State of Innovation

Patents and Innovation Economics

Long Term Economic Predictions 2011

Background

It has been two year since I published my book The Decline and Fall of the American Entrepreneur: How Little Know Laws and Regulations are Killing Innovation.  The book explains that the only way to increase real per capita income is by increasing our level of technology.  This can be accomplished by capital equipment purchases, which upgrade plant and equipment with newer technologies or by creation of inventions.  Since the United States is a leader in technology, we do not have the choice of just upgrading to new technologies produced in another country.  So we must create new technologies if we want our economy to grow.  There are two ways to encourage the creation of new technologies; government funding or private investment in inventions.  Government spending on research and development is not nearly as effective as private spending – see Solyndra.  A study by the Small Business Administration shows that most emerging technologies are invented by small entrepreneurial start-ups.  Unfortunately, since 2000 the U.S. has undermined the three foundations on which technology start-ups are based.  Those three foundations are intellectual capital, financial capital, and human capital.  We weakened the intellectual capital foundation by weakening our patent system, we weakened the financial capital foundation with the passage of Sarbanes Oxley, and the human capital foundation was weakened by the accounting rules that required the expensing of stock options.

Since my book was published the intellectual capital foundation has been undermined this year by the passage of the America Invents Act and the financial capital foundation has been undermined by the passage of the financial reform bill (Dodd Frank).  There has been no change on the human capital front.  There is mixed news on the intellectual capital front.

These problems are being exacerbated by the budgetary issues associated with aging baby boomers.  The Obama and Bush administrations compounded these problems by expanding Medicare to prescription drugs and the passage of Obama Care.  In 2010, Medicare/Medicaid and the Children’s Health Insurance Program (CHIP) represent 21 percent of the federal budget.  Social Security represents about 20 percent of the federal budget and interest payments represent about 8 percent of the federal budget.  It is estimated that about 10,000 baby boomers will go on Medicare per day for the next twenty years.  However, about 5000 seniors are dying per day.  Each Medicare recipient costs about $10,500, so Medicare costs will expand by $185 billion dollars (today’s dollars) or another 5% of the federal budget.  Roughly, the same calculation applies to social security.  So Medicare and Social Security will consume approximately 50% of the U.S. federal budget by 2020.  In addition, the interest payments are likely to consume around 30% of the U.S. federal budget.  This means that 80% of the federal budget will be spoken for.  This does not include any additional costs for Obama Care.  It is unlikely that the federal budget as a percentage of the economy can grow, since the U.S. had to borrow one third of the federal budget in 2010.

Here are my predictions for the next decade based on this background.  I provide an optimistic, most likely, and pessimistic scenarios.  Note these scenarios are based on what I believe is most likely to occur, not what I believe is the best that could be done or the worst that could be done to the U.S. economy.

Predictions Common to all Scenarios

Properties rights of all kinds will continue to be weakened.  It appears that you can get a PhD. in economics (or even win the Nobel Prize) without understanding even the most basic ideas of property rights and how they affect a free economy.  Even so called free market economists forget that Reagan not only cut tax rates, he strengthened property rights.  Particularly he strengthened patent rights – for more information click here.  He also strengthened property rights by weakening regulations and weakening the power of unions.  A number of so-called free market economists do not understand that property rights are based on productive activity.  As a result, they have joined in an all attack on property rights for inventions – patents.  For more information see Scarcity Does it Prove Intellectual Property is Unjustified.

One change from last year is that all the Republican candidates have come out for repealing or curtailing Sarbanes Oxley and the Financial Reform Bill.  There may be hope that entrepreneurial companies will no longer be starved for financial capital if the Republican’s win the presidency.  It appears unlikely we will strengthen property rights for inventions or property rights generally or signficantly strengthen our capital markets so they work for start-up companies, the most optimist scenario is limited to subpar growth.

The growth of the Internet will result in a continued decline in commercial real estate values under all scenarios.  Commodity prices are likely to increase, inflation adjusted, under all circumstance.  Growth in China and inflation will drive this increase in commodity prices.

