Optimal intellectual property protection (part 2)

In which the state of current copyright law is discussed, a meager calculation is effected shewing the exercise of said law necessary to compensate rights-holders for their losses, and the stage is set for act 3.

The major U.S. laws currently in place to handle copyright infringement on the internet are: The United States Copyright Law, and the DMCA.  Under the former, the maximum penalty for an infringer is $150,000 dollars per copyrighted work.  An unknowing infringer--somewhat not protected by fair use provisions, but not willfully breaking the law--suffers a minimum penalty of $200 dollars per copyrighted work.  Recent rulings have indicated that the granularity of a work is on the song (as opposed to album) level.  Now, judging from iTunes, the market value of a song is about $0.99.  That's quite a mark-up.  Real world awards have reached truly astronomical levels, but let's look at a recent case, in which a judge knocked down a $675,000 dollar fine to $67,500 for willful infringement for 30 songs.  That's $2,250 a song, down from an initial $22,500 a song.

Just working with the music numbers for a moment, things look a little like this:

In 2007, the RIAA report estimates sales losses of 3.7 billion dollars with their (quite reasonable) download substitution estimator.  I'm ignoring their physical piracy numbers because they don't apply to the intarwebs points I want to make.  To make up for this they'd have to levy the minimum fine on 18,500,000 (by the RIAA estimates, 0.3% of 6 billion yearly illegal downloads), the maximum fine on 24,667, or the judge determined "reasonable" $2250 fine on 1,644,445 instances of illegal downloads.  Even the largest of these would be a tiny percentage of enforcement.  Of course, the RIAA only managed to file 20,000 lawsuits (primarily ending in settlement) by 2008 when they mostly stopped doing that on account of it being hilariously unpopular.  It seems like the settlements were generally between the "reasonable" and minimum fine levels, so the RIAA clearly wasn't going to recoup costs through these lawsuits.  Since they gave up that tactic, they have focused on the DMCA, and on producing bigger, badder, scarier versions of it. 

At issue in the DMCA and its would-be successors is the burden of enforcing copyright laws.  Basically, the DMCA explicitly prohibits circumvention of copyright protections regardless of whether such circumventions are used to violate copyright, enacts the mechanism of "takedown notices" which limit the liability of compliant online service providers (OSPs) in exchange for rapid response to notification of infringement by copyright holders, and permits subpoenas of OSPs for user identity information.  Copyright holders feel that these provisions are insufficient, and have proposed a variety of legislation holding hosting sights responsible for infringing content posted by users.  Obviously, this imposes substantial costs, risks, and responsibilities on social networks and community content sites.

All this sets things up quite nicely for part 3: actual cost-benefit analysis!
Potential costs: money of social network sites, money of taxpayers, money of RIAA and member organizations.
Potential benefits: greater compensation of copyright holders, deterrence of copyright violation.

Of course, that's only if you forget that the goal of IP law is to incentivize the development of intellectual property.  So, we'll be taking a look at the incentive maximizing level of IP protection as well.  All that to come.

Macroeconomic quicky

Recessions and depressions occur when total spending--and therefore total income--is reduced.  This reduction of total spending is brought on by an increase in demand for money, either to hold as savings or to use to pay down debt.  Once you have your head around this, the Federal Reserve remedies for depressions and recessions--lower interest rates and higher inflation--become kind of obvious: they're both just ways to increase the supply of money, and reduce the demand for it.  It also becomes obvious that government austerity exacerbates the problem; it's just one more player contributing to the reduced spending and resulting reduced income.

Obviously, there are a bunch of wrinkles in this story, but sometimes it helps to just look at the simple fundamentals of a situation.  Those fundamentals indicate we should have more government spending, higher inflation, and lower interest rates.  Since interest rates are already at 0, we've only got two options left.

Let's have a little chat about Republicans

Once upon a time, Republicans were conservatives, and followed to a significant extent the primary dictate of conservatism:

conservatism - a political or theological orientation advocating the preservation of the best in society and opposing radical changes.

It seems clear that with Republicans routinely promoting the elimination or dramatic restructuring of things like Medicare, Medicaid, and Social Security, that fundamental position has been abandoned.  But, I don't think it is right to say that modern Republicans are entirely unprincipled, or that they are merely advocating the interests of their wealthy donors (though they are certainly pursuing policies that primarily favor the wealthy).  Rather, I think the best way to view Republican ideology is through the lens of psychology.

Republicans understand the direction of human psychology, and the sorts of motivations that impact people's behavior.  It's true that higher marginal tax rates make people less excited about making more money; I've experienced that first hand.  Likewise, it's true that the leap from something for nothing to a-little-more-something for a-lot-more-work is significant.  If you stop your thinking there, then it is obvious that things like unemployment benefits and high marginal tax rates are ridiculous, silly, and probably counterproductive.

