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Why the War on Drugs is hard to win
Here is a summary of forthcoming work by Gary Becker, Michael Grossman, and Kevin Murphy:
In an important new study, world-renowned economists--including a Nobel Prize winner and a MacArthur "genius"--argue that when demand for a good is inelastic, the cost of making consumption illegal exceeds the gain. Their forthcoming paper in the Journal of Political Economy is a definitive explanation of the economics of illegal goods and a thoughtful explication of the costs of enforcement.
The authors demonstrate how the elasticity of demand is crucial to understanding the effects of punishment on suppliers. Enforcement raises costs for suppliers, who must respond to the risk of imprisonment and other punishments. This cost is passed on to the consumer, which induces lower consumption when demand is relatively elastic. However, in the case of illegal goods like drugs--where demand seems inelastic--higher prices lead not to [TC: much?] less use, but to an increase in total spending.
In the case of drugs, then, the authors argue that excise taxes and persuasive techniques –such as advertising--are far more effective uses of enforcement expenditures.
"This analysis…helps us understand why the War on Drugs has been so difficult to win…why efforts to reduce the supply of drugs leads to violence and greater power to street gangs and drug cartels," conclude the authors. "The answer lies in the basic theory of enforcement developed in this paper."
Here is an earlier version of the paper.
Posted by Tyler Cowen on January 16, 2006 at 07:24 AM in Economics | Permalink
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» Why the War on Drugs is hard to win from The Crooked Links
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» Theory of Illegal Goods from The Stone City
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Tracked on Jan 17, 2006 10:40:32 AM
» Theory of Illegal Goods from The Stone City
Of the suggested benefits of legalization, then, one is contingent on the war on drugs being already lost, and the other on an implausible and morally dubious style of enforcement. This paper hints at the questions which should drive policy, but its ... [Read More]
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Comments
Gerry Swanson at the University of Arizona has been using this example in his introductory economics courses for over two decades to explain the importance of elasticity.
Posted by: EclectEcon at Jan 16, 2006 8:10:50 AM
And here's the kicker that explains why our approach to this problem is not likely to change (from the earlier paper):
"Our conclusion is that making goods illegal and punishing suppliers and
consumers by imprisonment and other methods are more costly to higher
income persons, and hence tends to reduce their consumption more than
consumption of lower income persons. Even if low, middle, and higher
income parents have the same desire to discourage drug use by their
children, the great political influence of higher education and income groups
would explain why drugs are illegal rather than subject to sizeable monetary
excise taxes. It also helps explain why punishment is mainly imposed on
suppliers rather than consumers of drugs since traffickers are more likely
than consumers to be low-income persons."
In other words, the enforcement approach *is* rationally preferred by precisely those groups who have the political power to realize their preferences -- hence 'the war on drugs' will continue.
Posted by: Slocum at Jan 16, 2006 8:17:49 AM
Slocum, while your comments may be completely correct, I have my doubts that it explains why many people vote for those who who favor the current approach. I suspect willful ignorance is a much more powerful explanation.
Posted by: spencer at Jan 16, 2006 9:13:47 AM
So if the demand is inelastic, then useage would not increase if these compounds were de-criminalized?
the removal of the risk premium in the street price would not lead to higher consumption? A competitive market
would ensue and the price of these agricultural commodities would decline. Sounds like a winning proposition.
Posted by: CK at Jan 16, 2006 10:02:55 AM
Maybe I'm missing something, but while I am no big fan of the
"war on drugs" approach, isn't the answer built into the model here?
If demand is assumed to be inelastic, then by definition high prices won't cut consumption. What am I missing that is novel?
Posted by: Tom Slee at Jan 16, 2006 11:10:31 AM
So. Why is demand for the good made illegal inelastic? In the case of illegal drugs research indicates that the brain develops a dependency for whatever the substance happens to be. If someone has a drug dependency like those observed in people with addictions, demand is virtually certain to be inelastic. Furthermore, someone who is addicted to a substance violates one of the key assumptions in economics: everyone is a rational player. WRT Prohibition, making a widely accepted substance illegal was clearly a bad idea and was reversed in fairly short order.
