Counterfeit Democracy

A new draft global trade treaty may interfere with fair use of copyrighted materials, require Internet Service Providers (ISPs) to monitor all consumers’ Internet communications, and undermine access to low-cost generic medicines.

Does the proposed Anti-Counterfeiting Trade Agreement (ACTA) contain provisions that would actually do these things?

There’s no way to know, because the treaty text remains secret.

More than 100 public interest organizations from around the world today called on officials from the countries negotiating ACTA — the United States, the European Union, Japan, South Korea, Canada, Mexico, Switzerland Australia and New Zealand — to publish immediately the draft text of the agreement.

In any case, what possible rationale is there to keep a treaty that claims to be about unauthorized copying secret? Are the negotiators worried that counterfeiters might somehow influence the negotiations?

U.S. trade negotiators have justified the cloak-and-dagger approach to ACTA on the grounds that all trade treaties are negotiated in secret. But this is not so. Negotiating texts are commonly made public in multilateral trade negotiations, including in the current Doha Round negotiations at the World Trade Organization and the now discarded talks for a Free Trade Area of the Americas, and in treaty negotiations at organizations like the World Health Organization (for example, here), and the World Intellectual Property Organization (for example, here).

No, the reason is to keep the public in the dark.

This matters, because intentionally or not, a treaty to prevent unauthorized copying may easily go too far, and undermine important consumer interests. And it matters because, not surprisingly, there’s more to worry about than errors by well-meaning technocrats.

The recording industry, Hollywood, the software moguls, and Big Pharma are all aiming to use tough talk about “counterfeiters” and “piracy” to push governments to do much more than crack down on trademark and copyright infringers who aim to deceive consumers. They want government assistance in enforcement of trademarks, copyright and patents, even though these are private rights. And they want to impose liability on third parties that might possibly facilitate unauthorized uses, even if these third parties are unaware of the activities of alleged infringers. This is an agenda being pursued in multiple venues, of which ACTA is among the most important.

One reason that ACTA is so important is that it almost certainly is intended to apply to the entire world. Borrowing from the strategy of the failed Multilateral Agreement on Investment, the rich countries are working out a deal among themselves. Then the rest of the world’s nations will be told that they can join the treaty on a take-it-or-leave-it basis — with major pressure imposed to get developing countries to take it.

News reports, leaked documents and published material from various business associations (linked here) certainly give reason to fear what may be in the treaty. The public interest sign-on letter expresses concern that ACTA may:

+ Require ISPs to monitor all consumers’ Internet communications, terminate their customers’ Internet connections based on copyright holders’ repeat allegations of copyright infringement, and divulge the identity of alleged copyright infringers possibly without judicial process, threatening Internet users’ due process and privacy rights; and potentially make ISPs liable for their end users’ alleged infringing activity;

+ Interfere with fair use of copyrighted materials;

+ Criminalize peer-to-peer file sharing;

+ Interfere with legitimate parallel trade in goods, including the resale of brand-name pharmaceutical products (known as drug “reimportation” in the United States);

+ Impose liability on manufacturers of pharmaceutical raw materials, if those raw materials are used to make counterfeits. Such a liability system would likely make raw materials manufacturers reluctant to sell to legal generic drug makers, and thereby significantly damage the functioning of the legal generic pharmaceutical industry;

+ Improperly criminalize acts not done for commercial purpose and with no public health consequences; and

+ Improperly divert public resources into enforcement of private rights.

(See more detailed information and criticisms about ACTA from Knowledge Ecology International, Public Knowledge, the Electronic Frontier Foundation, IP Justice and Michael Geist.)

Presented with these concerns, the U.S. Trade Representative’s officials say there is no reason to be worried. ACTA won’t require more than existing U.S. free trade agreements, the officials say.

This assurance is, first, not exactly a comfort.

Meanwhile, business groups are explicit that believe ACTA should do far more than existing U.S. free trade agreements. Are they having their way? There’s no way to know as long as the draft treaty remains a secret.

