham v. Mobil Oil Corporation, 545 F.2d 422, 433-35 (5th Cir. 1977), rev’d and remanded on other grounds, 436 U.S. 618, 98 S.Ct. 2010, 56 L.Ed.2d 581 (1978), this Court reviewed the District Court’s use of a 5% annual straight line estimated salary increase to calculate the probable future earnings of the deceased. Although the trial judge stated that he did not take into consideration “the decreasing purchasing power of the dollar,” we held that under Penrod “the plaintiff must bear the difficult burden of proving what portion of the increases would have been given other than as an automatic hedge against inflation.” 545 F.2d 434-35. The defendant, wielding the mighty sword of Penrod, made the factually unsupported argument that “it is common experience that annual ‘raises’ are for the most part cost of living wages,” therefore a 5% straight line annual increase amounted to a hidden inflation-based award. 545 F.2d at 434. While common experience likewise tells us that some portion of pay raises reflect performance and experience, the plaintiff’s expert failed to distinguish between cost of living or inflationary increases and rewards for experience or productivity. 545 F.2d at 435. Thus we rejected the District Court’s award based on the 5% future earnings factor, and remanded to give the plaintiff an opportunity to walk the straight and narrow of Penrod. Judge, now Chief Judge, Godbold, in his partial dissent, observed that in “innumerable other contexts we accept the events of the past as the basis for an inference as to what the future will hold.” 545 F.2d at 437 (Godbold, J.). “Yet we would not permit consideration of evidence that a particular plaintiff had received a $200 per year increase in pay every year for 20 years, unless he could divide it up into ‘productivity’ pay and ‘economic change pay.’ ” Id. (Godbold, J.).

In this single area of projecting future earnings we deny ourselves the best evidence available on the asserted ground that it is not sufficiently reliable, and, in the name of reliability we mandate the artificial conclusion that one will earn the rest of his life what he is earning on the day he is killed or injured. The only thing certain about this is that it is certain to be wrong.

Id. (Godbold, J.).

In Menard v. Penrod Drilling Company, 538 F.2d 1084, 1089 (5th Cir. 1976), the plaintiff’s economic expert estimated that, apart from the possibility that the plaintiff might advance through the ranks of his employer, a worker “would have to get at least 2% per year, on the average, increase to maintain the same buying that he has to-day.” A discount rate of 4}A% was selected by the expert. Id. Because no objection was made, the jury was actually permitted to consider future inflation as a factor in calculating damages. One member of this Court’s panel observed that although this was not plain error, it would have been reversible error under Penrod had an objection been made. Id. (Gee, J., concurring).

Continuing our historical journey into the past, this Court in Lacaze v. Olendorff, 526 F.2d 1213, 1222 (5th Cir. 1976), reh’g en banc granted, 526 F.2d at 1223, found error in the trial court’s overruling an objection to expert testimony on future lost earnings because the expert included a 3% inflation rate in his calculations. On the basis of Penrod the case was reversed and remanded on the issue of damages. 526 F.2d at 1223.

In Weakley v. Fischbach & Moore, Inc., 515 F.2d 1260 (5th Cir. 1975), a diversity suit arising out of an electrical explosion in Texas, we affirmed the judgment of the District Court even though the jury considered both future productivity and future inflation in assessing a $300,000 award for lost earning capacity. For this Court, Judge Wisdom observed that although this “Court has writ large its disapproval of calculating future damages by reference to predictions of future inflation,” Texas law applied, and juries in Texas are permitted to weigh evidence of future inflation in setting awards for future damages. 515 F.2d at 1266-67, citing Penrod. In a similar federal cause of action we may be certain that this Court would have reversed a judgment based on such a “speculative” jury finding.

Again, specifically on the basis of Penrod, we concluded in Petition of M/V ELAINE JONES, 513 F.2d 911, 912 (5th Cir. 1975) cert. denied, 423 U.S. 840, 96 S.Ct. 71, 46 L.Ed.2d 60 (1975), that the District Court erred by including a 2% per year cost of living increase in the computation of loss of future earnings. We announced that “the trier of fact should not be instructed to take into account future inflationary or deflationary trends in computing future lost earnings.”

