[A2k] Incisive Ars report on dodgy piracy statistics

[Pranesh Prakash]

--
[ Picked text/plain from multipart/alternative ]
>From Ars Technica:
http://arstechnica.com/articles/culture/dodgy-digits-behind-the-war-on-pira=
cy.ars

750,000 lost jobs? The dodgy digits behind the war on piracy

By Julian Sanchez <http://arstechnica.com/authors.ars/juliansanchez> |
Published: October 07, 2008 - 11:30PM CT
A 20-year game of Telephone

If you pay any attention to the endless debates over intellectual property
policy in the United States, you'll hear two numbers invoked over and over
again, like the stuttering chorus of some Philip Glass opera: 750,000 and
$200 to $250 billion. The first is the number of U.S. jobs supposedly lost
to intellectual property theft; the second is the annual dollar cost of IP
infringement to the U.S. economy. These statistics are brandished like a
talisman each time Congress is asked to step up enforcement to protect the
ever-beleaguered U.S. content industry. And both, as far as an extended
investigation by Ars Technica has been able to determine, are utterly bogus=
.


"I have said it thrice," wrote Lewis Carroll in his poem *The Hunting of th=
e
Snark*, "what I tell you three times is true." And by that standard, the
Pythagorean Theorem is but schoolyard gossip compared with our hoary
figures. As our colleagues at *Wired *noted earlier this
week<http://blog.wired.com/27bstroke6/2008/10/fiction-or-fict.html>,
the 750,000 jobs figure can be found cited by the U.S. Department of
Commerce, Customs and Border Patrol, and the U.S. Chamber of Commerce, amon=
g
others. Both feature prominently on
TheTrueCosts.org<http://www.thetruecosts.org/portal/truecosts/default>,
an industry site devoted to trumpeting the harms of piracy. They're
invoked<http://www.edn.com/index.asp?layout=3Darticle&articleid=3DCA6488501=
>by
the deputy director of the U.S. Patent and Trademark Office. And, of
course, they're a staple of indignant press
releases<http://leahy.senate.gov/press/200807/072408a.html>from the
congressional sponsors of tough-on-piracy legislation.

By more conventional standards of empirical verification, however, the
numbers fare less well. Try to follow the thread of citations to their
source, and you encounter a fractal tangle of recursive reference that
resembles nothing so much as the children's game known, in less-PC times, a=
s
"Chinese whispers," and these days more often called "Telephone." Usually,
the most respectable-sounding authority to cite for the numbers (the FBI fo=
r
the dollar amount, Customs for the jobs figure) is also the most
prevalent=E2=80=94but in each case, that authoritative "source" proves to b=
e a mere
waystation on a long and tortuous journey. So what is the secret origin of
these ubiquitous statistics? What doomed planet's desperate alien
statisticians rocketed them to Kansas? Ars did its best to find the
fountainhead. Here's what we discovered.
Looking for lost jobs

First, the estimate of 750,000 jobs lost. (Is that supposed to be per year?
A cumulative total over some undefined span? Those who cite the figure
seldom say.) Customs is most often given as the source for this, and indeed=
,
you can find press releases from as recently as
2002<http://www.cbp.gov/xp/cgov/newsroom/news_releases/archives/legacy/2002=
/52002/05292002.xml>giving
that figure as a U.S. Customs and Border Patrol estimate. Eureka! But
when we contacted CBP to determine how they had arrived at that imposing
figure, we were informed that it was, in essence, a goof. The figure,
Customs assured us, came from somewhere else, and was mistakenly described
as the agency's own. This should come as no great surprise: CBP is an
enforcement agency, whereas calculating the total loss of jobs from IP
infringement would require some terrifyingly complex counterfactual modelin=
g
by trained economists. Similar claims have appeared in Customs releases
dating back at least to 1993, but a CBP spokesperson assured us that the
agency has never been in the business of developing such estimates in-house=
.


With Customs a dead end, we dove into press archives, hoping to find the
earliest public mention of the elusive 750,000 jobs number. And we found it
in=E2=80=94this is not a typo=E2=80=941986. Yes, back in the days when "Pap=
a Don't Preach"
and "You Give Love a Bad Name" topped the charts, *The Christian Science
Monitor* quoted then-Commerce Secretary Malcom Baldridge, trumpeting Ronald
Reagan's own precursor to the recently passed PRO-IP
bill<http://arstechnica.com/news.ars/post/20080926-ip-bill-passes-senate-no=
-civil-enforcement-power-for-doj.html>.
Baldridge estimated the number of jobs lost to the counterfeiting of U.S.
goods at "anywhere from 130,000 to 750,000."

