November 16, 2018
(I originally posted this piece on my Patreon page.)
The right would like us to believe that the inequality we see in the United States, and increasingly in other countries, is a natural outcome of market processes. Unfortunately, many on the left seem to largely share this view, with the proviso that they would like the government to alter market outcomes, either with tax and transfer policy, or with interventions like a higher minimum wage.
While redistributive tax and transfer policies are desirable, as is a decent minimum wage, it is an incredible mistake to not recognize that the upward redistribution of the last four decades was brought about by conscious policy, not any sort of natural process of globalization and technology. Not recognizing this fact is an enormous mistake from both the standpoint of policy and politics.
From the policy standpoint, we give up a huge amount by not examining the policies that have caused before-tax income to be redistributed upward. As a practical matter, it is much easier to prevent all the money from going to the top in the first place than trying to tax it back after the fact.
On the political side, we should never have our argument be that somehow the big problem is that the Bill Gates of the world were too successful. The big problem is that we have badly structured the rules of the market so that we gave Bill Gates too much money. With different rules, he would not be one of the world’s richest people even if he had worked just as hard.
Since we’re on the topic of Bill Gates, patent and copyright rules are a good place to start. For some reason, it is difficult to get people to accept an obvious truth: there is a huge amount of money at stake with these rules. By my calculations, patent and copyright monopolies could well direct more than $1 trillion a year, a sum that is more than 60 percent of after-tax corporate profits.
The most visible place where these government-granted monopolies have a large effect is with prescription drugs. We will spend close to $440 billion (2.2 percent of GDP) this year on prescription drugs. If these drugs were sold in a free market without patents or related protections they would likely sell for less than $80 billion. The difference of $360 billion is roughly five times annual spending on SNAP.
The basic story here is that drugs are almost invariably cheap to manufacture. Like aspirin, the vast majority of drugs would sell for $10 or $15 per prescription. It is only because the government gives drug companies patent monopolies that drugs are expensive. We now have an absurd debate where the people who want to bring down drug prices are accused of interfering in the market. That is 180 degrees at odds with reality. The people who want to keep prices high want to maximize the value of their government-granted monopolies.
In this case, the effect of changes in policy is easy to see. In 1980, Congress passed the Bayh–Dole Act which made it possible for companies to get patent rights to government-sponsored research. As a result, spending on prescription drugs, which had hovered near 0.4 percent of GDP for two decades, began to explode.
We can argue the merits of the Bayh–Dole Act. Surely it did increase private spending on research and led to the development of new drugs, but the fact that we give more money to drug companies because of this intervention in the market is not debatable. This is a huge amount of money, with enormous consequences for public health, as well as income distribution, but almost no economists ever raise the issue.
The same story applies to patent and copyrights more generally. How much profit would Microsoft make if anyone anywhere in the world could make tens of millions of computers with Windows software and not even send them a thank you note? How much money would Disney make if all its movies could be instantly transmitted over the web and shown everywhere without them getting a penny?
We could tell the same story about medical equipment. Imagine the latest medical scanning device selling for tens of thousands of dollars instead of millions. Companies that make fertilizers, pesticides, and genetically modified seeds, all depend in a very fundamental way on their government-granted patent monopolies.
Patent and copyright monopolies do serve the purpose of providing incentives to innovate and do creative work. But there are other possible mechanisms for funding, the $37 billion a year the government gives to the National Institutes of Health is one obvious example (see Rigged, Chapter 5 for a fuller discussion [it’s free]). Even if we do decide that patent and copyright monopolies are the best mechanism, we can always make them shorter and weaker, reversing the course of longer and stronger that we have pursued over the last four decades.
This simple and undeniable point (we can alter the rules on patents and copyrights) is almost completely absent from debates on inequality, with very few exceptions. (Joe Stiglitz raises this issue frequently, see also The Captured Economy, by Brink Lindsey and Steve Teles.) These rules are very much at the heart of the upward redistribution of the last four decades.
It is not only the Bill Gates and other tech billionaires who owe their enormous wealth to these government-granted monopolies, the whole idea of an economy that places a high demand on computer, math, and other technical skills depends on our rules on patents and copyrights. With weaker rules, the demand for computer scientists and bioengineers would be much less, as would their pay.
It is incredible that so many economists and policy-types who work on inequality could somehow manage to avoid discussing intellectual property rules. We can speculate on the reasons for this neglect.
In some cases, liberal funders owe their wealth to these government-granted monopolies and are not interested in calling them into question. We once had a program officer at the Gates Foundation tell us unambiguously that they don’t talk about patents because of the source of wealth of their funder.
Thinking about how policy led to upward redistribution can also be upsetting to many liberals’ worldview. Many view themselves as people who have done well in the market economy but feel that they should share some of what they have earned with the less fortunate. The argument that they didn’t just happen to do well, but had the benefit of government policy designed to give them money (and to take it from the less fortunate), very fundamentally changes the picture.
Apart from these motives, there is the obvious truth that inertia in an incredibly powerful force in policy debates. As the saying goes, intellectuals have a hard time dealing with new ideas.
In any case, progressives miss a huge part of the story of upward redistribution when they fail to discuss rules on intellectual property. The importance of these rules is virtually certain to increase in coming years. Economists and policy-types who ignore them are not doing their jobs. I know I keep beating on this point, but it’s important. I will have more pieces in future weeks on other ways the government structures the market to hand more money to the rich, but patent and copyright monopolies are so big and so obvious, that it is incredible that they are not the center of discussions of inequality.