February 08, 2021
The explosion of inequality over the past four decades is appropriately a major focus of the political agenda for progressives. Unfortunately, policy prescriptions usually turn to various taxes directed at the wealthy and very wealthy. While making our tax structure more progressive is important, most of the increase in inequality comes from greater inequality in before-tax income, not from reductions in taxes paid by the rich. And, if we’re serious about reversing that trend, it is easier, as a practical matter, to keep people from getting ridiculously rich in the first place than to tax the money after they have it.
While the Reagan, George W. Bush, and Trump tax cuts all gave more money to the rich, policy changes in other areas, especially intellectual property have done far more to redistribute income upward. In the past four decades, a wide array of changes—under both Democratic and Republican presidents—made patent and copyright protection both longer and stronger.
In the case of patents, the TRIPS provisions of the World Trade Organization, which went into effect in January 1995, extended the length of patent monopolies from 17 years from the date of issuance to 20 years from the date of filing. The 1980 Bayh-Dole Act allowed for patents on government-financed research. In 1982, Congress established a special patent-friendly appellate court to hear cases on patent disputes. And court rulings extended patent coverage to include life forms, software, and business methods.
For copyrights, two revisions to the law, in 1976 and 1998, extended the maximum duration from 56 to 95 years. The Digital Millennial Copyright Act of 1998 imposed strong rules for copyright enforcement on the Internet. Washington has also sought to impose stronger intellectual property protections on our trading partners in every trade agreement that the United States has negotiated over the last three decades.
The effect of these changes was to transfer money from the bulk of the population to the relatively small group of people in a position to benefit from them, either because of their skills in software, biotechnology, and other areas, or because of their ownership of stock in companies that benefit from these rules.
The upward redistribution of wealth arising from intellectual property (IP) is typically disguised in public debates as being the result of “technology.” But blaming technology attributes it to an impersonal force. When we point out that it is due to intellectual property, we make it clear that inequality is a policy choice.
To take my favorite example, without Microsoft’s government-granted patent and copyright monopolies, Bill Gates would probably still be working for a living. Many other billionaires and millionaires would be far less wealthy if we had different rules for intellectual property.
By my calculations, the amount of money transferred from the rest of us to those in a position to benefit from IP comes to more than $1 trillion annually. This transfer comes in the form of higher prices for prescription drugs, medical equipment, software, and many other products. This amount is almost half the size of all before-tax corporate profits, and roughly one-third larger than the current military budget. In other words, it is real money.
Intellectual property does serve an important economic purpose in providing an incentive for innovation and creative work. But we can make patent and copyright monopolies shorter and weaker while still supporting innovation and creativity, instead of going the route of longer and stronger, as we have actually done over the past four decades.
We can also use alternative mechanisms to provide incentives. This is especially the case with prescription drugs, where we rely on direct public funding for a large portion of research costs. The federal government finances more than $40 billion in research annually through the National Institutes of Health, with several billion more funded through the Biomedical Advanced Research and Development Authority and other government agencies. This compares to $90 billion a year that the pharmaceutical industry spends itself and expects to finance through its patent monopolies.
Most of the public money goes to finance basic research, but sometimes the government supports the actual development process, as was the case with Moderna’s coronavirus vaccine. The government paid Moderna $483 million for its research and Phase 1 and 2 trials. It then coughed up another $472 million to cover the cost of Phase 3 trials. Incredibly, the Trump administration still allowed Moderna to have patent monopolies on its vaccine, even though the government had covered the development costs and taken the investment risk. If the vaccine had proven to be ineffective, the government would have borne the cost, while Moderna still would have been paid.
The contracting process for Moderna’s vaccine may have been chaotic and less transparent than desirable, since it was overseen by the Trump administration, operating in an emergency situation, but we did nonetheless manage to get a highly effective vaccine in record time. This is a clear case of direct government funding of research that proved to be effective.
We need to keep this example in mind as the Biden administration develops its foreign policy agenda, especially its relationship with China. Biden has already complained about China’s stealing “our” intellectual property. This sets the stage for potential conflicts that are not at all in the interest of the vast majority of the American people.
As a practical matter, very few of us receive any substantial income, either directly or indirectly, from intellectual property. That means that we don’t stand to lose anything if companies in China don’t honor Pfizer’s patents on a drug or Microsoft’s copyrights on software. In fact, if we are bothered by inequality, we really should not be upset that those at the top will have somewhat less income because China is not honoring their intellectual property claims.
While there may be cases where the failure to honor intellectual property can cost some middle-income jobs (for example, if China uses technology to which Boeing has patent rights), the impact is likely to be comparatively small. Arguing that we should protect Boeing’s IP on this basis would be like arguing that we should not tax Jeff Bezos because reducing his income could lead him to lay off some well-paid servants. The benefits that the relatively affluent and very wealthy get from IP protections are vastly greater than the higher wages that some workers may get as a result of working for Boeing or another company with large IP claims.
There’s another fundamental issue at stake here. Donald Trump openly sought to pursue a cold war with China. Unfortunately, many people around President Biden would like to continue this crusade. A cold war with China, like the historic Cold War with the Soviet Union, would be terrible for most people in the United States and the rest of world. It is also not one we are likely to win, since China’s economy is considerably larger than that of the United States.
Where there are legitimate areas of disagreement with China, Washington should push its concerns. They include China’s human rights record, most notably its brutal treatment of the Uighur population in Xinjiang. Beijing’s claims to islands in the South China Sea threaten long-established international boundaries. And we have economic differences as well, most notably the undervaluation of China’s currency, which is an important factor in our trade deficit.
But from the standpoint of the country as a whole, there is no reason Washington should push Pfizer and Microsoft’s IP claims. We should not ramp up hostility to China simply to give still more money to the ultra-wealthy. In fact, we should be going in the opposite direction. Rather than walling off knowledge with patent and copyright monopolies, we should be pooling our technology with cooperative, open-source research. This would be desirable in most areas, but especially in health and climate technologies.
We would be far better served if American researchers freely exchanged their ideas, allowing the technology to advance as quickly as possible. Think of how much better off the entire world would have been if all the research on coronavirus vaccines had been fully open, so that anyone with manufacturing capacity could have been producing the vaccines in large quantities as soon as they went into Phase 3 testing. That would have allowed the manufacture of large stockpiles as soon as the vaccines had been approved for use. It appears that the vaccines developed by Chinese companies are not as effective as the ones by Moderna and Pfizer—we certainly need more transparency from the Chinese on their trial results—but in the absence of sufficient supplies from Moderna and Pfizer, they are far better than nothing. We share a common, global goal in taming the pandemic as quickly as possible, so we should be using every tool available to accomplish it.
The same principle applies to technologies combating global warming. China is now the world leader in the deployment of wind and solar energy, as well as in sales of electric cars. We need to develop these technologies as quickly as possible. That is likely to occur if the United States and other countries pay for research and allow it to be freely shared, rather than allow private corporations to wall off their progress with patent monopolies.
The rules on intellectual property are a major part of the story of upward redistribution of the past four decades. Contrary to what is typically claimed, they have likely been a major obstacle to technological progress, especially in the areas of health and climate technologies. It would be tragic if the protection of IP was a major cause of a cold war with China. It would be even more tragic if progressives were leading the charge.