S. 3325: A Stitch in Time Can Save Billions
Release 4.17 September 2008
by Thomas Sydnor II*
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During the remainder of this session, the U.S. Senate should pass S. 3325, the Enforcement of Intellectual Property Rights Act of 2008 ("ERIPA"). ERIPA would reform federal IPR-enforcement efforts by providing dedicated investigators and better coordinating state, federal, and international IPR-enforcement efforts. Passing ERIPA now will create a net increase in federal revenues, grow the U.S. economy, protect consumers from dangerous goods, and attack organized crime.
ERIPA itself, like a companion bill passed by the House of Representatives, represents a private-public collaboration led by the Coalition Against Counterfeiting and Piracy and the U.S. Chamber of Commerce. The Coalition itself consists of hundreds of associations and companies representing most major sectors of the American economy--sectors that often disagree strongly about most IPR legislation. Support for IPR-enforcement reform also transcends other political or economic divides: as one union President noted, "I am pleased to be able to support [IPR-enforcement reform] legislation that not only has bipartisan support but also brings Labor and Management together, something I'm sure you'd agree doesn't often happen."
Nevertheless, some Senators or staff are reportedly concerned that ERIPA is not "revenue neutral." ERIPA is not an appropriations bill, so it would not increase federal spending. But it would authorize $57 million in annual spending on specified programs to improve the efficacy of state, federal, and international law-enforcement efforts.
In the case of ERIPA, the usually sound impulse to avoid further federal spending is misplaced. Dynamic analysis of ERIPA's costs and benefits shows that ERIPA is better than "revenue neutral"--it is "revenue enhancing."
The Coalition Against Counterfeiting and Piracy made this point by commissioning the Tyson Report, a conservative economic analysis of the probable costs and benefits of IPR-enforcement reform. The Tyson Report concluded that because counterfeiting and piracy annually drain about $225 billion from the U.S. economy, IPR-enforcement reforms that only slightly decreased counterfeiting and piracy over three years would increase U.S. output, earnings, and employment enough to increase federal tax revenues by $4.9 to $5.7 per dollar spent on reform, and generate another $1.25 billion in state and local tax revenues. For the American taxpayer, dollars spent on IPR-enforcement reform are investments that offer potential three-year returns of 490% to 570%, even when discounted to present value.
But while the conclusions of the Tyson Report are impressive, they are not surprising. Both common sense and economic analysis confirm that law enforcement is among the most productive of governmental activities. Consequently, passing ERIPA would increase both economic growth and federal revenues by reducing crime and enhancing the rule of law.
Law Enforcement Is Government's Most Fundamental Duty and Its Most Productive Investment
In Washington, it is sometimes easy to forget that governments can be productive enterprises that promote economic growth by protecting the security and freedom of their citizens. If government spends wisely to better perform its core functions, then government itself can be productive, and generate positive returns on taxpayers' "investments."
Law enforcement is among the most basic and productive of government's purposes. For example, in the U.S. Constitution, "the People" envision a "more perfect Union" whose first duty is to "establish justice and ensure domestic tranquility...."
Indeed, the World Bank recently confirmed empirically what the Framers of our Constitution knew intuitively. In its 2006 study, Where is the Wealth of Nations?, the World Bank concluded that 80% of the wealth of developed nations resides in "intangible capital"--the value generated when well-governed, educated citizens can live under the rule of law. The rule of law accounted for 57% of intangible capital; education accounted for 36%. This had obvious implications: "Policy makers, therefore, can be reasonably confident that investments in education and the justice system ... are the most important means of increasing the intangible-capital component of total wealth."
For example, if an economy has a very efficient judicial system, clear property rights, and an effective government, the effects will result in a high total wealth.... Investments in education, [and] the functioning of the judicial system... are the most important means of increasing the intangible components of total wealth.
The World Bank's conclusions are a more general confirmation of the conclusions of both the Tyson Report and the Framers of the Constitution: Enforcing the rule of law is both a core governmental function and a uniquely productive investment.
IPR-Enforcement Reform Can Reduce Crime and Enhance Public Safety
The breadth of support for IPR-enforcement reform reflects an understanding of the value inherent in the rule of law. When accepting the 1993 Nobel Prize for Economics, Douglass North framed the issues succinctly:
[I]f the institutional framework rewards piracy, then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations... will come into existence to engage in productive activities.