Do you try to protect society from the danger of addictive drugs or let nature run its course? Perhaps if nature were to run its course nature would end up selecting for individuals who are resistant to the addictive effects of drugs or whatever. The rest would be dead. However, what would be the cost to society to run that kind of experiment?
Posted by: GHanner at Jan 16, 2006 12:01:30 PM
GHanner - "In the case of illegal drugs research indicates that the brain develops a dependency for whatever the substance happens to be."
What an ignorant statement. First off, there are 101 drugs, belonging to various classes, with vastly different addictive potential and health risks. (check my blog for a British govt. report on drugs). All "drugs" have in common is that they're illegal and get one 'high'. Barring drugs like crack, the vast majority of people who try drugs don't become addicts. Just as the ONDCP czar said, 15% of cocaine users consume 80% of the cocaine. Drug demand is inelastic w.r.t. prices for this group. For the remaining 85%, high prices are a deterrence to regular use, but not occasional use. Drug addicts are rational players. They crave avoidance of withdrawl (in case of opiates) and/or the intoxication above the price for the drug, because of the immediacy of the craving. The key question here is, whether the cost of letting addicts have their drugs legally is higher than the cost of prohibition-induced crimes and law enforcement costs and social indoctrination programs and prison costs. The answer, according to legal heroin maintenance programs in Netherlands & Britain, is No (for heroin). For stimulants like crack and meth, the answer is trickier, and may well be Yes, but that's not firm.
Posted by: daksya at Jan 16, 2006 12:29:18 PM
"Slocum, while your comments may be completely correct, I have my doubts that it explains why many people vote for those who who favor the current approach. I suspect willful ignorance is a much more powerful explanation."
I don't think people have to understand all of the economics to understand the advantages to them. That is, I believe that well-off people understand that the possibility of a criminal record is a more powerful inducement to keep their kids off drugs than cost imposed by taxes would be.
Posted by: Slocum at Jan 16, 2006 12:31:18 PM
Addendum: In case of amphetamines, the history of Swedish drug control reveals an interesting story. In short, amphetamines were prescribed but liberally, starting in 1938. In 1944, restrictions were applied. In late 50s, they were made equivalent to narcotics (i.e. opiates). The nature and prevalence of amphetamines use tells an interesting story via this image @ Imageshack : http://img518.imageshack.us/my.php?image=ampsweden6xw.jpg
Posted by: daksya at Jan 16, 2006 12:53:14 PM
The issue of the drug war is embedded in how our society responds to unhealthy choices made by its members.
Consider how unhealthy diet and exercise choices are not just "allowed", but promoted.
The #1 killer life style choice, tobacco, also subsidized.
Alcohol is somewhat restricted.
And then a long list of drugs, not prepared with any reference to medical reality, subject to our drug war.
Posted by: REK at Jan 16, 2006 1:33:45 PM
Is there anything new or original in the article that hasn't been known for a long time?
Posted by: Bill Stepp at Jan 16, 2006 2:46:41 PM
The inelastic aspect of drug demand actually creates a problem in the legalization of drugs. If the government legalizes but rations drug sales, many users will still have a need that exceeds the ration. Also, how will you set the price? Currently, an open market sets the price. If the government sets the price, people will seek out a lower price alternative, just like they do with cigarettes. All this actually benefits the illegal market.
So would the alternative be to create an unresitrcted market? The Cocaine Corporation of America would import coke and sell it unrestricted to any consumer? Would that really only maintain the status quo? It seems the assumption of an inelastic market is the market will not shrink if drug enforcement is pursued. But what evidence is there the opposite way, that the market won't grow if made legal?
The government has legalized gambling and gambling addiction has risen. Just because something isn't chemically addictive doesn't mean it's not addictive. While you may not be able to stop current users, what about future users? While it can be argued that drug use hasn't slowed significantly during the War on Drugs, what evidence is there that it hasn't increased at a faster rate when compared to other negative legal behavior (i.e. obesity, alcoholism)? While most people may not become cocaine addicts just by sampling the powder, how many more would become addicted if the supply was cheaper and more available? How much more money do people spend today on state lotteries versus the numbers?
