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Home Publications Blogs Beat the Press David Leonhardt's List of Causes of Inequality is Too Short

David Leonhardt's List of Causes of Inequality is Too Short

Monday, 20 August 2012 14:18

Take the poll and add your two cents. Here's mine:


How about limited global competition? There are plenty of smart people in China and India who could train to U.S. standards and would be delighted to work as doctors or lawyers in the U.S. at $100k a year. That would reduce inequality.

How about a change in norms among corporate board members who essentially get paid off to let the CEOs pilfer the company? It's their job to restrain CEO pay. They don't do it.

How about stronger patent and copyright protection. We spend $300 billion a year on prescription drugs that would sell for $30 billion in a free market. Those patent rents don't go to people in the bottom 99 percent for the most part.

Deregulation is far too generous a term for the financial industry? If they had actual deregulation, meaning a lack of government involvement, most of Wall Street would be bankrupt right now. In fact, they have too-big-to-fail insurance which is provided free by the taxpayers.

Inequality is not something that just happened. Inequality was engineered by the folks who have power.

Comments (15)Add Comment
written by AndrewDover, August 20, 2012 2:59
Probably you wanted to say "weaker", not stronger patent and copyright protection.
written by urban legend, August 20, 2012 3:07
The patent and copyright statute existed since the founding of the country, including during the post-War period when inequality was decreasing. Copyright protection has been strengthened with a longer term (inappropriately in my opinion at the request of Hollywood and its powerful LA and NYC bars), and the strength of patent protection ebbs and flows all the time (excepting strengthening software protection with system patents and new statutes in the same nature, which do not apply to drugs), but those changes should not have affected drug patents

Here is Madison in Federalist 43 on the copyright and patent clause:

The utility of this power will scarcely be questioned. The copyright of authors has been solemnly adjudged, in Great Britain, to be a right of common law. The right to useful inventions seems with equal reason to belong to the inventors. The public good fully coincides in both cases with the claims of individuals.

It is true that the Constitutional provision in Article 2, Section 8 is merely permissive. But obviously Madison, defending national (Federal) takeover of patent and copyright law, reflected the strong prevailing belief that giving limited exclusive rights to inventors and writers is essential. Constant railing against patents and copyrights in general, without identifying specific aspects that should be changed especially with respect to drugs, is a waste of time. New drugs are inventions. Many of them have been life-savers or have made life better for millions if not billions of people. It will be impossible to take the entire industry out of the patent system and put compensation for R&D into some kind of bureaucratic scheme. It would be far more useful to demonstrate how the system should be modified to make the protection more tailored to a product with a public health purpose, including, in particular, orphan drugs. Applying and codifying a concept of "reasonable" compensation, enforceable by distributed processes in the courts while keeping drugs within the patent system, would make more sense and would be politically more feasible than some kind of a bureaucratic body deciding how much compensation for R&D leading to an invention deserves.
written by Nassim Sabba, August 20, 2012 3:38
This piece is succinct, short and to the point. It is all you need as talking points for the next five years, even without medicare and ss. They will be understood easier when these more complex issues are laid bare in this clear way that even I can understand. Thanks Dean.
Dear Urban Legends
written by Nassim Sabba, August 20, 2012 3:47
What makes the Founding Fathers any smarter that people who live today? Just because they had more slaves or because they believed women should not vote?
It is tiresome to read about them as if they were gods.
Yes, they had some insight, some courage, and some foresight for people that started bilking and continue today.
The constitution should be a dynamic and live text that should be modified as times demand. Women have votes (Read: founding father were WRONG), slaves are no more, at least not overtly (Ditto, Founding Fathers were wrong), people without property can vote...

We have over a dozen and a half amendments that witness their error. I would suggest a few more. Right to care, right to free competition, right to enjoy the work of theres with reasonable compensation to inventors. In fact discoverers are more important than inventor and they are those who take the fruit of usually academic people and build on top of their discoveries.
Lets have amendments that bring equity to the 21 century, and if need be, mid 21st, etc. If they don't work, smart people can repeal and adjust them in a simpler process.
Rigid laws are like chains the stifle, flexible ones are like roads, they lead somewhere.
Another factor
written by Floccina, August 20, 2012 4:17
The more important questions are why economic growth has slowed and why inequality has risen – not just over the last 12 years but, less severely, since the early 1970s as well.

I agree with you on excessive licensing and copyright and patent.

One of the causes is that we are wealthier today and more people afford divergent life styles.
This gives me a good laugh.
written by LSTB, August 20, 2012 4:37
There are plenty of smart people in China and India who could train to use standards and would be delighted to work as doctors or lawyers in the U.S. at $100k a year.

Tell that to the 16.8% of law graduates last year who are working full-time long-term as solos or in 2-10-attorney firms. Or the 10.5% that are working in what the ABA classifies as "Business & Industry," also known as "jobs that don't require a law degree." Or the 9.2% who reported that they were totally unemployed nine months after graduation. You could even tell that to the 2010 grads who aren't any better off. (Source: http://employmentsummary.abaquestionnaire.org/)

I'm sure they'd all be thrilled to work as lawyers for $100,000 annually. Or even $50,000, and best of all we don't have to worry as much about their language abilities and immigration status. Too bad there are hundreds of thousands of legally educated Americans who can easily fill all open attorney positions, otherwise we'd have to worry that the ABA is using powers it doesn't have to engineer an attorney shortage.

