The start of what will no doubt be a continuing series:

Dear New York Times:

Laudably, articles in Sunday's NYT address the need for innovation. Not one mentions the single most important ingredient needed to encourage innovation - patent reform. Patents no longer serve to encourage innovation. Rather, rent-seekers see who have the best ideas and use patents to blackmail them. Software has been one of the great engines of growth. Yet Bill Gates said: "If people had … taken out patents, the industry would be at a complete standstill today." Industry is now at a standstill and there can be no new direction for American innovation without a radical patent reform. Let us roll back patent protection in software; enforce the existing standard of non-obviousness; and eliminate the kidnapping of ideas for ransom by providing an independent invention defense. This - without public money, and unlike the random assortment of stimulus spending currently being proposed in Congress - would build the foundation for sustained economic growth.

Sincerely:

Michele Boldrin, David K. Levine, and Stephen M. Silberstein

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Michele Boldrin is Joseph G. Hoyt Distinguished Professor, and Chairman, in the Department of Economics at Washington University in St. Louis. He is a Fellow of the Econometric Society and a CEPR Research Associate. He is co-author of Against Intellectual Monopoly from Cambridge University Press, August 2008.

David K. Levine is John H. Biggs Distinguished Professor in the Department of Economics at Washington University in St. Louis. He is the President of the Society for Economic Dynamics, a Fellow of the Econometric Society and an NBER Research Associate. He is co-author of Against Intellectual Monopoly from Cambridge University Press, August 2008.

Stephen M. Silberstein co-founded, and served as the first President of, Innovative Interfaces Inc., the world's leading supplier of computer software for the automation of libraries.

What is the next great wave of innovations? It is hard to know for sure, but over-the-air internet seems an obvious possibility. We observe the following facts

*Cell phone service is highly monopolistic and lousy.

*Over-the-air internet service has arrived - watch people with their iphones at the restaurant...

*Over-the-air internet service is lousy - watch how long it takes them to load a web page

This raises the question: what would really good over-the-air internet service do? Really high speed all the time everywhere over-the-air internet exists in laboratories all over the world. It is directional and frequency hopping and it cleverly gets around problems of interference, including that caused by other devices. The technology is there now. Why can't we have all the information in the world at our fingertips all the time? Think of all the great business opportunities - from revolutionizing markets for small businesses, to great new businesses, to the business of writing the software, building the small portable internet devices, to building the large radio networks needed to make the vision a reality. Expensive proprietary over-the-air networks revolutionized trucking and shipping. Why not revolutionize everything else? There is no question that there is huge opportunity here: for individual people to make their fortune, for the more average of us to make a living in a new and growing industry.

So what is keeping the vision from reality? Not enough support from the government? No - government is the problem. From dragging their feet on the allocation of "white space" spectrum, to delaying the introduction of HDTV, to the more fundamental problem of tying up massive amount of bandwidth with obsolete over the air television that provides minuscule benefits to practically nobody - government regulation is the culprit. We don't need "net neutrality" laws; we don't need government regulation of the airwaves - we need competition, hard and fierce and innovative.

And let us not forget patents and copyright. So much of the new technology is tied up with patents of course. But I'm especially reminded of a conversation I had with Gary Shapiro, President of the Consumer Electronic Association, who I met at a Cato conference several years ago. He represents mostly smaller electronics firms - exactly the ones who are eager to innovate and bring new products to market. What is their greatest fear? That competitors will steal their ideas if they don't tie them up with patents? Of course not. It is that they will be sued by copyright holders for somehow encouraging piracy. If you want to know what that is all about, go look up the case of Replay TV.

Finally - what does it take to succeed? The biggest success of the last decade is Google. Did they do this by trying to squelch the competition with legal means? No. They have a vision - all information at your fingertips all the time - and they've ruthlessly pursued that vision, necessarily bending and breaking copyright laws along the way. So...do we spend our time patenting elaborate business models? Or do we build better mousetraps?

I think it is time to start a campaign to free the airwaves. The time has come for inexpensive high quality access to everyone and everything all the time.