While increased enforcement may lead to increased violence, it is arguable that it leads to an increase in crime. Murder rates may be high in the U.S., but property crime rates are high in countries that have legalized drugs. While the murders are horrible, they are usually limited to people in the drug trade. The property crimes are pervasive across society. So the question becomes one of sacrificing a portion of society to make the quality of life better for others.
There's also a major law enforcement piece that people miss with the War on Drugs. The crime of drug use is fairly ease to prove. Other crimes aren't. Many criminals use drugs. It's either their reason for being criminals or a symptom of their generally anti-social behavior. So, let's say Joe steals a TV and sells it. With his proceeds, Joe buys crack. He's done this before and has a record. The police bring Joe in for questioning, but can't prove he stold the TV. "We have to let you go, Joe, but before you leave, we need you to pee in this cup." Drug law enforcement is very effective in cutting down crime and has probably done as much to lower crime rates as abortion.
Also, I'm not convinced this statement is true: "...suppliers rather than consumers of drugs since traffickers are more likely than consumers to be low-income persons." If drugs were legal but really expensive, it would benefit wealthier drug users (they could afford the drugs) and harm poor drug users (they would still have to turn to the black market for their source).
Perhaps the best solution is one the Chinese employed to stem the growing tide of opium addicts. The government gave all addicts one year to kick the habit, providing any assistance they needed. At the end of the year, any one who was still addicted was executed. Since its hard to control the supply, you simply eliminate the market. Of course, a new market would arise, but the disincentive is pretty strong. But that approach opens a whole new can of worms.
Posted by: Ted Craig at Jan 16, 2006 5:40:48 PM
but property crime rates are high in countries that have legalized drugs.
Like which?
Posted by: daksya at Jan 16, 2006 5:55:53 PM
The war on drugs will continue until enough people recognize that human beings have the right to pursue happiness as they see fit.
Violence is not the way to change people's opinions about what they should put in their own bodies.
Posted by: Alan Brown at Jan 16, 2006 6:40:48 PM
Wouldn't this imply that an enforcement effort against consumers, rather than producers, might be much more effective?
If the risk of prosecution, fines, and imprisonment were borne by consumers rather than producers/sellers, then the increased cost due to drugs being illegal would translate into lower prices rather than higher prices.
Holding demand constant, increasing the "price" by imposing legal penalties (costs) on the consumers would reduce the amount they would be willing to pay the sellers. Assuming supply is elastic (which it probably is, if drug dealers care about money not drugs, since there are alternative sources of money), then the quantity supplied would be lower.
So, a demand-side "war on drugs" might be successful, but the supply-side "war on drugs" is doomed to failure.
Posted by: Robert Book at Jan 16, 2006 8:29:25 PM
Holland.
Posted by: Ted Craig at Jan 16, 2006 8:39:40 PM
The Netherlands.
Posted by: Ted Craig at Jan 16, 2006 8:43:59 PM
Ted Craig, Netherlands hasn't legalized drugs. They tolerate the sale of (only) cannabis in designated coffeeshops, with a few restrictions. Ironically, the policy is schizophrenic, as the suppliers of that cannabis are still subject to criminal penalties. In any case, most of the property crimes are associated with cocaine/heroin/speed, not pot, which is the whole rationale of the Dutch in separating the markets. I'm busy now, but I'll provide a more detailed rebuttal to your earlier post soon.
Posted by: daksya at Jan 16, 2006 8:57:21 PM
Ted Craig (TC) - "If the government legalizes but rations drug sales, many users will still have a need that exceeds the ration."
I don't see the point of rationing drug sales. Alcohol sales aren't rationed. Like you say, the ration won't stop the addictive personalities, and is an unnecessary instrument for those able to obey it.
TC - "Currently, an open market sets the price."
An unregulated, underground market is not an open market. Unlike regulated markets, if you don't like your competitor underpricing you and if you have the muscle, you take him out, not lower the prices. Jeffrey Miron, of Boston U., who specializes in drug war economics, estimates that the current street price of cocaine is 4 times what its after-tax retail price would be in a legal market. 15 times for cannabis, and between 8-19 times for heroin, depending on the locale. Cigarette smuggling exists, but accounts for only 5-6% of traded cigarettes by volume, according to the WHO. The markup on drugs happens at the distributor and retail stage. Again, lookup the report on my blog (click on my username).
