How to Break the Grip of Lobbyists

James Q. Wilson, reviewing Robert Kaiser’s new book So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government, explains how we could – but won’t – break the power of lobbyists:

Or one could do what would make the greatest difference: reduce federal spending programs of the sort that create incentives for lobbyists to expand them. The central reason earmarks developed in the 1970s is that by then Washington was trying to solve so many problems that it appropriated money for virtually everything.

Kaiser acknowledges that this is the problem. He notes that politicians, both liberal and conservative, have produced “a more intrusive government, more important to the well-being of more Americans.” The more groups saw “their own fate at stake in Washington’s debates on public policy, the better the market for lobbyists,” he writes.

But reducing the extent of government activity is only slightly more likely than amending the Constitution. It may be better to step back and ask, “Do American voters dislike Washington because it is corrupt, or do they dislike it because it is ineffective in solving the problems (some real, some only imagined) that it has embraced?”

When the federal agenda did not include agriculture, the environment, drug abuse, gun control, academic research, mortgages, homelessness and school quality – and that was during Kaiser’s lifetime and mine – it was hard to have an earmark because there were few programs to which they could be attached. And that was also the time when the great majority of Americans thought national officials were doing a good job.

Patents and Property: The Evidence

I’ve been really impressed with the job that Regulation, Cato’s quarterly journal of regulatory policy, has been doing covering patent policy of late. A year ago, I highlighted a fantastic exchange between legendary libertarian legal scholar (and Cato adjunct scholar) Richard Epstein and Berkeley law professor Peter Menell over the legal and philosophical status of the patent system. Epstein, drawing a close parallel between traditional property rights and patent rights, argued that courts should give patent holders the same kind of strong enforcement powers—including the power to obtain injunctions against infringers—that are available to the holders of traditional property rights. Menell, for his part, emphasized the differences between patents and traditional property rights, and argued that in light of the patent system’s various deficiencies, it’s a good idea to give trial judges wide discretion about whether to award injunctions or monetary damages in infringement cases.

In the latest issue of Regulation, two of my favorite patent scholars, James Bessen and Michael J. Meurer, contribute something that’s all too rare in patent debates: empirical evidence. They argue that at root, Epstein and Menell’s dispute isn’t so much a philosophical disagreement as an empirical one: do patents, in fact, operate in the same beneficial fashion as traditional property rights? That is, do they enhance legal certainty and increase incentives for innovation, or do they confuse and discourage potential innovators? This is a question that can’t be settled in the abstract; it must be answered by looking at the performance of real patent systems and seeing what effects they have in real industries.

Bessen and Meurer’s answer to the question “do patents promote innovation?” is “it depends.” In particular, there appears to be wide variation in the efficacy of the patent system across nations, industries, and time periods. Historically, the patent system appears to have worked somewhat better in the United States than the UK, although its performance in the 19th century was mixed in both cases. Today, the patent system appears to work well for the pharmaceutical and chemical industries and poorly for most other industries. In most non-chemical industries, the costs of litigation are so astronomical as to completely swamp the patent system’s benefits. That is, the threat of litigation due to inadvertent infringement discourages research and development more than the patent system’s rewards to inventors encourages it. If Bessen and Meurer’s data are right, then the public would be better off if those industries did not have access to the patent system at all.

Bessen and Meurer stop there in their Regulation piece, but in their book, they argue that the fundamental problem is that outside of the chemical industries, the patent system does a poor job of defining the boundaries of patent rights. That is, in industries like software, it’s difficult to determine which patents cover any given product or technology. It’s analogous to a physical property regime in which there were numerous, overlapping claims for any given piece of land, and no clear procedure for sorting out the true owner. Such a “property” system would not have any of the beneficial features that libertarians correctly attribute to well-designed property regimes.

Friedman prize winner Hernando de Soto made a name for himself by advocating reforms to third-world property systems to make them work more like Western property systems. I think we should regard patent reformers like Bessen, Meurer, and Menell as doing something similar: seeking to reform the patent system to bring something like the predictability found in traditional property systems. De Soto understood that until that can be achieved, it’s crucial that the old “property” system not be strictly enforced, because the laws on the books are so far out of sync with the facts on the ground. It’s not fair to a Guatamalan squatter to raze the home he’s lived in for a decade because some bureaucrat decides the land rightfully belongs to someone else. By the same token, it would be unfair to an innovator like Vonage to force it to shut down the Internet telephony network it has constructed because it accidentally violated one of Verizon’s overly-broad patents. Before insisting that people respect patents, we need to make sure that the patent system is respectable.