Chapter 9 live blog

I just came across an interesting thing I had not known about the effect of state meddling on publishing. See Wikipedia here and here, noting:

Thor Power Tool Company v. Commissioner, 439 U.S. 522 (1979) was a United States Supreme Court ruling which changed the way companies are allowed to depreciate their unsold inventory. Thor's inventory was overestimated, and was written down to scrap, but it did not immediately scrap the items or sell them at reduced prices. Thor treated the write-down of excess inventory as an adjustment to closing inventory increasing the costs of goods sold and reducing tax due. Reducing tax liability may not have been the drive behind Thor management's incentive to reduce inventory, but a welcome by-product; new management may have wanted to reduce the previous year's profits so as to seemingly increase their performance in the following year.

An unforeseen side effect of this decision was that it became less profitable for publishers to keep slowly but regularly selling books in print (their backlist). Some argue that this has made it harder for midlist authors to make a living because books tend to be remaindered or pulped and go out of print more quickly.

In other words, a de facto change in the tax laws concerning inventories made it profitable to pulp unsold books earlier and this has had an adverse effect on authors who have slow but steady sales. As Levine noted to me, this ties into the whole issue of digital technology. On the one hand, digital technology makes copyright de facto obsolete, and it can make it harder for creators to recoup their investment because the market may be flooded with cheap copies quickly. This is what the pro-copyright forces argue (so therefore we need draconian copyright laws to overcome all this). The basic facts are true, but there are many facts that go the other direction. This is one of them--by selling electronic or print-on-demand copies directly to buyers authors don't face "early liquidation" by publishers.

In The Reach of Patent Law and Institutional Competence, one Richard Gold makes an odd argument that "stealth libertarianism" is to blame for some of the problems in patent law. He believes there has been a "clandestine shift in patent law's normative base from a utilitarian justificatory rationale to a libertarian one; a trend the author refers to as 'stealth libertarianism.'"

Under the "libertarian" (sic) approach, it is assumed "that the social good is always attained by expanding patent rights in all domains," but courts dress this "libertarian analysis in the commonly accepted language of utilitarianism. This surreptitious adoption of libertarian analysis is particularly disconcerting because it enables courts to avoid addressing the ethical and distributional effects of patent determinations."

As far as I can tell from a quick read, Gold maintains that a utilitarian basis should be employed, instead of a "libertarian" one; that courts are incompetent to make these utilitarian determinations; and that if utilitarianism is correctly applied, patent law scope would not be expanded as much as it has been by courts applying a "stealth libertarian" rationale.

I can't figure out if this guy is an ally or not.

Live blog 7

"Some talk about the problems of general equilibrium theory and the Austrian alternative. Some amazing material for dissertations."

The two of us signed a statement from a number of economists urging caution about the stimulus package now before Congress. The statement was a modest one - here we want to elaborate our own views.

Amidst all the op-ed pieces and argument in Congress, the debate over stimulus spending is also a hidden fight over who gets the money. The great problem with government spending is that everybody wants a piece of the pie: each party wants make sure that its constituents benefit. So, for example, the Republicans favor cuts in tax rates because their rich constituents pay more in taxes, while the Democrats favor spending and lump sum tax rebates, because that gives money to their constituents. There is, of course, a lot of dissembling on both sides over this as the economic crisis becomes an opportunity to purchase future votes at the expenses of the public purse.

Paying off voters aside, is there a case for a stimulus package? People are worried about the future and are sensibly reducing their spending. Does this mean that the government should step in and do the spending for them? Put that way, the idea seems like a non-starter: if we are poorer, so is our government which will be able to collect fewer, not more taxes. On the other hand, government borrowing is cheap right now, and labor costs relatively low. Isn't this the right time for the government to spend? Put that way stimulus spending seems like a good idea: borrow and spend when costs are low and you get more bang for your buck. However, if we accept this logic, then we reach an interesting conclusion - the additional spending now should be offset by less spending in the future. Sadly none of the plans by either party propose anything of the sort. The plan is simply to spend more money - how that will be paid for in future tax increases or reductions in government services is not a topic of discussion.

A second key issue is whether the government should spend the money itself, or reduce taxes in hopes of inducing people to spend their money themselves. While the latter in principle seems the better approach, it does little good if the people who receive the money don't want to spend it. Giving money to people who are unemployed or otherwise struggling is likely to lead to more consumption spending than giving it to better off people who are concerned about their future and will save it. The Democratic proposal is to provide lump sum tax rebates. On the one hand this makes sure that the poor and struggling receive some money; on the other it does nothing to reduce the drag of the tax system on the private sector and on the cost of labor in particular. The Republican counterproposal is to cut the payroll tax. They rightly point out that this is a regressive tax, so cutting it will have substantial benefit for the relatively poorly paid, and that it will reduce the cost of hiring, making it easier for the private sector to get back to business. They do not point out that the payroll tax paid on the business side is not regressive, and in the short-run during the brief period of suspension - the benefit will go entirely to the business owners, who are few in number and not so likely to spend it. How about reducing just the part of the payroll tax paid by the worker? This tax is even more regressive, and will also reduce the hiring distortion. It is clear why the Republicans do not suggest this - it brings fewer benefits to their constituents. Presumably the Democrats are against it because it is expensive and interferes with their pet projects.

