Crovitz on our Broken Patent System

It’s a little old, but I wanted to highlight an excellent column by L. Gordon Crovitz, the Wall Street Journal publisher turned technology columnist, about the damage our broken patent system is doing to innovation:

Companies as diverse as Verizon, Google, Cisco and Hewlett-Packard recently formed the Allied Security Trust to buy patents they may want to use some day and that otherwise could end up in the hands of “patent trolls.” These firms buy up old patents not to produce anything, but instead to work the system to extract settlements. A similar group formed against trolls to protect the Linux open-source operating system. A Google executive explained that helping to buy up and license patents is the “legal equivalent of taking a long, deep, relaxing breath.” Companies can rest easier, and legitimate inventors get paid for their work.

These corporate trusts seem like odd ways to protect products, but the memory is still fresh of the BlackBerry device almost being forced to shut down. Parent company Research in Motion paid more than $600 million in 2006 to settle a case. But in this and many other cases, companies can’t be sure whether or not they are complying with patent law. For example, by one estimate there are more than 4,000 patents that must be reviewed and potentially licensed by firms selling products or services online. The legal abuses arising from uncertainty are legion. More than 100 companies are being sued for alleged patent infringement by using text messaging internationally.

When our most innovative companies are spending large sums to buy protection from the patent system, you know something has gone awry. Crovitz also highlights important new research suggesting that outside of the pharmaceutical and chemical industries, the patent system as a whole actually creates a net disincentive for innovation:

New empirical research by Boston University law professors James Bessen and Michael Meurer, reported in their book, “Patent Failure,” found that the value of pharmaceutical patents outweighed the costs of pharmaceutical-patent litigation. But for all other industries combined, they estimate that since the mid-1990s, the cost of U.S. patent litigation to alleged infringers ($12 billion in legal and business costs in 1999) is greater than the global profits that companies earn from patents (less than $4 billion in 1999). Since the 1980s, patent litigation has tripled and the probability that a particular patent is litigated within four years has more than doubled. Small inventors feel the brunt of the uncertainty costs, since bigger companies only pay for rights they think the system will protect.

These are shocking findings, but they point to the solution. New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.

Our patent system for most innovations has become patently absurd. It’s a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy. Imagine how much more productive our information-driven economy would be if the patent system lived up to the intention of the Founders, by encouraging progress instead of suppressing it.

It’s great to see another prominent commentator throwing his support behind patent reform.

America’s Self-Destructive Corporate Tax System

A new report from the Tax Foundation notes that America’s corporate tax rate is now 50 percent higher than the average for other industrialized countries. Keep that fact in mind next time you hear a politician “blame the victim” by complaining about companies not paying enough tax or whining that businesses are moving jobs overseas:

…for the 17th consecutive year the average rate of corporate taxes in non-U.S. countries fell while the U.S. corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50 percent higher than the OECD average. …The U.S. continues to have the second-highest combined federal-state corporate tax rate among industrialized countries at 39.3 percent. Only Japan has a higher overall corporate tax rate at 39.5 percent. By contrast, the average corporate tax rate among OECD countries has fallen a full percentage point in the past year, from 27.6 percent to 26.6 percent. Ireland’s 12.5 percent corporate tax rate remains the lowest among OECD nations. The OECD data shows that nine of the 30 OECD member nations have lower corporate tax rates in 2008 than in 2007, including Canada, Germany, New Zealand, Spain, the United Kingdom, Italy, Switzerland, the Czech Republic and Iceland. Germany made the biggest change, cutting its corporate rate 8.7 percentage points from 38.9 percent to 30.18 percent. As a result, Germany fell from having the third-highest overall rate to seventh-highest. France now imposes the third-highest rate of 34.4 percent. Italy had the second-largest rate cut, lowering its rate 5.5 percentage points, from 33 percent to 27.5 percent. As a result, Italy dropped in the rankings from seventh-highest to fifteenth-highest. Canada, meanwhile, dropped from fourth- to fifth-highest after cutting its overall corporate rate from 36 percent to 33.5 percent.

New Errors in Georgia

While the wire services bounce back and forth between declaring that Russian forces are attempting to hold Gori or leaving Gori, President Bush has made a statement that promises to embed the United States more deeply in the conflict, and French President Sarkozy has brokered a cease-fire deal that gives the Russians much of what they want and will be hard to square with, for example, Senator McCain’s position.

First, the Sarko peace deal.  As described here, it offered six provisions:

  1. the sides in the conflict should abstain from using force;
  2. all military activities would be terminated;
  3. all persons in the region should have free access to humanitarian aid;
  4. Georgian forces would return to their positions of permanent location before the conflict started;
  5. Russian forces are to withdraw at their previous position but would be allowed to take additional security measures until an international peacekeeping mechanism was set in place;
  6. there was to be a start of the international discussion of the future status of Georgia’s breakaway provinces South Ossetia and Abkhazia.

However, Georgian President Saakashvili rejected the sixth provision, as discussions of “future status” implied ambiguity about the nature of the two provinces, and Russia accepted, removing reference to future status.

