The Economics
Behind the U.S. Government's Unwinnable War on Drugs
By Benjamin Powell
The late Nobel
Laureate James Buchanan was known to
say, "Economics puts limits on people's utopias." Unfortunately, the
advocates of the U.S. government's war on drugs have failed to appreciate the
economics underlying the drug war that makes their utopian vision impossible to
achieve through drug prohibition.
Although the Obama
administration has softened the rhetoric of prior administrations by talking
about treatment rather than an "enforcement-centric 'war on drugs'
approach,"1 enforcement
budgets remain large and penalties for distribution severe. As for
legalization, the administration claims that "drug legalization also runs
counter to a public health and safety approach to drug policy. The more
Americans use drugs, the higher the health, safety, productivity, and criminal
justice costs we all have to bear."2
Regarding
violence, in a recent speech in Mexico, President Obama stated, "Much of
the root cause of violence that's been happening here in Mexico... is the
demand for illegal drugs in the United States."3 However, Mr. Obama
failed to specify whether the cause of the violence is drugs per se or the fact
that drugs are illegal.
Economics is a
science of means and ends. Thus, the question for economics is whether the
means—drug prohibition—is effective in promoting the ends of greater health,
safety, and productivity, as well as lower violence and criminal justice costs.
The Economics of a
Supply-Side War
Both the
possession and distribution of illegal narcotics are criminally punishable.
However, the penalties for distribution, whether street-level dealing or
international smuggling, have always been much harsher than the punishments for
possession. Possession—at least for marijuana—is becoming decriminalized in
some states. Meanwhile, enforcement devoted to interdiction of imports and the
breaking up of dealer networks continues. In short, while there are demand-side
penalties, the U.S. government's war on drugs is primarily a supply-side war.
At its core, a
supply-side drug war acts essentially like a tax placed on drug suppliers.4 It increases
their cost of bringing drugs to market and, thus, decreases their willingness
to supply drugs. The result, as in virtually any other market, will be higher
prices and a smaller quantity supplied. The key question for whether a
supply-side drug war can be won is whether the main effect is an increase in
price or a decrease in quantity. If the drug war is to be effective, its main
effect must be to decrease quantity rather than to increase price.
The amount of
illegal drugs that people use is not very sensitive to price. Many addicts
likely continue to consume close to the same quantity even in the face of large
price increases. The demand for illegal drugs is what economists call
"price inelastic."5 Figure 1
illustrates the effect of a supply-side drug war on an inelastic demand.
Figure 1. Effect
of a supply-side drug war on an inelastic demand
The war on drugs
shifts the supply of drugs from Supply (No Drug War) to Supply (Drug War)
because of the increased difficulty of getting the drugs into the United States
and then distributed to users. As a result, the benefit, in the eyes of the
drug prohibitionists, is the decrease in consumption from Q1 to Q2.
The main effect of
a supply-side drug war is a large increase in the price of drugs. Revenues of
drug dealers equal the price of the drugs times the quantity sold. Because the
drug war increases price more than it decreases quantity, the remaining drug
dealers have more revenue as a result of the drug war. In the above figure, the
drug war costs suppliers the revenue in the blue box, but suppliers gain the
revenue in the larger red box. They can use this increased revenue to buy
better technology to smuggle drugs into the United States, to buy more and
better weapons to fight law enforcement, or to corrupt more judges and police
officers.
Because the demand
for drugs is not price-sensitive, each "victory" in the war on drugs
enhances drug dealers' revenue, making future decreases in supply all the
harder to achieve. It is no accident that the number of annual drug-related
deaths in Mexico almost quintupled from 2,300 in 2007 to 11,000 in 2010. This
increase was a result of the Mexican government's stepped-up enforcement
efforts.6 The drug
suppliers used their enhanced revenue to fight back more violently.
If this were the
end of the story, some people might say, "Even if a supply-side war is
impossible to completely win, at least it is a step in the right direction.
After all, it does decrease the quantity of drugs used." Unfortunately,
this decrease in drug use comes with great costs that undermine the very goals
of the war.
Costs of Drug
Prohibition
Drug
prohibitionists want drugs to be illegal in order to minimize the damage drug
use does both to users and to the society around them. Unfortunately,
prohibition, while decreasing consumption, greatly increases the harm done to
the remaining users and to society.
