A New Kind of Drug War


By Christopher Farrell Starting with Richard Nixon, every U.S. President has declared war on drugs. The FBI, CIA, DEA, military, and countless prosecutors have devoted enormous resources to combating narcotics over the past several decades. According to an estimate by Boston University economist Jeffrey A. Miron, federal, state, and local governments have put some $33 billion in resources toward prosecuting the war on drugs in recent years.

How is the return on that investment? Abysmal. The demand for such illegal drugs as marijuana, cocaine, and heroin remains strong. Drug lords and their cartels terrorize nations and local communities. Crime and corruption derived from the illegal drug trade flourish. U.S. prisons are crowded with drug-law offenders -- more than 54% of federal prisoners sentenced in 2004 were sent away for breaking drug laws.

REMEMBER PROHIBITION. Here's how Harvard University economist and BusinessWeek commentator Robert J. Barro summed up the record of the war on drugs in his paper Getting It Right: Markets and Choices in a Free Society: "The experience with drug enforcement shows that prohibitions of recreational drugs drive up prices, stimulate illegal activity, have only a moderate negative effect on consumption, and impose unacceptable costs in terms of high crime, expansion of prison populations, and deterioration of relations with the foreign countries that supply the outlawed products."

It's time to consider a dramatic shift in policy. Instead of the battle cry "war on drugs," let's try the mantra "legalization, regulation, and taxation." We should regulate narcotics just as we do cigarettes and alcohol, restricting sales to minors and imposing steep excise taxes.

Indeed, the model for dealing with alcohol is instructive. Banning alcohol outright in the U.S. was a public policy disaster. Ending Prohibition quickly cleaned up the liquor industry. Gangsters were denied a lucrative source of income, and violent crime associated with the business fell.

FEAR FOR KIDS. Similarly, legalizing drugs would eliminate much of the profit, corruption, and violence from the trade. The risk of death or impairment from contaminated drugs would decrease. And the shift in focus would free up scarce government resources at a time when the twin demands of an aging population and the war on terror are putting stress on the fiscal purse.

The notion of legalizing drugs isn't new. Milton Friedman, the dean of conservative economists, argued as long ago as 1972 that "legalizing drugs would simultaneously reduce the amount of crime and raise the quality of law enforcement." Yet the idea never garnered much support beyond a hard core of conservative economists, libertarian idealists, and the occasional hard-pressed mayor and discouraged drug warrior.

The reason: Fear that the post-legalization drop in drug prices would cause the ranks of addicted citizens to soar. For instance, it's estimated that cocaine sells for 10 to 40 times its free market price. So, even though many practitioners of the dismal science believed the benefits of legalization would far outweigh the cost, many middle-class voters looked at their kids and decided that the risks weren't worth taking.

PRICE MATTERS. Yet recent research suggests that legislators and voters should take a close look at legalization. A recent paper by Nobel laureate and University of Chicago economist Gary S. Becker, his faculty peer Kevin M. Murphy, and City University of New York economist Michael Grossman persuasively argues that fighting a war on drugs through legalizing and heavily taxing them could be more effective in curbing consumption than prohibition and prosecution.

Their highly theoretical paper, "The Economic Theory of Illegal Goods: The Case of Drugs," builds on years of empirical work into the economics of illegal drugs. A key insight of the literature is that price matters -- even with addictive substances. Just as lower prices for drugs encourage consumption, higher prices discourage it.

In another research paper, Grossman delved into the impact of price on the consumption of cigarettes, beer, and marijuana from 1975 to 2003. His results are intriguing. He found that the 70% increase in the real price of cigarettes since 1997 (thanks to the tobacco settlement with state attorneys general) explains almost the entire 12% reduction in the cigarette smoking participation rate since then. The 7% increase in the real price of beer from 1990 to 1992 accounts for almost 90% of the 4 percentage point reduction in binge drinking through 2003.

SHOCKING SUM. Similarly, the increase in the real price of marijuana from 1975 to 1992 accounts for 70% of the usage reduction during that time period. Falling prices contributed some 60% of the increase in substance abuse from 1992 to 1997, and another wild upswing in price powered 60% of the decline in toking during the remaining years under study.

To be sure, addictive drugs are hard to quit. Many people who manage to stop snorting or shooting up spend the rest of their lives fighting the urge to get high. Still, one can't ignore that price matters even in this market.

Grossman's results remind me of my bunk mate on the rust-bucket oil tanker we worked on in the late 1970s. He was a grizzled old-timer carrying the scars of years of union organizing. Those times were long gone, as was his habit of smoking several packs a day. One night, between sips of coffee, he told me that he once calculated how much he was spending a year on cigarettes. The sum -- a couple of thousand dollars even back then -- shocked him, and he quit.

NO PANACEAS. The Becker, Murphy, and Grossman analysis suggests that with the addition of a steep excise tax -- several hundred percentage points above the cost of wholesale production, for example -- the price of cocaine could be greater than the price the fruitless war on drugs supports. It's possible that consumption would be lower in a high-tax regime than it is in today's law-enforcement environment.

A high price would give some producers an incentive to go underground as well. But law enforcement could focus its efforts on a much smaller illegal economy. And the tax revenue could go toward funding treatment programs.

Let's be clear: There are no panaceas and no easy choices here. As a parent, I find the notion of making heroin or cocaine legally available at the corner liquor store frightening. Yet -- with the benefit of several decades' worth of hindsight -- legalization, taxation, and regulation appear superior to the current strategy of prohibition and prosecution. There's just too much human devastation, violent crime, corruption, disease, and wasted time and money embedded in the old approach.

I know that the cost of drug abuse and addiction -- including nicotine and alcohol -- is already substantial, especially measured by increased health-care expenditures and lower worker productivity. And I have no wish to see the numbers of addicts increase. But there's the hope that with a carefully crafted new paradigm of legalization, there could be fewer users. That's positive. There's nothing positive to be derived from staying with the status quo. Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Sound Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online


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