This month, a leading newspaper ran a column bashing China by two former U.S. intelligence officials. The piece claimed that the United States loses $600 billion a year due to “intellectual property theft” and that “China accounts for most of that loss.”
This was striking for two reasons. First, the number is obviously absurd. Reputable news outlets usually make writers provide some backup for the numbers they use. That doesn’t seem to have been the case here. Second, if the number were plausible, the implications for policy on intellectual property and inequality would be enormous.
Starting with the absurdity of the $600 billion figure, this is more than 25 percent of the value of all U.S. exports. It’s more than one-third of all after-tax corporate profits in America. Does anyone really want to argue that corporate profits in the U.S. would be one third higher if companies were paid for intellectual property that was stolen from them?
While the piece gave no source, industry groups have produced such outlandish numbers in the past by assuming that all unauthorized versions of their product would sell at the retail price in the United States. This means that if the retail price of Windows and the Microsoft Office Suite is $100, and a hundred million unauthorized copies are in use in China, they would count this as $10 billion.
Or to take another example, the Hepatitis C drug Sovaldi has a list price in the U.S. of $84,000. A high quality generic version is available in India for $300. If a million people use the Indian generic, this would count this as $84 billion of stolen property. Of course Microsoft and Gilead Sciences (the maker of Sovaldi) would never see anything like this revenue. If the users of the allegedly stolen intellectual property (the rules are not clear) had to pay the retail price in the United States, almost none of them would buy it.
This point should be pretty obvious to anyone with even the most basic understanding of economics, so how does such an absurd number find its way into a major newspaper? It’s hard not to see a pretty serious class bias problem. While many major news outlets have run pieces ridiculing efforts to reduce the trade deficit in manufacturing jobs, they are prepared to push nonsense arguments to promote the interests of the pharmaceutical industry, the software industry and the entertainment industry in trade deals.
Needless to say, all the condescending arguments made against the people pushing for more balance in manufacturing trade would apply at least as strongly in the case of their intellectual property claims. Think of how much more money developing countries would have to spend on our cutting edge manufactured products if they didn’t have to pay so much money to Microsoft for its software and Pfizer for its drugs?
We also keep hearing about integrated supply chains and how they make things so complicated. Well, if we could get cheaper solar panels from Chinese manufacturers who “steal” intellectual property from companies here (according to their claims), then there will be more jobs in the U.S. for people installing solar panels here. How about some condescending news stories explaining this to the whiners pushing for stronger intellectual property rules who are too dumb to understand the simple economics?
While the double standard at work here is striking, it is worth asking for a moment what it would mean if this absurd $600 billion figure was real. If our companies are losing $600 billion to stolen intellectual property each year, then the total value of patents and copyrights and related protections in the U.S. must be at least three or four times this amount. That would put it in the neighborhood of $1.8 trillion to $2.4 trillion.
This is roughly twice the annual wage income of the bottom 50 percent of workers. It is equal to the full amount of the upward redistribution to the richest one percent over the last four decades. In other words, this is a huge amount of money. If this figure is accurate, then where were all the debates over the steps taken in the last four decades to make patents, copyrights, and related protections longer and stronger?
These protections are supposed to boost growth by providing incentives for innovation and creative work. We know that they increase inequality, since no poor person is collecting royalties or licensing fees. Bill Gates collects a lot of money this way. If we think there is so much money at stake, we should have been debating whether patent and copyright protections were leading to gains in growth that warranted the resulting increase in inequality. We didn’t.
Not highlighting the distributional aspects of our policy on intellectual policy is an enormous failure of the media even using the real numbers. The failure would be of gargantuan proportions if the numbers the numbers that appeared in this column bashing China were real. The media’s neglect in this area serves the interests of the rich and powerful. It is not responsible reporting.
By Dean Baker