Where did that preposterously broad range come from? As with the number of
licks needed to denude a Tootsie Pop, the world may never know. Ars
submitted a Freedom of Information Act request to the Department of Commerc=
e
this summer, hoping to uncover the basis of Baldridge's claim=E2=80=94or an=
y other
Commerce Department estimates of job losses to piracy=E2=80=94but came up e=
mpty. So
whatever marvelous proof the late secretary discovered was not to be found
in the margins of any document in the government's vaults. But no matter: B=
y
1987, that Brobdignagian statistical span had been reduced, as far as the
press were concerned, to "as many as 750,000" jobs. Subsequent reportage
dropped the qualifier. The 750,000 figure was still being bandied about thi=
s
summer in support of the aforementioned PRO-IP bill.
$250 billion? What's that in real money?

 What, then, of that $200 to $250 billion range? Often, it's attributed to
the Federal Bureau of Investigation, and indeed, the Bureau routinely
cites<http://www.fbi.gov/page2/dec03/ip122103.htm>those numbers.
According to FBI spokesperson Catherine Milhoan, the figure
"was derived through our coordination with industry, trade associations,
rights holders, and other law enforcement agencies" at a 2002 anti-piracy
confab. But neither the Bureau nor the National Intellectual Property Right=
s
Coordination Center, which assembled the inter-agency powwow, could find an=
y
record of how that number was computed.

At this point, it's necessary to get a little speculative. As with Customs,
the FBI is not in the habit of doing sophisticated economic analysis
in-house. And the last time the government conducted any sort of verifiably
rigorous study of the costs of IP theft=E2=80=94about which more presently=
=E2=80=94it was a
protracted undertaking that involved sending detailed questionnaires to
hundreds of businesses, which government economists concluded was still
insufficient to produce a reliable figure for the economy as a whole.
However, $250 billion is about the number you come up with if you start wit=
h
$200 billion in 1993 dollars and adjust for inflation to 2002. And that
lower end of the range, $200 billion, happens to date back to 1993.

Another group that routinely uses the $200 to $250 billion figure is
the International
Anti-Counterfeiting
Coalition<http://www.iacc.org/counterfeiting/counterfeiting.php>,
which (along with the FBI) is often given as the source of the number. That
organization's white papers <http://iacc.org/resources/IACC_WhitePaper.pdf>=
,
as recently as 2005, footnote the figure to 1995 congressional testimony
urging passage of what became the Anticounterfeiting Consumer Protection Ac=
t
of 1996. So Ars dug into the archives at the Library of Congress to discove=
r
where the witnesses before the House and Senate Judiciary Committees got
their data.

Several of the witnesses were conspicuously vague about their sources. An
IACC factsheet submitted for the hearings said the group itself "estimates
the economic cost due to product counterfeiting to exceed $200 billion each
year," a number repeated <http://judiciary.house.gov/Legacy/477.htm> by the
group's then-president, John Bliss. Congressman Bob Goodlatte (R-VA) gave
the same figure without sourcing.  But several witnesses pointed to
*Forbes*magazine as the source of the number. Rep. John Conyers (D-MI)
noted that
the International Trade Commission had placed the size of the counterfeit
market at $60 billion in 1988 and that "a more recent estimate by *Forbes
Magazine* says that American businesses are losing over $200 billion each
year as a result of illegal counterfeiting." Finally, Charlotte Simmons-Gil=
l
of the International Trademark Association was kind enough to give a precis=
e
citation <http://judiciary.house.gov/Legacy/475.htm>: the October 25, 1993
issue of *Forbes*.

Ars eagerly hunted down that issue and found a short article on
counterfeiting, in which the reader is informed that "counterfeit
merchandise" is "a $200 billion enterprise worldwide and growing faster tha=
n
many of the industries it's preying on." No further source is given.

Quite possibly, the authors of the article called up an industry group like
the IACC and got a ballpark guess. At any rate, there is nothing to indicat=
e
that *Forbes* itself had produced the estimate, Mr. Conyers' assertion
notwithstanding. What is very clear, however, is that even assuming the
figure is accurate, it is *not* an estimate of the cost to the U.S. economy
of IP piracy. It's an estimate of the size of the entire global market in
counterfeit goods. Despite the efforts of several witnesses to equate them,
it is plainly not on par with the earlier calculation by the ITC that many
had also cited.

But here, at last, we have a solid number to sink our claws into, right?
Sure, it's 20 years old, but the U.S. International Trade Commission at
least produced a reputable study yielding a definite figure for the cost of
piracy to the U.S. economy: $60 billion annually.

Well, not quite.
"Biased & self-serving"

 The number the ITC actually came up with, based on a survey of several
hundred business selected for their likely reliance on IP for revenue, was
$23.8 billion=E2=80=94the estimated losses to their respondents. That numbe=
r was
based on industry estimates that the authors of the study noted "could
admittedly be biased and self-serving," since the firms had every incentive
to paint the situation in the most dire terms as a means of spurring
government action. But the figures at least appeared to be consistent and
reasonable, both internally and across sectors.

