The Economics of Legalizing Drugs

BY RICHARD J. DENNIS

LAST YEAR FEDERAL AGENTS IN SOUTHERN CALIFORNIA BROKE THE SIXdollar lock on a warehouse and discovered twenty tons of cocaine. The raid was reported to be the largest seizure of illegal narcotics ever. Politicians and law-enforcement officials heralded it as proof not only of the severity of our drug problem but also of the success of our interdiction efforts, and the need for more of the same. However, in reality the California raid was evidence of nothing but the futility and irrationality of our current approach to illegal drugs. It is questionable whether the raid prevented a single person from busing cocaine. Addicts were not driven to seek treatment. No drug lord or street dealer was put out of business. The event had no perceptible impact on the public’s attitude toward drug use. People who wanted cocaine still wanted it—and got it.

If the raid had any effect at all, it was perverse. The street price of cocaine in southern California probably rose temporarily, further enriching the criminal network now terrorizing the nation’s inner cities. William Bennett, the director of national drug-control policy, and his fellow moral authoritarians were offered another opportunity to alarm an already overwrought public with a fresh gust of rhetoric. New support was given to a Bush Administration plan that is meant to reduce supply but in fact guarantees more money to foreign drug lords, who will soon become the richest private individuals in history.

Indeed, Americans have grown so hysterical about the drug problem that few public figures dare appear soft on drugs or say anything dispassionate about the situation. In a 1989 poll 54 percent of Americans cited drugs as the nation’s greatest threat. Four percent named unemployment. It is time, long past time, to take a clear-eyed look at illegal drugs and ask what government and law enforcement can really be expected to do.

Drug illegality has the same effect as a regressive tax: its chief aim is to save relatively wealthy potential users of drugs like marijuana and cocaine from self-destruction, at tremendous cost to the residents of inner cities. For this reason alone, people interested in policies that help America’s poor should embrace drug legalization. It would dethrone drug dealers in the ghettos and release inner-city residents from their status as hostages.

Once the drug war is considered in rational terms, the solution becomes obvious: declare peace. Legalize the stuff. Tax it and regulate its distribution, as liquor is nowtaxed and regulated. Educate those who will listen. Help those who need help.

Arguments for the benefits of drug legalization have appeared frequently in the press, most of them making the point that crime and other social hazards might be reduced as a result. This article presents an economic analysis of the benefits of legalizing drugs.

Some Wrong Ways to Discuss the Drug Problem

IN ORDER TO MAKE ANY SORT OF SANE ARGUMENT about drugs, of course, we have to decide what the problem is. That isn’t as simple as it might seem, Bennett’s thirty-second sound bites notwithstanding. It’s easier to say what the drug problem is not.

The drug problem is not a moral issue. There’s a streak of puritanism in the national soul, true, but most Americans are not morally opposed to substances that alter one’s mind and mood.

That issue was resolved in 1933, with the repeal of Prohibition. There is no question that drugs used to excess are harmful; so is alcohol. Americans seem to have no moral difficulty with the notion that adults should be allowed to use alcohol as they see fit, as long as others are not harmed.

The drug problem is not the country’s most important health issue. The use of heroin and cocaine can result in addiction and death; so can the use of alcohol and tobacco. In fact, some researchers estimate the yearly per capita mortality rate of tobacco among smokers at more than a hundred times that of cocaine among cocaine users. If the drug-policy director is worried about the effect on public health of substance abuse, he should spend most of his time talking about cigarettes and whiskey.

The drug problem is not entirely a societal issue—at least not in the sense that it is portrayed as one by politicians and the media. Drug dealing is a chance for people without legitimate opportunity. The problem of the underclass will never be solved by attacking it with force of arms.

So what is the problem? The heart of it is money. What most Americans want is less crime and less profit for inner-city thugs and Colombian drug lords. Less self-destruction by drug users would be nice, but what people increasingly demand is an end to the foreign and domestic terrorism—financed by vast amounts of our own money—associated with the illegal drug trade.