Patent Trolls Are a Symptom of Deeper Problems

The Center for American Progress’s Matt Yglesias emailed to tell me about the latest issue of Science Progress, CAP’s science journal, which includes an in-depth series of articles on patent reform. The article that particularly caught my eye was this piece on patent trolls. In it, Daniel P. McCurdy discusses the controversy over firms whose sole reason for existence is to acquire patents and then use the threat of litigation to extract licensing revenues. The classic patent troll has no products and no employees other than the lawyers required to negotiate licensing deals and file patent lawsuits.

Patent trolls are a real concern. Most famously, in 2006 Research in Motion was forced to pay $612.5 million to a patent-trolling firm called NTP. No one in the case claimed that RIM had directly infringed NTP’s patents. Rather, RIM had independently developed its technology and only found out years after the fact that it might be covered by NTP’s patents. Even more outrageous, the Patent Office had issued “non-final rejections” of the patents at issue in the case, but didn’t move quickly enough to spare RIM from forking over a 9-figure settlement to NTP.

With that said, it’s important to keep in mind that patent trolls are a symptom of deeper problems with the patent system, not the cause of the patent system’s problems. If we had a well-designed patent system in which only high-quality patents were issued, it would be much harder for patent trolls to engage in the kinds of abusive behaviors McCurdy laments. The reason patent trolling is so profitable is that over the last quarter century the courts have expanded patenting into new areas like software and business methods, and dramatically lowered the bar for receiving a patent. As a result, patents that would have been rejected 30 years ago (like this ridiculous patent on removing white space from database entries, which IBM received earlier this month) are now routinely approved by the Patent Office. As a result, patent trolls are able to buy up low-quality patents by the truckload. Even though the vast majority of the patents won’t survive legal challenges, defendants can’t take the chance that one of them might survive and force the firm into a 8- or 9-figure settlement.

Patent trolls make good poster children for the patent system’s dysfunctions, but focusing too much on them ignores the fact that abusing the patent system is a game played by large companies as well. For example, Verizon managed to extort tens of millions of dollars from Vonage to settle a lawsuit over an absurdly broad Internet telephony patent. Verizon, of course, isn’t a “patent troll,” but a competitor interested in hobbling an up-and-coming competitor. Any patent reform needs to address the Verizons of the world too, not just the NTPs.

The problems with the patent system have primarily been caused by the United States Court of Appeals for the Federal Circuit, which has jurisdiction over patent appeals and has aggressively expanded patenting over the quarter-century since its creation by Congress in the early 1980s. In the long run, the only solution to what ails the patent system is to undo the mistakes the Federal Circuit made. The Supreme Court has begun to make progress in that direction with recent decisions such as eBay (which weakened patent trolls by making injunctions harder to get) and KSR (which raised the bar on obviousness). The Federal Circuit’s Bilski decision, which placed new restrictions on “abstract” patents, is another step in the right direction. But there’s much more to be done. Most importantly, the courts need to overturn the Federal Circuit’s decisions from the 1990s that ruled (ignoring contrary Supreme Court precedent) that software was eligible for patent protection. It’s not a coincidence that the most prominent examples of abusive patent lawsuits are almost all in the IT sector.

There are also steps Congress could take, but the changes most frequently discussed—switching to a “first to file” system, for example—aren’t likely to have much of an impact on the problems of low-quality patents. A better option would be to follow Jim Bessen and Michael Meurer’s advice and dramatically increase fees for obtaining and renewing patents, which would give patent holders incentives not to waste everyone’s time with low-quality patents.

Finally, given that the Federal Circuit has been responsible for many of the problems with the patent system, Congress should strongly consider phasing out the Federal Circuit and returning jurisdiction over patent issues to the 11 geographically-based circuit courts. As I argued in an issue of TechKnowledge last year, competition among circuit courts is an important part of our decentralized common-law system of justice, and it has served us well in virtually every other area of the law. The experiment with a unified patent appeals court has not gone well, and Congress should consider reversing its mistake.