When drugs are
illegal, they become more potent. In order to minimize the risk of detection
per amount of narcotic supplied, suppliers make drugs as small and light as
possible. This means higher potency. Economist Mark Thornton has found that
increased federal expenditures on interdiction explain 93 percent of the
increase in marijuana's potency.7
Drug prohibition
also shrinks the price differential between more-potent and less-potent drugs
since the fixed cost of evading law enforcement is similar regardless of
potency. As a result, prohibition also encourages users to demand the
more-potent drugs because the relative price difference between more- and
less-potent drugs is lower.8
These same effects
were observed during alcohol prohibition. The relative price of hard liquor to
beer decreased, leading to increased consumption of higher potency drinks like
moonshine and gin.9
Illegality also
makes product quality more variable. When drugs are sold on the black market,
there can be no name brand attached to them. Thus, when a dealer sells a bad
dose, he does not damage the reputation of a supply chain nearly as much as
when, say, Tylenol sells a bad dose.10 Moreover,
consumers cannot sue drug suppliers for producing dangerous products. In a
legal market, drug suppliers would be pressured to supply quality products and
would face economic and legal consequences if they did not.
The net effect of
prohibition on drug users is, at best, to decrease consumption while making the
consumption of the remaining drug users much more dangerous because their
purchases are more potent and less predictable. This is borne out in the data
on deaths from drug overdoses. From 1971—two years before the creation of the
federal government's Drug Enforcement Administration and Nixon's declaration of
the war on drugs—to 2007, the rate of death from a drug overdose per 100,000
total deaths increased by a factor of ten.11
Prohibition also creates
more problems for non-users. Because it increases the cost for addicts to
support their habit, many resort to stealing in order to get their needed high.
In a study of the U.S. drug war on Latin America, economist David R. Henderson
estimated that if the same mark-ups applied to cocaine as to coffee, which
would be roughly accurate with cocaine legalization, then cocaine's price in
the United States would fall by about 97%.12 If cocaine
and other narcotics lost the price premium caused by the drug war, few, if any,
addicts would need to resort to crime to afford their habit.
On the supply side
of the market, the drug business is violent precisely because it is illegal.
Illegal businesses can't settle disputes in court, so they do so through
violence. If drugs were legalized, drug suppliers could settle disputes by
turning to courts and arbitrators. One reason that large dealer networks and
organized crime outcompete smaller dealers is that they can partially provide
their own internal dispute resolution.
When alcohol was
prohibited in the early twentieth century, violent criminal gangs catered to
the nation's thirst for alcohol. When Prohibition ended, normal businesses
returned to the market and violence subsided.
Economist Jeffery
Miron found that both alcohol prohibition and drug prohibition enforcement
efforts have increased the homicide rate in the United States. He estimates
that the homicide rate is 25-75 percent higher due to prohibition.13 In short,
the violence associated with drugs, both by users to support their habit and by
gangs supplying the drugs, is a product of prohibition rather than a rationale
for prohibition.
These costs, taken
together with the above supply and demand analysis, indicate that the very
concerns that animate drug prohibitionists—the harm to users and the violence
in society—should cause them to oppose drug prohibition.
External Costs of
the Drug War
In addition to the
costs that fall within a means-ends calculation for prohibitionists, there are
other costs of the drug war that many people care about, most notably the loss
of liberty.
The drug war must
be financed by tax dollars. Taxes restrict individual liberty by taking away
peoples' freedom to spend their money on goods and services. Currently the
government spends $51 billion annually on the war on drugs.14 This does
not count potential tax revenue that could be raised if drugs were legalized
(because that revenue represents a transfer, not a net cost or benefit).
More than half a
million people are incarcerated in the United States as a result of drug
convictions.15 Any
cost-benefit analysis of the drug war must count their lost liberty as a cost.
Furthermore, not only does the rest of society pay for their incarceration
through taxes, but we also lose out on whatever goods and services they might
produce for us were they not in prison.
Other lost
liberties arise from the nature of drug transactions. Normal crimes, such as
theft, have a victim who has an incentive to report the crime. But normal
detection and enforcement methods will not work in the drug war. Why? Because
regardless of what the rest of society thinks about drug use, neither drug
users nor drug dealers consider themselves victims. To enforce drug
prohibition, police must assume powers and pursue practices that are
unnecessary for enforcing laws against other crimes. These tactics include
searches of people and property suspected of holding drugs, wiretapping and
other surveillance, and violent raids of suspects' homes.