This, as it happens, is a problem that can be solved in quick and pragmatic fashion, by legalizing the sale of most drugs to adults. Virtually overnight crime and corruption would be reduced. The drug cartels would be shattered. Public resources could be diverted to meaningful education and treatment programs.

The alternative—driving up drug prices and increasing public costs with an accelerated drug war—inevitably will fail to solve anything. Instead of making holy war on the drug barons, the President’s plan subsidizes them.

Laws protecting children should obviously be retained. Some might question the effectiveness of combining legal drug use by adults with harsh penalties for the sale of drugs to minors. But effective statutory-rape laws demonstrate that society can maintain a distinction between the behavior of adults and that of minors when it truly believes such a distinction is warranted.

Legalization would require us to make some critical distinctions among drugs and drug users, of course. The Administration’s plan approaches the drug problem as a seamless whole. But in fact crack and heroin are harmful in ways that marijuana is not. This failure to distinguish among different drugs and their consequences serves only to discredit the anti-drug effort, especially among young people. It also disperses law-enforcement efforts, rendering them hopelessly ineffective. Instead of investing immense resources in a vain attempt to control the behavior of adults, we should put our money where the crisis is. Why spend anything to prosecute marijuana users in a college dormitory when the focus should be on the crack pusher in the Bronx schoolyard?

The appropriate standard in deciding if a drug should be made legal for adults ought to be whether it is more likely than alcohol to cause harm to an innocent party. If not, banning it cannot be justified while alcohol remains legal. For example, a sensible legalization plan would allow users of marijuana to buy it legally. Small dealers could sell it legally but would be regulated, as beer dealers are now in states where beer is sold in grocery stores. Their suppliers would be licensed and regulated. Selling marijuana to minors would be criminal.

Users of cocaine should be able to buy it through centers akin to state liquor stores. It is critical to remove the black-market profit from cocaine in order to destabilize organized crime and impoverish pushers. Selling cocaine to minors would be criminal, as it is now, but infractions could be better policed if effort were concentrated on them. Any black market that might remain would be in sales of crack or sales to minors, transactions that are now estimated to account for 20 percent of drug sales.

Cocaine runs the spectrum from coca leaf to powder to smokable crack; it’s the way people take it that makes the difference. Crack’s effects on individual behavior and its addictive potential place it in a category apart from other forms of cocaine. The actual degree of harm it does to those who use it is still to be discovered, but for the sake of argument let’s assume that it presents a clear danger to people who come in contact with the users. A crack user, therefore, should be subject to a civil fine, and mandatory treatment after multiple violations. Small dealers should have their supplies seized and be subject to moderate punishment for repeat offenses. Major dealers, however, should be subject to the kinds of sentences that are now given. And any adult convicted of selling crack to children should face the harshest prison sentence our criminal-justice system can mete out.

The same rules should apply to any drug that presents a substantial threat to others.

A serious objection to legalizing cocaine while crack remains illegal is that cocaine could be bought, turned into crack, and sold. But those who now buy powder cocaine could take it home and make it into crack, and very few do so. Moreover, legal cocaine would most likely be consumed in different settings and under different circumstances than still-illegal crack would be. Researchers believe that more-benign settings reduce the probability of addiction. Legalization could make it less likely that cocaine users will become crack users. In addition, an effective dose of crack is already so cheap that price is not much of a deterrent to those who want to try it. No price reduction as a result of the legalization of cocaine, then, should lead to a significant increase in the number of crack users.

As for heroin, the advent of methadone clinics shows that society has realized that addicts require maintenance. But there is little practical difference between methadone and heroin, and methadone clinics don’t get people off methadone. Heroin addicts should receive what they require, so that they don’t have to steal to support their habit. This would make heroin unprofitable for its pushers. And providing addicts with access to uninfected needles would help stop the spread of AIDS and help lure them into treatment programs.

