Thompson's Counterfeit Numbers

BY FELIX SALMON
December 2, 2004

New York City Comptroller William C. Thompson Jr. does many things, but releasing reliable statistics is not one of them. In the week before Thanksgiving, he released a report claiming that New York City is losing $1 billion a year in tax revenues due to trafficking in counterfeit trademark goods. He's the city comptroller, he should know, right? In fact, rather than reporting facts, he's exaggerating, sensationalizing, and scaremongering.

Mr. Thompson refuses to talk about his report. Instead, his office released a statement saying that their economists had consulted with unnamed "experts," and that "they, and we, stand by the numbers presented in the report."

Those numbers, however, aren't plausible. Take the first sentence of the report, which states that "New Yorkers paid $23 billion for counterfeit goods during 2003."

In fiscal 2004, New York City received $4 billion in sales tax revenue, which, at a sales tax rate of 8.625%, implies about $46 billion in total legal spending. If spending on counterfeit goods is indeed now $23 billion, then New York's black market would be fully half the size of its legitimate economy, accounting for a third of total spending.

No one, surely, lavishes a third of their total expenditure on fake goods. If the comptroller's estimates are right, then for every dollar you spent on hotels and restaurants, in bodegas and department stores, in wine shops and music shops, on cars or bicycles or skateboards, you would, on average, spend 50 cents on counterfeit and bootlegged goods.

Mr. Thompson's numbers aren't even internally consistent. One would think that the unpaid sales tax on $23 billion in counterfeit goods would be about $2 billion, at the 8.625% rate. In fact, the comptroller says that unpaid sales tax on that $23 billion totals just $380 million, or 1.65%.

So where is the comptroller getting his numbers? Not, it would seem, from any kind of on-the-ground legwork. The only breakdown of what the $23 billion is spent on comes at the end of the report, with an appendix on recorded music. There, we're told that in 2003, "approximately 17 million illicit sound recordings made their way undiscovered to the streets of New York City for sale to the public," generating some "$85 million in illicit sales per year." That $85 million accounts for roughly one-third of 1% of the $23 billion total: the other 99.63%, we can only assume, is "other."

In fact, Mr. Thompson works on a top-down, not a bottom-up, basis. He starts off by estimating global trade in counterfeit goods at $456 billion, or 6% of gross world trade. To back up that number, he cites the International Chamber of Commerce. Then, he estimates the size of the American counterfeit trade at $287 billion, leaving us to assume that somehow he's using the same estimate. He's not. In 2003, American goods exports were $714 billion and goods imports were $1,263 billion. Six percent of those two numbers is just $119 billion.

So where does the $287 billion figure - the basis for all the comptroller's subsequent calculations - come from? All the report says is that "this estimate is based upon an update of a 1996 estimate of U.S. losses," footnoting a 1996 article in Fortune magazine.

When you go to the article, it says that "federal and industry surveys indicate that America's annual losses from the problem have quadrupled over the past decade to a staggering $200 billion," without getting any more specific. It's the kind of pseudostatistic that is clearly a wild guess aimed more at scaring people than being accurate; what's more, it's eight years old. But it's Mr. Thompson's best source for the size of the market for bootleg goods in New York.

The comptroller's "update" clearly consisted of adding $87 billion to that figure to make it seem like less of a round number. But even assuming that the $200 billion number was accurate and not exaggerated, there's a huge difference between losses and sales. If I sell a bootleg copy of Adobe's Creative Suite for $20, Adobe's loss is $1,200, while my sales are, well, $20.

It's a distinction, however, that seems lost on the comptroller. He says that New Yorkers are shelling out $23 billion in cash for counterfeit and bootlegged goods, and he's basing that figure not on sales estimates but on loss estimates. It's like counting the number of books in Barnes & Noble, and using that as an estimate for the total number of crime novels in stock.

Once he comes up with his spurious $287 billion number, Mr. Thompson then has to work out what New York's share of the national total is: In the end, he decides to do it by doubling the city's share. Nowhere does the comptroller explain why he's using a multiplier of two rather than 1.5, say, or even three or four or 10.

There's simply a bald statement: "The Comptroller's Office estimates that New York City's share of the U.S. counterfeit goods trade is twice its share of gross product." Not even a footnote, this time. Actually, none of the comptroller's estimates comes from New York data: All of them take broader numbers from the country or even the world as a whole and then work out what New York's share of that might be.

That is hard to credit. Estimates of the global trade in counterfeit goods are only as good as their underlying data, which necessarily must come from component states and municipalities. We're all for trying to block counterfeiting. It's a serious problem. But if the best that New York can do is to work down from the global estimates, rather than producing its own bottom-up analyses, then the main lesson that we can learn from the whole exercise is that none of these numbers really means anything at all.

Mr. Salmon is a a British writer living in New York.

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