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Archive for October, 2011


Regulatory Reform: REINS Legislation

Federal regulations take up 81,000 pages and annual compliance costs are now $1.75 Trillion or 12% of U.S. GDP.  This is enough money to hire a quarter of the U.S. workforce.  (For more information see Episode Two: Economic Freedom in America Today).  Note that this does not include the cost of tax compliance, which is estimated at $431 Billion per year.  There is now a very modest proposal to put a halt to excessive and unnecessary and unconstitutional regulations called the REINS ACT, introduced by Congressman Geoff Davis.  This piece of legislation requires an up-or-down vote on all new proposed rules with an economic impact of over $100 million by both the House and the Senate and the signature of the President before they can be enforced on the American public.

I have written on this issue before, see Regulatory Bill of Rights.  Regulatory rules are used to circumvent not only Congress’ rights under the Constitution, but used to circumvent your rights under the Bill of Rights.  The penalties for regulatory infractions can include severe financial penalties and jail time.  Our Founding Fathers did not intend that the Bill of Rights to only apply to so called criminal laws.  Our government circumvents the Bill of Rights by pretending they are enforcing a civil law instead of a criminal law.  The only true civil law in the U.S. is between private citizens not a law between the government and the people – those are criminal laws.

The REINS Act is a very modest piece of legislation and does not go nearly far enough in curtailing the power or regulatory agencies, but it’s a start.

 

 
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

 

 
Patents Cause Economic Growth: Another Academic Study Shows

Two Singapore professor show patents result in significant economic growth.  Their paper, Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries concludes “the effect of strengthening patent rights on economic growth was substantial in economic terms.” P. 16

In the abstract of the paper, they conclude:

Our results have important implications for public policy. One is that patent laws and their enforcement matter for economic growth. However, our findings also suggest that patent rights vary by country and industry. We show that patent rights have a smaller impact on economic growth in poorer countries and in less patent-intensive industries. Since patent intensive industries account for a smaller share of the economies of the poorer countries, our results imply that the welfare gain in terms of economic growth for these countries is more likely to be outweighed by the welfare loss due to lower end-usage, and hence, tip the balance towards weaker rights being socially optimal.  Abstract

The paper’s conclusion with respect to “poorer” countries being better off with a weak patent system is pure conjecture and was not part of their study.  The reason that poor countries do not see a big boost by having stronger patent laws is: 1) poor countries are technologically backward and can advance economically by copying (purchasing) existing non-patented technologies, and 2) poor countries have poor property rights systems diminishing the effectiveness of their patent systems.  A poor country is poor because of its low level of technology.  Just raising a poor countries level of technology to the same level as the United States twenty years ago would result in huge economic gains.  The reason poor countries have a lower level of technology is because they have weak property right systems that results in under investment in technology (Capital Spending).  The paper hints at this point:

Our patent rights index depended on an assumption that enforcement of patent rights was correlated with enforcement of property rights in general, as measured by the Fraser index (The Fraser Institute does a study of economic freedom for all countries once a year). P. 10

In Figure 1, we plotted the Fraser index against the GP index (Patent Strength) scaled up by a factor of two.  The two indices were highly correlated. P. 10

In other words, there is a strong correlation between the strength of property rights in general with the strength of a patent system in a country. This should not be surprising since patents are property rights in inventions.  If you did a study of arbitrary government grants or monopolies versus the strength of patents in countries, you would find they are highly uncorrelated.  Despite the nonsense that suggests that patents are monopolies.

Another interesting point in the paper:

Among 15 Western countries over several centuries, enactment of patent law was associated with higher rates of scientific discoveries, inventions, and innovations.

Hu , Albert G.Z. and Png , I.P.L., Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, August, 2010.

 

 
Perfect Competition is Economic Equivalent of Altruism Morally & Why it Matters to Patents

Perfect competition is when no one producer or consumer has the ability to affect the market price and all producers and consumers compete for a homogenous product, driving down the cost of the product.  Under perfect competition, a producer’s profit is eliminated or at least reduced to a trivial return.  Why this matters to patents is that the theory of perfect competition is often used to attack the patents.  It is argued that patents allow producers a differentiating feature or product and therefore they have a greater margin than their competitors.  Economists argue this means that the patent holder is getting monopoly profits according to the “perfect competition” theory and they call this profit a “deadweight” loss.  This supposedly shows that resources are not being allocated efficiently.