TC - "While most people may not become cocaine addicts just by sampling the powder, how many more would become addicted if the supply was cheaper and more available?"
The proportion would decrease somewhat. People with impulsive and thrillseeking personalities are prime candidates for addiction. The small segment of the population that dabbles in illegal drugs tends to have higher representation of such personalities compared to the overall population. Check my second post for statistics on amphetamine usage in Sweden. A legal market doesn't mean a market free of regulation, including social oppobrium.
TC - "The property crimes are pervasive across society. So the question becomes one of sacrificing a portion of society to make the quality of life better for others."
Most property crimes committed by addicts to support their habit, are a result of the (artificially) high prices.
Your example about proving drug use is strange, considering that in most American jurisdictions, unlike Scandinavia, drug use is not a crime. Drug possession is. Your scenario might occur if Joe was on probation or parole.
Posted by: daksya at Jan 16, 2006 10:36:58 PM
Ted Craig talks about the benefits of drug laws as ways of locking up people the police "know" are criminals but can't prove guilty of anything. It seems pretty obvious that this works just as well to lock someone up who *wasn't* doing anything besides using drugs. If we want to let the police lock people up based on their suspicion, then maybe we should debate that as a policy, since we don't need drug laws to implement it.
One aside: It seems clear that the impact of legal drugs on peoples' behavior differs enormously. My (non-expert) impression is that there is a fair sized group of people who use small-time crime to support their alcohol habit, but essentially nobody who does this to support their nicotine habit, even though cigarettes are pretty expensive.
Posted by: albatross at Jan 17, 2006 9:40:35 AM
I am afraid that the assumptions made by Becker et al. have essentially the same strength as their conclusions, so that this exercise is not much use as a policy paper. Details here: http://stonecity.blogspot.com/2006/01/theory-of-illegal-goods.html
Posted by: sammler at Jan 17, 2006 10:39:23 AM
Have others noticed that the paper does not categorically weigh in on the inelasticity of drug demand. They also note that long-run elasticity is almost always greater than short-run and -- I would argue -- difficult to measure when you're looking at a regulated world. However they note that if the elasticity were high enough, the war on drugs would be justified on welfare grounds alone. Moreover, most such short run measures have always been poor guides to the long run. [A good example was the market for oil where almost all experts calculated that demand was much more inelastic than it proved to be in the 70s and 80s.]
Further, the welfare calculations assume everyone's utility is weighted equally, but in these paternalistic interventions, the claim is that not all utilities are equal. At this point in time, society does not view the pleasure some derive from getting high the same as the displeasure some derive from knowing that their children might be more tempted to use drugs. Indeed, the majority feels that even adults with these preferences deserve to be undercounted in the welfare calculations. One does not have to agree with this argument to realize that it changes the interpretation of the paper's results.
None of this points to a clear conclusion, but the paper is less clearcut than is being made out in the commentary.
Posted by: anony at Jan 17, 2006 11:52:03 AM
I agree that attacking supply, the DEA's approach, is inefficent. Directly attacking the casual user, frightening him away through the use of shame and the threat public humiliation and its consequences, has worked to clean up neighborhoods effectively. Seriously addicted users lack the means to meaintain the drug market. It works with prostitution, it would work here as well.
Posted by: Dan at Jan 17, 2006 5:28:26 PM
Slocum, I can tell you from personal experience that your reasoning is wrongheaded. While the monetary equivalent cost of imprisonment may be higher for someone in a family with more money, kids in families with more money have more money to buy drugs, and you're more likely to get away using drugs and less likely to go to jail if you get caught if you're in a richer family. This last part is partly the result of an economic figuring by the police that it is better to jail a poor drug user than a richer one, because it is easier to get a conviction and because they figure that they're more likely to commit crimes.
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Posted by: levan at Sep 6, 2006 2:23:50 AM
