Gabriel Zucman's latest very interesting paper

There's much huffing and puffing about the information in that above chart. The capitalist bastards are taking an ever growing share of the economy and something must be done! And then along comes Gabriel Zucman (he's the third of the Parisian economic trio, along with Emmanuel Saez and Thomas Piketty) to try and tell us that this really is a problem and something must be done! Except the evidence that he shows us tells us that it's not the problem that it is usually identified as. Here's his latest paper:

Measuring the costs of tax havens to foreign governments is fraught with difficulties. However, balance of payments data and corporate filings show that US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a large and growing scale. About 20 percent of all US corporate profits are now booked in such havens, a tenfold increase since the 1980s. This profit-shifting is typically done within the letter of the law and thus would be best described as tax avoidance rather than fraud.

There's certainly profit shifting going on but it's not profits being shifted out of the US and into those tax havens, not to any great degree at least. The IRS isn't dumb enough to allow that at any great scale. What is happening is that US based corporations are making larger profits from their foreign activities and then parking them in those tax havens.

Yes, really: the way that US profits as a share of GDP is calculated is that all profits made by US domiciled firms are counted as part of US GDP. So, Glaxo's profits in the US (and the associated underlying economic activity that generates them) are part of US GDP. Apple's profits in the US, and the associated underlying economic activity in the US, are part of US GDP. But, crucially, Apple's profits in Europe, but not the underlying associated economic activity in Europe that generates them, are also part of US GDP. So, if Apple's European profits rise then US GDP rises by the amount of those profits and the capital share, or the associated profit share, of US GDP also rises by the same amount. But, of course, that means that the profit share of US GDP rises: but that's purely an effect of the way that we calculate the numbers. Nothing has flowed from labour to capital in the US economy. The workers aren't getting any less of the portion of their labours.

Simply, foreign profits of US corporations have risen. This means absolutely nothing at all to the US domestic economy in the sense that while, because of the way we measure it, the capital (or profit) shares are rising, there's simply no effect at all on the division of spoils inside the American economy.

Zucman is also showing that this is a significant effect. At least two whole percentage points of GDP.

Of course, Zucman is also telling us that this is terrible and that something must be done! On examination however it seems to be largely of no import at all. So, Apple is increasing its European profits. This is bad because?

The terrible error of Naomi Klein

Naomi Klein tells us that the polluter must pay. Something that is both logical and true. Then she tells us that the fossil fuel companies must be made to pay for the damage that they do. Also logical and true:

Up until the early 1980s, that was still a guiding principle of environmental law-making in North America. And the principle hasn’t totally disappeared – it’s the reason why Exxon and BP were forced to pick up large portions of the bills after the Valdez and Deepwater Horizon disasters.

We might quibble about whether the damage was quite what was described or paid for but the basic principle is entirely fair. However, here comes the error:

The astronomical profits these companies and their cohorts continue to earn from digging up and burning fossil fuels cannot continue to haemorrhage into private coffers. They must, instead, be harnessed to help roll out the clean technologies and infrastructure that will allow us to move beyond these dangerous energy sources, as well as to help us adapt to the heavy weather we have already locked in. A minimal carbon tax whose price tag can be passed on to consumers is no substitute for a real polluter-pays framework – not after decades of inaction has made the problem immeasurably worse (inaction secured, in part, by a climate denial movement funded by some of these same corporations).

Assume, for a moment, that CO2 emissions are indeed causing damage. So, who is responsible for those emissions? Who is the polluter here who must pay?

When I drive to the shops it is me making the decision to do so, me making the decision to emit CO2 in gaining my supply of comestibles. I am therefore the polluter. That's why, if there is to be a tax on polluters it should be upon me, the polluter. Which is the entire point of a carbon tax that can be passed on to the consumers. It is we consumers who are the polluters which is why we should have that tax which falls upon the polluters.

This is the most appalling and most basic error by Klein. We do not consume fossil fuels because Teh Eeevil Corporations force them upon us. We consume them because they provide us with things that we desire, transport, heat, light and so on. The fault, as it were, is not in our suppliers but in ourselves.

Of course, as many do around here, it's entirely possible to reject the entire thesis. But working within the logical structure of the IPCC we still end up with the result that a tax which falls upon consumers is the correct action: as every single economic report about the problem, from Stern through Nordhaus and the IPCC itself, has pointed out. Because it's the consumers who are the polluters and yes, the polluters should pay.