Executive Pay and “The Market Economy”

It’s pretty hard these days to justify astronomical executive pay. In 2007, the average CEO’s pay of $10.5 million was 344 times higher on average than the average worker’s wage, according to Executive Excess 2008, a joint report from the Washington, D.C.-based Institute for Policy Studies and Boston-based United for a Fair Economy. The top 50 private investment fund managers each took home more than 19,000 times the average worker’s earnings.

But never fear, Jack and Suzy Welch — the former high-flying CEO of General Electric and his wife, the former editor of the Harvard Business Review — are willing to defend high executive pay by return to first principles and invocation of “the market economy.”

In a recent issue of Business Week, they write, “Yes, most CEOs make a ton of money, and sometimes they make too much, but in a market economy salaries are set by supply and demand. We also live in a market economy where companies that field the best teams win, and, because of global competition, the best teams tend to be expensive.”

There are several decisive rebuttals to this claptrap.

First, there is no plausible market-based story why executive pay should have been bid up so much over the past quarter century. Are executives working harder now? Making better decisions? Has the CEO supply and demand equation changed?

Second, executive pay is not set by the market, but by boards of directors, who frequently are CEO cronies and excuse their behavior by relying on conflicted compensation consultants.

Third, the most super-high compensation packages are typically based on performance standards, with executives cashing in on stock options as share values rise. But this is a system easily gamed, with those same shares sold before short-term thinking leads to medium-term losses. By way of example, consider the massive pay packages obtained by the ousted CEOs of the now-floundering Wall Street firms.

And now comes a new analysis that further debunks the market-based rationalization for ridiculous CEO compensation levels. Executive Excess 2008 shows how taxpayers are helping foot the bill for these outrageous compensation packages.

Executive Excess 2008 highlights five distinct U.S. tax subsidies for executive pay. These are actually market distorting, in that they let top executives and investment fund managers take home more than they would if they played by the same tax rules as regular people. Altogether, Executive Excess 2008 reports, the five tax loopholes heap $20 billion in subsidies on the corporate and hedge fund honchos.

+ The hedge fund manager loophole, involving what is called “carried interest,” enables investment fund managers to treat most of their salaries as capital gains, and to pay taxes at the capital gains rate, rather than the ordinary income tax rate. Annual cost to taxpayers: $2.6 billion.

+ The pensions for the rich loophole. While regular people can place a maximum of $15,500 in 401(k) plans — deferring taxes until they withdraw the money — CEOs can place unlimited amounts in deferred pay plans. Annual cost to taxpayers: $80 million.

+ The offshoring loophole. Although companies cannot deduct the expense of executive compensation in deferred accounts, this is no problem for businesses registered in offshore tax havens. Set up an offshore subsidiary, and you can deduct the deferred income from revenue. Annual cost to taxpayers: $2 billion.

+ The greed loophole. Money spent on wages and salaries are deducted from corporate revenues, and is not taxable. For top executives, however, U.S. tax rules impose a limit: corporations cannot deduct salaries and compensation that is more than “reasonable.” An effort to define reasonable as $1 million has been entirely circumvented — and corporations can, in effect, deduct whatever they pay CEOs. Annual cost to taxpayers: $5.2 billion.

+ The double-standard loophole. Stock options — the right to buy stock at a preset value, at a later date — are now a huge component of executive pay. For their internal accounting, corporations value stock options using the value of the stock on the date of the option grant. For tax purposes, however, they can deduct the generally much higher value of the stock on the date the options are exercised. In other words, they can deduct more than they list as their expense. Annual cost to taxpayers: $10 billion.

Not long ago, it was possible to argue that executive pay was an important but symbolic issue. But then it became clear that ever-escalating executive pay is creating a culture of greed that is fueling income and wealth inequality. And now it has become clear that executive pay schemes are contributing to corporate practices harmful not only to workers, consumers, communities and the environment, but to corporations themselves, and even to the functioning of the economy.

The foolish and inexcusable housing-related investments by Wall Street firms, Fannie Mae and Freddie Mac resulted in no small part from executive compensation-driven efforts to drive up short-term stock values. These decisions were so bad, and of such enormous scale, that they have endangered the functioning of the financial system itself, thereby necessitating government intervention and massive taxpayer expenses — an indirect but even more expensive taxpayer subsidy for executive compensation.

A “market economy” indeed.