Should we be concerned that cutting taxes will result in less consumption than direct government spending? The essence of the question is whether we need more private savings or not. A decade of poor investments in housing and an over-valuation of assets driven by irresponsible lending has resulted in the inability of a large number of American families to cope with their debt. There are only a few ways out: default on the debt, consume less, or work and earn more. So far we have had success in defaulting on debt - with the result that financial markets have collapsed. Currently we are starting to consume less. It remains to start working more. Cutting taxes on labor income, especially for incomes in the lower brackets, cannot possibly reduce employment and it will certainly increase it. What is more important is to note that, in circumstances like these and for those households having a hard time paying their mortgages, if some of the extra income generated by a reduction in tax rate goes toward saving (keeping up with mortgage payments, paying back debt on credit cards and so on) this will be an extremely good thing for the country (including its banking system) and not a bad one. Failure to appreciate this simple point is an important conceptual mistake behind the design of the stimulus plan.

Going through the original Obama proposal of January 15, we see a random collection of proposed spending. Some are sensible. There is a proposal to spend $102 billion to extend unemployment benefits, subsidize health care for the unemployed and increase the food stamp program. The cost is modest, the benefit targeted to people who are genuinely in need, and because the proposal is so clearly tied to an economic crisis over which the beneficiaries have little control, involves little moral hazard.

Also proposed are numerous spending programs on infrastructure. Some of these, including the $146 billion proposed for transportation, improving the electrical grid, and health care infrastructure, are probably meritorious. On the other hand, the problem with these kinds of programs is that it takes time to spend money on these programs...and so by the time the work really gets under way the crisis will be over: we will have had the illusion of having done something to help, while we did not do much. Other parts of the program seem to be simple pork-barrel spending for the Democrat's constituents: 6 billion for internet access for rural areas (why do we need to subsidize rural areas?); 16 billion to repair public housing and make it more energy efficient; and 6 billion to weatherize modest homes.

The broadband access spending proposal highlights the key deficiency of having the government involved in "innovation." As a give-a-way to a few politically well connected internet service providers who have been slow to build up their wireless networks, Congress and the Executive are trying to delay the requirement that over-the-air TV switch to HD. This, of course, will slow the introduction of wireless infrastructure by those providers who have innovated and are building out their networks. More to the point - why do we still have over-the-air TV at all? This benefits a handful of people while tying up massive amounts of bandwidth that would be far more useful for internet service or other wireless communication. The fact that the same bandwidth used by a TV station is worth ten times as much if used for a cell phone network shows the enormous distortion involved. Rather than spending billions building what will no doubt turn out to be relatively useless internet access, why not free the bandwidth and let the innovators provide us with really high speed internet access? This would have the additional benefit that there would be widespread competition over the "last mile" putting to rest once and for all any need for "internet neutrality" laws.

This latter point perhaps needs elaboration. If we are to get out of the current crisis we must come up with new ideas and ways of doing things. The stimulus bill is full of rhetoric about innovation. Predicting the next big thing is no easier for us than for Congress - but it is at least possible to make some sensible conjectures. The last big thing was the wired internet. It looks like the next big thing may well be the wireless internet. We already see people browsing the web on their cell phones in restaurants. The next generation of wireless technology promises us the mobile always on personal high bandwidth internet. All the information in the world at the tip of our fingers everywhere all the time. Who knows what great new businesses and entertainment will be built on the back of such an infrastructure? What is blocking this dream? Is it the fact that the government hasn't dumped $6 billion dollars into rural internet access? No. The government is itself the obstacle standing in the way. From foolishly allowing obsolete television stations to cling to over-the-air bandwidth; by regulating the use of radio devices on airplanes; by delaying new technologies such as HDTV (since when do we promote innovation by delaying it?); by over-regulating the spectrum - as in the recent set of roadblocks created over the use of "white-space," to the fact that so many technologies are tied up in obscure patents that should never have been issued...The government here is the problem, not the solution.

