A Brief Note on SOPA and PIPA

Today, permit me a brief break from academic papers to post about an issue of import to me both as a research blogger and as an economist working on invention and innovation. Across the internet, a number of sites tomorrow will go dark to raise awareness of two absurd bills, SOPA and PIPA, winding their way through the US Congress. These bills essentially allow the US government to seize the domain name of sites committing willful piracy, or those who link to sites doing so, without trial and with essentially no due process other than a sealed judge order. A related policy of the US Customs agency has already seen judges signing off on domain name seizures of sites that hosted music sent to them by the record companies themselves, that were completely legal in the country where they based (the .com registry is in the US, even though internet companies are based around the world), and that were accused completely mistakenly of hosting child pornography. In the first two cases, the sites seized were not illegal, but were competing with major music and movie companies: the US government was essentially deputized to reduce competition.

The site you are currently reading would violate SOPA and PIPA: I link almost exclusively to ungated copies of work whose copyright has generally been transferred to a journal. Though many journals essentially ignore the fact that authors place copies of their articles on personal websites without the journal’s permission, the fact remains that such articles are being backed up by their authors in violation of the journal’s copyright, absurd as this may be. Beyond simple academic research blogs, huge swathes of fast-growing internet firms from the past 15 years, such as Youtube, would never have appeared in a SOPA/PIPA world.

Until a recent uproar, these bills were sailing through Congress. I recently consulted for a white paper on a similarly wrongheaded bill, the Research Works Act, which would vastly limit your access to new research papers. In doing so, I had to read the records of Congressional hearings on these bills. Aside from a handful of congressmen, the people voting on issues related to invention, science and the internet have very limited knowledge of these issues; this is no surprise, as only four out of 535 congressmen hold a research doctorate, an average age in the Senate of 63, and technology firms have a relatively tiny lobbying presence compared to old media companies. The major movie and recording industry lobbyist groups also form one of Washington’s most notorious revolving doors: the MPAA head is former senator Chris Dodd, and the federal judge at the venue of choice for suits related to the music industry is herself a former RIAA lobbyist.

Economists and academics really need to make themselves heard on these bills and on other bills related to innovation. If nearly every major politician country frequently said that “we all agree that we need to ensure steelworkers get paid” with little concern for the broader welfare effects of tariffs, economists would surely bring up the vast amount of research that exists on Ricardian advantage, trade wars, the tradeoffs inherent in protectionism, etc. Yet politicians also say “we all agree that we need to ensure content creators get paid” even though, from the perspective of social welfare, that is completely unimportant. As social planners dealing with innovation, we need to worry about policies that both limit the creation of new content and inventions while simultaneously not expanding consumption of existing products enough to overcome that first decrease. It is striking that in Congressional testimony on copyright issues, no one arguing for SOPA and PIPA even pretends to argue that access to film and music and books and newspapers has decreased – it is clearly a Golden Age for access – or that the amount of new film or music or text has decreased. Given those facts, even though content creators, and particularly middlemen, may find it more difficult to extract rents from their work, as economists we realize that this “era of piracy” has probably led to massive social welfare gains. This is a perspective that, when economists have made it in the past, has been largely ignored, but nonetheless it is one we need to continue to make.

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“Compulsory Licensing – Evidence from the Trading with the Enemy Act,” P. Moser & A. Voena (2011)

Petra Moser is unquestionably doing the most interesting data-driven work on invention and growth of any economist working today; indeed, if only she applied her great data more directly to puzzles in theory, I think she would become a good bet for a Clark medal in a few years. The present paper, with Alessandra Voena, a star on last year’s junior job market, is forthcoming in the AER, and deservedly.

The problem at hand is compulsory licensing. This is a big deal in the Doha Round of WTO negotiations, since many poor and middle-income countries (think Thailand and Brazil) force drugmakers to license some particularly important drugs to local manufacturers. This helps lower the cost of AIDS retrovirals, but probably also has some negative effect on the incentive to develop newer drugs for diseases prevalent in the third world. But the tradeoff is not this simple! Because the drugs are licensed to local firms, who then produce them, there is some technology transfer and presumably some learning-by-doing. Does compulsory licensing help infant industries grow in the recipient country? And by how much?