The $60 billion number comes from a two-page appendix, in which the authors
note that it's impossible to extrapolate from a self-selecting group of
IP-heavy respondents to the economy as a whole. But taking a wild stab and
assuming that firms outside their sample experienced losses totaling a
quarter to half those of their respondents, the ITC guessed that the
aggregate losses to the economy might be on the order of "$43 billion to $6=
1
billion."

The survey also, incidentally, asked respondents to estimate the number of
job losses they could attribute to inadequate intellectual property
protection. The number they came up with was 5,374. If we assume, very
crudely, that job losses are proportionate to dollar losses, then the ITC's
high-end estimate of $61 billion in total economic costs would correspond t=
o
a loss of not 750,000 jobs, but 13,774.

If we want to be very precise, however, we should note that the ITC was not
calculating losses from IP "theft," but rather "inadequate protection" of
intellectual property. And "inadequate protection" was interpreted to mean
protection falling short of the level provided by U.S. law. The protection
provided by a foreign country might be deemed "inadequate," the study
explained, if "exceptions to exclusive rights are overly broad"=E2=80=94for=
 example,
if a country's law contained "broad exceptions for public performances in
hotels or film clips" or "too broad exceptions for educational
photocopying." A legal regime could be "inadequate" because "terms of
protection are too short" or because of "inadequate" civil or criminal
remedies, meaning monetary damages or criminal penalties for infringers wer=
e
not high enough.
Calculating the net cost of piracy to the economy

One final, slightly theoretical point deserves emphasis here. All the
projections we've discussed, the rigorous and the suspect alike, calculate
losses in sales or royalties to U.S. firms. This is often conflated with th=
e
net "cost to the U.S. economy." But those numbers=E2=80=94whatever they mig=
ht be=E2=80=94are
almost certainly not the same. When someone torrents a $12 album that they
would have otherwise purchased, the record industry loses $12, to be sure.
But that doesn't mean that $12 has magically vanished from the economy. On
the contrary: someone has gotten the value of the album and still has $12 t=
o
spend somewhere else.

 In economic jargon, charging *anything* for pure IP=E2=80=94which has a ma=
rginal
cost approaching zero once it has been produced=E2=80=94creates a deadweigh=
t
economic loss, at least in static terms. The actual net loss of IP
infringement is an *allocative* loss that only appears in a dynamic
analysis. Simply put, when people pirate IP, the market is not accurately
signaling how highly people value the effort that was put into
*creating*it, which leads to underproduction of new IP. To calculate
the
*net *loss to the economy over the long run, you'd need to figure out the
value of the lost innovation in which IP owners would have invested the
marginal dollar lost to piracy, and subtract from that the value of the
second-best allocation=E2=80=94which is to say, whatever the consumer of th=
e pirated
good spent his money on instead=E2=80=94and the value of the deadweight los=
s (free
music or software is a net economic benefit to someone) incurred by pricing
IP at all.

If that sounds incredibly complicated, it is. And in fact, it's more
complicated than that, because as Yochai Benkler has argued
persuasively<http://cyber.law.harvard.edu/wealth_of_networks/Main_Page>,
IP is an input to innovation as well as the product of innovation. So under
certain very specific conditions, "piracy" can produce net gains. While it
seems extremely unlikely that this is the case in the aggregate=E2=80=94IP =
theft
almost certainly does impose net economic costs=E2=80=94*simply* calculatin=
g lost
sales and licensing fees, assuming someone could produce a credible figure,
would not provide a complete picture of the economic impact of IP
infringement. It would give us, at most, one side of the ledger.
Conclusions

But enough theory and speculation; here is what we can say for certain: the
two numbers that are invariably invoked whenever Congress considers the nee=
d
for more stringent IP enforcement are, at best, highly dubious. They are
phantoms. We have no good reason to think that either is remotely reliable.


Perhaps more importantly, both numbers are seemingly decades old, gaining a
patina of currency and credibility by virtue of having been laundered
through a relay race of respectable sources, even as their origin recedes
into the mists.  That's especially significant, because these numbers are
always invoked as proof that the piracy problem is still dire=E2=80=94that
everything we've done to step up international enforcement of intellectual
property laws has been in vain. But of course, if you simply recycle the
same numbers from 15 and 20 years ago=E2=80=94remember that IACC's
*2005*publications<http://iacc.org/resources/IACC_WhitePaper.pdf>still
cite that 1995 congressional testimony, from which it seems safe to
infer that they have no more recent source=E2=80=94then it will necessarily=
 seem as
though no ground has been gained.

Neither figure is terribly plausible on its face. As *Wired*
noted<http://blog.wired.com/27bstroke6/2008/10/fiction-or-fict.html>earlier
this week, 750,000 jobs is fully 8 percent of the current number of
unemployed in the United States. And $250 billion is more than the *combine=
d
* 2005 gross domestic revenues of the movie, music, software, and video gam=
e
industries.

Still, anything is possible: The figures *could* happen to be more or less
accurate. But given the shady provenance of the data, the one thing we know
for certain is that we don't know for certain. And we're making policy on
the basis of our ignorance.