Turning back to the stimulus proposals, the big joker is the 91 billion in aid to the states. This is a good way to get money spent right away on useful things. Unfortunately the states have been less than provident in budgeting, and if we do this we will wind up like Argentina or Brazil where the states spend money, but the Federal government picks up the tab. Needless to say this makes it impossible to balance a budget in those countries and has led to enormous long term economic problems. If we believe that the states are "too big to fail," then at the very least the Federal government needs to behave like the old bad IMF - tying any aid to reforms that will get their fiscal house in order.

One of the most dangerous, and revealing, aspects of the proposed bill is the provision to "buy American." This is sold as a "patriotic" measure, but it is quite the opposite: buying only from each other makes us all worse off not better off. Tragically, if we start becoming protectionist the rest of the world will happily follow us - and we may truly have a decade long depression. The "buy American" provision also reveals the stimulus bill for what it is: we are not spending the $800 billion because we need to make needed investments in infrastructure but because we want to give away public money to politically favored businesses. If the projects are there because we need these investments and want to take advantage of low borrowing rates and low labor costs, then the government should be looking to get good value for its money - which doesn't mean buying from American firms if they do not offer the best value. Bailing out badly run steel firms by borrowing against future taxes is not going to move us forward.

Finally - how can we discuss innovating our way out of trouble without speaking of patents? A long collection of articles in Sunday's NYTs speaks of the need for innovation. Not one of these articles mentions patent reform. We now live in a world in which patents do not serve to encourage innovation. Rather rent-seekers look around to see who has the most successful new businesses and then use patents to blackmail them. The software industry - and the internet - have been one of the great engines of recent growth. Yes Bill Gates said: "If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today." He was right - industry is now at a standstill and there can be no new direction for American innovation without a radical patent reform. Let us roll back patent protection in software; enforce the existing standard of non-obviousness for inventions; and eliminate the kidnapping of ideas for ransom by providing a proper independent invention defense. These reforms - that would not cost a penny of public money - would do far more to build the foundation for sustained economic growth than the random assortment of stimulus spending currently being proposed in Congress.

Ultimately the current crisis is driven by a failure of confidence in institutions. Bankers have absconded with peoples' life savings; investment brokers have perhaps accomplished the same thing legally. Sadly, while trust is quickly broken it takes time to restore. One of the few institutions in which people still have confidence is the Federal government - so now is not the right time to talk about reducing its role in the economy. Unfortunately, the current stimulus package appears to be a compendium of the worst form of government misbehavior: pork barrel spending and a large increase in our future debt, without almost any tax relief for working families. While this may generate some popular enthusiasm in the short run, it may have dire consequences shortly after: not in the famous long run when we are no longer around, but a year or two from now. If the Federal government is the only remaining institution that draws public confidence, it needs to behave well enough that this confidence is sustained in the long run.

Jeffrey Tucker's live blog has moved to Chapter 6.

In Apple May Use ‘Nuclear Arsenal' to Delay Palm's IPhone Rival, Bloombert reports: "Apple Inc., usually on the defensive when it comes to intellectual-property lawsuits, is threatening to use its hoard of patents to quash iPhone competitors."

For shame, Apple, for shame. They appear to be suffering from the delusion pointed out by Boldrin & Levine, as noted by Tucker in Seen and Unseen Costs of Patents:

It is the most common thing in the world for a businessperson who use every market-oriented skill to get a product to market: a good product at a good price that becomes the market leader. At this point, and for some odd reason, the businessperson gets confused. He thinks that it his IP that is the key to his success and ends up fighting for it with all his might, even at his own expense.

Here is the statement by Boldrine and Levine: " "Being a monopolist" is, apparently, akin to going on drugs or joining some strange religious sect. It seems to lead to a complete loss of any sense of what profitable opportunities are and of how free markets function. Monopolists, apparently, can conceive of only one way of making money, that is bullying consumers and competitors to put up or shut up. Furthermore, it also appears to mean that past mistakes have to be repeated at a larger, and ever more egregious, scale."

(Cross-posted at Mises Blog.)

I added a booklist (below the comments). It has Michele's and my book, and Stephan's. Other suggestions? I want to keep it reasonably short (five?) so books like the various books like Seth Shulman's that focus on particular cases are probably not what we want, rather more general purpose books about IP or monopoly.