Privateers and the sinister threat posed by 'patent trolls'

Many in Britain may not be familiar with the term ‘patent privateering’ – but that may all be about to change. British courts are apparently being targeted in a forum-shopping exercise by global monopolists, who are using this technique to reduce competition and innovation in the hi-tech sector. This new menace to the workings of efficient markets is rapidly gripping the global hi-tech sector and it threatens to stifle innovation, raise prices and constrain choice for consumers not just in Britain but across the globe. The threat has been dubbed ‘patent privateering’ and its impact on effective competition is already alarming.

Patent privateering refers to the practice whereby corporations enter into private agreements with patent assertion entities (PAEs) - effectively separate companies with no assets or manufacturing capabilities. The process works along these lines: Company X and Company Y have agreements to license a specified number of patents from each other in order to create a product. What Company Y does not know is that Company X has a private agreement with Company Z (a privateer) to hold certain patents that are essential to the production of the product Company Y is creating. Once the product is in the market, the privateer, Company Z, threatens to sue Company Y. Since it may cost Company Y anything up to $2.5 million to defend itself, most companies opt to settle. So Company X benefits from a large share of the proceeds collected by the privateer Company Z. Such behaviour cramps competition and damages the end consumer – big time.

This cynical form of economic rent-seeking is becoming more and more widespread. PAEs or ‘patent trolls’ as they are sometimes styled are now estimated to add a staggering annual burden of $29 billion on the back of American consumers alone[i].

Incumbents with a market share to defend are tempted to set up patent trolls – it’s often impossible to trace their real owner – to raise competitors’ product prices and shackle innovation and choice in the marketplace. By employing patent trolls the incumbents avoid counter suits which would risk their own asset base as well as attract unwelcome publicity and potential reputational damage.

Media reports have begun to shine some light on these questionable practices. One of the most prominent is MOSAID, a controversial patent troll which collects royalties on 2,000 patents transferred by Microsoft and Nokia while another troll, Unwired Planet, is collecting royalties on 2,185 patents assigned by Swedish telecoms giant Ericsson. Another PAE, owned by a group including Goldman Sachs and Boston Consulting Group collects royalties for patents originally filed by our own British Telecom, which stands to collect half the proceeds from the patent.

These developments risk turning patents into a tool of litigation rather than innovation. Abuse of the patents principle runs counter to the original intent of patents, which was a set of exclusive rights granted by a government of a sovereign state to spur innovation and provide entrepreneurs with a reasonable return for their innovative research collected on a fair, reasonable and non discriminatory (what lawyers term FRAND) basis.

In the computer software industry over 100,000 patents are filed each year. Many of these are for innovations which are not particularly novel and are likely to be independently invented by a host of IT engineers. In practice, it is often impossible for a software firm to know that it is not infringing on an existing patent. In the US, where wilful infringement triggers treble damages if proved in court, software developers have a powerful incentive not to conduct a patent search.

Competition watchdogs need to cast a careful eye on these worrying developments. Already in the US, the Federal Trade Commission (FTC) has begun to collect information on patent trolls’ corporate structures, their portfolio of patents and the way in which they acquire them and enforce them. Congress is also considering legislation[ii] aimed at outlawing deceptive patent demand letters and granting the FTC civil penalty authority to tackle this rapidly emerging threat to consumer welfare.

In Europe, regulators have yet to really tackle the problem posed by patent privateers. Yet, as Robert Harris, a law professor at the University of Berkeley, California, points out, “Given the harm to competition that patent entity sponsored privateering, there are important roles for anti-trust authorities: blocking potentially anticompetitive patent transfers and bringing enforcement actions against anticompetitive conduct by patent entity sponsored PAEs”[iii].

Due to the lack of regulation of this anti-competitive practice, the courts in England, it seems, will be the first in Europe to evaluate and rule on patent privateers. Cases are expected to begin in the High Court from the end of 2014. U.S. courts have already suffered from bruising judicial battles that have proved a perfect case-study of how rent-seeking through the courts can harm the effective functioning of a dynamic market.

The hope is that we do not have to learn the lesson the hard way, as the Americans have done. It’s about time our troop of regulators woke up to the threat posed by the growing ranks of rent-seeking patent trolls.

[i]                  See ‘As Congress and Enforcers Contemplate Patent Trolls, Don’t Forget about Privateering’, by David   Balto (a former policy director at the FTC), Huffington Post, 4 December 2013.

[ii]                 The House Subcommittee on Commerce, Manufacturing & Trade of the Committee on Energy & Commerce has been holding expert testimony hearings on a draft Bill with respect to deceptive patent demand letters (see FTC testimony, 22 May 2014).

[iii]                 PAEs & Privateers: Economic Harm to Competition & Innovation, Robert G Harris, Georgetown Law Annual Antitrust Symposium, Georgetown Law School, Washington DC, September 2013.