The trouble, of course, is that you can't stop there: you have to measure the size of the effect.  Basically everyone in Republican-land is assuming very-large, even dominating, effects from these psychological factors.  Thus things like "the confidence fairy", "regulatory uncertainty","bond market vigilantes", a preoccupation with "moral hazard" and the like.  Sadly, in most cases the empirical evidence seems to indicate that these psychological effects, though often real, are quite small.  The far side of the Laffer Curve--the hypothetical curve depicting the point at which increases in tax rate actually reduce tax revenues through disincentive effects--is estimated to be around a 70% tax rate.  Likewise, unemployment benefits increase unemployment rates much less than one might naively expect, especially in severe recessions like the one we are in.  As for the confidence fairy, bond market vigilantes, and regulatory uncertainty--they just don't seem to apply to our current situation.

Basically, Republicans show an interest in and a sense of human psychology which is intuitive, substantially correct, and praiseworthy.  Liberals are all too often guilty of ignoring the human, social, and psychological aspects of situations.  However, when it comes to accurately describing the way the world works, you'd be much better off dropping the psychological variables from your equations than the mechanical ones.  Or, best of all, keeping them all in and looking at what the econometrics data is actually telling you.  Doing that tends to show that optimal economic policy is much more closely aligned to Keynesian policies than Austrian ones.  Just goes to show that even if your intuitions are broadly right, it is still important to look at the data.

A little post-script:
It does seem that Republicans tend to forget their psychology when it comes to looking at regulating business.  Much, if not all, of the recent bank legislation is about avoiding the "moral hazard" created by federal guarantees on bank deposits, and for some reason that isn't subject to the same psychological rational as unemployment benefits.  Hard to see why, really, except for a sort of team "give the rich what they want" mentality.  That's a bit annoying.

Also, it's worth pointing out that a lot of people think that the financial collapse was brought on by Republican banking deregulation, and the conservatism as defined earlier would have been the exact impulse--that the rules of the past were laid down with wisdom and shouldn't be so easily cast aside--that protected us from that silliness.  In a proper conservative-liberal dichotomy, the liberals should have been pushing for the deregulation, and the conservatives should have been saying "hey man, we made those rules for a reason".

In my mind, both of these failures of Republicans to follow either their "human nature" or "conservative" ideologies is strong evidence of regulatory capture; the business interests have at least partially conquered the Republican party and put them to use on the behalf of banking against the best interests of society.

Optimal intellectual property protection (part 1)

You often see stuff from the MPAA and RIAA about how piracy is destroying all artists' livelihoods always forever.  The natural solution to this problem is to somehow end piracy through legislative penalties.  So what does that look like?  Let's look at some horribly skewed and biased numbers!

Apparently, there's a man named Stephen Siwek who is happy to produce research showing the devastating effects of copyright infringement.  He isn't very creative about names though; one might even think he plagiarized himself.  But don't take my word for it, look at the names of his two "studies":

For the RIAA:   The True Cost of Sound Recording Piracy to the U.S. Economy
For the MPAA:  The True Cost of Copyright Industry Piracy to the U.S. Economy

It's a little tricky, because the Sound Recording Industry is a subset of the Copyright industry, and, actually, so is the Software Industry, which I won't discuss here.  Both these studies have some important characteristics though.

• They assume substantial full price substitution rates.   In fairness, I read through the "Sound Recording" report, and found that its estimated substitution rate is 60.7% for physical piracy and 20% for digital piracy.  The 60.7% is absurdly high based on my brief survey of the literature, but the digital piracy number is actually on the low end.  The most recent research (admittedly using a sample of U. Penn undergrads... not exactly a representative demographic in any way) puts it (and physical piracy, incidentally) at between 15% and 30%.  Of course, some researchers show no effect on physical sales and slight positive effects for online and concert sales (that's on an international sample, but its methods are a little harder to follow and its credentials aren't as towering).  The "Copyright Industry" report only says "less than one", a value it claims is "conservative" on the grounds that some internal industry "estimates" claim that it is exactly one.  Furthermore, each lost purchase is imagined to have replaced one at full price and new.  
• They calculate losses in the global market. So piracy in China is lumped right in and used to justify stronger copyright enforcement in the U.S.  I mean, maybe fair enough for treaties, but in general? 
• They show "total economic output lost".  This goes beyond lost sales to include the hypothetical economic impacts up and down the supply chain of the copyright industry. 
• They neglect the obvious economic benefits to consumers of receiving goods for free. This seems particularly relevant given their lost sales model of substantial purchase substitution, and their insistence on evaluating macroeconomic effects.  Every dollar not spent on frivolous entertainment is available to be spent elsewhere, in some other industry (or in the same one, for that matter).  Effectively, they are assuming that people choose between purchasing music and "pirating while putting the money they save under a rock".
• They rely substantially on confidential and industry provided data.  Well of course they do; how else could you produce credible looking studies without any means of verification?  Well, I guess they aren't that credible looking.
• They include both physical and digital piracy.  Bootlegs, bit-torrent, mix-tape? All the same.

Anyway, the number Siwek comes up with for the cost of worldwide, savings-burying, any format, substantial pirated-copy-to-lost-new-sale substitution, all-copyright-industry piracy is:  

58 billion dollars.