In Standefer v. United States, 511 F.2d 101 (5th Cir. 1975), the District Court, sitting without a jury, awarded damages to a plaintiff for loss of future earnings and included an inflationary factor of 5.5%; in addition, the award of future medical expenses included an inflationary factor of 4.5%. Because Penrod foreclosed any consideration of inflation in computing such damages, the District Court’s decision was reversed and remanded for a recomputation of damages.

Robertson v. Douglas Steamship Company, 510 F.2d 829 (5th Cir. 1975), stands as yet another example of how we applied the Penrod strait-jacket. In accordance with the trial court’s instructions, the jury divided the plaintiff’s award into (i) the amount of basic damages and (ii) the amount of damages sustained “as a result of loss of future wage increases or inflation or decrease in the purchasing power of money.” 510 F.2d at 836-37. Of course, the second part of the award was reversed, even though it is possible that a portion of that element was awarded due to likely merit or productivity increases not based upon inflation or cost of living adjustments. Thus we see that although Penrod was not intended to eliminate evidence of future wage increases on the basis of merit or productivity, the practical effect of Penrod is often to throw the baby of future merit increases out with the inflationary washtub waters.

Finally, on the very day that Penrod was published, this Court, in Law v. Sea Drilling Corporation, 510 F.2d 242, 251-52 (5th Cir. 1975) on reh’ing, 523 F.2d 793 (5th Cir. 1975), held that the District Court’s allowance for additional inflationary cost of living increases was improper. Again, the increases in the decedent’s income over the years before his death, upon which the trial judge based his reasonable expectation that the decedent’s income would have continued to rise, probably reflected increases due to both merit and productivity and not just cost of living increases. Nevertheless, because an element of inflation was considered, Penrod was dispositive. .

In all of the above discussed cases, this Court, by both its actions and its words, flatly prohibited any consideration of inflation, whether in evidence presented, in jury instructions or in final argument, without regard to the cogency or persuasiveness of the evidence offered to prove that inflation, to some extent, will likely occur. Swept unthinkingly before Penrod also were merit-productivity increases. Thus stands the law in this Circuit, until today.

In our attempt to assess the impact of Penrod in this Circuit, not only is it necessary to consider our own appellate opinions, as we have done above, but it is also helpful to review some of the District Court opinions where the tentacles of Penrod were perceived and predictably effective. In Complaint of Metcalf, 530 F.Supp. 446 (S.D. Tex. 1981), the District Court stated emphatically that in its award for loss of earnings in the future, any “future inflationary or deflationary effect on earnings is not to be considered.” 530 F.Supp. at 458, citing Penrod. Likewise, in Kratzer v. Capital Marine Supply, Inc., 490 F.Supp. 222 (M.D. La. 1980), aff’d 645 F.2d 477 (1981), the plaintiff produced an economist who testified as to lost wages predicated upon an inflation factor and an increased productivity factor. The District Court simply cited Penrod and stated that there “was no evidentiary justification for these factors, and the Court declines to accept them, and as noted, utilized a discount figure of 6 percent with no other factors in computing lost wages.” Again, we see how Penrod often operates to prohibit not only evidence of inflation, but also evidence of likely merit or productivity wage increases. In McLean v. United States, 446 F.Supp. 9 (E.D. La. 1977), the plaintiff carefully met his burden of proof by establishing a “productivity” factor of 5.7% on the basis of past merit and change in job title increases over his previous years of employment. Because that factor was in no way compensation for inflation, evidence thereof was admissible under Penrod. 446 F.Supp. at 13, 14. In Thompson v. Offshore Co., 440 F.Supp. 752 (S.D. Tex. 1977), the District Court announced that in calculating a decedent’s future earnings, any future inflationary effect on wages is not to be considered. 440 F.Supp. at 762. Finally, in Hamilton v. Canal Barge Co., 395 F.Supp. 978 (E.D. La. 1975), allowance for inflation or increased cost of living was denied in light of Penrod, and for the additional reason that the diminution in the purchasing power of an award, caused by inflation, is not an item of damage caused by death or by prepayment of future wages. 395 F.Supp. at 987. However, the District Court did allow a 4% annual increase factor on the basis of skill and productivity. Id.

