Patents and the Abundance Agenda

I haven’t read Ezra Klein and Derek Thompson’s new book, Abundance, but everyone I know seems to be talking about it. Therefore, I thought I would throw in my two cents, not on the book for obvious reasons, but on what a serious Abundance Agenda (AA) should look like. Specifically, I want to talk about patents and how reform of the rules on intellectual property really needs to be at the center of a serious AA.

The key point that most people in policy debates seem determined to ignore is that there is a huge amount of money at stake with patent monopolies and their cousin, copyrights. My calculations indicate that these monopolies raise the cost of the protected items by more than $1 trillion a year. This comes to around $7,500 per household.

In the case of prescriptions drugs alone these protections likely increase the costs by more than $500 billion a year. Imagine we lived in a world where nearly all drugs were cheap. Drugs are rarely expensive to manufacture or distribute. Without patent monopolies, drugs would be selling as cheap generics, costing $10 or $20 a prescription, and often less. No one would have to set up GoFundMe pages to cover the cost of a lifesaving drug.

Patent monopolies also hugely raise the cost of medical equipment like MRIs or kidney dialysis machines. If this equipment sold in a free market, we would likely be paying around a third or less than what we do today. Low-cost drugs and medical equipment would go far toward making medical care affordable.

We do need to pay for the research underlying these innovations, but this can be done through other mechanisms, most obviously direct public funding, as we used to do the tune of $50 billion a year through the National Institutes of Health and government agencies. We can also make this research more efficient by requiring that it be open source. (I discuss funding mechanisms in chapter 5 of Rigged [it’s free].)

In a world where patent and copyright monopolies played a much smaller role, a wide range of items, from smart phones and computers to software, movies, and video games would be far cheaper than is currently the case. This would seem to fit in well with a real AA.

The Political Appeal of Reforming Intellectual Property

But beyond just making things cheap, reforming intellectual property is also likely to have some serious political appeal if any politician ever took it up. First, the effort would be acknowledgement that bad things didn’t just happen to less-educated workers, the losers in the economy over the last half-century. Politicians and their accomplices in the policy world did bad things to them.

Specifically, they repeatedly changed the rules on intellectual property to make patent and copyright monopolies longer and stronger. These rules changes, both in domestic law and international trade agreements, were not just the natural working of the market. They were deliberate policy that had the effect of shifting income from less-educated workers to those with college and advanced degrees.

Putting intellectual property reform on the table is acknowledgement that policy did in fact screw tens of millions of less-educated workers to the benefit of more educated workers. Just to take one important example, before the Bayh-Dole Act passed in 1980, which made it far easier for private corporations to get patents on publicly funding research, just 0.4 percent of GDP was spent of prescription drugs. Furthermore, there was no upward trend in this spending, it had been roughly the same for the prior two decades. Spending on drugs rose rapidly in the next two decades. It is now more than 2.2 percent of GDP, a difference of $540 billion a year.

If we restructured patent and copyright rules to make them shorter and weaker, it would redistribute a massive amount of income from the richest 10 percent of the population, and especially the richest 1 percent, to everyone else. This would be a great act of redistribution that involved less government, not more.

This change would also help with the biggest grievance raised by Klein and Thompson, restrictive zoning. While we badly do need zoning reform, it is worth noting that excessive land and housing demand from the rich and super-rich decreases the supply for everyone else.

To take one particularly egregious example, Bill Gates owns 10.5 acres of prime land for his mansion just outside of Seattle. This could easily be a location for one hundred single-family houses or several hundred multi-family units. And that’s just from one copyright enriched billionaire.

Taking a slightly different angle, the stock of second homes is roughly 6.5 million. Suppose that reformed patent and copyright rules, along with other redistributive measures, cut this figure in half. That would leave another 3.3 million units, 2.3 percent of the housing stock, to be occupied by people as first homes. If we increased current production by 20 percent, a big lift, it would take us more than 10 years to add this much additional housing. In this sense, a bit of redistribution can go far towards creating abundance.

I could go on with other growth enhancing measures that also reverse upward redistribution (free trade in doctors’ services and a modest sales tax on financial transactions to reduce waste in the sector are two favorites), but I’ll save those for another day, perhaps after I’ve read the book. But no one should be confused, patent and copyright monopolies are a big deal in the economy and redistribute an enormous amount of income upward. We should be talking about them when we talk about an abundance agenda.