Digging Piracy

Something rather astonishing happened on the Internet on Tuesday. Let me start with a bit of background: Hollywood has an encryption system called AACS that it uses to scramble the content on high-definiton home video discs. Like all copy protection systems, it only took a few months before hackers found security flaws in the system. In the process they extracted a 16-byte key (basically, a very long number) that allows programmers to unlock the encrypted content.

This key had been floating around various minor websites over the last couple of months. But last month, the organization that controls the AACS system began sending cease and desist letters to various ISPs demanding that the keys be taken down from websites that were displaying them. In response, people all over the web began posting copies of the key, which is just a 16-character string.

One of the sites that had the key on it is Digg. Digg is a news website in which all of the news stories are chosen by the collective wisdom of readers. Anyone can submit a story, and then other users can vote for (called “digging”) or against (called “burying”) individual stories. The stories that get the most votes get promoted to the front page where they’re viewed by hundreds of thousands of people.

Somebody posted a story containing the AACS key, and Digg got a letter demanding that the story be removed. Digg complied. Princeton computer science professor Ed Felten describes what happened next:

Then Digg’s users revolted. As word got around about what Digg was doing, users launched a deluge of submissions to Digg, all mentioning or linking to the key. Digg’s administrators tried to keep up, but submissions showed up faster than the administrators could cancel them. For a while yesterday, the entire front page of Digg — the “hottest” pages according to Digg’s algorithms — consisted of links to the AACS key.

Last night, Digg capitulated to its users. Digg promised to stop removing links to the key, and Digg founder Kevin Rose even posted the key to the site himself.

Fred von Lohmann has a good rundown on the legal liability Digg could face from allowing the key to be posted on their site. But more interesting, I think, is the light the incident sheds on the broader debate over Internet piracy.

In a sense, Digg is a microcosm of the Internet at large. What makes the Internet so powerful is that we’re finding more and more clever ways to turn tasks that once required a human being over to machines. In the case of Digg, Kevin Rose found a way to automate the editing process. Instead of having a single human being read through all the stories and select the best ones, he created a system in which readers—who are on the site reading stories anyway—could quickly and easily choose stories for him. This has made the site extraordinarily successful.

But technology is amoral. A system that transmits news and information can just as easily be used to transmit pirated music, encryption keys, or even child pornography. Moreover, you can’t fine a computer algorithm or throw it in jail. Which means that as we automate more and more of our information-distribution systems, there are fewer and fewer ways for the legal authorities to exert control over what kinds of information is transmitted.

In the early days of the Internet, people created special-purpose tools like Napster whose primary use was to swap illicit materials. Copyright holders got those tools shut down. But increasingly, illicit information sharing is being done using the same tools we use to share legal content. Napster’s primary use was to share copyrighted music. But one of its successors, BitTorrent, is widely used to exchange legitimate content, including open source software, computer game updates, and even legitimate movie downloads. It would be unreasonable to outlaw BitTorrent, given how many legitimate uses it has.

On Tuesday, Kevin Rose had only two options: He could allow the encryption key to appear on his site, or he could shut his site down. Shutting his site down wasn’t really an option (it’s a multi-million dollar business) so his only real choice was to allow the content to be transmitted. As a society, we face precisely the same dilemma with regard to the Internet as a whole. People use the Internet to transmit information most of us think they shouldn’t be transmitting. But our only alternatives are to cripple the Internet or turn the country into a police state. Nobody wants to do either of those things, so we’re going to have to live with the fact that any information a significant number of people want to share is going to be shared. We’re going to have to find ways to adjust our copyright system to a world in which anyone who’s willing to break the law will be able to get most copyrighted content for free. As a supporter of copyright, this doesn’t make me happy. But there doesn’t seem to be anything we can do about it.

REAL ID Comment Campaign

The comment period on Department of Homeland Security regulations implementing the REAL ID Act ends early next week. A broad coalition of groups has put together a Web page urging people to submit their comments. The page has instructions for commenting, a quite helpful thing given how arcane the regulatory process is.

Feel free to comment – good, bad, or indifferent – on the regs. My views are known, but the Department of Homeland Security doesn’t know yours.

Two Million French Have Escaped France

Anne Applebaum’s Washington Post column discusses the upcoming French election. But most relevant for fans of tax competition, she notes that two million French have fled the high taxes and economic stagnation of their home country. Not surprisingly, a poll reveals that the overwhelming majority of French expats are happy in countries with more opportunity. Applebaum also explains that Europe’s less competitive nations have been trying to export their anti-growth policies in an effort to “make life equally difficult everywhere.”

Standing in the heart of London’s financial district, Sarkozy heaped compliments upon his country’s historic enemy. The British capital was, he said, a “town that seems more and more prosperous and dynamic every time I come here.” More important, it had become “one of the great French cities.” He understood, furthermore, that hundreds of thousands of Frenchmen had moved to Britain because “they are risk-takers, and risk is a bad word” in France. … [E]ven a Sarkozy victory in the final round of voting on Sunday won’t persuade all of the 2 million-plus French exiles to go home. Asked by a French polling company, TNS Sofres, “Are you satisfied with your life abroad?” 93 percent of French emigres surveyed recently said “yes.” … [T]here is nothing odd about the fact that the French now vote with their feet. There are better-paying jobs in London, taxes are lower in London, the economy grows faster in London: C’est la vie – and tough luck for Paris. … For the past decade, French, German and other European leaders have tried to unify European tax laws and regulations, the better to “even out the playing field” – or (depending on your point of view) to make life equally difficult everywhere.