Nesmith v. Texaco, Inc., 491 F.Supp. 561 (W.D. La. 1980), stands out as an anomaly to the law of Penrod. In startling contrast to the usual acceptance of Penrod’s rejection of evidence of inflation, the District Court interpreted Norfolk & Western Railway v. Liepeit, 444 U.S. 490, 100 S.Ct. 755, 62 L.Ed.2d 689 (1980), to say that “in arriving at an award for future loss of earnings the very factors disapproved in [Penrod] should now be considered.” 491 F.Supp. at 564. While the court was “mindful of the fact that this interpretation of Liepeit may be erroneous, and [Penrod] may still bar the door to speculative damages as to factors other than income taxes in a case of future loss from personal injuries,” the plaintiff was permitted to present expert testimony that the growth rate for wages based upon inflationary factors in the plaintiff’s job and geographic area will be approximately 6% over the next 30 years. 491 F.Supp. 564, 565 n. 4. This attempt to break the bonds of Penrod resulted in an appeal, disposition of which is being held pending the outcome of the present opinion and Byrd, see note 1.

The cases discussed in this section demonstrate the absolute prohibition on any consideration of inflationary or cost of living trends in the courts of this Circuit. District Court judges have found themselves under a duty, imposed by Penrod, to prevent experts in their testimony, and attorneys in their arguments, from even mentioning economic trends that would effect future wage increases. Likewise, in their instructions to the jury, District judges have been careful not to mention inflation as a factor in computing damages, or, where inflation was mentioned, the purpose was to explain to the jury that they should not consider inflation in their computations. In those cases where the jury was permitted to consider the effect of future inflation on damage awards, either because they heard testimony by an expert or because the trial judge instructed them to consider inflation, we have reversed the judgment and, in most cases, remanded for a new trial. In non-jury cases, the District Court judges have not been permitted to consider inflation in their assessment of damages. Even where plaintiffs have clearly limited their evidence (as to inflation) to likely cost of living increases, thereby carefully avoiding any inference that the total award should be somehow “protected” from inflation irrespective of wage increases, the evidence has been rejected. In short, Penrod in practice has been a firm, inflexible standard that we have been unable to explain or interpret away. The standard is simple: no evidence of inflation may be presented to the trier of fact, regardless of how expert the testimony, how understandable the presentation, or how fair to the parties. Argument of counsel is also forbidden, as is jury instruction by the Court. This standard has at times been so overwhelming that it has prohibited evidence that should have been allowed, such as evidence of likely wage increases based upon merit or productivity, either on a misreading of Penrod or a perceived (and sometimes actual) impossibility of separating out inflationary elements from admissible merit-productivity increases. Quite possibly, an employer may take into account rising inflation in his decision to grant promotions, and it would be impossible for anyone, expert or otherwise, to distinguish that part due to merit only and determine the percentage amount of the raise due wholly to non-inflationary factors.

V.

Penrod and Other Circuits

Worthy of our consideration is how our sister circuits perceive Penrod. In 1975, the Eighth Circuit, citing Penrod, was able to say that the

federal circuits that have faced the issue in cases involving federally created claims, governed by federal rather than state law, have for the most part rejected testimony, jury instructions or trial court consideration of future inflationary trends in damage assessment.

Johnson v. Serra, 521 F.2d 1289, 1295-96 (8th Cir. 1975), aff’d on remand, 586 F.2d 1291 (8th Cir. 1978). More recently, however, in the trend toward increasing consideration of inflation, Taenzler v. Burlington Northern, 608 F.2d 796, 800 n. 9 (8th Cir. 1979), cited Penrod but declined to follow its approach. Expert testimony on future wage increases, when limited to future trends in earnings of a particular group of employees, thus avoiding the excessively general national inflation rate, was found to be acceptable in trial courts. 608 F.2d at 801.