So why do I say Perfect Competition is the equivalent of Altruism morally?  Altruism is the idea of self sacrifice as a moral value and perfect competition is the economic idea of sacrificing a producer profits and a consumer’s right to choice.  The goal of perfect competition is that no one, producer or consumer, is treated as an individual and everyone needs to be sacrificed to the altar of perfect competition collective.  There is never any discussion of property rights with respect to “perfect competition” or individual rights.

Ayn Rand often stated that so called defenders of capitalism are often worse than its detractors.  Perfect competition is another example of this.  The Chicago School of economics, which included Milton Friedman, pushed the idea of “perfect competition.”  The book of A Random Walk Down Wall Street was the application of perfect competition to Wall Street by a Chicago School of Economics professor.  Perfect competition is the enemy of capitalism, individual rights, and economic growth.

Real per capita growth is the result of increases in one’s level of technology.  Under perfect competition, there is no reason to invest in creating new technologies and in fact there is no reason to invest at all.  Under perfect competition every investment yields the same low rate of return or no rate of return.  Perfect competition is used to justify antitrust laws that destroy property rights and most importantly property rights in inventions.  Perfect competition results in the same sort of idea of self sacrifice as altruism and is totally incompatible with capitalism, property rights, natural rights, and human happiness.

 

 

Patrick Anderson at GametimeIP has an interesting post that explains investment in new technologies is affected by competition between the patent systems of countries.  He quotes Judge Rader as pointing out that

By creating obstacles to patent protection, the real-world impact is to frustrate innovation and drive research funding to more hospitable locations. To be direct, if one nation makes patent protection difficult, it will drive research to another, more accommodating, nation.

Anderson further explains:

Rader then recounts the tale of the European patent system, which he says “became known for subjecting [biotech] inventions to delays in the patent office, challenges in litigation, increases in cost, and uncertainties in the legal landscape.”  Consequently, Rader continues, “investors, corporations, and clinics shifted their research from Europe to the United States.”  Rader then warns that the tide can turn against the United States just as easily.

It appears that in these difficult economic times other countries are waking up to these facts.  The post talks about a Halliburton case in the UK in which the judge took a narrow approach to excluding software inventions.  The judge made this insightful comment:

Thus when confronted by an invention which is implemented in computer software, the mere fact that it works that way does not normally answer the question of patentability. The question is decided by considering what task it is that the program (or the programmed computer) actually performs. A computer programmed to perform a task which makes a contribution to the art which is technical in nature, is a patentable invention and may be claimed as such. Indeed in those circumstances the patentee is perfectly entitled to claim the computer program itself.

Please read the full post at GametimeIP.

 

 
Evolution, Economics, and Patent Law

The study of economics would be the same thing as the study of evolution of humans if humans did not invent.  Without invention there is no reason for trade.  Why would we trade my berries for your berries if they are essentially the same berries?  If we both eat the same dead animals, what would the purpose of trade be?  Without trade, production is limited to the immediate needs of the person.  Perhaps you might store up some nuts, but everything else will spoil.  Note that shelter is an invention, unless it only involves taking over a cave or a hole in a tree.  The unique feature of man is that he is a rational animal and in the economic realm this means that he invents.  No other animal invents.  Only humans change their environment to meet their needs.