Optimistic Scenario (This is Unchanged from 2010)

This scenario assumes that the U.S. faces up to its budgetary problems, repeals Obama Care, and rationalizes it tax structure.  This scenario assumes that Obama is not elected for a second term.  Government spending will grow slightly as a percentage of GDP.  Supply Side economists would probably consider this enough to create vigorous economic growth.  However, it does nothing to really encourage investment in new technologies.  As a result, real inflation adjusted GDP growth over the decade will probably be around 2%.  Median household family income after taxes will be stagnant.  This will be two decades during which median household income has not grown in the U.S.  I believe that will be the first time in the history of the U.S. this has occurred.

The housing market is likely to be stagnant since family incomes will be stagnant.  Inflation is likely to run 4-6% (Note that it appears that government is determined to lie about the inflation numbers, so it will be hard to determine the real inflation rate), but this will not be enough to cause appreciation in housing prices.  In fact, inflation adjusted housing prices will likely decline.

The best economic opportunities will be in government related jobs or businesses.  Commodity based business will also prosper.  Technology entrepreneurs will be few and far between.  Unemployment numbers will hover between 7-9% throughout the whole decade – this will be the new normal.  The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. may fall below the top ten in the world.  The U.S. will also be one among many equals in technological and scientific leadership.  All social ills will increase slowly including crime, number of welfare dependents, and black market transactions.

Most Likely Scenario

This scenario assumes that the U.S. will not face up to its budgetary problems and Obama Care will not be repealed completely.  Under this scenario, the U.S. will go from financial crisis to financial crisis.  Each financial crisis will be meet with a short term band-aid solutions.  Federal government spending will grow to at least 30% of GDP and total government spending will be 50-60% of GDP.  Inflation will grow to 10-14% by the end of the decade.  Despite this, housing prices will not keep up with inflation.  Median household family income after taxes will decline by 2-7%.  Official GDP numbers will show slightly negative growth, but this will over state the actual growth rate.

The best economic opportunities will be in government related jobs or businesses.  Commodity based business will also prosper.  The financial differences between those who are in the government’s favor and those who are not will be huge.  Technology entrepreneurs will be almost nonexistent.  The brain drain from the U.S. will be apparent and a cause for anxiety.  Unemployment numbers will hover between 9-15% throughout the whole decade.  The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. will fall well below the top ten in the world.  The U.S. will also be a declining power in technology and science.  All social ills will increase moderately including crime, number of welfare dependents, and black market transactions.  The chance of a major war in the world will be moderate.

Pessimistic Scenario

The U.S. will not face up to its budgetary issues even to get through a crisis.  The U.S. will either literally default on its debt or inflation will be over 20% or both.  Multiple states will go bankrupt and be bailed out by the federal government.  Tax burdens will skyrocket as will the black market.  Housing prices will decrease significantly except in extremely exclusively neighborhoods.  Social order will collapse.  The pretense that the U.S. is a nation of laws or that the Constitution has any meaning will be completely destroyed.  There is a possibility (15%) that there will be a military coup.  Alternatively or in combination there is a possibility that the U.S. will break up into a number of separate countries.  Many parts of the U.S. will decide that it no longer makes sense to support Washington, Wall Street and parts of California that have become use to crony capitalism and government handouts.  The brain drain from the U.S. will be well known and huge.  This may be the driver for politicians and voters to demand real reform.  China and India will dominate the world economy.  Unfortunately, neither will likely fill the U.S.’s shoes and become a technological and scientific leader.  Singapore will likely be the richest country in the world on a per capita basis by a large margin.  They will be the major center of technological and scientific research.  The chance of a major war in the world will be probably.

