Narrowing fair use of copyright undermines economic productivity throughout the economy and causes inflation

This report provides updated information on U.S. industries that depend on and/or benefit from limitations and exceptions to copyrights, including the fair use of copyrighted materials. This “fair use” economy has grown in importance since the publication of the original CapTrade study, which was published in 2007 and covered data through 2006.3 Subsequent updates found that the fair use economy continued to grow, even during the Great Recession.4

Fair use in the strict sense is an important statutory restriction on the rights conferred on original works by the U.S. Copyright Act of 1976:5 According to Sec. 107, “[t]he fair use of a copyrighted work for . . . purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research is not an infringement of copyright.”6 The fair use doctrine, and other limitations and exceptions to copyright,7 have grown in importance with the rise of the digital economy, as fair use permits a range of activities that are critical to many high technology businesses, including search portals and web hosting.8 In the discussion that follows, the term “fair use” sometimes will be used as a shorthand expression referring to the full range of limitations and exceptions in U.S. copyright law.

Industries benefiting from fair use continue to have a profound impact on the U.S. economy, which has been significantly transformed during the past 30 years. Increasing manufactured imports and technological advances have led to a large decline in manufacturing employment in the United States.9 Growth in service sector output and employment has been instrumental in creating new U.S. jobs, both directly through the creation of new firms, and indirectly through intermediate demands of these new firms and spending by their employees. For example, according to an analysis of high-tech industries by the U.S. Bureau of Labor Statistics, employment in high-tech services was only slightly larger than in high-tech manufacturing industries in 1994. However, employment in high-tech services industries grew by 3.4 million workers through 2014 while employment in high-tech manufacturing industries declined by one million workers.10

The growing importance of the fair use economy and the Internet in general has led to a number of studies of the digital economy and digital trade. A study by the United States International Trade Commission published in August 2014 found that domestic commerce and international trade conducted via the Internet in the U.S. and global economies increased U.S. real GDP by 3.4-to-4.8 percent, increased real wages by 4.5-to-5.0 percent, and increased employment by up to 2.4 million full-time equivalent employees.11 According to the Commission, these gains arise due to enhanced productivity and lower trade costs.12 The Commission’s analysis includes a comprehensive explanation of how the gains from digitally intensive industries, which rely on fair use, translate into gains for the broader U.S. economy:

Higher productivity in certain digitally intensive industries due to the Internet increases output in these industries while lowering costs of producers and therefore prices to consumers. These gains in digitally intensive industries spill over to the rest of the economy and lead to economy-wide effects. Higher demand for workers in the digitally intensive industries drives up wages in the labor market, draws workers from other sectors of the economy, and can also increase aggregate employment as more workers are brought into the labor force. The productivity-based reductions in costs translate into lower prices for consumers, and this increases the purchasing power of their wages.13

New firms have played a central role in the fair use economy. Startups in the core fair use space have generated new jobs while sometimes disrupting established industries and underperforming firms.14 While some companies such as Google, Amazon, and Facebook have grown rapidly in a short period of time, there are numerous under-the-radar firms that are benefiting from the business opportunities provided by fair use.15 Though the net job creation of disruptive startups is not always positive in the short run, their productivity-enhancing innovations are indisputably beneficial. The creation of new businesses and business activities has in turn fueled demand from other sectors of the U.S. economy, transformed a host of business processes, and opened up new avenues for accessing entertainment and information. For example, the so-called App Economy supported an estimated 1.66 million U.S. jobs in December 2015, up from 466,000 in the Fall of 2011.16

As explained in the previous studies of the fair use economy, the fair use of copyrighted material and other limitations and exceptions are an important foundation of the Internet economy. For example, one force driving the expansion of the Internet as a tool for commerce and education is the user’s ability to locate useful information with widely available search engines.17 The courts have held that the main service provided by search engines is fair use.18 Absent the exceptions to copyright law provided by the fair use doctrine, search engine firms and others would face uncertain liability for infringement, a significant deterrent to providing this valuable service. Such an outcome would thwart the educational purposes and growing commerce facilitated by Internet search engines, thereby reducing the economic contribution of the Internet.