Sometimes these
tactics have tragic results. Police mistakes often result in
"no-knock" raids of the wrong homes. Since 1985, innocent people's
homes have been mistakenly raided around 200 times and, in approximately 50
instances, police killed innocent civilians.16
Moreover, police
routinely confiscate personal property if it is suspected of being involved in
the drug trade. The police are not even required to file charges in order to
confiscate property, and police departments supplement their budgets with these
confiscations. In the 20 years ending in 2009, the authorities seized
approximately $11 billion in private assets in this manner, and the seizure
rate has been growing at nearly 20 percent per year.17
This is not an
exhaustive list of the costs. These and others are important costs to consider
when evaluating the war on drugs.
Conclusion
The U.S.
government's policy of drug prohibition, like alcohol prohibition before it, is
a failure—and not one that can be corrected by a mere tweaking of current
policy. The economic analysis of fighting a supply-side drug war predicts that
the war will enhance drug suppliers' revenues, enabling them to continuously
ratchet up their efforts to supply drugs in response to greater enforcement.
The result is a drug war that escalates in cost and violence.
Furthermore, the
secondary consequences of prohibition are perverse. The drug war causes drugs
to be more potent and their quality less predictable than if drugs were legal,
leaving the remaining users at greater risk and, in the face of higher prices,
more likely to commit crimes to support their habit.
In short, the
means—drug prohibition—is incompatible with the ends of improving health and
decreasing violence. There are two paths forward: a demand-side drug war or
legalization.
A demand-side drug
war that places draconian penalties on usage or possession does not necessarily
fail a means-ends test. If the goal is simply to end drug usage, implementing a
swift death penalty for anyone convicted of possession or use would do the
trick. Of course, it would not improve those people's health.
Most people, including myself, would consider such a policy even more unjust
than the current drug policy.
The alternative,
legalization, is a better path forward. It passes a means-ends test while
better respecting individual liberty. Consumption may increase but the drugs
that are consumed would be safer; and violence would decrease. To the extent
that decreasing drug consumption is desirable, moral suasion and education
would be more effective—without the nasty side effects—than the current policy
of prohibition.
Footnotes
1. Kay Steiger, "Obama
administration signals change from prison to treatment in drug war,"The Raw Story, April 25, 2013.
4. See Miron, Jeffrey and Jeffrey Zwiebel, "The Economic Case
Against Drug Prohibition."Journal of
Economic Perspectives. Fall 1995.Vol 9, No. 4: 175-192.
5. Tyler Cowen and Alex Tabarrok suggest an
elasticity in the range of 0.5 based on the existing literature. Modern
Principles: Microeconomics (2009), Worth Publishers. Chap 4.
7. Thornton, Mark (1991) The Economics of
Prohibition. The University of Utah Press: Salt Lake City. p. 107.
8. Armen A. Alchian and William
R. Allen were the first economists to point out this effect, although they did
it in a different context. They noted that the cost of shipping oranges from
California to New York was the same whether the oranges were high-quality or
low-quality. This fixed transport cost, added to the price, narrowed the
relative price difference between "good" and "bad" oranges.
Therefore the ratio of the price of good oranges in New York to the price of
bad oranges in New York is lower than the same price ratio in California. That,
they explained, is why the good oranges tend to shipped out to more-distant
places. We can apply their insight to illegal drugs, where the fixed cost is
the risk. See Armen A. Alchian and Willam R. Allen, University
Economics, 3rded., Belmont, California: Wadsworth, 1972, p. 70-71.
9. Thornton, Mark (1991) The Economics of
Prohibition. The University of Utah Press: Salt Lake City. p. 105.
10. Benjamin Klein writes, "Even in cases where
the problem is not strictly the company's 'fault,' such as the 1982 Tylenol
tampering cases that led to seven poisoning deaths, the $2 billion (or more
than 20 percent) decline in stock-market value borne by the producer, Johnson
and Johnson, was almost ten times as great as the company's direct recall and
litigation costs. See Benjamin Klein, "Brand Names," in David R.
Henderson, ed., The Concise Encyclopedia of Economics, 2nd ed.,
2008.
11. Boettke, Peter, Christopher Coyne, and Abigail
Hall (2013) "Keep Off the Grass: The Economics of Prohibition and U.S.
Drug Policy." Oregon Law Review Vol. 91: 1079.
12. Henderson, David R. (1997) "The U.S. Drug
War on Latin America," Unpublished Manuscript.
13. Miron, Jeffery (1999) "Violence and the U.S.
Prohibition of Drugs and Alcohol."NBER Working Paper
No. 6950. PDF file.
15. Derived from Boettke et al. p. 1071 and Drug
War Statistics.
17. Boettke
et al: 1069.
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