Caveats

The best reason to be more optimistic is that the U.S. has never had two bad decades in a row.  In the late 1930s and late 1970s there was no reason to suppose that the U.S. would right itself economically.  We pulled out the 1930s because Roosevelt realized that he had to adopt pro-business policies if the U.S. was to have any chance of winning World War II and so did the voters.  In the 70s, there was little hope that the U.S., let alone England, would pull out of the inflationary spiral, increasing unionization, increased regulation, increasing government spending and entitlements.  However, there was the glimmer of Ronald Reagan and a surge of free market economists such as Milton Friedman, who still understood property rights.  Unfortunately, I do not see a Ronald Reagan on the horizon and many of today’s free market economists are overly focused on the detrimental effects of Federal Reserve and high marginal tax rates.  Very few seem to understand the importance of strengthening property rights, particularly for inventions or the need to free up our capital markets from regulation.  I hope I am wrong and there is a politician who understands property rights, particularly for inventions, and the need to free up our capital markets, while having the strength to stand up to government unions and special interests.

I cannot decide if we are seeing the collapse of Western Civilization under the weight of the welfare state (socialism) or if we are seeing the last hurrah of the welfare state.

December 22, 2011 Posted by | -Economics | , , | Leave a comment

Patents Important to Economic Growth of Emerging Countries

According to the paper, Korea’s Patent Policy and Its Impact on Economic Development: A Model for Emerging Countries?, a strong patent system is a positive part of encouraging economic growth for emerging economies.  The paper points out that:

Korea has long been a proponent of strong patent protection and of the need to maintain a robust, well-functioning patent office that supports the development of local technology.  That view is consistent with the notion, to which Korea subscribes, that the patent system can help promote and sustain healthy economic development, particularly in emerging-or newly industrializing-countries. P. 443

Korea’s economic results have been some of the best among emerging countries.

In the early 1960s the Republic of Korea (Korea) was the poorest country in East Asia with a per capita income less than half that of Ghana or Honduras, and a per capita GDP of approximately $160.  Today, Korea has achieved the status of a newly advanced economy. It ranks thirteenth in the amount of trade generated, fourth in the number of patent applications filed in 2008,3 and by 2007 its per capita GDP had risen to $20,000. P. 442

Korea has put real teeth into its patent laws and even has criminal provisions

There are serious consequences for infringing a patent right under the Korean Patent Act. A patentee is entitled not only to an injunction to prevent the infringing activity, but also to demand destruction of the infringing articles, and a patent infringer is subject not only to damages, but also to criminal sanctions, including imprisonment. P. 458

Korea requires separate compensation for inventions of employees.

The Korean patent law requires that inventors who are employees be compensated for their inventions.  P. 461

Korea’s creative use of the patent system to promote technological capacity has arguably been a significant factor in the country’s economic growth.  P. 480

 

Erstling, Jay, “Korea’s Patent Policy and Its Impact on Economic Development: A Model for Emerging Countries?” (2010). Faculty Scholarship. Paper 138. http://open.wmitchell.edu/facsch/138

 

October 23, 2011 Posted by | -Economics, Patents | , , , , | Leave a comment

My Book: The Decline and Fall of the American Entrepreneur Now Available on Kindle

The The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation , is now available in Kindle format for only $7.99.

Book Highlights:

*New US laws since 2000 are killing US Innovation

*Explains why the venture capital model is dying.

*Innovation is key to creating high quality jobs

*Innovation is key to increasing real per capita incomes of Americans

*How to make the US the innovation leader of the world again

 

What others are saying about the book

Mr. Halling combines two topics — the impediments to entrepreneurship that have been created by the U.S. government as an unintended consequence of its pursuit of other goals and the systemic weakening of the U.S. patent system by the U.S. Supreme Court and the Congress.

The resulting technological stagnation is a major reason the U.S. has gone from producing 25 percent of the World’s Gross Product in the mid 1990s to about 20 percent today. The loss is significant – about $3 trillion of U.S. GDP in 2009 alone.

He demonstrates in clear terms the linkages between economic growth, productivity, and income. And he lays out how technological advancement has always been the American advantage in global competition, an advantage that the U.S. is squandering.