Fed Chairman Explains Benefits of Free Trade, Warns against Protectionism

Federal Reserve Board Chairman Ben Bernanke delivered an important speech Tuesday on the benefits of free trade to our economy and workers. Speaking to an audience in Butte, Montana, Bernanke explained why trade raises our standard of living and backed up his economic logic with up-to-date evidence.

He acknowledged that some workers and companies lose out, at least temporarily, from more vigorous global competition, but he warned that protectionism would be the worst possible policy response.

As the Fed chairman told his audience:

Restricting trade by imposing tariffs, quotas, or other barriers is exactly the wrong thing to do. Such solutions might temporarily slow job loss in affected industries, but the benefits would be outweighed, typically many times over, by the costs, which would include higher prices for consumers and increased costs (and thus reduced competitiveness) for U.S. firms. Indeed, studies of the effects of protectionist policies almost invariably find that the costs to the rest of society far exceed the benefits to the protected industry. In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers.

Rather than closing U.S. markets, Bernanke wisely recommends “policies and programs aimed at easing the transition of displaced workers into new jobs and increasing the adaptability and skills of the labor force more generally.”

If you want to understand what free trade really means for Americans, I recommend the full text of his illuminating speech.

Sarkozy Is the Conservative Candidate?

The political spectrum in France is so distorted that a candidate who calls for new taxes, tax harmonization, expanded trade barriers, and restrictions on capital flows is the supposed conservative candidate. The UK-based Times reports on the anti-market views of Nicolas Sarkozy:

At his first EU summit, in Brussels in June, a President Sarkozy would push hard for a new tariff on imports from outside the European Union to protect jobs and discourage firms from moving production outside the area, he said. …Mr Sarkozy said that he would also press for harmonised business taxes — a project long rejected by Britain and other states. It was time to reduce the power of the national veto in such areas, he said. His proposal for a protective “European preference” in trade is also opposed by Britain and conflicts with the Union’s free-trade policies.

Scandalous Pensions for European Parliamentarians

While the US Congress is infamous for its taxpayer-subsidized perks, US lawmakers are amateurs compared to the scammers in Brussels. Members of the European Parliament have a lavish taxpayer-financed retirement scheme that enables them to get $2 of taxpayer money for every $1 they put into their pension fund. But this immense perk does not even require them to necessarily use their own money. As the UK-based Telegraph reports, some MEPs – perhaps most MEPs – use office administrative funds:

The European Parliament’s bureau, the body that oversees the assembly’s administration, has voted to prevent publication of a list naming the 475 MEPs who benefit from a pension scheme worth more than £1,400 a month to Euro-MPs with the taxpayer matching every euro personally contributed with two from the public purse. Payments are controversial because, for “administrative reasons”, the MEP’s personal contributions are taken automatically from office expenses. No one checks whether the politician actually pays anything into the fund from his own salary. Many in Brussels believe that a “large proportion” of Euro-MPs are using their office payments to get a free second pension on top of national schemes.

New Report Unwittingly Reveals Small Impact of China Trade on U.S. Jobs

Our friends and ideological rivals at the Economic Policy Institute in Washington are releasing a report this week that supposedly documents that trade with China has cost more than 2 million Americans their jobs. The report is illuminating, but in ways its author did not intend.

Here’s how EPI’s press release on the study describes its results:

The dramatic rise in the United States’ trade deficit with China from 1997 - 2006 has cost jobs in every region in the country.  In a new report, Costly Trade with China, to be issued May 2, 2007 by the Economic Policy Institute, economist Robert Scott reports the growth of the trade deficit with China in this period has displaced production that supported 2,166,000 U.S. jobs, with New England being the hardest hit region of the country. 

For reasons I’ve explained in detail before [.pdf], EPI’s methodology for calculating job losses from trade is fundamentally flawed. Its model ignores the dynamic effects of trade on U.S. economic growth, the beneficial effects of foreign investment, and the tremendous and healthy “churn” of the U.S. labor market.

Even if we accept EPI’s calculation of 2.2 million jobs lost, that is a drop in the bucket in an economy that employs almost 150 million people. Note that EPI’s number is spread over a decade, meaning that the actual number of jobs lost each year on average would be 216,600.

Compare that to the 320,000 or so Americans who line up EVERY WEEK to claim unemployment insurance after being displaced from their jobs–mostly because of technology, and domestic competition. In other words, trade with China, even by EPI’s exaggerated measure, accounts for about three business days’ worth of unemployment claims in a typical year.

More than compensating for the relatively small job displacement caused by trade with China are the huge benefits it delivers through lower prices at the store, lower interest rates, growing export opportunities, and greater peace and stability in East Asia.

For more on trade with China, check out our research at www.freetrade.org.