The historical experiment is the Trading with the Enemy Act. During WWI, the US government seized a bunch of property owned by German firms, including their patents. They then licensed these at low cost to US firms. Germany was well ahead of the US technologically in organic chemistry, and Moser and Voena use this fact to study the impact of compulsory licenses for a variety of chemical dyes. They find that in (very narrowly defined) technological areas where patents where licensed, future propensity to patent by US firms roughly doubled. No such increase was seen in non-American firms who didn’t have access to such cheap licenses. The impact on future patents occurred a few years after WWI, consistent with a learning by doing story. Relevant for the Doha Round debate, German firms quickly began working on new chemistry inventions after the war, which you might interpret as consistent with a one-time seizure of IP having no long-term impact on invention if it truly an exceptional circumstance.

Why the delay if you have a patent explaining what to do? It turns out that patents – and this is true even today – are often woefully insufficient to replicate an original invention. DuPont’s first attempt at (German-invented) indigo dye turned out green instead of blue! BASF’s Haber-Bosch process patent didn’t include certain tricky details regarding chemical nature of the appropriate catalyst; it took 10 years for US firms to figure out the secret.

http://ssrn.com/abstract=1313867 (July 2011 working paper. Moser and Voena also, according to Moser’s website, have a forthcoming working paper on the impact of TRIPS licensing on the US pharma industry which I certainly want to check out. As far as I know, that paper hasn’t begun to circulate.)

“Bye Bye Miss American Pie? The Supply of New Recorded Music since Napster,” J. Waldfogel (2011)

A number of major industries – film, music, books, newspapers, etc. – have gone through an enormous structural change in the past 10 years. The vanguard of this change was surely Napster in at the turn of the century. There have been many, many articles published on the effect of Napster on sales, but nothing I would call great – my favorite used German school holidays to instrument for reduced supply of pirated songs when the kids were away from high-speed university connections.

There has been a bunch of BS about piracy spouted by the industry mouthpieces and lobbyists: did you know that the MPAA and RIAA, among other industry lobbying groups, has legal authority to file reports on international piracy with the US Trade Representative (the “Special 301”), and that these utterly ridiculous numbers actually have legislative bite?

While we have numbers on the effect of piracy and sales ranging from decent to industry-supplied terrible, none of us, as economists, actually care about sales, right? Surely the relevant question for economists and for policymakers is whether Napster and its ilk have had positive or negative welfare impact. I am working on this topic right now, in a very general model, but you can imagine the basic difficulty: if we want to know the welfare impact of Honey Nut Cheerios, we need only look at increases in surplus on the demand side, a trick that has been done for the Cheerios case in nice 1990s papers by Jerry Hausman and Aviv Nevo. Napster, on the other hand, has affected both the supply side and the demand side simultaneously, and in nonobvious ways. There are also nonobvious time lags in how the effect is evidenced, so I think there is no way to avoid a fancy structural model and its related bevy of assumptions. Hopefully I’ll have some more to report on this topic by the end of the year, but my preliminary work suggests that mp3 downloading was unambiguously positive for welfare.

What else has been done on piracy and welfare? The only real work on the topic that I know of is this recent paper by Waldfogel. He investigates a much more straightforward question: is the quality of music since Napster better or worse? It’s tough to just look at sales or number of releases: sales are affected both by quality and by piracy, and the number of songs released has surely gone up because the cost of creating new music during the 2000s dropped with the introduction of home music production software.

Waldfogel instead gathers a huge number of “best albums of all time” and “best songs of the era” lists. If a magazine or Zagat’s or a prominent music website put out such a list, he scraped the data. In general, the lists all seem to agree that the 1960s and the early 1990s were the high points of music during the past 50 years. More importantly – and given many caveats – there doesn’t seem to be any decrease in the number of “good” releases since Napster. Further, the “good” releases of the 2000s are just as likely to come from new bands as from bands that were formed before 2000. In my work, I have an alternative method for adjusting for quality over time, but the basic result is the same: music piracy does not seem to have had much affect on the quality of new music.

http://www.tc.umn.edu/~jwaldfog/pdfs/American_Pie_Waldfogel.pdf (Jan 2011 working paper)