Don't worry though. Law school grads will very likely make $100,000+ per year ... in the 2030s when the IRS tells them that they have to pay income tax on their canceled loan balances that've been on Income-Based Repayment for 20 years and have swollen due to "negative amortization."
written by urban legend, August 20, 2012 4:40
Nassim --

My point was not that Madison was "right," only that it is and has been universally accepted that inventors and writers need to be rewarded for their successful efforts, and that generally if not virtually universally, for hundreds of years and throughout the world via many treaties, the temporary monopoly granted in a patent (and to a much narrower extent in a copyright) is the best way to to reward inventors and writers. It has been the law for over 200 years, and the constituency for changing it is puny.

Because of that general acceptance and the argument available to the industry -- likely a legitimate argument -- that hundreds of life-saving or life-improving drugs have been invented because of the enticement of the patent reward system, there is no political chance of taking drugs out of that system entirely, as so many of Dean's comments implicitly advocate. He has at least once disavowed that expectation, but attacking intellectual property generally keeps renewing the impression that it is really what he is advocating. It would be more persuasive and more within the realm of political feasibility to identify specific ways the system can be modified to address particular abuses by the industry. The constant referral to an impractical dream of a world where there are no "patent monopolies" only allows opponents to disparage the value of his otherwise terrific commentary.

Curing abuses by the drug industry by making specific revisions to the patent law has a chance to gain political support. Eliminating patents in general on new drugs does not.
written by urban legend, August 20, 2012 4:46
Instead of bringing in foreign doctors and adding to the denominator in the unemployment rate calculator, how about we first try increasing the number of doctors from our own student population? Admission is done on a curve: there are only so many slots, regardless of the qualifications of the entire applicant pool. There are many thousands of students who would like to be doctors but they are not allowed to do what they would like to do because those slots are kept limited.
Another founding father, on patents:
written by David, August 20, 2012 5:30
Gov’r. Thomas was so pleas’d with the construction of this stove, as described in it, that he offered to give me a patent for the sole vending of them for a term of years; but I declin’d it from a principle which has ever weighed with me on such occasions, viz., That, as we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours; and this we should do freely and generously. -- Ben Franklin

But then, Franklin esteemed ethical behavior.
@urban legend
written by David, August 20, 2012 6:00
For every pre-med student in the US there are 10 in China and 8 in India who have far better math and science skills. Take the top 10% from China: they will work for cheaper but have better science education, by far. What I'm saying is, the US students aren't very good, comparatively.
Baker's Solution: Separate Recovery of High Fixed Cost From Low Marginal Cost
written by Last Mover, August 20, 2012 6:54
On patents and copyrights as a matter of inequality, the essential problem is they can generate economic rent far above that necessary to induce creation of the product in the first place, particularly in the case of something like blockbuster drugs or famous books with long dead authors. Microsoft is another example but more complicated because of the network monopoly effect.

A reservation price is that price just high enough to induce such creation but not too high to include economic rent. The reservation price would represent the present value of future income available from the product with no economic rent.

Intellectual products have a high fixed cost and low marginal cost like some physical counterparts, for example nuclear power plants. However in the physical world both high fixed costs and low marginal costs can be recovered in the same way with no necessary recovery of economic rent. High fixed cost for intellectual property is different because unlike a nuclear plant, once created it can be reproduced infinitely at low marginal cost.

When Baker says a true competitive free market would price an intellectual product at it's low marginal cost of production and distribution, this causes much confusion because most readers don't understand that his alternative solutions to patents and copyrights go the to high fixed cost component, which is a way to provide for a reservation price paid to creators just high enough to pay for the high fixed cost necessary to induce their creations but with no economic rent.

It also separates the high fixed cost from low marginal cost and prevents the unit sale price from being heavily loaded with economic rent that results in mark-ups of thousands of percentage points.

Once the product is created free of economic rent, it can be produced and distributed in conventional market fashion by the creators or anyone else for a price necessary to cover only the low marginal cost of production and distribution, since the high fixed costs are already paid for.

Baker's solutions for the recovery of high fixed cost of intellectual products are ignored by the economic powers that be because they indeed would produce outcomes equivalent to a competitive free market.

They would sharply reduce inequality in this area by eradicting the monopoly power behind the economic rent component while spreading greatly the potential for innovation and invention through competition from more creators who are there to actually create rather than seek economic rent.
written by Ecletic Obsvr, August 21, 2012 2:03
My input was on the lines of labor - blue collar or white, were disadvanataged to bargain for more of the gdp pie Unions, globalization, finance were all part of my discussion.

I get the impression NYT lready has its mind made up, though.
written by skeptonomist, August 21, 2012 2:36
One thing which the Founding Fathers - or anyone else involved in devising the the current patent system - did not have to deal with is the very lengthy and expensive testing that is necessary to verify that drugs actually work (at least prescription drugs). You can argue that this requires a very high payoff for a new discovery, but you can also argue that this is best done in a government research program. Having drug companies do it themselves has led to a lot of corrupt "research".
written by jay, August 21, 2012 9:45
There are plenty of American lawyers willing to work for $80,000 a year. It's not about the supply of lawyers when it comes to legal costs. You have people lining up for legal aid jobs that pay less than $40,000. Consumers, employees, and plaintiffs need more bargaining power. You cannot get someone to do $20,000 worth of litigation and pre-pay for expenses when the client can only pay $500 on a case worth less than $10,000. We need more government support of legal services.
A.K. & G.M. Smith Professor of Literature
written by Paul Lauter, August 27, 2012 3:56
First, the mixing of copyright and patent issues confuses matters. Second, with respect to copyright: these comments do not at all reflect reality in the publishing industry. There, ancillary rights have become ever more important and consequently charges for permissions in any form have escalated enormously. Such charges less and less go to writers or their families, but rather go toward the bottom lines of increasingly predatory corporations which have in many cases (e.g., F.Scott Fitzgerald novels) done nothing toward the creativity from which they profit for half a century and more. When students complain about the cost of textbooks, let's keep this reality in mind.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.