What the Drug War Costs and What We Could Save

THE MAJOR ARGUMENT AGAINST LEGALIZATION, and one that deserves to be taken seriously, is a possible increase in drug use and addiction. But it can be shown that if reasonable costs are assigned to all aspects of the drug problem, the benefits of drug peace would be large enough to offset even a doubling in the number of addicts.

Any numerical cost-benefit analysis of drug legalization versus the current drug war rests on assumptions that are difficult to substantiate. The figures for the costs of drug use must be estimates, and so the following analysis is by necessity illustrative rather than definitive. But the numbers used in the analysis below are at least of the right magnitude; most are based on government data. These assumptions, moreover, give the benefit of the doubt to the drug warriors and shortchange proponents of drug legalization.

The statistical assumptions that form the basis of this cost-benefit analysis are as follows:

阄 The social cost of all drug use at all levels can be estimated by assuming that America now has two million illicit-drug addicts. Slightly more than one million addicts use cocaine (including crack) about four times a week; 500,000 addicts use heroin at about the same rate. This means that there are about 1.5 million hardcore addicts. Some experts argue that the figures for addiction should be higher. An estimate of the social cost of drug use should also take into account casual use, even if the social cost of it is arguable; 10 million people, at most, use cocaine and other dangerous drugs monthly. To ensure a fair estimate of social cost, let’s assume that America now has two million drug addicts.

阄 Legalization would result in an immediate and permanent 25 percent increase in the number of addicts and the costs associated with them. This projection is derived by estimating the number of people who would try hard drugs it they were legalized and then estimating how many of them would end up addicted. In past years—during a time when marijuana was more or less decriminalized— approximately 60 million Americans tried marijuana and almost 30 million tried cocaine, America’s most popular hard drug. (It is fair to assume that nearly all of those who tried cocaine also tried marijuana and that those who haven’t tried marijuana in the past twenty-five years will not decide to try decriminalized cocaine.) This leaves 30 million people who have tried marijuana but not cocaine, and who might be at risk to try legal, inexpensive cocaine.

In a 1985 survey of people who voluntarily stopped using cocaine, 21 percent claimed they did so because they feared for their health, 12 percent because they were pressured by friends and family, and 12 percent because the drug was too expensive. The reasons of the other half of those surveyed were unspecified, but for the purpose of this exercise we will assume that they stopped for the same reasons in the same proportions as the other respondents. (Interestingly, the survey did not mention users who said they had stopped because cocaine is illegal or out of fear of law enforcement.) It seems reasonable to assume that many people would decide not to use legalized drugs for the same reasons that these experimenters quit. Therefore, of the 30 million people estimated to be at risk of trying legal cocaine, only about a quarter might actually try it—the quarter that is price-sensitive, because the price of cocaine, once the drug was legalized, would plummet. This leaves us with approximately 7.5 million new cocaine users. How many of them could we expect to become cocaine addicts? The estimate that there are now one million cocaine addicts suggests a onein-thirty chance of addiction through experimentation. Thus from the 7.5 million new users we could expect about 250,000 new addicts, or an increase of 25 percent over the number of cocaine addicts that we now have. We can assume about the same increase in the number of users of other hard drugs.

Those who argue that wide availability must mean significantly higher usage overlook the fact that there is no economic incentive for dealers to push dirt-cheap drugs. Legalization might thus lead to less rather than more drug use, particularly by children and teenagers. Also, the public evinces little interest in trying legalized drugs. Last year, at the direction of this author, the polling firm Targeting Systems Inc., in Arlington, Virginia, asked a nationwide sample of 600 adults, “If cocaine were legalized, would you personally consider purchasing it or not?" Only one percent said they would.

阀 The drug war will result in a 25 percent decrease in drug use. That’s the midpoint in William Bennett’s ten-year plan to cut drug use by 50 percent by the year 2000. Since this figure is based on Bennett’s official prediction, we might expect it to be highly optimistic. But to demonstrate the enormous benefits of legalization, let’s accept his rosy scenario.

