How Patent Laws Are Stifling American Growth

In pharmaceuticals, existing patent laws are making it harder to develop new technologies. Photograph by Michael Fein/Bloomberg

As the battle over taxes, spending ,and sequestration rages in Washington, D.C., one answer to our mounting debt problems rarely gets a mention. Journalist David Leonhardt explains in his new book, Here’s the Deal: “A strong economy can outgrow its debt.” He suggests a number of ways we could accomplish that—not least, greater immigration to increase the number of taxpayers. That’s why, if it passes, comprehensive immigration reform is likely to be the most important piece of debt-reduction legislation of the year.

There’s another step Congress could take that would have as big an impact on long-term growth as letting in more foreign workers: an overhaul of America’s chronically excessive intellectual property laws.

Our current system of patent protections is a considerable drag on gross domestic product—a dead weight on the economy that is likely to grow. In a recent article (pdf) in the Journal of Economic Perspectives, Michele Boldrin and David Levine of the Federal Reserve Bank of St Louis conclude “there is no empirical evidence” that more patents or stronger patent laws contribute to productivity. Instead, patents are used to protect incumbent companies in mature industries from new competitors.

In other words, existing patent law slows innovation. Across industries within the U.S., no significant relationship exists between patenting activity and either output per worker or overall productivity. In 1983 the U.S. issued fewer than 60,000 patents. In 2010 that had climbed to 244,000—a fourfold increase. Yet research and development spending in the U.S. has stagnated at around 2.5 percent of GDP, and total factor productivity growth has been slowing rather than rising over that time. One big reason is that over the past three decades, the standards required to show an invention deserves a patent have been significantly diluted.

This proliferation of patents has had a chilling effect on would-be innovators because they’re too busy worrying about licensing and legal action from patent trolls. Imagine, for example, you manage to invent a way to move information through the fifth dimension. Perhaps you’d get a Nobel in physics. But you’d be legally evacuated of any prize winnings if you tried to commercialize the discovery: U.S. Patent 6,025,810 has already been granted to the idea. Or what about the concept of delivering stuff to customers on a regular basis while allowing for the fact that people might want to change their order once in a while? Amazon has that one: It’s patent 8,370,271. (If you are one of a dying breed of newspaper delivery boys, you probably better get ready to be sued.) Boldrin and Levine suggest that as much as 14 percent of R&D expenditures by the end of the 1990s were accounted for by patent litigation costs.

Even in pharmaceuticals, existing patent laws are making it harder to develop new technologies. Drug companies often claim that because patents prevent competitors from producing copycat drugs, they’re the only way to offset the cost of developing a new one, which approaches $1 billion. Yet legal monopolies aren’t required to keep copycat drugs off the market, at least for some time. Evidence from markets where patent protection hasn’t become overweening suggests it takes about four years for other companies to reverse-engineer tests and produce generic versions. If governments reduced the obscene regulatory costs of bringing a drug to market, pharmaceutical companies could make back the necessary R&D costs from that four-year market advantage.

Sadly, the U.S. patent lobby is not only trying to strengthen intellectual monopoly provisions in the domestic arena. The lobbyists have co-opted the Office of the U.S. Trade Representative to fight for extended monopolies worldwide, at an immense cost to global consumers. Tougher patent laws on the costs of one family of drugs in India under new World Trade Organization regulations, for example, would drive up the cost of antibacterial treatments by $300 million, while adding only $20 million to drug company profits. And America is busy pushing bilateral trade deals that demand patent and copyright terms even harsher than those mandated by the WTO.

Pushing intellectual monopolies on the world is sure to come back and bite us here at home. After all, the rest of the world is rapidly growing—and increasing its own R&D expenditures. China spends more than $100 billion on research and development each year. That means pretty soon the U.S. will find itself on the wrong end of a whole load of legal cases, from both authentic inventors and patent trolls from Shanghai to São Paolo.

In fields where a bit more creativity would be a good thing, we’re busy suffocating innovation with the damp blanket of excessive regulation. Most of the big victories for the consumer over the past century have involved greater competition, such as breaking up banking and transport cartels or reducing protection for domestic producers. For the sake of those consumers and the global economy as a whole, it’s time to break up intellectual monopolies, too. At the least, we should limit how long patents last, go back to a stricter definition of what’s a patentable insight, require proper disclosure of how a new invention works, and allow independent innovation as a defense against infringement claims.

Congress, in the spirit of public good, will probably not act on intellectual monopolies this year, especially, because of entrenched beneficiaries, immigration reform looks simple compared with an overhaul of intellectual property law. Yet perhaps one day we’ll realize that it will take pro-growth policies—not stifling innovation to sustain overstuffed incumbents—to grow our way out of debt.