Dr. Pat Choate, economist, former Vice Presidential running mate of Ross Perot 1996, Director of the Manufacturing Policy Institute, Phd. Economics University of Oklahoma

 

“Dale Halling’s Decline and Fall of the American Entrepreneur makes a compelling case for the need to reform regulatory and other policies that hamstring entrepreneurial innovation in our country. Everyone concerned about the decline in American innovation should read this book.”

David Kline, Coauthor of “Rembrandts in the Attic” and “Burning the Ships”

The Decline and Fall of the American Entrepreneur presents the issues facing technology start-up companies in today’s environment.  The book sheds light on the underpinnings of these issues and is enthralling.  Halling’s tight, accessible and personal style make this a fast and compelling read.  His book is a political clarion call that should be heard now.

Greg Jones, Former President Ramtron International (RMTR) and CEO Symetrix Corporation.  Both companies founded on IP.

This book conclusively establishes the link between innovation and per capita income, and shows that we have recently entered into a time in which innovation is under assault.  This assault has resulted in a predictable loss of income and contributed significantly to the economic woes we are experiencing right now.  The book’s sound policy recommendations suggest a way to turn the economic ship around to set a course for a return to prosperity.

Peter Meza,Patent Attorney – Counsel Hogan & Hartson, Attorney for Alappat –  In re Alappat

 

October 4, 2011 Posted by | Innovation | , , , , , , , , , | Leave a comment

George Will: US Suffering From Innovation Dearth

In a January 2, 2011 column (Needed: A science stimulus) in the Washington Post, George Will points out that the US is suffering from a lack of innovation.  He makes a token node to the patent system in the article and then he focuses on government spending on science and engineering and does not mention the patent office is underfunded.  George reflects Washingtons and the elitists attitude that government spending is what drives the economy.  He just believes government spending should be directed to science.  In addition, he repeats the elitist comment that most of the science is done by the elite and us peasants don’t really contribute much.

The late Nobel laureate Julius Axelrod said, “Ninety-nine percent of the discoveries are made by 1 percent of the scientists.”

This elitist attitude contradicts all the available evidence.  As the book, The Most Powerful Idea in the World, discussed in Georges’ article points out, sustained economic growth does not happen until property rights for ideas (patents) are enacted.  This releases a flood of inventions, not by the elite, but by ordinary citizens.  It was the democratization of the inventing process that lifted the masses out of the Malthusian Trap.

 

January 14, 2011 Posted by | Uncategorized | , , , , , , | 5 Comments

Patents Critical Indicator of Success

Another study shows that start-up company success is tied to patenting success.  The authors of the study are a pair of professors of  finance, Jerry Cao of Singapore Management University and Po-Hsuan Hsu of University of Connecticut.  Perhaps the key finding is:

Start-up firms that successfully file patents before receiving any VC investment and more likely to complete IPOs and less likely to fail or be acquired.

The study shows that

67.39% of patenting VC investees successfully completed the IPO process, whereas only 14.81% of VC investees without patents did do.

This is a huge difference.  Patents are also a good indicator of whether a firm will end up in bankruptcy.

On the other hand, only 3.47% or patent-filing VC investees filed bankruptcy, in sharp contrast to the 10.12% of VC investees without patents who did so.

This study clearly shows that patents are critical to the success of start-up companies.

September 29, 2010 Posted by | -Economics, Innovation, Patents | , , , , , | Leave a comment

Could Congress Abolish Patents and Copyrights?

Some people are suggesting that Congress has the power to abolish patents and copyrights in the United States.  The argument is that Article 1, Section 8, Clause 8 of the Constitution states “The Congress shall have Power To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writing and Discoveries” and whether they exercise this power is optional.

