"Reviving Economic Growth" Cato Forum IP Extract

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Reviving Economic Growth: A Cato Online Forum (November 2014) has 51 “leading economists and policy experts” responding to:

If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?

8 are critical of patents (3 of those also of copyright). 2 propose non-property replacements for drug development, one of the two contemporary signal cases for intellectual property. The other signal case, big-budget movies, are not mentioned by anyone, as of course movies have nothing to do with long-term growth. 4 others mention patents, but without good or bad implication. Excerpts interspersed with brief comments on these 12 below.

None calls for stronger intellectual property.

Many call for improving education in some way or for increasing high-skilled immigration. These are levers for innovation policy. It is important to note this, as they should be seen as in competition with intellectual property, where the general goal is promoting progress and innovation. The many available policies for increasing innovation should make us all the more eager to dethrone and discard intellectual property for its toxic side effects on freedom, equality, and security.

I suspect that a similar set of essays in recent decades past would have featured fewer and less skeptical mentions of intellectual property (evidence either way would be most welcome) and that this trend will continue. But wonk skepticism alone has never killed a bad policy. The main thing missing from these essays is the mechanism of commons-based product and policy competition incrementally growing a constituency in opposition to intellectual property while at the same time destroying rents from and the constituency for intellectual property. Not even any mention of exemplars such as Linux and Wikipedia and concepts such as open innovation and peer production. Asking how one would use a “magic wand” is perhaps not conducive to getting incremental and sustainable responses, but these are what is needed to obtain a good future rather than forever writing about ever-worsening policy.

Doctors and Drugs: Promoting Growth and Equality through Free Trade by Dean Baker:

If eliminating barriers to trade in professional services offers large potential gains, the elimination of patent protection for prescription drugs could offer even greater benefits. In 2013 the country spent over $380 billion (2.2 percent of GDP) on pharmaceuticals. In almost all cases drugs would be cheap to produce without patent and related protections. It is likely that drugs would have cost only 10-20 percent of this amount if they were sold in a free market in the same way as other products. We would likely also get better drugs. It is necessary to have an alternative mechanism for financing drug development, but it would be difficult to have a worse mechanism than awarding patent monopolies.

The impact of these two changes on both growth and inequality is likely to be enormous. The combined savings could easily be as much as 2-3 percent of GDP. This dwarfs the potential gains from the trade agreements of the last three decades and most other major policy initiatives. And the gains also come with redistribution from the top to those at the middle and bottom of the income distribution. It is difficult to envision a better way to boost the economy while at the same time reducing inequality.

Hear, hear.

Sidestep the FCC and the FDA by Arnold Kling:

To me, it appears that 21st-century medical research is difficult to reconcile with the patent system, and the FDA approval process merely compounds that more fundamental problem.

The current system rewards companies that come up with widely-applicable drugs, devices, or medical tests that can be patented. It is not suited to rewarding incremental additions to knowledge or the development of therapies tailored to narrow populations.

What we want to reward is the development of practical knowledge. However, some knowledge is not patent-able. Consider, for example, the discovery of “off-label” uses of a drug, which rewards the original developers of the drug but not those who discover the new use. Another example would be a protocol for combining drugs to treat certain cancers in certain patients but which does not involve the development of any new molecule.

We could broaden the patent system to allow protocols and new uses for drugs to be patented. However, the objective of policy should be to increase the amount of knowledge in the public domain, a goal which is not served by a thicket of patents. Broadening the patent system would serve to reward patent lawyers rather than researchers.

Instead, we need to do a better job of aligning the institutions that surround biomedical research with the path that medical discovery is likely to take going forward, as we seek diagnostic tools and treatments based on genetic information and biochemistry. What I propose here is a hybrid of a research grant and a prize, which could be awarded to either for-profit or nonprofit entities.

This mechanism can be implemented incrementally, including by private funders. Incidentally, I noticed this collection of essays in Kling’s blog post about his and Baker’s.

Restrain Regressive Rent-Seeking by Steven Teles:

We often talk about the last third of a century as an era of deregulation and the expansions of markets. And in certain areas that is certainly true. But the most important market rigidities that have been eliminated have been those that protected those from the middle class on down. In fact, the great paradox of the last third of a century is that we have actually had an explosion of regulation in this “supposedly deregulatory” era — but regulation that has the effect of redistributing, sometimes dramatically, upward.