The Shape of Waste to Come

House Democrats have released a $825 billion plan to “stimulate” the nation’s economy.  After reading through the 13-page press release, it is blatantly obvious to me that the proposal is nothing more than a conglomeration of traditional special interest favorites.  Education pork?  Check.  Science pork?  Check.  Transportation pork?  Check.  Pork for state and local governments?  Check and check.

Cato scholars have written extensively on most of the plan’s components at one time or another.  For instance, anyone interested in the alleged stimulative power of more federal dollars being spent on higher education should check out Neal McCluskey’s post from Friday.  Or see Chris Edwards and Peter Van Doren on infrastructure spending in this nifty piece.

In no particular order, I thought I’d pick out some of the programs targeted for “stimulating” and provide an example of how taxpayers can expect their money to be spent.  Lest anyone think I’m cherry-picking, the following hardly scratches the surface:

HOME Investment Partnerships: “$1.5 billion to help local communities build and rehabilitate low-income housing using green technologies.”

A March 2008 HUD Inspector General audit found that of the $10.5 million in HOME funding Fulton County Georgia received since 2000, $6.4 million involved questionable usage.  According to the Atlanta Journal Constitution, a nonprofit that was originally allocated $244,850 by the county for a home building project was given another $220,000 due to cost overruns.  The nonprofit was supposed to repay the money when the homes were sold but went into default and the money was never recovered.  Only one four-plex housing unit was near completion and it has since succumbed to vandals.  There’s no word from HUD bureaucrats yet on whether the weeds growing up around the building count as “green technologies.”

Homeless Assistance Grants: “$1.5 billion for the Emergency Shelter Grant program to provide short term rental assistance, housing relocation, and stabilization services for families during the economic crisis.”

An October HUD IG audit of a Chicago homeless assistance grantee, which has received $2.8 million since 2004, found that it “materially failed” to manage its grant money.  According to the audit, $671,252 in unsupported expenses were uncovered including money spent on DVDs, video consoles and games, audio systems, digital camera, and party supplies.  $2,840 was spent on maintenance for the executive director’s personal vehicle.

Self-Help and Assisted Homeownership Program (SHOP): “$10 million for rural, high-need areas to undertake projects using sustainable and energy-efficient building and rehabilitation practices.”

The Association of Community Organizations for Reform Now (ACORN) is a radical leftist outfit known for perpetrating vote fraud and advocating for detrimental government policies, of which it often benefits from financially.  As of 2006, ACORN has received over $2.7 million in SHOP funds.  As Sol Stern wrote in City Journal, “It [ACORN] promotes a 1960s-bred agenda of anti-capitalism, central planning, victimology, and government handouts to the poor.  As a result, not only does it hard the poor it claims to serve; it is also a serious threat to the urban future.”

Community Development Block Grants: “$1 billion for community and economic development projects including housing and services for those hit hard by tough economic times.”

In 2006, the HUD IG looked at the CDBG program and found that fraud by local governments and private grantees was common and increasing.  After reviewing only 35 of nearly 1,200 CDBG grant recipients since 2004, investigators tallied $100 million in improper or questionable spending.  For example, a December audit of the City of San Diego’s use of CDBG money found that $1.8 million was spent on ineligible activities and another $11.1 million in spending could not be supported due to insufficient reporting.  In one instance, thousands of dollars were spent on a festival to celebrate a shopping center.

Economic Development Assistance: “$250 million to address long-term economic distress in urban industrial cores and rural areas distributed based on need and ability to create jobs and attract private investment.”

This money will be administered by the Dept. of Commerce’s Economic Development Administration.  The EDA has been a recognized source of wasteful spending since its creation in the 60s.  It was a frequent target of former Sen. William Proxmire (known for his anti-pork “Golden Fleece Awards”) who once stated that the EDA “deserves to die.”

One EDA boondoggle highlighted by Proxmire is memorialized on the internet.  The EDA funded grants to Bedford, Indiana to build limestone replicas of the Great Wall of China and the Egyptian pyramid of Cheops.  An EDA official at the time said that the grants “gave promise of bringing some economic development to a very poor part of Indiana.”  The project was never completed.