This interpretation relies on the idea that when Congress is granted a Power it is unlimited.  The United States was founded on the idea that Government power is not unlimited like the Devine Right of Kings.  The United States was founded on the idea that powers of government are limited and come with duties, while Rights of citizens are unlimited and do not come with duties.  I know this will come as a shock to those people raised on the modern liberal interpretation, which wants unlimited powers for government and sees the Bill of Rights as a list of negative rights – see Barack Obama.  Congress, under Article 1, Section 8 also has the power to set “an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.”  This is not optional on the part of Congress, with the power comes the duty to establish these rules.

The interpretation of the Constitution that suggests Congress has the option to establish systems to protect inventors’ and authors’ rights is totally inconsistent with the history of the Constitution.  The purpose of the Constitution was to set out the powers of the federal government.  Article 1, Section 8 lists the powers but also the responsibilities of Congress.  For instance, even the power to declare war comes with the responsibility to do so when the U.S. is under attack from foreign powers.

How do we know that Congress has the duty to protect the “Rights” of inventors and authors?  Because the Declaration of Independence say so:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men,

It is well known that the unalienable Rights of the Declaration of Independence are the Natural Rights of Locke – Life, Liberty, and Property.  Many people believe that Jefferson changed property to the pursuit of happiness because he was worried it would be interpreted as endorsing slavery.  When the Founders used the word “right” they meant natural rights.  The purpose of government is to secure these rights.  When the Constitution states that inventors and authors have “Rights” in their creations, they mean natural rights and they understood that the purpose of governments was to secure these rights.  This means that Congress has a duty to secure the rights of inventors and authors under Article 1, Section 8, Clause 8.  If the words patent and copyright are meant as rights in inventions and writing, then it is clear Congress does not have the option of eliminating them.  It is also clear that patents and copyrights are not limited by the preamble.  Natural rights are not utilitarian, but are endowed on men by their Creator.

September 11, 2010 Posted by | -Law, -Philosophy | , , , , , , , | 11 Comments

Judge Michel – Economy Recovery Requires Strong Patent System

Judge Paul Michel has an excellent article in JPTOS.  Judge Michel first explains that the economy and a well functioning patent system are connect.

The primary engine of American recovery and resurgence will therefore have to be an improved patent system. Without that, both short term recovery and long-term prosperity will be stunted. By “system”, I mean primarily the Patent and Trademark Office, and the Federal courts, which along with the International Trade Commission provide the only mechanisms to monetize patent value.

Next he points out one of my main complaints about the patent publication requirements – we are giving away our technology

Because most applications must by law be published at 18 months, others, including foreign competitors, can pirate inventions for years before the patents issue, for until then patent owners have no rights.

Michel then discusses the damaging effects of fee diversion from the patent office.

In addition, the Congress must guarantee the PTO will keep all fees. Since 1992, Congress diverted over 900 million dollars in patent fees to other uses. ‘This fiscal year Congress, once again, will not allow the office to keep all the fees it expects to collect; an estimated $150-250 million will go elsewhere. Permanently ending such “fee diversion” is necessary to reviving the PTO. If Congress continues diverting fees to other purposes, raising fee levels will have little effect. In addition, is it fair that fees provided by private patent applicants finance other government activities?

Finally, he suggests PTO satellite office, which has been a hot button of mine.

What else? Let the PTO open satellite offices, in places like Detroit, and Houston, and hire unemployed engineers who are already experienced IP professionals. But again, Congressional authorization is needed. Under current law, most employees must work in Alexandria, Virginia. Congress also controls the pay structure for examiners. The General Schedule that sets pay for civil servants should not apply to the scientists and engineers in the patent office. Industry would willingly pay higher fees to enable the PTO to pay more competitive salaries to highly-skilled examiners. Congress should raise these pay levels.

May 15, 2010 Posted by | Innovation, Patents | , , , , , , , , | 1 Comment

Voices on the Net a Session with JJ

I had an excellent interview with JJ on a Session w/JJ on Voice on the net.  For the full interview click here.

April 28, 2010 Posted by | Innovation | , , , , , , , , | Leave a comment

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