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As the holiday shopping season approaches, expect alarmism from New York City officials about counterfeiting. Two years ago, Mayor Michael Bloomberg said counterfeit goods cost the city $500 million annually in lost tax revenue. Last year Comptroller William Thompson released a report raising that number to $1.03 billion. According to Thompson, counterfeiting in New York City is a $23 billion-a-year industry.” But these numbers should not be believed. The true scale of the counterfeiting problem in New York — and across the country — is much smaller. As Mark Lemley, a professor at Stanford University, puts it: “Counterfeiting statistics are counterfeit.” Thompson’s report was written partly at the instigation of Barbara Kolsun, general counsel for handbag manufacturer Kate Spade. Kolsun has no doubt that the government’s numbers are true. In fact, she says, “I think that $1 billion is the tip of the iceberg: The lost tax figures are probably 10 times that.” But it’s impossible for the tax revenue that New York loses to counterfeiting each year to be $10 billion: Total sales tax revenue for the city is only $4 billion annually. Kolsun says that she provided the comptroller’s office with many statistics from her own industry, which were then combined with stats from other industries to form the basis of the report. But there’s more to the story. Although Thompson was in possession of industry estimates when he drew up his report, he didn’t use them when it came time to estimate how much counterfeiting costs New York. Rather, his office used highly suspect source materials to come up with key data for the report — and built on that material by making startling assumptions. Jeff Simmons, Thompson’s spokesman, refuses to divulge the names of anybody who worked on the report. It’s a shame, because the New York comptroller’s office is one of the few institutions that actually claims to have done any original research into the size of the counterfeiting industry. Most other sources of statistics, such as the International Chamber of Commerce’s Counterfeiting Intelligence Bureau or the International Anti-Counterfeiting Coalition, an industry umbrella group, don’t author reports themselves (though they are happy to promulgate statistics such as Thompson’s). Despite his office’s reluctance to talk about the report, Thompson did provide some detail in the document about how he arrived at this $23 billion estimate. He starts by assuming that counterfeiting in the United States is a $287 billion industry, and then says that New York City’s share is double its 4 percent share of gross domestic product: 8 percent of $287 billion is $23 billion. The doubling of the GDP figure is based on a guesstimate that counterfeiting is twice as prevalent in New York City as it is elsewhere in the country. Any normal economist would subject that result to a smell test: $23 billion works out to about $8,000 per New York City household, or $2,600 per resident, and can’t realistically be accurate. There’s no way the average household or resident spends that much on counterfeit goods every year. Thompson arrived at his $287 billion number with a classic bit of statistical sleight of hand. He writes: “The comptroller’s office estimates that the total dollar exchange of counterfeit goods in the U.S. during 2003 totals $287 billion. This estimate is based upon an update of a 1996 estimate of U.S. losses.” But this is ludicrous in a few ways. First, the comptroller’s office is essentially admitting defeat in its stated task of estimating the size of the counterfeiting industry in New York today: It’s using a national estimate from 1996. Since the degree of understanding of the size and importance of the counterfeiting industry has increased substantially over the past nine years, it’s telling that 1996 numbers seem to be the best that the comptroller can find. Second, that estimate turns out to be a suspiciously round $200 billion, taken from an article in Fortune magazine that cites only unnamed “federal and industry surveys.” Third, dollar exchange, the actual money paid for a counterfeit product, should always be a lower number than losses. For example, if I sell a bootleg copy of Adobe’s Creative Suite for $20, Adobe’s loss is usually put at $1,200 — the full retail price of the software. The dollar exchange, meanwhile, is less than 2 percent of that. Thompson, on the other hand, puts dollar exchange at $287 billion — and he’s gotten to that number from estimated losses of $200 billion. In Thompson’s world, then, counterfeit goods are pricier than the real thing. David Stipp, the author of the Fortune article, notes that his piece, titled “Farewell, My Logo: A Detective Story,” is not the report’s only cited source — also cited are the International Chamber of Commerce, the International Trade Commission, and the United Nations. However, Stipp’s story is the only source that the comptroller used for generating his estimates of New York tax losses. “It makes me uncomfortable that the figure from my story was cited as if it were definitive, given that all such figures are debatable estimates and, as the Fortune story stated, the estimate we used was based on other organizations’ estimates and surveys rather than on original research by me or others at the magazine,” Stipp says. Stipp’s number is not the most commonly cited estimate used to establish counterfeiting numbers. It’s typically stated that counterfeiting accounts for between 5 percent and 7 percent of world trade. The source of this number, however, is “lost in the mists of time,” says Peter Lowe, assistant director of the Counterfeiting Intelligence Bureau. “I don’t know what the source of that was, but it’s widely bandied around. It’s passed into anti-counterfeiting folklore,” he says. Many people in the industry think that the source is a 1998 report from the Organisation for Economic Cooperation and Development, but the OECD paper says that there is no data to support it. In fact, any stats based on counterfeiting being a certain percentage of world trade, or any number in the hundreds of billions of dollars, has no statistical basis. Even smaller numbers, such as a 2000 European report claiming that “the trade in counterfeits in just four industries reduces E.U. gross domestic product by �8 billion per annum and costs 17,000 jobs,” turn out to be based on obviously exaggerated estimates. The �8 billion number assumes, for instance, that counterfeits accounted for 6 percent of the European pharmaceutical industry in 2000 — a number that even pharmaceutical industry lobbyists admit is vastly exaggerated. And the figures are certainly not based on extrapolations from customs seizures, as many anti-counterfeiting lobbyists seem to believe. U.S. customs seizures amounted to just $139 million in 2004. There’s no way that they can be extrapolated to hundreds of billions of dollars. According to the U.S. Customs Service, customs inspects 8 percent of shipments into the United States, which would make importing counterfeits a $1.6 billion industry. That’s big, but it’s a tiny fraction of the numbers commonly bandied around. The International Anti-Counterfeiting Coalition likes to say that total global sales of counterfeit goods are $500 billion a year. The true number is unknown, but it’s certainly nowhere near that large. And while counterfeiting is a problem, says Lemley, the exaggerated statistics are a problem as well. “It may prompt Congress to act on the assumption that the sky really is going to fall if they don’t,” says Lemley. The theory of “garbage in, garbage out” applies here: Bad statistics often underpin bad laws. Felix Salmon is the Latin America correspondent of Euromoney magazine. Web site: felixsalmon.com.

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