Authority Figures Criticizing the Junk Science from Gerald Friedman

Christina and David Romer have written a devastating critic of that silly multiplier analysis from Gerald Friedman but some do not even want to read this as they are insulted by the alleged appeal to “authority”. I could understand this had the Romer’s included a long winded discussion of who they are but they did not jumping what Friedman wrote and their concerns. I’m thinking about this in terms of two business litigations where I did not testify because my side had attorneys who did not like what I had to say. Let’s play this out in terms of tale where a business used the technology from Bernie Co. to manufacturer and sell cutting edge sanders. Alas, they refused to pay royalties to Bernie Co. and so were sued for patent infringement. Let the attorneys for this slimy business be Team Republican who decide that the patent was not infringed just like real Republicans will scream Socialism. Of course this will not prevail as even Romer and Romer note:

Although we share many of Senator Sanders’s values and enthusiastically support some of his goals, such as greater public investment in infrastructure and education, we also believe it is vitally important to be realistic about the impact of policies on the performance of the overall economy

The plaintiff hires as its expert some little known valuation expert – Dr. Friedman – who posits a model of patent value (expected future sales, reasonable royalty rate, and a discount rate) that say the value is $29 billion (no Dr. Evil today). The defense attorneys are hoping that the estimated value can be placed at something south of $20 billion. What Romer and Romer showed that Friedman’s estimate was not credible as if it were “junk science” and would likely face a Daubert motion:

A Daubert motion is a specific type of motion in limine. It is raised before or during trial, to exclude the presentation of unqualified evidence to the jury. Daubert motion is used to exclude the testimony of an expert witness does not possess the requisite level of expertise or used questionable methods to obtain data

But what about an affirmative analysis? More on that latter after I noted the two real world litigations. The expert witness RIAA v. Napster was David Teece. His testimony started with his biography which I guess some might call appealing to Authority. Of course anyone who ever met David knows his expertise speaks for itself. The same goes with the Romers. But it was the high quality of his testimony that impressed the Court. The same holds for the Romer and Romer rebuttal. A lot of us back then were pulling for Napster but we also knew that the case for RIAA was impressive. But let’s turn to this diaper patent infringement case:

The Procter & Gamble Company ("P & G") has filed suit against Paragon Trade Brands, Inc. ("Paragon"), alleging that Paragon infringes P & G's patent rights to the barrier leg cuff feature on disposable diapers. Paragon has counterclaimed for the alleged infringement of a patent relating to diaper absorbent cores1 and for a violation of the antitrust laws.

While Paragon Trade Brands said they wanted to simply compete. Procter & Gamble was going to win it effect to drive out competition as their Ultra diapers did violate P&G diapers. And Bernie is a social democrat, I was not impressed with the expert witness and his overall valuation or his claim that a reasonable royalty rate should be 2.5%. I told the defense attorneys that the evidence supported a 2% royalty rate for reasons the Court later smartly noted. But that meant they did not want to hire me. They hired Robert Reilly instead as he argued for a very low royalty rate:

The highly experienced authors of the Guide to Intangible Asset Valuation define and explain the disciplined process of identifying assets that have clear economic benefit, and provide an invaluable framework within which to value these assets. With clarity and precision the authors lay out the critical process that leads you through the description, identification and valuation of intangible assets.

Yep – an appeal to Authority. Never mind that the Court rejected his testimony out of hand which often happens to his testimony in other cases as Courts seem him as advocate not an expert witness. While Friedman argues real GDP can be $29 trillion as of 2026, the CBO is saying that this will only be $20.6 trillion under current policies. Of course Sanders is proposing an interesting change in policies so one might argue we should model out how this might work. I’m sure Team Republicans might turn to section III.B of Romer and Romer:

Against these potential positives, there are features of Senator Sanders’s proposals that could work to slow the growth of productive capacity. The higher interest rates resulting from demand expansion that led to inflation would lower investment, and so slow growth of capacity. More generous Social Security, while surely desirable for poorer Americans, would cause some people to retire earlier. Strengthening disability insurance, another laudable goal, would likely lead to more people being on the program. Making public colleges free would cause some people to spend longer in school and less time working. And extensive research, to which we have contributed, shows that although the disincentive effects of higher tax rates are small, they are not zero.23 Potentially more worrisome are the extensive interventions in the labor market.

I’m sure weeds in the garden John Cochrane would be willing to use these effects to argue for a level of real GDP in 2026 less than $20 billion.

When Democrats have proposed incentive-killing growth-killing marginal tax rate increases with lots of exemptions for their donors...

Of course this ignores Romer and Romer’s section III.A.

Senator Sanders’s proposals would likely act to raise productive capacity in several ways. Most directly, infrastructure and education make the economy more productive. If Senator Sanders’s policies led to an additional $1.5 trillion of investment in these areas over the next decade and those investments have a rate of return of 10% (which appears to be a reasonable estimate for well-targeted public investments), this would raise output in 2026 by $150 billion, or somewhat less than 1%.19 Since this is an effect over ten years, the implied increase in average annual growth of capacity (or potential output) is less than a tenth of a percentage point. Thus, although there is a strong case for greater public investment based on its rate of return and on its potential impact on quality of life and equality of opportunity, it would not yield a fundamental change in the economy’s growth trajectory. Likewise, there is evidence that family-friendly policies, like parental leave, help keep workers in the labor force.20 And regulatory and tax changes that benefited low-income workers would make work more attractive. Again, such policies have much to recommend them.

They also say the net effects will be small as if their model might suggest real GDP closer to $21 trillion by 2026. I would argue, however, that a different model from what the CBO has might be used. Would that alternative model suggests $22 billion or $25 billion? Who knows as no one has done this. This is a shame as these issues mattered. I’m getting too old to do a quality job and I don’t have that magic Authority. But Team Democrat – whether Bernie or Hillary – should assemble a team of progressive economists to do the hard work