The driving function of evolution is the Malthusian Trap.  In the Malthusian Trap, food (things need to survive) is limited and population growth in any species is always greater than the growth of the food supply, except humans very recently.  This puts species into competition for food and selects for the species that are most successful in a given area.  The only reason that humans (some) were able to escape the Malthusian Trap was that they invented faster than their population grew.  Meaning the rate at which technology changed provided greater productivity growth than the expansion in the population.  Why after 20,000 to 100,000 years of human existence did people in England, the United States, and the West suddenly escape the Malthusian Trap?  Clearly, the rate of invention accelerated in these places so that productivity outstripped population growth.  But why there and why then?  There is extensive evidence that the introduction of property rights (individual – there is no such thing as group property rights) always provides a strong incentive to maximize return on an asset.  England and then the U.S. at the beginning of the Industrial Revolution were the first large groups of people to introduce property rights in inventions.  This provided the necessary impetus to invent new technologies and diffuse them widely.  Clearly, patents cannot provide this incredible benefit outside of a system of individual rights and property rights.  However, it was the linchpin that launched large groups of humans outside of the Malthusian Trap and the constraints of biological evolution.

For more information see:

The Source of Economic Growth

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention

Jobs and Patents

Are Patents Relevant

 

 

A great video from the Economic Freedom blog shows how the U.S. has wiped out two decade of progress toward economic freedom in a nine years.  According to the video government spending and regulation take up 65% of the GDP.  Regulation by itself takes up 19% of GDP.  This means that the average goods and services in the U.S. have to be 23.4% higher in price just to pay for regulations.  Imagine how much “demand” would be opened up if the average price of goods and services were lowered by this amount.  To understand why the price of the average goods and services is 23.4% higher because of regulations see Austerity: Why it is Key for Both Short Term and Long Term Economic Growth.

 

 
Another Study Shows How Far the U.S. Has Fallen

Forbes magazine released its ranking of the best countries in which to do business.  The U.S. fell a spot to tenth on the list.  Canada jumped three spots to first place.  This is another list confirming that the U.S. is slipping economically because of the policies that it is pursuing.  Another recent list ranked the U.S. tenth in economic freedom.  The answers to our economic problems are not too complex to understand, it is easy to define which policies further economic freedom and individual rights and which do not.  The Obama and Bush administrations both moved us away from freedom and toward socialism (more accurately Fascism).  Both administrations introduced the largest, most expensive entitlement programs during their administration since Lyndon Johnson and Medicare.  They did this at a time when both knew that Medicare and Social Security were bankrupt actuarially.  Even Obama knew it was a LIE that Obamacare would save money – that was never his intention.  His intention was to move the U.S. towards his socialist vision and he stated this clearly if you listened to what he has said throughout his life,  not just the sound bites when he was pushing Obamacare.

Here are specific policies that we need to enact in order to avoid a financial collapse of the West.

 

1) Rationalize our tax system

We need a tax system designed to raise revenue as efficiently as possible.  A flat tax or a sales tax both fit the bill.  Any tax system should only be on earnings or spending and not on capital gains and estate taxes.  Our tax system is a national disgrace

2) Regulatory Bill of Rights

Our Bill of Rights has been completely circumvented by the regulatory state.  It is not enough to just roll back regulations, we need a real check and balance on the Regulatory state.  I have proposed such a system in my post Regulatory Bill of Rights.

 

3) Cut Government Spending and limit total government spending to no more that 15% of GDP.

The evidence is overwhelming that government spending destroys both the economy and our individual rights.  See Austerity: Why it is Key to Both Our Short Term and Long Term Economic Growth.  This means that we have to reform Social Security and Medicare and turn them into a private saving program.  Obviously, this will take time and the transition has to be fair to today’s seniors and in the long term should phase out these unconstitutional programs.

 

4) Strengthen Our Patent Rights and All Property Rights

Patents are the most important property right for economic growth.  We need patent offices that issues patents in under a year, courts that understand patent laws and protect the property rights of inventors, and we need patent rights to extend across national borders like copyrights do.  It goes without saying we need to repeal the AIA and the publication rule.

It is no coincidence that when patent rights are under attack then so are all other property rights.  This was true in 1970s, the 1930s and in every country that has limited property rights.