Feldman v. Allegheny Airlines, Inc., 524 F.2d 384 (2d Cir. 1975), a case arising under Connecticut law, cited with approval Judge Friendly’s earlier assessment of inflation:

There are few who do not regard some degree of continuing inflation as here to stay and would be willing to translate their own earning power into a fixed annuity, and it is scarcely to be expected that the average personal injury plaintiff will have the acumen to find investments that are proof against both inflation and depression — a task formidable for the most expert investor.

524 F.2d at 388, citing McWeeney v. New York, New Haven and Hartford Railroad, 282 F.2d 34, 38 (2d Cir. 1960) (Friendly, J.). The computation by trial Judge Blumenfeld of the discount rate by offsetting the anticipated rate of earnings on a prudent unsophisticated investment by an inflation factor was approved. This computation, subtracting the assumed inflation rate from the rate of interest on a safe investment (the traditional discount rate), yields an “inflation-adjusted discount rate.” Judge Friendly, a member of the panel in Feldman, was not completely satisfied with this result — Penrod’s emphasis on “the plethora of uncertainties” that accompany testimony regarding inflationary trends was contrasted with the trial court’s apparent construction of “an iron-clad guaranty against the unknown and unknowable future effects of inflation.” 524 F.2d at 392 (Friendly, J. concurring). Such protection against inflation is not enjoyed by the millions of Americans on fixed pension or investment income, or even by the average worker whose wages do not keep up with inflation. This highlights a weakness in the Feldman approach: it assumes that wage increases will mirror inflation. Id. Judge Friendly thus predicted that Feldman “will not constitute a precedent on the inflation problem in a case arising under federal law.” 524 F.2d at 393, (Friendly, J. concurring).

More recently, in a suit brought by an injured cargo checker against a stevedore and a shipowner (neither was his employer), pursuant to the LHWCA, 33 U.S.C. §§ 901 et seq., the Second Circuit carefully considered the question whether and to what extent an award for lost future wages should be adjusted because of inflation. Doca v. Marina Mercante Nicaraguense, S.A., 634 F.2d 30 (2d Cir. 1980), cert. denied, 451 U.S. 971, 101 S.Ct. 2049, 68 L.Ed.2d 351 (1981). Penrod as well as similar cases in the Third and First Circuits were identified as unsound minority views. 634 F.2d at 36. Broad agreement was perceived among economists that inflation “is a dominant factor on the current economic scene and, despite episodic recessions, is likely to be so for the forseeable future.” 634 F.2d at 37.

The District Court in Doca, 474 F.Supp. 751, 758 (S.D.N.Y. 1979), found that the plaintiff was entitled to recover $352,560, “representing his future loss of earnings considering both probability of continued inflation and a discount to present value.” The extent to which inflation was considered was unspecified, and no computation was provided by the District Court. 634 F.2d at 34. On appeal, the plaintiff urged that the trial judge used a discount factor of 1%, an inference drawn by comparing the difference between the award given and the plaintiff’s own projection of future lost wages. 634 F.2d at 34 & n. 4. The defendants objected to the court’s computation on the grounds of lack of evidence to support an estimate of future inflation and argued that any adjustment for inflation is impermissible. 634 F.2d at 34-35.

The Second Circuit in Doca described two basic approaches as to how inflation could be considered. First, the question of inflation rate may be submitted to the fact finder in one of three ways: (i) by allowing expert opinion, (ii) by requiring the fact finder to apply its own knowledge, or (iii) by permitting the fact finder to apply its own knowledge together with expert testimony. Each of the three contemplate that a separate determination as to inflation is to be made in each case. Second, a rule of law may be adopted that focuses on the somewhat constant relationship between inflation and interest rates, as in the Alaska Supreme Court’s view that the inflation rate should be assumed to equal the interest rate, thereby eliminating the discount to present value. 634 F.2d at 38-39. The Doca Court was not prepared to specify any particular methodology:

If litigants prefer to offer evidence as to future rates of both inflation and interest, they are entitled to do so... .

We emphasize that we are not requiring the use of an inflation-adjusted discount rate. . . . Litigants are free to account for inflation in other ways, or, if they use the adjusted discount rate approach, to offer evidence of a rate [other] than 2%.