What the FISA Court of Review Said and Didn’t Say

After a quick read of the FISA Court of Review’s latest opinion on NSA wiretaps (In Re: Directives) …

Essentially, the Court affirmed that the Protect America Act was constitutional as applied to a particular telecom company.  More specifically, the Court held:  (1) A warrant might impose unreasonable delay.  There’s a “special needs” exception to the warrant requirement for foreign intelligence targeted at a person reasonably believed to be outside the US.  (2) The “reasonableness” requirement of the 4th Amendment was not violated. National security trumps the privacy right of targets even without a court-reviewed determination of the purpose, target, and particularity of the search. Executive branch review of those items, along with minimization procedures, provided sufficient safeguards.

Notably, the Court did not address the original NSA warrantless surveillance program, which covered communications between US persons in the US and persons outside the US, regardless of the target’s location.  Moreover, the Court’s holding was constitutional, not statutory.  No one challenged whether the NSA was complying with the terms of the Protect America Act.  The issue was whether that Act was itself constitutional, as applied.  Recall that my principal concern regarding the original NSA program was whether the executive branch had unilaterally adopted procedures that Congress had either not approved or expressly rejected. It was the Youngstown paradigm that the executive branch had offended, even if the original NSA program might have passed constitutional muster had it been enacted by Congress.  Nothing in the Court’s latest opinion is contrary to that assessment of the original program.

It’s also worth noting that the Protect America Act was replaced by the FISA Amendments of 2008, which requires, among other things, an individualized probable cause determination by the FISA court to surveil US persons outside the US.  In other words, the Court’s latest opinion addresses an act that, first, has been superseded and, second, was deemed by Congress to be unwise as a policy matter even if it survived constitutional scrutiny.

Expensive, Dangerous, and Unnecessary

On Friday, Washington Post business columnist Steve Pearlstein made a great case against the $825 billion “stimulus” monstrosity starting to take shape in the hallowed hallways of Congress.  I’ll sample some of the good stuff:

Great news! We’re going to lose only another 2 million jobs! And it will cost the average American household only $6,000.

The basic problem is that over the past several years, the U.S. economy over-expanded in response to a surge in debt-financed spending by American households and government.

The current recession is the process by which a market economy adjusts to that reality, which in this case could involve shrinking capacity in many sectors by 10 percent or more. And while that adjustment will be brutal, it is necessary to get to the point where supply and demand get back into balance so that the economy can begin to grow again in a healthy and sustainable way. To try to stop that process and return things to the way they were would amount to nothing more than reinflating the bubble economy.

Unfortunately, he concludes:

What government can do, however, is try to manage the process so that it doesn’t spin out of control, as it probably would, and turn a recession into something deeper and longer. That’s what the stimulus is about.

Steve, you had me at hello!  You’re telling me that the same gang of enlightened elected officials who fostered this economic downturn with their profligate spending, perverse incentives, and politicized subsidies are to be tasked with fixing the mess with an extra few hundred billion taxpayer dollars?

He proceeds to rhetorically ask “What is the optimal level of stimulus?” and admits that “In truth, nobody really knows.”

Nobody really knows, yet the continuance of bailout mania is the prudent course?  At this point in the game Congress is acting as if it’s playing roulette with other people’s money.  Oh wait, it is.

Time to Conjure Up the Ghost of Harold McGugin

As federal policymakers trip over each other to launch “New Deal II,” I thought I’d share a poignant statement delivered by an obscure Kansas congressman on the House floor in 1932.  Congressman Harold McGugin’s career apparently didn’t last too long, and there’s little information on the internet about him.  So, should some knowledgeable historian report that the man didn’t like kittens or kept the neighborhood kids’ baseballs when they strayed into his yard, please forgive me.  Regardless, I’d like to see more statements like this on the House floor during these heady days of “stimulus.”

I do not believe the obligation is upon the Congress of the United States to solve the financial, social, and economic problems of the individual citizens of this country.  The Federal Government was not framed for that purpose…We cannot escape the proposition that every time we appropriate money out of the Public Treasury to solve our troubles, whether they be troubles of the plug hats or of the humble people, we are following socialism.  Marxism is sweeping this country, and nowhere it it finding greater hold than in this particular Congress…I know not of a single emergency measure that is not founded upon the proposition of milking the Public Treasury.

My emphasis added.