A few examples will suffice to make the point. Intellectual property protections, especially patents and copyright, have been expanded dramatically over this period, both in time (through patent and copyright extensions for existing IP) and across space (by using trade agreements to push American IP principles into foreign law). While there is an argument that this expansion has actually reduced innovation, there is no doubt that it has allowed existing firms to use the force of law (rather than the market) to enrich themselves by reaching further into the pockets of consumers.

Fighting the Crony Capitalist Alliance by James Pethokoukis:

One big way government intersects with the world of ideas and innovation is through patent and copyright law. But U.S. copyright and patent laws have evolved into cronyist protection of the revenue streams of powerful incumbent companies that hampers innovation and entrepreneurship. And that protection, a type of regulation, hampers innovation and entrepreneurship. Indeed, patent and copyright laws have become a key manifestation of the long-term corporatist turn of the U.S. economy that works against startups, economic dynamism, and creative destruction. As Nobel Prize-winning economist Edmund Phelps writes in his book Mass Flourishing: “But now the economy is clogged with patents. In the high-tech industries, there is such a dark thicket of patents in force that a creator of a new method might well require as many lawyers as engineers to proceed … Copyright has only recently seen controversy. The passage by Congress in 1998 of the Sonny Bono Act lengthening copyright protection by 20 years—to author’s life plus 70 years—prevents wider use of Walt Disney’s creations and prevent wider use of performances copyrighted by the record companies. The length of the copyright term may be be deterring new innovation that would have had to draw on products at Disney and EMI. Members of Congress have a private interest in lengthening copyright and patent protections since they can expect to share in the big gains of the few without paying for the small costs borne by the rest of society.”

The 2014 paper “Intellectual Property Rights, the Pool of Knowledge, and Innovation” by Joseph Stiglitz outlines the problem in a similar way: “We have shown that tighter intellectual property regimes, by reducing the newly available set of ideas from which others can draw and by increasing the extent of the enclosure of the knowledge commons, may lead to lower levels of innovation, and even lower levels of investment in innovation, as a result of the diminution in the size of the knowledge pool.” In short, an overly strict patent and copyright regime benefits existing players, not new ones.

I believe this is the only use of the word “commons” in this collection, though only in a quote, and only with respect to enclosure rather than production.

Invest in Smarter Government by Lee Drutman:

If one wanted another way in which public policy limits economic growth, how about the rules around intellectual property? One recent study found that the existing regime, which allow so-called “patent trolls” to do nothing but hold patents and file lawsuits, has caused a significant decline in R&D spending.

Unleashing Innovation by Derek Khanna:

One of the primary ways that the federal government regulates the private sector is through its provisions of patents and copyrights. Patents and copyrights are government-granted protection to incentivize creation and risk-taking, but they are also a form of market limitation – a limitation on our individual liberty. Those limitations, particularly in the cases of patents, need to be justified, because otherwise the government is limiting particular markets to only one participant, or a few participants, thereby creating government-implemented monopolies or oligopolies. Such restrictions drive up prices, remove competitive intensity, and can reduce or even eliminate innovation. In the case of true inventions, the Founders believed that this patent exclusivity is justified (otherwise we wouldn’t have those incredible technologies that may cost billions to develop, such as a new drug). But in other cases where they are not warranted, patents can perversely discourage innovation: big firms have filed patents on non-inventions to ensure high barriers to entry. Often patents have become a moat to protect incumbent firms, a moat created and enforced by the government to stop competition from raiding the castle through competition.

Patents must be reserved only for true inventions, as every time patents are granted for something that is not truly novel, the government is intervening in the market by pulling the emergency brake on innovation and growth and giving a bounty to one producer. Copyright policy is just as problematic, as modern copyright policies are unclear and, from an originalist perspective, unconstitutional. Websites that feature copyrighted content are increasingly finding themselves liable for millions or billions of dollars of liability—this discourages legitimate innovation. This is why some venture funds, such as Y Combinator, warn entrepreneurs that they will not invest in any start-up that touches content/copyright because the legal landscape is so fraught with uncertain liability.

