US: Inequality As Policy, Selective Trade Protectionism Favors Higher Earners

Written on November 3rd, 2016 in politics Comments Off

Published on New Economic Thinking, by Dean Baker, Oct 27, 2016.

Offshoring manufacturing may have hurt many working people in America, but professionals and intellectual property have been robustly protected.

Globalization and technology are routinely cited as drivers of inequality over the last four decades. While the relative importance of these causes is disputed, both are often viewed as natural and inevitable products of the working of the economy, rather than as the outcomes of deliberate policy. In fact, both the course of globalization and the distribution of rewards from technological innovation are very much the result of policy. Insofar as they have led to greater inequality, this has been the result of conscious policy choices … //

… The pattern of gains from technology has been even more directly determined by policy than is the case with gains from trade. There has been a considerable strengthening and lengthening of patent and copyright and related protections over the last four decades. The laws have been changed to extend patents to new areas such as life forms, business methods, and software. Copyright duration has been extended from 55 years to 95 years. Perhaps even more important, the laws have become much more friendly to holders of these property claims to tilt legal proceedings in their favor, with courts becoming more patent-friendly and penalties for violations becoming harsher. And, the United States has placed stronger intellectual property (IP) rules at center of every trade agreement negotiated in the last quarter century.

In this context, it would hardly be surprising if the development of “technology” was causing an upward redistribution of income. The people in a position to profit from stronger IP rules are almost exclusively the highly educated and those at the top end of the income distribution. It is almost definitional that stronger IP rules will result in an upward redistribution of income.

This upward redistribution could be justified if stronger IP rules led to more rapid productivity growth, thereby benefitting the economy as a whole. However, there is very little evidence to support that claim. Michele Boldrin and David Levine have done considerable research on this topic and generally found the opposite. My own work, using cross-country regressions with standard measures of patent strength, generally found a negative and often significant relationship between patent strength and productivity growth.

There is also a substantial amount of money at stake. In the case of prescription drugs alone, the United States is on path to spend more than $430 billion in 2016 for drugs that would likely cost one-tenth of this amount in the absence of patent and related protections. While we do need mechanisms for financing innovation and creative work, it is almost certainly the case that patent and copyright monopolies as currently structured are not the most efficient route, even if their negative consequences for distribution are quite evident … //

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