North's warning stresses how conservative the Tyson Report‘s cost-benefit analysis is. The Tyson Report tries to estimate and monetize the benefits to industries and governments of small reductions in counterfeiting and piracy. The Tyson Report does not, however, try to calculate the human costs that IPR crimes inflict on consumers and the public.
Although the Tyson Report--understandably--did not try to monetize such costs, they cannot be ignored by legislators. Indeed, no one today can deny the growing threats to public health and safety posed by counterfeiting: a year-long procession of dead pets, poisonous toothpaste, and lead-painted toys have made them clear. Nor have the counterfeiters failed to demonstrate their willingness to kill or maim: If they can make something that looks like a life-saving prescription drug from a mixture of boric acid, floor wax and lead paint, then that is what they will do.
Worse yet, in the past, such threats to public safety tended to arise--not from counterfeiting and copyright piracy generally--but from the counterfeiting of certain sensitive products, like prescription drugs. Now, two factors have changed the public-safety calculus of counterfeiting and piracy.
First, organized criminal syndicates and terrorists have discovered the high profits, low risks of detection, and weak penalties of counterfeiting and piracy. In a 2007, the Organization for Economic Co-Operation Development (OECD) warned that "criminal networks and organized crime are playing a significant role in counterfeiting and piracy":
The groups involved in counterfeiting and piracy include mafias in Europe and the America and Asian "triads", which are also involved heroin trafficking, prostitution, gambling, extortion, money laundering, and human trafficking....
In addition to the established link between counterfeiting and piracy and organized crime, Interpol has highlighted a disturbing relationship of counterfeiting and piracy with terrorist financing, with IP crime said to be becoming the preferred method of financing for a number of terrorist groups.
The Tyson Report shows that reducing counterfeiting and piracy will increase economic growth and governmental revenue. Not doing so will increase funding for drug trafficking, prostitution, extortion, or something worse.
Second, as commercial activity shifts towards interactive digital communications networks like the Internet, would-be pirate kings have proven that even the most seeming innocuous forms of counterfeiting and piracy--such as piracy of popular music and movies--can metastasize into complex threats to public safety in which risks are deliberately shifted toward children and consumers and personal, national, and military security are compromised.
Internet copyright piracy transformed itself into a threat in order to exploit court decisions like A&M Records, Inc. v. Napster, Inc. and Sony Corp. of Am. V. Universal City Studios, Inc. Distributors of certain file-sharing programs concluded that these decisions would let them intentionally profit from piracy by distributing programs that, while having some potential lawful uses, were actually designed to encourage or dupe vulnerable persons--like students, single mothers, immigrants, the disabled, teenagers, and preteen children--into performing infringing acts that would give these distributors "no product costs to acquire music" and an "ability to get all the music." Some thus intended to profit by distributing dangerous toys to children and then blaming the children when those programs were used for the purpose for which they were best suited--infringing copyrights in popular music, movies, and software.
But many of these malign distributors overestimated the gullibility of the students, single mothers, immigrants, disabled veterans, teenagers, and children who were supposed to bear all of the risks while distributors made all the money. Researchers found that once users of file-sharing programs were actually sued for sharing infringing files, almost all tried to stop.
When that happened, many file-sharing programs changed. Back in 2002 and 2003, published research and congressional hearings had identified certain "features" that would tend to dupe users of file-sharing programs into "sharing" all of their personal files inadvertently--including, of course, all their audiovisual files audio files legally "ripped" from purchased CDs. Distributors were warned that any further use of these dangerous "features" would cause identity theft and compromise national and military security.
But as many users stopped sharing files, many programs either began or resumed use of the very "features" that had already been shown to dupe users into sharing all of their personal files inadvertently. The long-predicted consequences then followed: inadvertent sharing facilitated rampant identity theft and hundreds of breaches of national and military security that disclosed highly classified documents. Soon enough, Justice Breyer, once file-sharing's biggest fan at the Supreme Court, saw his own finances broadcast across the globe, courtesy of LimeWire--one of the program that his Grokster concurrence had wrongly predicted would soon be used for many lawful purposes. As a result, copyright piracy became a proven threat to personal, national, and military security.
ERIPA is a stitch in time that can save nine--or billions. It is a sound investment in the rule of law. The Tyson Report, the World Bank, and common sense all suggest that law enforcement is an invaluable public good that can actually generate more revenue than it expends. The Senate should pass ERIPA.