As is typical (link concerns big-budget movies, but I should have a similar page of quotes about big budget drugs) the parenthetical gives away the farm, but fortunately is disputed by the Baker and Kling essays above.

Taxes, Patents, and Money: Three Proposals by Ramesh Ponnuru:

Protections for intellectual property are supposed to promote innovation. While debate among specialists over the proper contours of that protection continues, it appears that aspects of our system are perversely reducing innovation. Low-quality patents on software and business methods appear to have generated a lot of rent-seeking litigation, diverting resources away from productive activity. Scholars suggest that patents in these areas are particularly conducive to this kind of abuse because of their inherently “fuzzy boundaries.” We have inadvertently created a system that creates an incentive to acquire vague patents for the purpose of opportunistic litigation.

It is a growing problem, and it is not easy to see how the abuse of these patents can be fixed. Barring such a solution it would be best to return to our earlier practice of not recognizing patents in software and business methods. Pieces of music can be copyrighted but not patented; the same should be true of programming code. Congress could, for example, exclude from patent protection those industries where it is hard for companies to discover what patents they might be infringing.

Though this change may be good (depending on details), non-vague and non-software patents are also problems. A better direction would be to protect commons-based production from patents: forswear infringement of others’ intellectual freedom, “infringe” others’ intellectual property without consequence.

No Easy Answers by Peter Van Doren:

Innovation is a component of our measured ignorance. Is policy optimally encouraging innovation? Burk argues that our system of intellectual property is premised on the belief that the social cost of the market power created by patents is less than the benefits created by the inventions that result. But there is surprisingly little data to support or refute this belief (Burk 2012). Bell and Parchomovsky (2014) propose to end the one-size-fits-all patent monopoly and its accompanying economic distortions (excessively high prices and reduced output) with a menu of options that would charge inventers more for longer patents with greater rights to sue infringers and less for shorter patents and fewer rights. Their basic insight is that we charge too little now for the monopoly rights we grant and thus have too much intellectual property.

High-Skill Immigration and Visionary Investments by Jim Manzi:

We should reduce social expenditures by 5 percent, and redeploy this money to roughly double annual government R&D spending.

To spend this money most productively, we should think differently about what basic science we conduct here. We should bias basic-research funds not toward those areas that inherently hold the greatest promise, but toward those in which the long-run economic benefits are likely to remain in the United States because they require the build-up of hard-to-transfer expertise or infrastructure that is likely to generate commercial spin-offs. University and research laboratory rules and the patent system should recognize the long-run desirability of researchers creating private wealth in part through the exploitation of knowledge created by these publicly supported institutions.

More fundamentally, the sweet spot for most government research funding will likely be visionary technology projects, rather than true basic research on one extreme or commercialization and scale-up on the other. We have a long track record of doing this well and an existing civilian infrastructure that can be repurposed, including most prominently the Department of Energy’s national laboratories, the National Institutes of Health, and NASA. Each of these entities is to some extent adrift and should be given bold, audacious goals. They should be focused on solving technical problems that offer enormous social benefit, but are too long-term, too speculative, or have benefits too diffuse to be funded by private companies.

Above doesn’t specify how patent system should change, but elsewhere Manzi criticizes software and business method patents. Further, his call for government funding of visionary technology projects is an alternative to government granted patents, e.g., for drug development.

Tax Cuts for Innovators Are a Good Economic Investment by Enrico Moretti:

The problem is that the difference between private and social return on innovation is much larger than the current subsidies. Bloom and Van Reenen estimate that the social rate of return on R&D is about 38 percent, almost twice as large as the private return. The implication is jarring. The United States is not just underinvesting in R&D; our current level of R&D investment is barely a fraction of the optimal level. This is not just an American problem, but it is more salient for the United States than for other countries because of the role that innovation will play in our future growth.

Although patents in theory protect intellectual property, in practice innovative companies that invest in research appropriate just some of the benefits of their efforts. This is an unavoidable feature of the way innovation is created today and the speed at which new ideas and new knowledge spread in the high tech industry. Last year, a federal jury in San Jose, CA did find Samsung guilty of making phones and tablet computers that copy key features of the iPhone and iPad, thus infringing on Apple’s patents. But it is hard to stop the flow of knowledge through lawsuits. When high tech companies need to hire lawyers to protect their products instead of engineers, creativity and innovation inevitably take a toll.

