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October 05, 2011

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nato

I'm not going to comment on most of this, but I do want to comment on patents. I'm just not seeing how buying out patents would help US businesses, unless it's in terms of the government just paying them billions of dollars directly. I mean, buying Apple's patent portfolio would probably require buying the company at a large premium, because without its patent protection, it would be annihilated by commodity competitors from China. I think one could say much the same thing about Genentech, and Beckman Coulter, and so on. I'm not saying it would be impossible to come up with ways to reduce dead weight loss through purchase of selected patents, but it's not easy from my perspective.

Nathan Smith

Oh, it certainly wouldn't be easy. You'd have to develop a very sophisticated auction structure, and even then you probably couldn't avoid creating some ongoing distortions in the orientation of R&D activities (though the current structure of R&SD efforts is not necessarily optimal either). And you probably wouldn't buy out all patents, or all of any particular company's patents, and you wouldn't coerce companies to sell. (At most, you might coerce companies to put their patents up for auction, but they could bid an unlimited amount, to themselves, and thus forestall any rival bid.)

But at least this is a case where there is a strong theoretical case that a particular intervention would, as you say, eliminate deadweight loss, and thereby raise long-run productivity. Also, I'm not sure if it's true to say that Apple would be annihilated by commodity competitors if their portfolio were bought out. I mean, they'd have a lot of cash then, and they would still have their R&D engine intact, and they could always go on to invent new stuff on which they would have patents. If they didn't have many more good ideas they could just liquidate, giving huge payouts to shareholders

Meanwhile, others could improve on their designs in other ways, in ways that are prevented now because they would violate the patent. Also, a flood of generics would drastically improve prices for the consumer. You'd get a special kind of technological-institutional deflation, which hopefully the Fed would respond to with looser money. Anyway, you'd give both consumers and investors good reason to hope that the economy would grow faster in future, and thus a reason to spend and invest more. I think a large part of the reason why a lot of federal spending would be self-defeating is that people would anticipate that the country would be poorer in the long run, and since the permanent income hypothesis is basically true, that means they'd just save more now, so you wouldn't get an increase in spending.

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