The interesting thing about this deal is that it gives Russia much of what it has been saying it wanted, and looks eerily similar to what happened in Kosovo.  In Kosovo, NATO won the war, established a deterrent military presence in Kosovo, and kicked the can of the hard questions down the road. 

What Russia will likely do now — again, this is subject to change as events on the ground are changing by the minute — is withdraw from territories outside South Ossetia and Abkhazia, appearing to make a “concession” by doing so, in order to press its case for leaving behind a much stronger “peacekeeping” force in the two provinces.

The Sarkozy plan doesn’t appear to offer much resistance to that model, which for obvious reasons the Georgians see as undesirable.  Recall that less than 10 years after the war in Kosovo, Kosovo had been pried from Serbia and its independence had been recognized by the United States and Western Europe.  Since before the Western powers recognized Kosovo, Russian officials warned that they saw a precedent for South Ossetia and other separatist regions in the former Soviet Union.

The Western powers, of course, did not deal with the objections from Russia, and recognized Kosovo as a newly independent country anyway earlier this year.  At that point, observers began claiming that “Russia’s bluff had been called” regarding outright recognition of the separatist provinces, but failed to address the prospect for catastrophic miscalculation by one of the relevant parties.  Which has obviously happened in Georgia.

Now, President Bush is dispatching Condoleezza Rice to Paris and then Tbilisi, and is promising a humanitarian mission will enter Georgia in the form of the U.S. military.  The relevant paragraphs from his statement:

I’ve also directed Secretary of Defense Bob Gates to begin a humanitarian mission to the people of Georgia, headed by the United States military. This mission will be vigorous and ongoing. A U.S. C-17 aircraft with humanitarian supplies is on its way. And in the days ahead we will use U.S. aircraft, as well as naval forces, to deliver humanitarian and medical supplies.

We expect Russia to honor its commitment to let in all forms of humanitarian assistance. We expect Russia to ensure that all lines of communication and transport, including seaports, airports, roads, and airspace, remain open for the delivery of humanitarian assistance and for civilian transit. We expect Russia to meet its commitment to cease all military activities in Georgia. And we expect all Russian forces that entered Georgia in recent days to withdraw from that country.

The italicized portions represent two parts of the statement that present big, dangerous issues.

Issue One: Where will U.S. troops be, what will they be doing, and how long will they be doing it?  Is the president saying that he expects the Russians to open lines of transport through South Ossetia to U.S. troops?  South Ossetia is recognized as part of Georgian territory.  But it seems awfully unlikely that the Russians are going to accept U.S. military personnel in South Ossetia alongside their peacekeepers, which, while they act in a lot of ways that have less to do with keeping peace and more to do with keeping Russian influence over the region, the Russians argue are there in accordance with the 1992 Sochi agreement.  Saakashvili, for his part, rushed to the telephone to tell the New York Times that he interpreted Bush’s statement as promising “definitely an American military presence.”  (Side question: What military assets are Western European powers or NATO powers contributing?)

Issue Two: the Bush statement seems to call for all additional Russian forces inserted into South Ossetia to be withdrawn.  But if the theory about the Kosovo model is right, the Russians will most likely want to leave behind some of those forces in South Ossetia to shore up its influence in the province as NATO left troops behind in Kosovo.  What happens if the Russians leave several thousand additional troops behind anyway?

Both these topics deserve more scrutiny from the press and the public.  The president appears to be looking at a much more direct involvement of U.S. troops and resources on Georgian territory.  His restraint heretofore has been prudent; this measure appears much more risky.

Gasoline Affordability Reconsidered

Last Monday, the Los Angeles Times published an op-ed written by Indur Goklany and me about gasoline prices.  Yesterday, it ran in the Minneapolis Star Tribune Today, that same piece has been posted at the Christian Science Monitor and it will appear in their print edition tomorrow.  Our argument: Once you adjust gasoline prices in 1960 for both inflation and changes in per capita disposable income, you find that gasoline prices today are actually more affordable than they were back then.  Faithful Cato@Liberty readers might well recognize this argument given that it was first offered in a blog post here a few days back by Indur Goklany.

While the predictable grousing on the newspaper comment boards followed (hell hath no fury like a motorist who thinks he was told to stop whining about pump prices), some commenters raised a legitimate issue: Would the picture change if we used median per capita income rather than mean per capita income in our analysis?  Well, yes.  But not by that much.  Let’s walk through the numbers.

First some background.  Income data come from two very different sources.  Disposable income data are produced by the Bureau of Economic Analysis (BEA), an arm of the U.S. Department of Commerce, as part of its effort to estimate the gross domestic product (GDP).  Data on family and household income come from surveys conducted by the Census Bureau.

Disposable income per capita or mean disposable income is simply total disposable income divided by the population of the United States.  Median disposable income data, however, are not available because the GDP data do not come from household surveys.  Only surveys allow us to rank order all the households (or families) and find the number that divides the bottom 50 percent from the top 50 — the definition of the median.