 

 
Economic Freedom on the Decline: U.S. Falls Four Slots

According to the Frasier Institute economic freedom around the world is the lowest it has been in three decades.  The U.S. has fallen from number three in 2000 to number ten, in 2010  the US was sixth and has fallen to tenth this year.  Is it any wonder that we are in the worst economic downturn since the Great Depression?  The three decade low matches the malaise of the Carter years.  Lack of economic freedom is  traditionally associated with death, bone crushing poverty, violation of civil rights, and every anti-human condition.  The evidence is overwhelming:  if you are pro-human then you have to be pro-freedom, meaning pro individual rights.  If you are anti-human then you will advocate more government spending, more government control, and more government manipulation of the money supply.  If the Obama Administration and the Socialists and il-Liberals were truly interested in creating jobs and human happiness, they would support pro-freedom, pro-individual rights policies.  But since they continue hate-speech claiming that everyone needs to pay their fair share and we need more government, rather than actually pursuing pro-human policies, the only conclusion is they hate human happiness and want to destroy it.

Now is not the time to elect more timid leaders, we need leaders who would make Reagan and Thatch seem timid.  Failure to do so we lead to economic collapse.  Unfortunately, some of the so-called pro-freedom organizations are pushing weakening the most fundamental of all property rights – patents.  Property rights correlate almost perfectly with economic growth, the beginning of real per capita increases in income correlates exactly with modern patent systems.  Yet, detractors expect us to see the connection between economic freedom and human happiness, but deny the obvious correlation with patent rights.  Increases in our level of technology are the only way to provide sustained long term economic growth.  See the Source of Economic Growth.

Here are specific policies that we need to enact in order to avoid a financial collapse of the West.

 

1) Rationalize our tax system

We need a tax system designed to raise revenue as efficiently as possible.  A flat tax or a sale tax both fit the bill.  Any tax system should only be on earnings or spending and not on capital gains and estate taxes.  Our tax system is a national disgrace

2) Regulatory Bill of Rights

Our Bill of Rights has been completely circumvented by the regulatory state.  It is not enough to just roll back regulations, we need a real check and balance on the Regulatory state.  I have proposed such a system in my post Regulatory Bill of Rights.

 

3) Cut Government Spending and limit total government spending to no more that 15% of GDP.

The evidence is overwhelming that government spending destroys both the economy and our individual rights.  See Austerity: Why it is Key to Both Our Short Term and Long Term Economic Growth.  This means that we have to reform Social Security and Medicare and turn them into a private saving program.  Obviously, this will take time and the transition has to be fair to today’s seniors and in the long term should phase out these unconstitutional programs.

 

4) Strengthen Our Patent Rights and All Property Rights

Patents are the most important property right for economic growth.  We need patent office’s that issues patents in under a year, courts that understand patent laws and protect the property rights of inventors, and we need patent rights to extend across national borders like copyrights do.  It goes without saying we need to repeal the AIA and the publication rule.

It is no coincidence that when patent rights are under attack then so are all other property rights.  This was true in 1970s, the 1930s and in every country that has limited property rights.

 

 
Great American Inventor Steve Jobs Dies

Steve Jobs was an inventor on over 300 patents.  He is the quintessential American inventor entrepreneur.  He and Steve Wozniak started Apple in January of 1977.  The company went public in December of 1980 and was the largest IPO (Initial Public Offering) since Ford in 1956.  Apple goes on to launch the MacIntosh in 1984 with its now famous television ad that played off the book 1984, where IBM played the role of Big Brother.  This launches the graphical user interface (GUI) as the standard for computers.[1]

This fairy tale start to Apple is marred by John Sculley, former president of Pepsi, being appointed CEO of Apple and firing Steve Jobs in 1985.  Strangely enough, Jobs foreshadowed this event in his Playboy interview in which he talked about how Polaroid fired Edwin Land, their creative founder and how Polaroid floundered  thereafter.  Once Jobs was fired,  Apple floundered for over a decade, and in the late 1990’s was all but dead.  Jobs returned to Apple 1997 and to profitability by 1998.  This is a cautionary tale for all those management gurus who ignore the technical creative genius and believe running a business is all about people skills, management, or finance.  Real wealth is created by invention and Jobs was a consummate inventor as his patent record shows.