阄 The drug war will cost government at all levels $30 billion a year. Keeping drugs illegal costs state and local law-enforcement agencies approximately $10 billion a year—a conservative figure derived from the costs of arresting, prosecuting, and imprisoning several hundred thousand people a year for drug violations. Bennett recently implied before Congress that state governments will need to spend as much as $10 billion in new money when he was asked about what it will cost to keep in prison a higher proportion of the country’s 20 million or more users of hard and soft drugs. The drug war will also cost the federal government about $10 billion a year, mostly in law enforcement—about what Congress has agreed to spend in the next fiscal year.

If marijuana and cocaine were legalized and crack and all drugs for children remained illegal, about 80 percent of current illegal drug use would become legal. This would permit savings of 80 percent—or $8 billion—of the current costs of state and local law enforcement. By rolling back the war on drugs, we could save up to all $20 billion of projected new federal and state expenditures.

阄 The current dollar volume of the drug trade is approximately $100 billion a year. If Bennett’s prediction is accurate and drug consumption is cut by half over the next ten years, Colombian drug lords will still receive, on average, $3.75 billion a year, assuming that they net five percent of gross receipts—a conservative estimate. The money reaped by drug lords can be used for weapons, planes, and bombs, which could necessitate U.S. expenditures of at least one dollar to combat every dollar of drug profits if a drug war turned into real fighting.

If legalized, taxed drugs were sold for a seventh or an eighth of their current price—a level low enough for illegal dealing to be financially unattractive—the taxes could bring in at least $10 billion at the current level of usage.

阄 The most important—and most loosely defined—variable is the social cost of drug use. The term “social cost” is used indiscriminately. A narrow definition includes only health costs and taxes lost to the government through loss of income, and a broad definition counts other factors, such as the loss of the personal income itself and the value of stolen property associated with drug use. The Alcohol, Drug Abuse, and Mental Health Administration has estimated that drug and alcohol abuse cost the nation as much as $175 billion a year, of which alcohol abuse alone accounts for at least $115 billion. These figures probably include costs not really related to drug use, as a result of the Administration’s zeal to dramatize the drug crisis. We will assume that $50 billion a year is a realistic estimate of the share for drug use.

Once these usually qualitative factors have been assigned numbers, it is possible to estimate how much the drug war costs in an average year and how much drug peace might save us. Again, this assumes that 25 percent fewer people in a mid-point year will use drugs owing to a successful drug war and 25 percent more people will use drugs with the establishment of drug peace.

If we choose drug peace as opposed to drug war. we’ll save $10 billion a year in federal law enforcement, $10 billion a year in new state and local prosecution, about $8 billion a year in other law-enforcement costs (80 percent of the current $10 billion a year), about $6 billion a year in the value of stolen property associated with drug use (80 percent of the current $7.5 billion), and $3.75 billion a year by eliminating the need to match the Colombians drug profits dollar for dollar. We’ll also benefit from taxes of $12.5 billion. These social gains amount to $50.25 billion.

If use rises 25 percent, instead of declining by that amount, it will result in a social cost of $25 billion (50 percent of $50 billion). Therefore, the net social gain of drug peace is $25.25 billion. If legalization resulted in an immediate and permanent increase in use of more than 25 percent, the benefits of drug peace would narrow. But additional tax revenue would partly make up for the shrinkage. For example, if the increase in use was 50 percent instead of 25 percent, that would add another $12.5 billion in social costs per year but would contribute another $2.5 billion in tax revenue.

At the rate at which those numbers converge, almost a 100 percent increase in the number of addicts would be required before the net benefits of drug peace equaled zero. This would seem to be a worst-case scenario. But to the drug warriors, any uncertainty is an opportunity to fan the flames of fear. Last year Bennett wrote, in The Wall Street Journal, “Of course, no one . . . can say with certainty what would happen in the U.S. if drugs were suddenly to become a readily purchased product. We do know, however, that whenever drugs have been cheaper and more easily obtained, drug use—and addiction— have skyrocketed.” Bennett cited two examples to prove his thesis: a fortyfold increase in the number of heroin addicts in Great Britain since the drug began to he legally prescribed there, and a 350 percent increase in alcohol consumption in the United States after Prohibition.

