Drug War Crimes

The Consequences of Prohibition

By Jeffrey A. Miron

The Independent Institute

Copyright © 2004 The Independent Institute
All rights reserved.
ISBN: 978-0-945999-90-4

Contents

Chapter 1 Introduction,
Chapter 2 The Economic Analysis of Drug Prohibition,
Chapter 3 The Effect of Drug Prohibition on Drug Consumption: Evidence from Alcohol Prohibition,
Chapter 4 Prohibitions and Violence,
Chapter 5 Is Prohibition Good Policy?,
Chapter 6 Alternatives to Prohibition and Other Policies Toward Drugs,
Chapter 7 Conclusion,
References,
Index,
About the Author,

CHAPTER 1

Introduction

Drug prohibition in the United States is now almost eighty years old. Federal law first prohibited cocaine, heroin, and related drugs in 1914, and marijuana in 1937. In recent years government expenditure for prohibition enforcement has exceeded $33 billion annually, with law enforcement authorities making more than 1.5 million arrests per year on drug-related charges (Miron 2003b). In the United States, there are now more than 318,000 persons behind bars for violations of drug prohibition, more than the number of persons incarcerated for all crimes in the United Kingdom, France, Germany, Italy, and Spain combined.

What does the United States gain from this incredible investment of resources? Prohibitionists believe drug use would soar if drugs were legal, and they regard any increase as undesirable per se. Prohibitionists also assert that drug use causes crime, diminishes health and productivity for drug users, encourages driving and industrial accidents, exacerbates poverty, supports terrorism, and contributes generally to societal decay. Thus, advocates claim, prohibition benefits drug users and society alike.

I argue here that drug prohibition, rather than drug use, causes most ills typically attributed to drugs. I show that prohibition’s ability to reduce drug use is modest rather than dramatic, so any benefits of reduced consumption are moderate at best. I demonstrate that prohibition has a range of negative consequences, including increased violence, reduced health for drug users, transfers to criminals, and diminished civil liberties; thus, prohibition exacerbates many of the problems it allegedly solves. I explain that reduced drug use is not, in general, an appropriate goal for government policy. And I demonstrate that, even if a policy-induced reduction in drug consumption is desirable, prohibition is a terrible choice for achieving this goal.

I base these conclusions on an economic analysis of drug prohibition. This analysis uses economic reasoning to determine the likely effects of prohibition on drug use, crime, health, productivity, product quality, and other outcomes. The analysis also examines evidence on how drugs and drug policy influence each of these outcomes. There is room for scientific disagreement about some of this evidence. But dispassionate examination supports the arguments for drug legalization rather than those for prohibition.

The remainder of the book proceeds as follows.

Chapter 2 reviews the standard economic analysis of prohibition. The discussion is “positive” rather than “normative,” meaning it identifies the effects of prohibition without taking a stand on whether prohibition is good or bad. The usual defense of prohibition assumes it substantially reduces drug use and, by so doing, lowers crime and improves the health and productivity of drug users. The analysis here shows, however, that prohibition-induced reductions in drug consumption are not necessarily large or even in the “desired” direction. Moreover, prohibition can increase rather than decrease crime and diminish rather than enhance health and productivity. In addition, prohibition can generate numerous undesirable consequences such as corruption, infringements on civil liberties, wealth transfers to criminals, unwarranted restrictions on medicinal uses of drugs, and insurrection in drug-producing countries. And these unintended consequences are possible even if prohibition has a substantial impact on drug use.

This positive analysis of prohibition therefore suggests two issues are central to the normative analysis of prohibition. The first is whether prohibition’s effect on drug consumption is “small” or “large,” and the second is whether prohibition increases or decreases crime. If the prohibition-induced change in drug consumption is small, any benefits that might result from reduced consumption are also small, implying the costs of prohibition almost certainly exceed the benefits. If prohibition increases rather than decreases crime, then it causes one of the main problems it attempts to alleviate, raising questions about prohibition even if it substantially reduces drug use. Thus, these two issues deserve special attention.

Chapter 3 addresses the effect of prohibition on drug consumption by examining cirrhosis death rates during the Prohibition period. Although not identical to current drug prohibition in structure or enforcement, alcohol prohibition is a natural laboratory for studying the effects of drug prohibition on drug consumption. Debates over prohibition routinely cite this episode as supporting one side or the other, but previous analyses have not controlled adequately for factors other than prohibition that might have influenced cirrhosis. The analysis here indicates alcohol prohibition had a modest effect on alcohol consumption, which implies drug prohibition has a modest effect on drug use. Auxiliary evidence from a variety of sources suggests the same conclusion.

