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Monday, April 6, 2009

How We Caused The Mexico Drug War (And How To Fix It)

What are we to do about the drug violence in Mexico?

CNN reports: "Authorities on both sides of the U.S.-Mexico border blame drug cartels for a surge in violence in the region... Analysts point out that most of the violence is occurring along the U.S. border, particularly in Ciudad Juarez, Chihuahua and Tijuana. Drug cartel violence is also found on Mexico's western coast." Could the U.S. be to blame for some of this?

Secretary of State Hillary Clinton seems to think so: "The United States shares the blame for Mexican drug trafficking and the attendant violence that has killed thousands in the past year alone, Secretary of State Hillary Clinton said Wednesday. 'Our insatiable demand for illegal drugs fuels the drug trade,' she said en route to Mexico City." What if Secretary Clinton is half right and half wrong? What if the United States is partially responsible for the violent situation in Mexico, though not because of its citizens' insatiable demand, but rather its government's polices that restrict supply?

Here's the economic case for how the War on Drugs has incentivized violent crime in Mexico and why we should abolish the War on Drugs along with restrictive drugs laws:

The Law of Supply and Demand

This is a very short primer on microeconomic theory. If you already know how to read these graphs, you can skip down to the next bold heading.
The graph above depicts quantity on the x-axis and price on the y-axis, showing how the two relate. The red line is a demand curve and illustrates The Law of Demand- if something is cheaper you are willing to buy more of it and if something is more expensive you buy less. That's why as you follow the demand curve, when price goes down, the quantity demanded of a good goes up. The blue line is the supply curve, which illustrates The Law of Supply- that it is less lucrative to supply a good as the good's price decreases, so suppliers will want to supply less of it. Conversely- the more highly priced the good, the more of it they want to supply.

Suppliers can't sell more of a good than buyers are willing to buy and buyers can't buy more of a good than suppliers are willing to supply, so the point where the interests of all buyers and all suppliers in a market meet determines the quantity of goods produced and what the price of each unit of that good is. This is the place where the two lines intersect and it is called equilibrium. The total value of that market is the quantity of goods sold times the price of each individual unit, which is graphically represented by the square created by the two arrows and the two axes.

The Market For Drugs in the United States

-looks like this. Notice the demand curve is steeper than in the graph above. This represents the "insatiable demand" Secretary Clinton referred to. As the price of drugs increases, the quantity of drugs demanded decreases at a smaller rate than for other goods. Drugs have what economists call inelastic demand. This is why CNN's Jack Cafferty writes "The United States is the largest illegal drug market in the world. Americans want their weed, crack, cocaine, heroin, whatever. And they're willing to pay big money to get it."
He also notes that, "The drug suppliers are only too happy to oblige. The Mexican drug cartels now have operations in 230 American cities." Why is this? Notice something else about the market for drugs depicted above, the supply curve represented by the blue line is far to the left of the graph. This is because supply is restricted. How? The United States has restrictive drug laws at every level of government that keep supply down. Its national, state, and local police forces engage in drug interdiction, finding and removing drugs from the market and burning entire fields of drug crops. What would happen if the United States ended its war on drugs, abolished restrictive drug laws, and ended police interdiction?

The Market For Drugs in the U.S. Post-Legalization

Naturally, the supply of drugs would increase, represented in the graph below by the rightward shift of the supply curve. But look what happens to the price of drugs as well as the total value of the drug industry... they drastically decrease! Any economist armed with basic economic theory could predict such a price decrease as a response to increased supply. This shows us that U.S. drug policies as they currently stand create an artificially high price for drugs and an artificially high value for drug related activity and even violence.
This is why "drug suppliers are only too happy to oblige" America's drug habit, because U.S. and Mexican drug policies make it so lucrative by artificially inflating its price. The housing bubble's dead and gone, but the drug bubble is alive and well. The higher the returns, the more people are willing to get into the industry, the less risk-averse people become, and the more likely people are to engage in violence to secure the high profits at stake (especially if they are in an illegal market to begin with). This is why Will Wilkinson writes, "There’s a lot of money to be made in America’s black market for drugs and Mexican suppliers are willing to kill a lot of people to control those markets and capture the gains. Conservative estimates put the death toll of the war between rival Mexican gangs at over 5,000 in the last year alone."

The Economics of Drugs and Costs of the Drug War

Notice that the value of the industry increases slightly along the x-axis as a result of increased supply, but that this is significantly offset by the decreased value of the drug industry along the y-axis. Economists can predict this kind of result because as I noted earlier, the demand curve for drugs is inelastic.
Ending the violence and instability in Mexico may be enough of a reason in itself to legalize drugs, but legalization will do far more. It will save the United States government billions, good news during a recession. Consider the size of America's prison population, the percentage of those prisoners who are incarcerated for drug-related offenses, and the colossal number of tax dollars wasted to detain them. Wilkinson writes that "the United States of America, the Land of the Free, puts a larger portion of its population behind bars than any country on earth."

But that's not all! In addition to cutting costs, by legalizing and levying taxes, the U.S. could see some major tax revenue from a currently untaxed, extralegal industry worth billions. Cafferty quotes a senior Harvard economist who estimates that "
we spend $44 billion a year fighting the war on drugs. He says if they were legal, governments would realize about $33 billion a year in tax revenue. Net swing of $77 billion. Could we use that money today for something else? You bet your ass we could. Plus the cartels would be out of business. Instantly. Goodbye crime and violence."

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  1. Precisely! I did research on this issue five years ago regarding this at

  2. Thanks for the link... I might be perusing your paper again at some future point for source material as I continue to cover the war on drugs here.


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