28 Nov
2014

Maybe the real problem with Bessen and Meurer is that they just don't understand economics

This blog has run a few pieces recently that focus on the increasingly questionable work of James Bessen and Michael Meurer, the two Boston University academics whose research has so often been cited by those who believe that fundamental reform of the US patent system is necessary (see here, here and here). 

Following the publication of the blogs, last week we received an email from Matt Miskimin, director of IP monetisation and transactions at AWAIPro AB in Sweden, who thought there might be even more reasons to doubt the professors. Matt actually comes at the issue from a very different angle. It is that even if we accept that the figures Bessen and Meurer come up with are accurate (and, of course, it is highly unlikely that they are), the idea that they represent any kind of loss to the US economy is just plain wrong; in fact, the precise opposite may well apply.

Now, I am not an economist so cannot comment on the detail of what Matt says, but I am happy to share his analysis with the blog’s readers to see what they think. So, here goes: 

Given that Messrs Bessen and Meurer are academic “economists” at a respected university in Boston, that they have given themselves the vaunted position of arbiters of moral right and wrong in the NPE/troll debate, and have attached figures such as $29billion as NPE/troll “taxes” on the US economy, it is worth asking whether the professors have actually defined a “public good” or “public evil”.

As economists, they are surely familiar with the basic concepts of the marginal propensity to consume (MPC) and the multiplier effect. For those of you not steeped in these principles here is a quick review of Macro Econ 101.

The MPC is the fraction of each extra unit of wealth/income (a dollar) that a normal citizen would use to buy new goods or services if he/she suddenly received some extra wealth/income. The opposite of the MPC is the MPS or marginal propensity to save. The multiplier effect (ME) represents the compounding effect on economic growth (GDP) that can be expected from a unit of wealth (a dollar) as it travels through the economy.

The MPC and MPS sum up to 1.0 and are usually given in decimal form. For example, assume that an economy has an MPC = 0.8 or 8/10 which gives an MPS = 0.2 or 1/5.

The multiplier effect, ME, is calculated in the following way: 1/MPS giving 1/ 1/5 = 5x in the example above.

ME is what national economists look at to guess what the likely effect of changes in fiscal policy and monetary policy might be. For example, if the government injects “wealth” into the economy by giving each citizen a $1,000 tax rebate before Christmas what will be the effect on retail sales and quarterly GDP? Yup, they may save a bit, but generally citizens will go out and buy something – and that makes the economy spin. The Fed has just spent a few years injecting “wealth” back into the economy with QE2 hoping for an ME driven GDP recovery.

A licensing fee or royalty agreement is, in essence, just a transfer of wealth from one entity to another. The NPE/troll “tax” neither increases nor decreases the nominal amount of wealth in the economy. But the redistribution of that wealth and the velocity of that wealth as it is moving through the economy does have a significant effect on overall economic activity; ie, GDP. NPEs/trolls do generally pay salaries and even invest in things like research projects, patents, new infrastructure, buildings, plane tickets, food and so on – classic “rings on the water”.

If we assume that your average NPE or troll, irrespective of which of the Bessen and Meurer definitions we use, is likely to have an MPC/MPS similar to the rest of the economy, then there is, paradoxically, huge potential for increasing GDP by fostering a redistribution of wealth from a number of large corporations that are regularly accused of amassing profits from normal operations, but delaying tax payments by using offshore entities to house licensing activities, while at the same time not necessarily re-investing enough of those profits in new R&D or infrastructure. Offshore profits are locked away due to the tax code and therefore tend to have a low MPC or ME effect on the US economy.

So, if the MPC of the US economy is 0.8 then what might the effect be of transferring  the $29 billion NPE/troll costs back into the general economy via the NPE/trolls, and what is the likely net tax and GDP effect? Right!  5 x 29 billion = $145 billion in likely economic activity thanks to the multiplier effect of the wealth redistribution. Tax that wealth at normal rates for income or profit and you might just help balance the budget and also spur new innovation at universities and corporations that suddenly have gotten an IP-driven licensing revenue flow. What is good and what is bad? That depends on who your master is, I guess.

Joff Wild

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Joff Wild