In fact experts are far from certain about the outcome of the British experiment. The statistics on the increase in the number of drug abusers are unreliable. All that is known is that a significant rise in the number of addicts seeking treatment took place. Moreover, according to some estimates, Britain has approximately sixty-two addicts or regular users of heroin per 100,000 population (for a total of 30,000 to 35,000), while the United States has 209 heroin addicts or users per 100,000 population, for a total of 500,000. And very few British heroin addicts engage in serious crime, unlike heroin addicts in America. Bennett’s criticism notwithstanding, the British apparently have broken the link between heroin addiction and violent crime.

As for Prohibition, its effects were hardly as dramatic as Bennett implied. During 1916-1919 per capita consumption of pure alcohol among the U.S. drinking-age population was 1.96 gallons a year; during Prohibition it dropped to 0.90 gallons; after Repeal, during 1936-1941, it went up about 70 percent, to 1.54 gallons.

And how does Bennett explain the experience of the Netherlands, where the decriminalization of drugs has resulted in decreased use? Does he think that what made all the difference in Holland is the fact that it has a smaller underclass than we do? In essence, the Dutch policy involves vigorous enforcement against dealers of hard drugs, official tolerance of soft drugs such as marijuana and hashish, and decriminalization of all users. The number of marijuana users began decreasing shortly after the Dutch government decriminalized marijuana, in 1976. In 1984 about four percent of Dutch young people age ten to eighteen reported having smoked marijuana— roughly a third the rate among minors in the United States. In Amsterdam the number of heroin addicts has declined from 9,000 in 1984 to fewer than 6,000 today. Over that same period the average age of addicts has risen from twenty-six to thirty-one, indicating that few new users have taken up the habit. And there is no evidence that crack has made inroads among Dutch addicts, in contrast to its prevalence in America.

Amsterdam is a capital city close in size (population 695,000), if not in culture and economic demographics, to Washington, D.C. (population 604,000). Amsterdam had forty-six homicides last year, of which perhaps 30 percent were related to the drug trade. Washington had 438 homicides, 60 to 80 percent of which were drug-related. The rate of homicides per 100,000 population was 6.6 in Amsterdam, less than a tenth the rate of 72.5 in Washington.

Holland’s strategy is one of only two that have been shown to cause a real decline in drug use. The other is Singapore’s, which consists of imposing the death penalty on people caught in possession of as little as fifteen grams of heroin. If this is Bennett’s fallback position, perhaps he should say so explicitly.

Some Objections Considered

THE FEAR THAT LEGALIZATION WOULD LEAD TO increased drug use and addiction is not, of course, the only basis on which legalization is opposed. We should address other frequently heard objections here.

阄 Crack is our No. 1 drug problem. Legalizing other drugs while crack remains illegal won’t solve the problem. Although crack has captured the lion’s share of public attention, marijuana has always commanded the bulk of law-enforcement interest. Despite de facto urban decriminalization, more than a third of all drug arrests occur in connection with marijuana—mostly for mere possession. Three fourths of all violations of drug laws relate to marijuana, and two thirds of all people charged with violation of federal marijuana laws are sentenced to prison (state figures are not available).

Crack appears to account for about 10 percent of the total dollar volume of the drug trade, according to National Institute on Drug Abuse estimates of the number of regular crack users. Legalizing other drugs would free up most of the law-enforcement resources currently focused on less dangerous substances and their users. It’s true that as long as crack remains illegal, there will be a black market and associated crime. But we would still reap most of the benefits of legalization outlined above.