An interesting question is raised in the book Great Again is could Apple have been successful today?  They answer the above query with a series of questions:

Could a twenty-year-old college dropout, just back from six months in an ashram somewhere, attract funding for a capital-intensive venture based on the manufacture (yes, they manufacture) and sale of a $2,500 consumer product unlike any that had ever been bought by consumers before?  One whose potential uses were at best unknown, and possibly nonexistent? And one for which the total current market size was exactly zero?

Not only could Apple not get funded today, it probably could not go public. Nor would Apple have received its first patent (USPN 4,136,359) in only 20 months.  The book asks “how many of today’s Apples are not getting a chance?”  Perhaps the death of Steve Jobs is the right time to examine this question.


[1] XEROX’s PARC center deserves a significant amount of credit for inventing the GUI.  Unfortunately, the FTC’s absurd attack on XEROX in the early 1970s for being a technological leader caused this great American company to pull back on commercializing a number of great inventions, including Ethernet.  This is a shameful history in American government that is being repeated today.  For more information see http://hallingblog.com/jobs-the-economy-and-patents/.

 

 
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

 

 
Austerity: Why it is Key for Both Short Term and Long Term Economic Growth

Keynesians have continually argued that cutting government spending will kill economic growth.  They point to Great Britain as showing that austerity does not work.  The UK introduced an austerity package that included substantial cuts in government spending and tax increases in June of 2010.  Since then the UK’s growth rate has been anemic.  However, there are a number of flaws with the Keynesians argument.  First, the UK raised taxes, which is not austerity.  Second, the US and the West are already actuarially bankrupt so we have to cut our budgets.  See US Goes Bankrupt by 2019.

It is not an austerity program when you raise taxes.  This is like a family saying they were instituting an austerity program by demanding their boss give them a raise.  In addition, the UK raised capital gains taxes from 18% to 28%, which is the taxes that hit business formation the most.  Raising capital gains decreases the return on investing in new economic activities and investors can easily decide not to invest their capital so this tax reduces economic activity more quickly than other taxes.  If the UK had not raised taxes, they would most likely now be experiencing an economic boom.  The empirical data clearly shows that lower government spending results in greater economic activity.  As an example of one study that clearly shows this see “The Size and Functions of Government and Economic Growth”.  This study clearly shows that the lower government spending the greater subsequent growth of the economy.  (see Graph)

Logically, if a government absorbs 50% of a country’s GDP then the cost of goods and services on average have to be twice as much as they would otherwise be.  In order to pay the expenses of government, a private sector producer who would normally charge $1.00 for a good in the absences of any government costs will now have to charge $2 and pay $1 of it to the government.  If the government consumes 25% of the economy then the average cost of goods and services has to be 33% higher than they otherwise be.  The simple math to figure this out is to take the reciprocal of 1-government spending.  If you want to stimulate “demand” as the Keynesians are constantly suggesting, then the way to do it is to cut government spending not increase it.  Imagine the increase in demand if the US were to reduce its total government spending of about 50% of the economy down to 25% of the economy.  This means that the average cost of goods and services would fall 39%.  How many more cars, computers, software, etc would people purchase if they were 39% cheaper?  Austerity is one of the keys to both our short term and our long term economic health.

Note that the regulatory burden government imposes is not part of the government spending but it has the same effect as government spending on the economy so that should be taken into account.  For instance, the cost of complying with the federal tax system is estimated by the Heritage Foundation at $431 billion.  Simplifying our tax code to say a flat or fair tax could reduce this cost by more than 90%.  As a result, any intelligent austerity program would include simplifying our corrupt tax code.  This is the exact opposite of what the UK did.

This is not to suggest that we do not need a government.  However, ”The Size and Functions of Government and Economic Growth”  study showed that even at the very low level of 15% of GDP for total government spending countries continued to have increased growth rates.  People forget that it was common among Western countries for total government spending to be below 10% of GDP until around 1900.  If Keynesians and Socialists really cared about people they would focus on economic growth.  There is no way to make the average person wealthier without growing the economy.  Charity never increased the average wealth of anyone.  The only reason we ever escaped the Malthusian Trap was because of the increase in per capita wealth.

 

 

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