634 F.2d at 39-40. The District Court’s award was remanded for reconsideration for two reasons: (i) if a 1% adjusted discount rate was used, it was too low since 2% is the “true cost of money appropriate for use in a computation to determine the present value of lost future wages,” and (ii) the District Court took into account a post-trial wage increase based upon cost of living, therefore duplicative consideration was given to the impact of inflation. 634 F.2d at 40.

Feldman, supra, approved the use of an “inflation-adjusted discount rate” of 1.5%. 524 F.2d at 387. The purpose of the method used in Feldman, and approved as one possible technique in Doca, was to determine the “real yield” of money — that portion of interest gained on virtually risk-free investments which represents only the real growth of the investment and not the losses due to future inflation. The theory is that the “real yield” of money is roughly 2% in any year, because in periods of high inflation, interest rates will be a bit higher, and in low inflationary periods, the interest rates will still be a little above the rate of inflation.

Doca recognized the disagreement among economists over the validity of the assumption that the real rate of interest is constant and consequently independent of inflation, but noted that various economic studies of similar time frames have estimated that the real rate of interest was between 1.5% and 3%. 634 F.2d at 39 n. 10.

VI.

Penrod and Some Commentators

In 1977, one commentator — with an error in timing — predicted that “the Fifth Circuit soon could decide . . . that Penrod is ‘substantively indefensible.’ ” This was precipitated by Judge Wisdom’s concurring opinion in Freeport Sulphur Co. v. S/S HERMOSA, 526 F.2d 300, 311 (5th Cir. 1976) (Wisdom, J., concurring). Judge Wisdom there expressed his dissatisfaction with Penrod and identified the inconsistency in this Circuit’s insistence upon discounting while ignoring inflationary effects. Id. The policy concerns of Penrod, (i) achieving complete compensation, (ii) preventing speculation, and (iii) simplifying trial procedures, would be served better by adopting an approach that considered the effect of inflation on damage awards. Id.

Penrod has also been labeled a source of serious judicial error. Kane, Inflation, tight money, and Penrod: the cost of judicial error, Texas Trial Lawyers Forum, April-June, 1980, at 3-5. In Penrod, we stated that “if future inflation does cause higher wages, experience predictably demonstrates that higher interest rates on investments which have always accompanied inflation will also occur and this factor will mitigate the failure to include an inflationary surcharge in wage rate calculations.” 510 F.2d at 236.

The obvious flaw in this line of reasoning lies in the fact that while interest rates do rise in response to accelerating inflation, a higher interest rate only reduces the present value of a future loss, thus further penalizing the plaintiff. The problem for the plaintiff is compounded when the series of future income payments cannot be proportionally increased for the same inflation that drove up the interest rate.

Kane, supra, at 3-4.

Spiraling inflation during the years since Penrod has indirectly led to much of the criticism of our 1975 opinion. Although consumer prices have fallen in the early months of 1982, which might signal the beginning of the end to “spiraling” inflation, this does not demonstrate that Pen-rod is not so bad after all. The problem with Penrod is not primarily its spectacular unfairness in periods of extremely high inflation. To the contrary, the danger of Penrod lies in its unwillingness to consider the effect of inflation on future wages at all. Penrod stands for the inflexible proposition that triers of fact should not consider inflation or deflation at all, whether high or low or nonexistent, in predicting wage loss. At the same time, defendants are freely allowed to show the highest inflation-induced interest rates available on relatively safe investments. Unfortunately, any evidence of the fact that wages will likely increase to combat the eroding effects of inflation remains eclipsed by the Court-declared spectre of speculation.

What we seek, in response to criticism from both within and without the Circuit, is fairness with regard to the presentation of economic data by either side in the legal controversies that our federal courts face. The principles that we adopt to facilitate this goal must be flexible enough to remain workable in any economic climate. To this end, the remainder of this opinion will explore the alternatives and adopt those that meet the standards of economic flexibility and fairness to plaintiffs and defendants alike.

VII.