阄 Legalization would result in a huge loss in productivity and in higher health-care costs. In truth, productivity lost to drugs is minor compared with productivity lost to alcohol and cigarettes, which remain legal. Hundreds of variables affect a person’s job performance, ranging from the consumption of whiskey and cigarettes to obesity and family problems. On a purely statistical level it can be demonstrated that marital status affects productivity, yet we do not allow employers to dismiss workers on the basis of that factor.

If legal drug use resulted in higher social costs, the government could levy a tax on the sale of drugs in some rough proportion to the monetary value of those costs— as it does now for alcohol and cigarettes. This wouldn’t provide the government with a financial stake in addiction. Rather, the government would be making sure that users of socially costly items paid those social costs. Funds from the tax on decriminalized drugs could be used for anti-drug advertising, which could be made more effective by a total ban on drug advertising. A government that licenses the sale of drugs must actively educate its citizens about their dangers, as Holland does in discouraging young people from using marijuana.

阄 Drug legalization implies approval. One of the glories of American life is that many things that are not condoned by society at large, such as atheism, offensive speech, and heavy-metal music, are legal. The well-publicized death of Len Bias and other harrowing stories have carried the message far and wide that drugs are dangerous. In arguing that legalization would persuade people that drug use is safe, drug warriors underestimate our intelligence.

阄 Any restriction on total legalization would lead to continuing, substantial corruption. Under the plan proposed here, restrictions would continue on the sale of crack and on the sale of all drugs to children. Even if black-market corruption continued in those areas, we would experience an immediate 80 percent reduction in corruption overall.

阄 Legalization is too unpredictable and sweeping an action to be undertaken all at once. It would be better to establish several test areas first, and evaluate the results. The results of such a trial would probably not further the case of either side. If use went up in the test area, it could be argued that this was caused by an influx of people from areas where drugs were still illegal; if use went down, it could be argued that the area chosen was unrepresentative.

阄 Even if current drugs are legalized, much more destructive drugs will be developed in the future. The most destructive current drug is crack, which would remain illegal. Many analysts believe that the development of crack was a marketing strategy, since powder cocaine was too expensive for many users. If cocaine had been legal, crack might never have been marketed. In any case, it a drug presents a clear danger to bystanders, it should not be legal.

阄 No matter how the government distributes drugs, users will continue to seek greater quantities and higher potency on the black market. If the government restricts the amount of a drug that can be distributed legally, legalization will fail. It must make drugs available at all levels of quantity and potency. The government should regulate the distributors but not the product itself. The model should be the distribution of alcohol through state-regulated liquor stores.

阄 Legalizing drugs would ensure that America’s inner cities remain places of hopelessness and despair. If drugs disappeared tomorrow from America’s ghettos, the ghettos would remain places of hopelessness and despair. But legalization would put most drug dealers out of business and remove the main source of financing for violent gangs. At the least, legalization would spare the inner cities from drugdriven terrorism.

阄 Marijuana in itself may be relatively harmless, but it is a “gateway drug.”Legalization would lead its users to more harmful and addictive drugs. While government studies show some correlation between marijuana use and cocaine addiction, they also show that tobacco and alcohol use correlate with drug addiction. Moreover, keeping marijuana illegal forces buyers into an illegal market, where they are likely to be offered other drugs. Finally, 60 million Americans have tried marijuana, and there are one million cocaine addicts. If marijuana is a gateway drug, the gate is narrow.

阄 Legalizing drugs would aggravate the growing problem of “crack babies.” The sale of crack would remain illegal. Even so, it is difficult to believe that anyone ignorant or desperate enough to use crack while pregnant would be deterred by a law. Laws against drug use are more likely to deter users from seeking treatment. Crack babies probably would have a better chance in a less censorious environment, in which their mothers had less to fear from seeking treatment.

Drug use in the United States can be seen as a symptom of recent cultural changes that have led to an erosion of traditional values and an inability to replace them. There are those who are walling to pay the price to try to save people from themselves. But there are surely just as many who would pay to preserve a person’s right to be wrong. To the pragmatist, the choice is clear: legalization is the best bet. □