The lessons for Congress are clear: the current U.S. tax credit for corporate spending on R&D is far smaller than it should be.

Perhaps, but such a tax credit should not encourage patents. Preferably it should be conditioned on not patenting and on knowledge sharing.

Boost Highly Skilled Immigration by Alex Nowrasteh:

Several conclusions can be drawn from this research. The impact of immigrant workers on TFP are notoriously difficult to measure and papers attempting to do so are open to methodological challenges. However, much research finds that immigrant workers increase TFP and there is no major study or academic research that has found that immigrants reduce it. Increased patents and innovation are likely the main way by which immigrants affect TFP while task specialization is an additional factor. Studies on immigrant innovation through patents are generally convincing as an increase in the supply of scientists and engineers has historically increased the supply of research and development in the United States. One influential paper by Jones estimated that as much as 50 percent of U.S. productivity growth between 1950 and 1993 could be attributed to growth in the share of scientists and engineers – two sectors likely to expand if skilled immigration was liberalized.

Not about patent policy, but uses patent activity as a proxy for innovation, conferring status on patents. Better metrics for innovation urgently need to be found and used.

Embracing a Culture of Permissionless Innovation by Adam Thierer:

“On Capitol Hill and in Brussels, there seems to be a belief that if only governments adopt the right tax policies, adequately fund R&D, enforce patents and copyrights, and support manufacturing, innovative, then start-ups will pop up everywhere and supercharge economic growth. Unfortunately, that misses an underlying problem: In many parts of the U.S. and Europe, innovation is not really welcome. It is misunderstood and even feared.”

This quote from a footnote is excerpted because there are no mentions of patents in the body, but the quote also summarizes the essay. Perhaps innovation would be more welcome and less feared, not to mention more permissionless, if it were not subject to government-granted monopolies such as patent and copyright.

Finally, two essays that do not mention copyright or patent at all, but are pertinent.

Two Relatively Painless Ways to Boost Growth by Robert E. Litan:

There are now over 2 million people behind bars, of whom over 60 percent are serving time for nonviolent offenses. In particular, over a quarter of incarcerated Americans — more than 500,000 people — are there for drug offenses. Some 40,000 people are behind bars on marijuana charges, and approximately 650,000 arrests for marijuana-related offenses occur every year.

Litan wants to transfer some spending on incarceration to paying some teachers more. Great, though no such excuse for ending the drug war and mass incarceration should be needed. How to prevent the next great criminalization before it results in mass incarceration? Legalize something that everyone does and which is subject to creeping criminalization. Get on a path to sustainable abolition of intellectual property, or it’s over.

The Primacy of Foreign Policy by Tyler Cowen:

It is possible that we are still living inside the biggest bubble of them all and that is called “the peace bubble.” I’ve also heard this described as the bubble of “Pax Americana,” although that is a more partisan take on the role of America in global peace. You might think the chance of this being a “peace bubble” is say only five or ten percent. Maybe so, but still in expected value terms that is still the most important issue to worry about. The breaking of that peace bubble on a larger scale could endanger all of the progress and accumulated well-being of the human race, including the United States.

Let’s not forget that over the next one hundred years, if the world remains relatively peaceful, it is unlikely that most global innovation will come from the United States. China in particular may assume a major role as a generator of new ideas, just as the United States supplied a wide variety of useful innovations to Great Britain starting in the mid to late 19th century. Even if a “Fortress America” could survive geopolitical turmoil in the broader world, it would be a much poorer place. We rely on the rest of the world for inspiration, for creation, for appreciation, for increasing market size and thus the spurring of American innovations, and of course we rely on the rest of the world for innovations more directly. A future America in a chaotic world is much, much poorer and riskier than a future America in a peaceful world.

One thing we can do to increase the chance of a peaceful future is to take the dominant resource, knowledge, off the table as something to be owned and controlled. For years I’ve predicted trade and possible shooting wars over intellectual property, largely on the intuition that states will fight over the most important scarce resource, and knowledge is ever more important, and ever more treated as scarce by intellectual property regimes. As I was writing this I noticed that I had just missed a live stream of a Cato event on Sovereign Patent Funds — A New Issue at the Nexus of International Trade and Intellectual Property. Update your priors accordingly.

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