Brock Lorber

More About: Drug War

Prohibition vs. Tax & Regulate – All Wrong Again

The preface to the UNODC World Drug Report 2009 is truly breathtaking.  For the first time, Executive Director Antonio Maria Costa is concerned enough about chatter from real people to acknowledge that there is a significant push for drug legalization.

Of course, it would not be a government report without mischaracterization and an army of straw men to be knocked over (original emphasis throughout).  Particularly striking is Costa's (Ph.D. in econ from UC-Berkeley) characterization of policy arguments as economic.

Economic Argument I

The economic argument for drug legalization says: legalize drugs, and generate tax income.  This argument is gaining favour, as national administrations seek new sources of revenue during the current economic crisis.

No, that's a fiscal and a public policy argument.  Economics only studies the resource tradeoff decisions that people make when acting to move from state A to state B.  Economics never, ever makes "should" arguments; rather individuals may make policy arguments based on economic analysis.

An economic argument (greatly simplified) would go something like this:

In equilibrium, the supply and demand for substance X is illustrated in figure 1.  All else being equal, a government prohibition on the manufacture, transportation, sale, and use of substance X restricts the supply of X as illustrated in figure 2.

Note that, although supply moves from S to S', the demand for X does not change.  That is because the willingness to pay a risk premium for X is already reflected in the downward-sloping demand curve.

The benefit of prohibition, as revealed by figure 2, is delta Q times some unit benefit in terms of public health.  This unit benefit would include health care cost, productivity gains, and reduction in violent and property crimes committed while under the influence of substance X, as well as quality of life intangibles.

The product of delta P x Q' is the total cost of the risk premium on substance X.  That cost is paid by individuals who earn the money legitimately through productive means and individuals whose willingness to commit violent and property crimes to obtain the risk premium have been activated by the prohibition.

Individuals in the latter group pose one portion of the cost of prohibition.  Beyond the diversion of time from productive employment or leisure to criminal activity, there is also a risk premium to be paid on the criminal activity itself.  To obtain the risk premium for substance X, individuals in this group must conduct some multiple of that premium in criminal activity to satisfy the additional risk premium.

For example, fenced goods may pay 20% of the value of the stolen good.  To obtain the value of one stolen good, then, the criminal must steal five of those goods at, presumably, five times the cost in time.

Individuals who pay the risk premium from resources earned through legitimate, productive means must also impose a cost of prohibition, although they are consumers of substance X with or without prohibition.  The risk premium they pay is diverted from other consumption or investment that this group would have in the absence of prohibition.

There are also costs of prohibition that are not revealed by figure 2.  All the costs of law enforcement, jails, property destruction by law enforcement, court costs, corruption, etc. must be included in any cost-benefit analysis.  Additionally, there is an economic cost associated with the diversion of law enforcement, courts, clerks, lawyers, and those imprisoned from productive employment.

An economic argument, then, is reduced to, "prohibition of substance X is economic only if the sum of the total risk premium paid plus the direct and economic costs of prohibition itself is less than the reduction in quantity consumed times the unit benefit."

Economic Argument II

Costa continues:
This legalize and tax argument is unethical and uneconomical.  It proposes a perverse tax, generation upon generation, on marginalized cohorts (lost to addiction) to stimulate economic recovery. ... The economic argument is also based on poor fiscal logic: any reduction in the cost of drug control (due to lower law enforcement expenditure) will be offset by much higher expenditure on public health (due to the surge of drug consumption).

Again, economics cannot make the "unethical" or "perverse" determination (at least as Costa presents it).  All economics can do is observe that legalize and tax does not remove the risk premium (delta P X Q' in figure 2).  Rather, legalize and tax merely shifts the recipient of some or all of the risk premium.  Also, as I have previously noted, there is no proposal currently on the table to lower law enforcement expenditure.

Instead, legalize and tax imposes additional costs in the form of compliance and revenue collection.  Proponents of legalize and tax have posited all sorts of revenue numbers that could be realized by taxing controlled substances, offsetting these new costs.  However, even the most conservative estimates require an outward shift in the supply curve which is unwarranted at the levels of taxation they propose.
Legalize and tax does have one benefit, however. That is the reclamation of productive labor from those who would otherwise be imprisoned for the non-violent manufacture, distribution, possession, and use of controlled substances.

The only economic argument regarding legalize and tax that can be made, then, is that, "to the extent that prohibition is uneconomic, legalize and tax is just as uneconomic."

Is Prohibition Economical?

Before we can answer the question of "is prohibition economical" we must first answer the question of "economical to whom?"

Costa identifies "marginalized cohorts" as those lost to addiction.  However, those individuals are smack dab in the middle of figure 2.  The truly marginalized are those on the far right of the demand curve, whose demand for controlled substances is zero quantity at any cost.

If any of the claims by either prohibitionists or legalize and taxers contain any truth, we know that the truly marginalized group receives only some slim fraction of the intangible quality of life benefits of substance control.  We also know that they pay an infinitely disproportionate amount of the costs of prohibition (you can't divide by zero).  For an individual in this group to receive more benefit than the cost he incurs, the unit benefit of prohibition must necessarily be astronomically high.

But, consider that three of the last four US Presidents are admitted drug users.  The political class cannot keep drugs off their streets, can't keep them out of their prisons, and can't even keep drugs out of their own bodies.  It is highly doubtful that prohibition results in any unit benefit, let alone one high enough to benefit the marginal group of non-drug users over the costs they are forced to pay.

With no benefit and all cost to drug users, and doubtful benefit and demonstrated cost to non-drug users, the only group left that may derive some economic benefit from prohibition is potential drug users.  However, beyond the problem of demonstrating any unit benefit to this group, there is also the problem of population.  It is impossible to know how many people are in this group unless and until they reveal themselves as drug consumers.

Any claims of net benefit (or net cost) to this group, then, is the product of two unknowable numbers.  At best, we can make an educated guess and all the relevant medical and sociological data are trending toward net cost.  There is little or no data that would support a net benefit large enough to this group to justify the costs prohibition imposes on drug users and non-users.

Certainly, neither Costa nor the tax and regulate crowd have provided any data to support either prohibition or legalize and tax as an economical solution to the perceived problem of drug use.  Rather, every hollow argument they make supports ending prohibition by dismantling the prohibition apparatus.


1 Comments in Response to

Comment by Bob Podolsky
Entered on:

Great article! Excellent analysis! The only issue on which I would have like to have seen more discussion is the financial benefits that some people derive from prohibition.

Clearly, besides the elevated profits derived by drug suppliers due to prohibition, there are legions of politicians, police officials, judges, lawyers, prison personnel, and police equipment manufacturers who also benefit from prohibition.

If I were a billionaire drug-lord, I would contribute heavily to the campaign funds of every federal politico who might be persuaded to keep up the war on drugs. To do so would certainly be "economic" from my point of view.

Do you have any doubt that such "legal bribery" is actually taking place?

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