So, that's a lot of money, I guess.  By contrast, if a naive but mathematically capable person tried to estimate the cost of pre-screening all copyrighted content on youtube alone through manual human curation they'd come up with something between $441,029,692 and $36,829,468,840 per year. Ahem:

37 billion dollars.

And that's just youtube! Imagine all the streaming sites and content lockers...  Plus, the comparison is unfair because youtube doesn't host software or videogames--both major contributors to that headline number.  If you chop out Software and Videogames from the 58 billion total estimate you are left with 19.256 billion dollars of loss per year (approximately, since they don't actually break this out by industry I have to do some funny stuff--basically I multiply the total loss by the percentage of direct loss in the music and media industries: 33.2%)

Now, those numbers are quite silly.  Also, they naively ignore the existence of Google's Content ID system, which basically does this automatically in software.  One might imagine it is substantially cheaper than any of the estimates of human manual labor curation.  The point (for tonight) is merely that anyone with a bit of time and some trumped up numbers can make pseudo-reasonable apocalyptic claims about the cost of enforcing or not enforcing copyright.  Next post, a closer look at the genuine economics and law of the situation.

Contrarian Confessions

I've noticed that as I anticipate my move to San Francisco my views have been skewing more conservative / conservative apologist than usual.  It's not that I'm becoming Republican; that would be ridiculous.  Rather, I seem to be unconsciously prepping my internal devil's advocate in anticipation of being immersed in a much more liberal environment.  I fully realize that this is conclusive evidence that I am a broken and perverse creature.

Why do we disagree? contd.

The recent debate over the student loan rate hikes is a great example of the ways in which fundamental policy agreements can be obscured by other issues.  In this case, Republicans and Democrats agree that student loan rates should not double this year.  If these were the good old Bush Years that would be the end of it because, as Cheney allegedly said, "deficits don't matter", but nowadays everything but tax cuts for the rich have to be paid for.  Which leads us to the confusing state in which the Democrats have blocked the Republican bill preventing the rate hikes, and Republicans have reciprocated.  Democrats like to pay for things with tax increases on the wealthy, and Republicans like to pay for things with "dynamic scoring" and/or imposing further financial burdens on the poor and middle class.

Problematically, this issue has been spun by both sides as evidence that the other wants to impose rate hikes on students.  The general public has a natural bias towards not giving a shit about accounting unless the political classes are really insistent that it matters, so politicians preferentially phrase disputes as policy disagreements.  But a disturbing number of bills fail due to the same fundamental disagreement over how much money the government should spend, and where it should come from.

From my perspective, this is doing it ass-backwards.  You figure out what you want to do, then you figure out what it should cost, then you figure out whether it is worth doing, then you figure out how to pay for it.

The Republican strategy is to pick how much they want to spend, and then eliminate social programs until they get far enough below that spending number to give some tax cuts to the rich.  The Democratic strategy is to pick policies and pay-fors in an ad-hoc manner, which would be fine except that you lose sight of the greater context that way and you have to have two debates for each policy, one for policy and one for pay-for.  A better strategy would be to work out a bunch of things you want to do each year, prioritize them, and pay for all the ones you can afford. But that would require a fair amount of consensus about a) priorities and b) how much can be afforded, and we have neither.  Please can we get a parliamentary system?

Notre Dame is suing the government on the HHS mandate... and that's fine by me

The Catholic Church's displeasure with the HHS contraceptive mandate is common knowledge, so it is no surprise that the University of Notre Dame--"where the Catholic Church does its thinking"--is filing a lawsuit opposing it.  Regular readers of this blog might be expecting me to get huffy at this point and start arguing about how wrong the whole thing is, but, readers, prepare to be surprised.  I am totally okay with the lawsuit, and the reason is simple: the lawsuit is against the finalized January rule, which includes none of the compromises I think make the HHS mandate acceptable.  The compromise rules are still in the "open to public comment" phase through June, and, as Jenkins stated in his email to ND:

Although I do not question the good intentions and sincerity of all involved in these discussions, progress has not been encouraging and an announcement seeking comments on how to structure any accommodation (HHS Advanced Notification of Proposed Rule Making on preventative services policy, March 16, 2012) provides little in the way of a specific, substantive proposal or a definite timeline for resolution.   Moreover, the process laid out in this announcement will last months, making it impossible for us to plan for and implement any changes to our health plans by the government-mandated deadlines

Okay, so I do take issue with the notion that there's little in the way of a specific substantive proposal in the March 16th public comment document.  I've read it, and it is tediously specific.  It isn't the full exemption I suspect the University is gunning for, but I think it represents a morally valid compromise because it incorporates all the stuff I've talked about in my billion other posts on the subject.  Since the University only has a year to comply, and there's no sure reason to believe that the accommodations will be finalized by that time, it is in the best interests of the University and of religious freedom writ large to sue and at least obtain a stay until accommodations can be implemented.

Also, I think that the lawsuit could clear up some interesting muddles in the area of religious freedom.  I rather suspect that in this case the right of people to privacy regarding their sex lives will trump the rights of religious organizations to force their agenda on non-conforming individuals if this makes it to a high court.