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War on drugs

Author: Christiern Rose

War on drugs

Last week in the Times, Richard Branson, the Billionaire founder of the Virgin Group, called for an end to the `war on drugs’, arguing that only the `naive’ have not realised that this policy has failed. In fact, it may be far worse than that – the evidence suggests that the current weapons used in this war are actively making the situation worse.

Each year, the United States government spends billions of dollars to wage the “war on drugs”. The phrase – first coined by Richard Nixon in 1962- encompasses an arsenal of supply side policies with the objective of restricting drug availability.  Interventions include regulating precursors, dismantling production facilities, seizing shipments in transit and incarcerating suppliers.

The facts speak for themselves. Between 1985 and 2011, the Drug Enforcement Administration’s real annual budget has risen from $756 million to just over $2 billion, whilst the number of special agents has more than doubled. Over the same period, the street price of 0.1grammes of crack cocaine has fallen from $130 to just $30, whilst purity has fallen from 90% to 58%. The upshot is that crack is more affordable than ever. A number of empirical papers show that seizures of narcotics have no impact on affordability (DiNardo; 1993[1], Caulkins & Yuan[2]; 1998, Rose; 2012[3]).

The drug war is justified through invoking elementary theories of supply and demand: through restricting supply, enforcement policies aspire to drive up street prices and reduce consumption. In this framework, disruptive policies are akin to taxation of alcohol/tobacco products. I argue that the failure of the drug war has root in the fallacy of the elementary model in this context.

The elementary framework relies on buyers and sellers having perfect information. This is violated in at least two dimensions. First, the seller may “cut” their product with visually identical adulterants. For example, retail cocaine is frequently diluted with caffeine powder, available at a fraction of the cost of wholesale cocaine. Buyers do not observe purity prior to trade; hence the seller faces a strong incentive to rip them off. In such an environment, all that prevents the seller from always providing zero purity drugs is the knowledge that doing so will damage his reputation, reducing future demand for his product.  Second, buyers do not perfectly observe supply disruption; whether or not his shipment was seized is known only by the seller.

These characteristics have substantial implications for the impact of seizures on retail market conditions. Scarcity of wholesale narcotics provides sellers with a strong incentive to dilute their product, in spite of the harm done to their reputation. If sellers respond by cutting, seizures act to reduce purity today and prices tomorrow. Consequentially, in the long-run, increased enforcement results both in lower prices and lower purity. The empirical evidence is consistent with this mechanism:  estimates show that a standard deviation increase in the number of cocaine seizures causes both price and purity of crack cocaine to fall by around 4%. Moreover, since 1985, both price and purity have fallen steadily whilst DEA expenditure has risen. Finally, seizures have no effect on the amount of pure cocaine that may be purchased for a given price.

If the objective is to reduce the pure quantity of drugs consumed then supply disruption is successful by definition. However, if the objective is to curb initiation, price reductions are undoubtedly an undesirable outcome. Moreover, if cutting agents are harmful, purity reductions may pose health risks to users. The medical literature suggests that an increasingly popular cocaine adulterant is Levamisole, which causes long term harm to the immune system. Whether demand side policies perform any better is uncertain, though work by Rydell & Everingham (1994)[4] suggests that this may be the case.

[1] DiNardo, John. “Law enforcement, the price of cocaine and cocaine use.”Mathematical and computer Modelling 17, no. 2 (1993): 53-64.

[2] Yuan, Yuehong, and Jonathan P. Caulkins. “The effect of variation in high-level domestic drug enforcement on variation in drug prices.” Socio-Economic Planning Sciences 32, no. 4 (1998): 265-276.

[3] Rose, Christiern. The Impact of Supply Disruption in the War on Drugs: Can Seizures Raise Prices. Working Paper, 2012

[4] Rydell, C. Peter, and Susan S. Everingham. Controlling cocaine: Supply versus demand programs. Vol. 331. Rand Corporation, 1994

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