Illegal Drugs

How Economists Would Wage the War on Drugs

from The Wall Street Journal,

The monstrous cartels that run the narcotics business face the same dilemmas as ordinary firms—and have the same weaknesses.

n April, the world’s governments will meet in New York for a special assembly at the United Nations to discuss how to solve the drug problem. Don’t hold your breath: Since the previous such gathering nearly two decades ago, the narcotics industry has done better than ever. The number of people using cannabis and cocaine has risen by half since 1998, while the number taking heroin and other opiates has tripled. Illegal drugs are now a $300 billion world-wide business, and the diplomats of the U.N. aren’t any closer to finding a way to stamp them out. This failure has a simple reason: Governments continue to treat the drug problem as a battle to be fought, not a market to be tamed. The cartels that run the narcotics business are monstrous, but they face the same dilemmas as ordinary firms—and have the same weaknesses.

Soldiers and police officers have done rather poorly at regulating this complex global business. So what would happen if the war on drugs were waged instead by economists? Take cocaine, which presents one of the great economic puzzles of narcotics. The war against cocaine rests on a simple idea: If you restrict its supply, you force up its price, and fewer people will buy it. Andean governments have thus deployed their armies to uproot the coca bushes that provide cocaine’s raw ingredient. Each year, they eradicate coca plants covering an area 14 times the size of Manhattan, depriving the cartels of about half their harvest. But despite the slashing and burning, the price of cocaine in the U.S. has hardly budged, bobbing between $150 and $200 per pure gram for most of the past 20 years. How have the cartels done it?

Even if the price of coca could be raised, it wouldn’t have much effect on cocaine’s street price. The raw leaf needed to make one kilogram of cocaine powder costs about $400 in Colombia; in the U.S., that kilogram retails for around $150,000, once divided into one-gram portions. So even if governments doubled the price of coca leaf, from $400 to $800, cocaine’s retail price would at most rise from $150,000 to $150,400 per kilogram. The price of a $150 gram would go up by 40 cents—not much of a return on the billions invested in destroying crops. Consider trying to raise the price of art by driving up the cost of paint: It would be futile since the cost of the raw material has so little to do with the final price. Economics points to a fundamental mistake in the war on drugs. Most of the money spent tackling narcotics is directed toward disrupting supply.

Demand for drugs is inelastic—that is, when prices rise, people cut their consumption relatively little. (Given that most banned drugs are addictive, this isn’t surprising.)

Demand-side interventions are not only more effective, they’re also considerably cheaper than playing about with helicopters in the Andes. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America; spending it on treatment for addicts reduces it by 10 times as much. Rehab programs for prescription-painkiller users might seem costly, but they prevent those people from slipping into the colossally more expensive problem of heroin addiction. Where demand cannot be dampened, it can be redirected toward a legal source, as a few U.S. states have done with marijuana—a development that has inflicted bigger losses on the cartels than any supply-disruption policy. In any other industry, the current approach to drug control would have been identified as faulty years ago.

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