no third solution

Blogging about liberty, anarchy, economics and politics

Legalize ALL Drugs

February 27th, 2009

Last week I had a discussion about the legalization of drugs with a friend, who remained convinced that the legalization of drugs would cause an instant and damaging spike in the incidence of use/abuse despite what’s generally accepted as a relatively inelastic demand curve (and despite centuries of evidence to the contrary with alcohol) and that this spike in use/abuse would lead to an increase in violent crimes. Strangely enough he that Big Leaguers should be allowed to Roid Rage whenever they want, but that ordinary people shouldn’t be able to do lines of coke in their own living rooms without the fear that some Stasi Jackboot might kick down their doors, kill their Labrador retrievers, and haul them off to prison. There are countless flaws I could expose in the abbreviated summary of his arguments (above), but I’d like to take a more substantive approach:

People who overestimate the malevolence of human nature are quick to conclude that, upon legalizing marijuana and cocaine, for example, all of these drug dealers would quickly find another lucrative, criminal enterprise in which to engage. I reject this hypothesis for (at least) two reasons which come immediately to mind, but first let’s put the picture in perspective.

  • In Holland, the cannabis trade alone is valued at $3 Billion[1]. It is so profitable only because competition is artificially hindered.
  • Globally, the illicit drug trade is something like $1 Trillion per year. Even the production of opiates in U.S. military occupied and embattled Afghanistan has been increasing![2].
  • The U.S. alone spends over $20 Billion per year on the “drug war”, about one-third of which is used to incarcerate 250,000+ non-violent offenders, at an average cost of about $70/day[3].

If that sounds expensive, don’t stop there. The true cost of the drug war is far greater.

The explicit cost of incarceration is $70/inmate/day. The true cost would correctly include whatever productivity wouldn’t have been sucked out of the economy by the 1 in 3 state employees currently working in a correctional capacity. I’ve previously estimated that the true cost of incarceration is not the $28,000 widely reported, but rather that the true economic cost is closer to $100,000 per inmate, per year[4].

That works out to be $25 Billion annually, or about the size of the GM Bailout, in the U.S. economy alone!

The profits accruing in the illicit drug trade are kept artificially high by prohibition.

Any restriction in supply (partial or complete prohibition, etc.) only serves to cement the profitability of foreign cartels and warlords. If the cartels aren’t making money, then neither are the footsoldiers and corner dealers. Take away the monopoly profits, or eliminate the institution which encourages monopoly profits, and few people will want to waste their time on these endeavors.

Although some people would have you believe that your average, run-of-the-mill drug dealer is truly a “bad” person, the fact of the matter is that for most of them, they believe (rightly or wrongly) that selling controlled substances is the most lucrative opportunity afforded to them, even given the extreme risks involved[5].

In a report funded by the Wisconsin Policy Research Institute, researchers concluded that “drug sales in poor neighborhoods are part of a growing informal economy which has expanded and innovatively organized in response to the loss of good jobs.” The report characterizes drug dealing as “fundamentally a lower class response [to the information economy] by men and women with little formal education and few formal skills,” and the report notes “If the jobs won’t be created by either the public or private sector, then poor people will have to create the jobs themselves.”

At least one factor contributing to all crime (not just pseudo-crimes like drug-dealing) is lack of employment opportunities. Unable to earn a licit living, they will find another way to put food on the table. Some of them work off the books fixing cars, painting houses, etc. Others sell dope.

The availability of alternative means of earning incomes is artificially reduced.

There is a chapter in Freakonomics that examines drug gangs[6]. If I recall accurately, the authors find that the average drug dealer only earns something like $3 an hour, so, much less than minimum wage across the country which make it illegal for a gas station owner to hire someone for $4 an hour. There are so many other restrictions on who can be hired, how they must be employed, what they must be paid, what actions people are “permitted” or “licensed” by the state to perform, and the costs of these restrictions are borne disproportionately by the poor and the unskilled (who often happen to be poor). Inner cities everywhere are blights: vacant houses and buildings that man is forbidden to occupy, state-housing projects in gross disrepair, open fields that no man may farm. Unable to find employment, some of these people will eventually decide to take the other $4/hour job, where they face a one-in-four chance of being killed over a few rocks of crack.

Almost all violent crime can be traced back to the drugs, not because of some inherent quality in the drug itself, and not because of some malevolent human element, rather because the monopoly profits earned by cartels in the drug trade are sufficient to compensate for the costs of war, and the illusion of these profits is sufficient to entice those willing to do the dirty work. In reality, if we eliminate all of the pseudo-crimes like smoking pot or selling cocaine, pretty much all that’s left are actual crimes, against person and/or property, crimes against which it is infinitely easier to protect oneself.