The Real Rate of Interest: A Possible Solution

In layman’s terms, the real rate of. interest mirrors the rate of interest that lenders would charge in an inflationless society. Interest rates are much higher because of the expectation of inflation and the uncertainty as to its extent. Thus, the real rate of interest becomes more difficult to calculate. For example,

You lend [or invest] $100 for ... 30 years, at a rate of interest of 5 percent per year. The $5 interest paid to you annually will rise or fall in purchasing power depending upon whether or not the general price level of various goods and services falls or rises. If the price level should increase during the first year by 3 percent, this means that of the 5 percent interest ($5 each year) about 3 percentage points (or $3 in real terms) is eroded away by the higher prices you must pay for goods and services. In effect, in real terms you have gotten only about 2 percent interest on your $100 loan [or investment].

A. Alchian & W. Allen, University Economics 193 (3d ed. 1972). Thus, the lender who correctly anticipated the rise in price level would have set a higher nominal interest rate on the loan, perhaps 8%, to allow 3% for the anticipated rise in prices and 5% for interest in terms of real purchasing power. Id. Accordingly, the nominal or advertised interest rate reflects both the basic or real rate of interest (which would exist absent any inflation anticipations) and an adjustment for the anticipated rise in price levels.

In theory, the real rate of interest represents a possible standard for determining the proper and fair discount rate to be applied to damages resulting from the loss of future income. For courts using this method, the rate of inflation, however calculated, is subtracted from the interest rate for some relatively risk-free investment, and the remainder is the real rate of interest, or discount rate, to be applied to the damages award. In practice, of course, the problem becomes more difficult. Even where parties to a controversy are able to establish both a projected inflation rate and an interest rate on some risk-free investment, using legally acceptable indexes and tables, the fact remains that the goal of the exercise is to compensate the plaintiff for the income the worker would in all probability actually receive in future years. It is well-recognized that the average wage increases of many workers in the United States have not kept up consistently with inflation. This factor, then, must be applied to increase (e.g., from 2% to 4%) the discount rate so that the plaintiff, whose wages have not kept up and likely will not keep up with inflation, will not receive increases based upon inflation. On the other hand, if the average annual increase in wages in a particular profession has risen above the inflation rate, the plaintiff should not be limited to increases based upon the inflation rate. This factor highlights the major weakness of the “real rate of interest” approach.

A simpler and more accurate approach to the problem is found where the plaintiff shows, by expert testimony or otherwise, all of the increases in wages he is likely to receive during his work-life expectancy. Likely increases in wages due to cost of living increases, merit or productivity increases, or promotion increases could all be separately established by the plaintiff in computing the total amount of lost wages. For most occupations, it is easy to find economic data of general wage increases, which include increases due to cost of living, merit, and productivity. The more difficult task of breaking down the data into the reasons for the increase, e.g. cost of living or merit increases, is not necessary in this simpler method. Then, the defendant has the opportunity to establish, by expert testimony or otherwise, the discount rate which reflects the rate of interest in a relatively safe investment, which is applied to the award to reduce it to present value. If this methodology is followed, the rate of inflation itself is not directly involved — inflation is only indirectly reflected (i) in the cost of living increases projected by the plaintiff (which may be more or less than the rate of inflation), and (ii) in the discount rate established by the defendant (which includes both the real rate of interest and the predicted effect of inflation). The result of such a calculation should not differ greatly from the result obtained through the Feldman approach. However, unlike the Feldman approach, this alternative method would more accurately represent the future wages lost by a particular plaintiff, in a particular occupation, in a particular geographic area.

VIII.

Economic Predictions and the Courts’ Serbonian Bog

We agree with the critics that Penrod represents an idea whose time has passed. In an era of inflation, which has been with us for over forty years, it is quite clear that plaintiffs are unfairly penalized by their absolute inability to present evidence of a historical fact — inflation. The likely effect of inflationary trends upon future wages is forbidden even though Penrod allows evidence from defendants regarding the applicable discount rate which has been increased by the very inflation so roundly excluded.