Chapter 4 examines the effect of drug prohibition on violence. Prohibition advocates claim drug use causes violent behavior, while prohibition critics claim prohibition generates violence by forcing drug markets underground. These claims are not mutually exclusive, but it is important to determine if one or the other predominates in practice. The chapter addresses these competing claims by first examining homicide rates over the past century in the United States. The evidence that alcohol prohibition had a modest impact on alcohol consumption suggests drug prohibition has a modest impact in reducing violence, but this evidence is not by itself decisive. The chapter shows that both drug and alcohol prohibition coincided with increases in the homicide rate, consistent with the view that under prohibition, market participants substitute guns for lawyers in the resolution of disputes. The chapter then discusses the relation between prohibition and violence across countries. Again, the evidence indicates that vigorous enforcement of prohibition is associated with higher rather than lower rates of violence, contrary to the standard defenses of prohibition. And a broad range of other evidence is consistent with this conclusion.

In Chapters 5 and 6, I turn from the positive analysis of drug prohibition to the “normative” analysis, meaning the question of whether prohibition is desirable policy. The implication of Chapters 2–4 is that prohibition has numerous effects, beyond any decrease in drug consumption, including increased violence, greater corruption, diminished health for users, reduced civil liberties, and more. These effects are all undesirable, so the question is whether these consequences are worth paying in exchange for whatever reduction in drug consumption prohibition achieves.

Chapter 5 addresses this question by discussing under what conditions reduced drug consumption is an appropriate goal of public policy. Most policy discussions take as given that reduced drug consumption is beneficial, but this assumption does not follow from standard economic principles. Reduced drug consumption might be an appropriate goal if drug consumption generates externalities or if consumer choices about drug consumption are myopic, but the evidence shows that externalities from drugs, and myopia with respect to drugs, are both modest relative to exaggerated fear stories promulgated by prohibitionists. Moreover, neither externalities nor myopia related to drugs are obviously different from those of many legal goods. In any case, policies to reduce drug consumption make sense only if their benefits exceed their costs. Since prohibition has substantial enforcement costs and itself generates externalities, prohibition is a poor choice for reducing drug consumption.

Chapter 6 therefore asks what policy toward drugs achieves the best balancing of costs and benefits. Many modifications of current prohibition, such as diminished enforcement, decriminalization, medicalization, or legalization of marijuana only, are moves in a beneficial direction, but they are inferior to a regime in which drugs are legal. Within a legal regime, policies such as subsidized treatment, needle exchanges, public health campaigns, age restrictions, or limits on advertising might have desirable effects, but these policies also have negative consequences that can outweigh any positives. The bottom line is that legalization, with drugs treated like all other commodities, is the best policy for society overall.

CHAPTER 2

The Economic Analysis of Drug Prohibition

This chapter reviews the standard economic analysis of drug prohibition, with two main messages in mind. The first is that prohibition’s ability to reduce drug consumption is modest rather than dramatic, contrary to claims typically made by prohibition advocates. The second message is that, whether or not prohibition substantially reduces drug use, prohibition has numerous other effects, most of them undesirable.

Prices and Quantities under Prohibition: Supply

The most obvious effect of prohibition is to raise some costs of supplying drugs. Under prohibition, suppliers face legal punishments for manufacturing, distributing, and selling drugs. Equivalently, black market suppliers incur the costs of bribing law enforcement authorities and elected officials so as to avoid these legal punishments. The magnitude of these effects depends on the level of enforcement; weakly imposed prohibitions raise costs less than more stringently imposed prohibitions. Likewise, the degree to which prohibition allows exceptions (such as the medicinal use of drugs) affects the degree to which it promotes a black market and raises costs.

The increased costs created by prohibition imply that, other things equal, drug prices are higher, and drug consumption is lower, under prohibition. Other things are not likely to be equal, however, so the net effects of prohibition on costs, price, and consumption are more subtle.

To begin, black market suppliers of drugs can easily evade government regulations and taxes, including environmental regulations, employment discrimination laws, child-labor laws, antitrust laws, occupational health and safety regulations, tariffs and other import restrictions, income taxes, social security taxes, and excise taxes. These cost savings offset some of the increased costs caused by prohibition, implying a weaker effect on costs and price. Because firms in a legal market can always evade taxes (by acting as if their product were prohibited), costs and price under prohibition can never be lower than they would be in a legal market. But they need not be much higher.

A second reason prohibition might have a weak effect on costs is that increased expenditure for enforcement of prohibition can imply decreased expenditure for enforcement of other cost-increasing government policies. For example, expenditure for enforcement of prohibition might lead to diminished expenditure for enforcement of an excise tax on drugs, implying a small overall effect on costs. Thus, governments might choose prohibition over other policies because prohibition appears to cost nothing; this implies expenditure for enforcement of cost-increasing policies might actually be lower under prohibition.