  1. Kucharz, Christel. Holland: Cannabis Trade at All-Time High.
  2. No Third Solution archives: Afghanistan and Prohibition. 20-September-2006.
  3. Drug War Facts: Economics.
  4. No Third Solution archives: Police State. 2-May-2008.
  5. Hagedorn, John M., Ph.D., The Business of Drug Dealing in Milwaukee (Milwaukee, WI: Wisconsin Policy Research Institute, 1998), p. 3. (via Drug War Facts: Economics).
  6. Levitt, S. and Dubner, S. Freakonomics, Chapter 3: Why Do Drug Dealers Still Live with Their Moms?

401(k) – The Next Bubble?

February 9th, 2009

There’s a really large proportion of people who are more-or-less passively “investing” in 401(k) type funds — a large enough proportion that if, in addition to the speculative bubble in mortgages that destroyed all sorts of paper “wealth” over the last 12-24 months, a macro-bubble exists, a lot of people are going to be all sorts of financially FUBAR.

The unintended consequences of government intervention in individual retirement planning is terrifying: it’s so massive and affects so many people. I suggest that, as the working population grew over the last several decades, this process created its own macro bubble, for which there are a few contributing factors:

  1. Even if prospects are poor, it seems foolish to turn down “free” and tax-deferred money.
  2. The individual has relatively little control over the allocation of his funds, especially he can not “cash & hold”.
  3. The individual can’t liquidate his holdings unless he’s unemployed, deqlinquent on your mortgage, or otherwise altogether financially f**ked.
  4. There is no opt-out mechanism: even if fund managers think there is nothing worth buying, they have to buy.

For most people making small/minimum contributions, even abstaining from contributing to these plans would only make a barely noticeable difference in their take-home pay. Individuals, faced with the prospect of “free money” via employer-matched funds, as well as tax deferral, have a huge economic incentive to invest in these vehicles. People, faced with severe economic incentives to invest in these vehicles (“matching funds” and tax deferral) will more often than not, put 3% or 6% or 10% into a 401(k) type plan. Corporations get to include matched funds as part of total compensation, which is tax deductible, it’s like health insurance: “We offer this awesome Health Plan/401(k) plan as part of our total compensation package. You don’t have to sign up, but you don’t get any substitutions if you don’t, though.”

So, why wouldn’t someonesign up? Keep in mind that they’re not actually making a trade-off between A and B, they’re making trade-offs between A and nil. Now, the individual has essentially delegated her retirement savings to the fund. And the fund takes care of her retirement, so she doesn’t have to &mash; indeed 60% of working Americans think of their 401(k) as their primary retirement fund! But here’s the rub: The level of control which any individual can exercise over his account is relatively limited, for instance, Vin Suprynowicz tried to convert his holdings to physical gold, gold ETFs, mining shares, and finally to cash — he couldn’t do any of these! There are also strict limits on how and under what circumstances an individual may withdraw from her account, but typically one must be unemployed, delinquent on her mortgage, or have suffered the death of an immediate family member.

The bottom line is that people are contributing to these funds because they really don’t have another meaningful option. This is interesting, and terribly frightening, because I don’t think we’ve seen the tip of the iceberg yet.

The “value” of these funds have previously been buoyed by (essentially) forced contributions burgeoned by a growing workforce. Funds were being bought because money was coming in, and managers had no other option but to buy.

As the growth of the workforce slows or potentially declines, what happens to the values of all these funds? Or, to make mattes even worse, when the baby-boomers begin drawing down these funds (i.e., selling them) in order to draw a retirement income, what happens to their value when there’s nobody buying them on the other end?


(H/T: Vin Suprynowicz’s recent editorial.)

The Effects of Minimum Wage Hikes

July 1st, 2008

Yesterday night I was grocery shopping at the local Meijer. When I went to check out, it dawned on me that they had replaced about a dozen more cashiers with self-scan registers. I will spare you another tirade about the so-far-imperfect technology: it’s nice to be able to check out without waiting in line for the two cashiers on duty at 10pm, but it’s a pain in the ass when the register gives you an error after every item. Even when there is nobody else in line, and I only have one or two items, I’m still not convinced that these machines are saving me time.

But I’m fairly convinced that these machines are saving Meijer stockholders a boat-load of wage expenses. Installing a dozen more U-Scan registers was probably a substantial initial capital outlay, but it’s also eliminating a number of low-wage employment opportunities. Because the minimum wage is in the midst of a 40% hike, which came as no surprise to anyone, a number of people who were making $10 an hour (plus incidental benefits, taxes, etc.) scanning groceries are now unemployed (or about to be unemployed) and watching a machine scan groceries that they can no longer afford to buy without welfare assistance. When the wages due to labor are held artificially high, a few lucky employees are able to reap the benefits, but the rest of them are out of luck as labor-substitutes like capital equipment are made artificially more attractive from a profit-and-loss POV.

no third solution

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