However, we are less than satisfied with the so-called Alaska Rule, which by assuming that the discount rate and the inflation rate are virtually identical, unnecessarily penalizes defendants because, as noted above in our discussion of the real rate of interest, interest rates on relatively safe investments will typically ride several percentage points above the rate of inflation. In addition, 'tied as it is to changes in the Consumer Price Index (CPI), the result would unfairly award the plaintiff the difference between the changes in the CPI and the actual or average increase in wages.

We are much impressed with, but certainly not willing to embrace uncritically, Feldman ’s approval of an inflation-adjusted discount rate in the neighborhood of 1.5%. 524 F.2d at 387-88. This view represents a compromise between the Alaska rule’s penalizing of defendants and Penrod’s penalizing of plaintiffs. However, fixing the inflation-adjusted discount rate at 1.5%, or even 2% or 3%, would subject this Court to criticisms not unlike those aimed at Penrod and even the Alaska rule. In the dynamic and ever-changing world of finance and economics, we as judges cannot rule out that the interest rate on risk-free investments might equal the inflation rate during a certain period such that the Alaska Rule is vindicated. Indeed, the logic behind the Alaska Rule is that in an economy of ups and downs, “it will all come out in the wash” — the interest rate and the inflation rate being, on the average, roughly equivalent. However, any standard which is inflexible in a dynamic economy will likely be unable to cope with the problem of preventing windfalls either to plaintiff or defendant. Although a perfect method may never be found, we must attempt to create standards that are fair to both sides of the controversy, with the trier of fact being allowed to receive and act upon credible evidence of the economic facts bearing, pro and con, on the competing theories.

The methodological basis of Feldman must be clearly understood as our analysis proceeds. Quite simply, and perhaps even simplistically, Feldman is a backward-looking, past-performance approach:

(1) It begins by considering the effective annual interest rate payable on a certain relatively risk-free investment each year during a particular past period of years, for example, 1940-1980. For each of those years during the period chosen, the average annual percentage change in the Consumer Price Index (CPI) (see note 25, supra) is determined using historical data.

(2) Subtracting the average annual percentage change in the CPI for each year from the effective annual interest on the investment for that same year yields the actual or “real” rate of interest that an investor would gain during that year in terms of the buying power of the dollars invested. Because a single year in the past several decades might be unreliable, all of the real rates of interest are averaged. The result of such an analysis, for almost any relatively risk-free investment during any 10 or 15 year period in the past several decades, will be approximately 1-3%.

(3) This inflation-adjusted discount rate, the result of subtracting changes in the CPI from safe investment interest rates, is then projected over the plaintiff’s expected work-life by applying the inflation-adjusted discount rate to each year’s estimated salary to reduce the future annual salaries to their present value. The discount factor applied to each year would be different because the present value of a dollar received in the future, e.g., ten or twenty years from trial-date, is much less than the present value of a dollar received on the date of trial. Indeed, one dollar received even one year from now is worth less than one dollar today.

(4) If wages will increase due to promotion, merit, or productivity, then instead of using the plaintiff’s current wages as the amount to be discounted to present value for each future year of expected work-life, each future year’s wage is computed by finding what a person in the promoted position would likely be earning in the respective year. All the years are then added together to reach the lump-sum award. This computation is not limited to the single promotion or merit increase that the plaintiff would have received during the year of his injury, but may involve several increases during the plaintiff’s work-life expectancy. For example, if the plaintiff is a stock-boy with a 30-year work-life expectancy, and he likely would be promoted in 10 years to stock manager, and in 10 more years to store manager, which is the highest position he would predictably attain, then the trier of fact would compute the trial-date salary of stock manager and store manager. The stock-boy’s salary for each of the first 10 years would be reduced to its present value, the stock manager’s salary for each of the second 10 years would be reduced to its present value, and the store manager’s salary for each of the third 10 years would be reduced to its present value. All these results are added to find the lump sum award.

In light of our discussion, supra, of the theory of the “real rate of interest,” several critical remarks are appropriate. First, the purpose of an inflation-adjusted discount rate, which simply means that the discount rate (proposed on the basis of safe investment) should be reduced by the rate of inflation eroding the profit on such an investment, is fully to compensate the plaintiff such that if the lump-sum award given in court is invested, the plaintiff will be able to receive, as nearly as possible, the amount of assumed income that would have been received each year in the future if no injury had occurred.