A related reason prohibition might have a weak effect on costs is that the efficacy of enforcement expenditure is plausibly greater for taxation and regulation policies than for prohibition. Taxes and regulations create potential complainants who monitor businesses subject to these polices. These complainants include employees (labor market regulation, OSHA regulation), customers (false or misleading advertising), consumer watchdog groups (environmental regulation), and rival firms (most cost-increasing policies, including taxation). Prohibition creates no such complainants; indeed, prohibition outlaws mutually beneficial exchange between drug buyers and sellers. Prohibition enforcement must therefore rely on informants, sting operations, busts, and the like, all of which require enforcement expenditure. And the groups that might complain about noncompliance with tax and regulatory policies in a legal market are unlikely to complain in a black market, since this creates legal risks for the complainant. These considerations suggest that, for a given level of enforcement expenditure, the costs imposed by enforcement of a given policy are higher in a legal as opposed to an illicit market.

A third reason prohibition might have modest effects on costs is that prohibition affects the ability to advertise. In legal markets, advertising comprises a substantial fraction of the price of many goods. In a prohibited market, firms face increased costs of advertising, since such activities reveal their identity or location. This higher cost of advertising, in and of itself, suggests higher prices under prohibition, but there are indirect effects that might yield lower prices. If advertising enhances product differentiation, as with alcohol, cigarettes, or soft drinks, then advertising can make demand less sensitive to price. In this case, the de facto prohibition on advertising that occurs under prohibition means less advertising, moreprice-sensitive demands, and lower prices.

Additionally, advertising in many industries mainly divides a fixed pie of consumers among different firms rather than attracting new consumers. In these industries advertising is like an arms race. Each firm advertises to attract consumers from other firms, but each ends up with approximately the same market share. Worse, from the firm perspective, each has higher total costs due to advertising, so price is higher and consumption is lower. Firms in this situation would prefer not to advertise, but an agreement to do so would violate antitrust laws. Prohibition, however, effectively bans advertising, lowers industry costs, and increases the size of the industry.

A final factor that affects price under prohibition is prohibition’s impact on market power. One possibility is that prohibition facilitates evasion of antitrust laws, thereby increasing market power. Another is that prohibition lowers the marginal cost of violence, since drug traffickers are already evading law enforcement authorities. This means suppliers have an easier time maintaining collusive agreements because the parties can, literally, threaten to kill defectors. If these are the predominant effects of prohibition on market power, prices should be higher by more than the increase in direct costs.

On the other hand, certain enforcement activities appear to enhance competition. The arrest and incarceration of a dominant supplier can encourage price wars among remaining suppliers as they attempt to capture the arrested supplier’s market share. Increased enforcement can make it harder for firms to observe their rivals’ prices, which inhibits the ability to collude. In addition, enforcement can make it profitable to incur the fixed costs of new distribution networks or new evasion techniques, which then compete with existing arrangements. For example, government efforts to prevent Peruvian coca paste from being transported to Colombia for processing into cocaine caused Colombian processors to develop coca-growing capabilities in Colombia. Thus, the net effect of prohibition on market power is ambiguous and probably depends on both the level and kind of enforcement activities.

All of these considerations suggest rethinking the view that prohibition substantially raises the costs of supplying drugs. The overall effect is almost certainly to increase costs and thus price, but the magnitude of the increase is not obviously large on a priori grounds and must be determined empirically. Chapter 3 presents evidence based on prohibitions of alcohol, cocaine, and heroin in the United States.

Prices and Quantities Under Prohibition: Demand

In addition to affecting the supply side of the market, prohibition affects the demand side. Prohibition reduces the demand for drugs by imposing legal penalties for possession and by increasing uncertainty about product quality. Further, prohibition decreases demand if consumers exhibit “respect for the law.” At the same time, prohibition can increase demand by creating a “forbidden fruit.”

As with the supply side, the magnitude of the change in demand caused by prohibition depends on the nature of the law and on the degree to which it is enforced. In some cases prohibition does not impose penalties for possession of small quantities of drugs, and in many cases the penalties that exist are weakly enforced.

The degree to which prohibition in the United States imposes penalties for purchase or possession is arguably lax. Although there are more than 1.2 million possession arrests each year, there are more than 28 million drug users, and most purchase drugs on many occasions. Thus, the most obvious calculation — the number of arrests divided by the number of drug purchases — suggests low probabilities of arrest for mere purchase or possession. Moreover, many arrests for possession occur because the arrestee violated some other law — prostitution, theft, speeding, loitering, disorderly conduct, and so on — and was also found to possess drugs. Thus, otherwise law-abiding citizens who wish to purchase and consume drugs face minimal risk of arrest or other sanction.

(Continues…)Excerpted from Drug War Crimes by Jeffrey A. Miron. Copyright © 2004 The Independent Institute. Excerpted by permission of The Independent Institute.
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