Median income estimates from Census data (the Current Population Survey or CPS) are available only for households and families.  Data regarding median household income are only available from 1967 to the present, so the only measure available to us for longer term analysis is median family income.  But BEA and CPS definitions of income differ.  In 2001 for example, BEA personal income totaled $8.678 trillion while CPS money income totaled $6.446 trillion.   The two income time series differ in important ways.  For example, BEA data include property income and adjustments for underreporting of proprietor’s income.  

With that out of the way, let’s get to the numbers.

(Leaded) Gasoline prices in 1960 averaged 31.1 cents per gallon.  Median family income in 1960 was $5,620.  In 2006 (the most recent year for which we have reliable data), median family income stood at $58,407.  If the price per gallon were the same percent of median family income in 2006 as in 1960, the 1960 price would translate into $3.23 in 2006.  Unfortunately, the (median family income) data aren’t yet available for calculations applying to 2007 or 2008.

A complete history of fuel prices for 1949-2006, adjusted for changes in median family income, can be seen in the figure below.

Offsetting the fact that the price of gasoline as a function of median family income is probably (somewhat) higher today than it was in 1960 is the important fact that vehicle fuel economy is better today than it was then.  The gasoline consumed by passenger cars in 1960 was 14.26 miles per gallon.   By 2006, it was 22.4 mpg.   Even the mileage for all other 2-axle 4-tire vehicles (lights trucks, etc.) in 2006 was 18.0 mpg — higher than the fuel efficiency of cars in 1960.  Hence, the cost of the fuel necessary to drive a mile might well be less today that it was in 1960 if we’re adjusting for changes in median family income.  Again, I say “might” because 2007 and 2008 data are not yet available to provide concrete numbers.

On the other hand, it is certainly true that people have responded to higher incomes and better fuel efficiency by driving more.  Vehicle miles per capita in 1960 were 3,249; in 2006, it had increased to 9,171 (the numbers are author calculations based on vehicle miles traveled data from National Transportation Statistics table 1-32 and population data from Statistical Abstract of the United States Table 1. The 2006 VMT figures includes passenger cars and other 2-axle 4 wheeled vehicles).   Vehicle miles traveled is a function of individual decisions about where to live, where to shop, and how to spend discretionary income.  Many people, of course, made decisions about those things when fuel prices were at their historic lows (the late 1990s) and now find that those decisions are now more costly.  Adjustments are and will continue to occur on this front.

A comprehensive measure of how these various factors — higher fuel prices, higher incomes, better mileage, more miles traveled — work to affect the cost of driving is the percent of disposable personal income spent on gasoline and on all user-owned transportation expenditures over time.  And what do you know?  The percent of income we spend on transportation has been remarkably constant over time even though the distance we travel per capita has nearly tripled (The data for this calculation come from the GDP data available from the National Income and Product Accounts Table 2.5.5 line 69 (total user-owned transportation expenditures) and line 75 [gasoline and oil expenditures] and table 2.1 line 26 [disposable personal income]).

  • In 1960, gasoline expenditures were 3.3% of disposable personal income.  In 2007, gasoline expenditures constituted 3.4% of disposable personal income.
  • In 1960, total user-owned transportation expenditures were 10.8% of personal income.  In 2007, those costs constituted 10.5% of personal income.

So no matter how you slice the (available) data, it tells more or less the same story.  All things considered, the cost of driving is reasonably affordable today relative to what it has been in the past.

Update: Data links added.

The Answer to High Oil Prices and Global Warming? More Global Poverty, Less Immigration

Opponents of immigration are now trying to hitch their wagon to worries about high oil prices and global warming.

An ad on page A12 of today’s Washington Post asks, “If foreign oil has us over a barrel now, what happens when our population increases by another 100 million?” The text of the ad tries to provide the answer: “With America’s population at a record 300 million today, [oil] supplies are again tight in spite of record high prices. And the U.S. Census Bureau projects that another 110 million people will be added to our population between 2000 and 2040.” So, if we want lower oil prices, we need to reduce America’s population growth and that means reducing immigration. Get it?

The ad is sponsored by five anti-immigration, anti-population-growth groups, including the Federation for American Immigration Reform (FAIR) and Californians for Population Stabilization.

The ad provides no evidence that rising global demand for oil has been driven primarily or even significantly by population growth in the United States. In fact, our total oil consumption has actually declined compared to last year, while demand continues to rise in developing countries. The two previous big spikes in global oil prices, in 1973 and 1979, occurred when the U.S. population was 80 to 90 million LOWER than it is today.

The future direction of oil prices will be determined by such factors as energy efficiency, economic growth in emerging economies, oil production, and development of alternative energy sources. Immigration rates to the United States won’t matter.

As though on cue, the Center for Immigration Studies released a report this morning with the headline, “Immigration to U.S. Increases Global Greenhouse-Gas Emissions.” The report argues that immigration “significantly increases world-wide CO2 emissions because it transfers population from lower-polluting parts of the world to the United States, which is a higher-polluting country.”

What the CIS study is really arguing is that rich people pollute more than poor people, so the world would be better off if more people remained poor. The same argument could be used to oppose economic development in places such as China and India that has lifted hundreds of millions of people out of poverty in the past two decades.

Through the dark lens of CIS, the world is a better place when poor people remain stuck in poor countries, and poor countries remain poor.