However, the Feldman approach assumes that the plaintiff’s past and future income would increase, as it has, roughly, in the past forty years, along with the CPI. The difficulty with this assumption is that annual wage increases may not keep up with inflation as reflected in the CPI, and, to the contrary, such increases in average earnings in some occupations might be much greater than inflation. Second, the American economy may change radically in the next several years. As evidence becomes available that the next 20 or 30 years will not be like the past 20 or 30 years, then the Feldman approach is less helpful. Nevertheless, despite these criticisms, the Feldman approach represents a fair and flexible alternative that' is clearly superior, and more economically sound, than either Penrod or the Alaska Rule.

Lest we lose sight of the forest of practice in these trees of theory, our analysis must move to a practical example.

IX.

A Helpful Hypothetical

“The war against inflation is a grim affair.” Justice Douglas, Davies Warehouse Co. v. Bowles, 321 U.S. 144 at 158, 64 S.Ct. 474 at 482, 88 L.Ed. 635.

We may now consider two hypothetical situations illustrating that the process of computing likely wage increases, due to the effects of inflation and other factors, need not depend upon suspect speculation, the use of strange formulae, or intricate expert prognoses.

First, assume that a plaintiff is totally and permanently disabled and that after allowable deductions for income taxes, social security taxes, and union dues, and after adding various fringe benefits, where applicable, his/her loss of future earnings would be $10,000 per year for the balance of a work-life expectancy of 18 years, or a gross expectancy of $180,000. This plaintiff could purchase for approximately $78,000 enough United States Bonds to allow him or her to receive $10,000 each year from 1981 through 1998. Government Bonds are relatively risk-free investments for an unsophisticated investor, because they typically require no reinvesting of funds over the next 18 years provided that no bonds are redeemed in advance of their maturity. This rough computation takes into account the interest that would be paid on the bonds, as well as the estimated income taxes on the interest received each year by the plaintiff, such that the plaintiff receives $10,000 spendable dollars each year. The economic fact that the plaintiff needs only $78,000 to ensure that he or she will receive the assumed $180,000 in lost future wages is, of course, the legal justification for applying a discount rate. Significantly, this model assumes that the plaintiff would have received no wage increases, for whatever reason, in the next 18 years.

Second, assume a projected 5.12% annual increase in wages based upon past increases in the national average weekly wage, such that this plaintiff’s salary increases from $10,000 in the first year, to $10,512 in the second year, to $11,050 in the third year, and so on until an annual salary of $23,314 is reached in 1998. The total amount earned by the plaintiff, assuming this increase in wages, would be $284,494. Of course, this estimate assumes that the plaintiff would experience wage increases, either on the basis of performance and experience or due to cost of living increases, at the national average (5.12%) of workers over the past several decades. Using the same calculations as above for a risk-free U.S. Bond portfolio, it can be estimated that approximately $120,000 would produce the $284,000 in wages lost with the 5.12% per year increase considered.

In summary, in the first hypothetical situation above, the plaintiff would introduce evidence that his/her annual take-home pay is $10,000 and that he/she would probably have worked for 18 more years. The defendant would simply prove that it would take about $78,000, safely invested, to assure that projected loss of income. In the second hypothetical situation, which is much more realistic in terms of our national economy, the plaintiff not only shows present income and work-life expectancy, but also presents evidence that his/her salary will likely increase, just like average wages have increased in the past, at the annual rate of 5.12% due to inflationary (cost of living increases) and non-inflationary (merit, productivity, etc.) factors. The defendant in its response again can establish that approximately $120,000, safely invested, would allow the plaintiff to spend each year an amount roughly equivalent to his/her projected annual salary.

Comparing the above two hypothetical situations with the approach in other jurisdictions, it is clear that under the Alaska Rule, the plaintiff would receive a lump sum of $180,000 in both situations, because inflation (and cost of living increases) are presumed equal to the discount rate (i.e., safe