by Elliott Morss, Morss Global Finance
Consider first that a drug is “a chemical substance that affects the processes of the mind or body”. That means nicotine, cocaine, opium, alcohol, heroin, amphetamines and food (yes – food) are drugs. And as I have written, all of them are dangerous. One would hope that US drug restrictions and penalties would reflect the dangers of the drugs. They do not. Changes are needed.
Prevalence of “Illicit” Drugs
According to the UN, there are globally almost 300 million “illicit drug” users, with Cannabis being used more than any other. 3.8% of the world’s population between 15-64, or almost 172 million people use cannabis. Worldwide, there are 41,000 metric tons of cannabis produced annually. At $10/gram, that generates $354 billion annually. Most of the high grade cannabis produced in the United States is grown in hidden fields or indoors. The number one producer is California with annual revenues of nearly $14 billion.
Opium derivatives are the second leading “illicit drug”, with 53 million people using them. Sales are approximately $262 billion annually. Amphetamines are next with 33 million users and sales of $19 billion.
According to the same report, 16 million people or 0.4% of the global population between 15 and 64 use cocaine. 994 metric tons of cocaine were produced in three Latin American countries (Bolivia, Colombia, and Peru). Most of this was probably sold in the US market. US retail prices fluctuate, but a recent estimate for a “pure” grain of cocaine in New York City was $123. That means the retail value of 994 metric tons is $122 billion.
Only 0.4% of the global population or 16 million people aged 15-64 use Ecstasy. The UN report estimates global Ecstasy consumption to be 131 metric tons. At a recently estimated $25 per tablet price, this works out to approximately $14 billion in sales (8.4 million).
Source: UNODC: World Drug Report 2012
As Table 2 indicates, “illicit drug” sales are a big business, more than $800 billion annually. In global expenditures, drugs rank just below alcohol and far more than cigarette sales.
Source: Morss, “Dangerous Addictions”
Addictions – How Dangerous?
What is your immediate reaction is to the term “illegal drug”? “Addictive and bad for my health” comes to mind. So what is an addiction? It is “a persistent, compulsive dependence on a behavior or substance”. Persistent? People do them “persistently” because they generate pleasure or satisfaction. For me, writing and exercise give me pleasure and satisfaction – I am hooked. Of course, addictions to some drugs can kill. But keep in mind, drugs do provide pleasure or there would not be $2.6 trillion spent on them annually.
How can we measure danger? Certainly deaths are an indication of danger, but hardly adequate. As I have pointed out, not nearly as many people die of drinking as smoking, but the effects of alcoholism are far more pervasive – loss of job, family violence, and auto accidents. The UN has come up with a more comprehensive health risk statistic to measure danger: Disability-Adjusted Life Years (DALYs). It measures years lost both because of a premature mortality and years lost due to time lived in less than full health. DALYs for dangerous addictions in high income countries are presented in Table 3.
It would appear that overeating is the most dangerous addiction measured both by DALYs and deaths. For overeating, I have included deaths and years lost from obesity, high blood pressure, high blood glucose, physical inactivity, high cholesterol, and low fruit/vegetable intake. Tobacco is the second most dangerous addiction, followed by alcohol. Note that illicit drugs hardly register.
US drug policies do not reflect the danger of each addiction. For food, the only restriction I know of is Mayor Bloomberg’s limitation on the size of soft drinks in NYC. Tobacco is different: it is heavily taxed with age restrictions on who can buy. Alcohol is moderately taxed with age restrictions and nuisance distribution rules that benefit wholesale distributors and liquor stores. The illicit drugs – Cannabis, opium derivatives, cocaine, amphetamines, and ecstasy – all with low DALYs and deaths, are banned.
The Prohibition Era – What are the Lessons?
The US engaged in a very interesting experiment between 1920 and 1933: it banned the manufacture, transportation and sale of alcohol. What was learned?
- Alcohol consumption did not end, despite significant efforts by Federal, state and local governments;
- Making the production and sale of alcohol illegal simply meant the market was served by criminals;
- Violence increased as different gangs fought over market control;
- Alcohol prices increased significantly;
- The quality of the alcohol products varied, creating greater health risks.
Do these lessons apply to illicit drugs? Has consumption been significantly curtailed? Has a criminal element emerged? And are the penalties and enforcement efforts working?
The UN provides estimates on the production and sale of illicit drugs. It mostly comes from drugs seized. The UN has found that seizures are not an indicator of interdiction success but rather and indications of increased production and consumption! It reports there are vibrant markets throughout the world for cannabis, opium, heroin, cocaine, and amphetamines.
Cannabis is a global phenomenon. It is not only consumed in all countries in the form of cannabis herb (marijuana), it is also grown in most of them. Much of the demand for cannabis can be covered by local production In the US, eradication data point to continuing extensive cannabis cultivation. The total number of eradicated cannabis plants continued to increase in 2010, with fewer of the eradicated plants having been cultivated outdoors (almost 10 million plants) and more cultivated indoors (almost half a million plants).
Estimated potential opium production was highest just before the global recession at almost 9,000 tons in 2007. Demand fell during the recession. In addition, there was crop failure in Afghanistan in 2010 that cut estimated global production to just under 5,000 tons. But production surged in 2011, back up to 7,000 tons. Prices have remained stable in the US over the last decade, suggesting there have not been supply limitations. The UN reports new supply sources are being created. In Myanmar, for example, potential opium production increased from 580 tons in 2010 to 610 in 2011, while in the Lao People’s Democratic Republic it increased from 18 tons in 2010 to 25 tons in 2011.
The US amphetamine market (amphetamines, methamphetamines and ecstasy) appears to be growing. US law enforcement officers report that the price of methamphetamines seized is down and the purity is up. The UN interprets this to mean the supply of methamphetamine has been increasing in every part of the United States. The UN reports further that the availability of “ecstasy” in the United States also appears to be on the increase, with more coming in via Canada. The quantity of “ecstasy” seized along the border between Canada and the United States increased from more than 1.9 million tablets in 2006 to more than 3.9 million tablets in 2010, the largest amount seized in half a decade and an indication of the rising importance of Canada as a source for the manufacture of ecstasy.
The UN reports that cocaine use “is stable”. There are some production declines in Colombia, but these are being made up by increased production in Bolivia and Peru. Higher end use prices are often an indication that supplies are being limited. That does not appear to be the case with cocaine. The UN reports that the “purity adjusted prices” have changed very little since 2003.
As was the case during the Prohibition era, it does not appear that efforts to limit the use of illicit drugs are working. Despite efforts to cut off supply and penalize marketers/users, illicit drug sales continue unabated.
Efforts to Cut Off Supplies
Since 1996, the US government has spent more than $150 billion to cut off illicit drug supplies. In 2011, the government spent more than $15 billion to reduce supplies, with 36% of that going to “domestic law enforcement” and 16% to “domestic interdiction”. More than $2 billion was spent internationally.
None of this has worked. More than a decade ago, I was a principal in a consulting firm that got contracts every year from the US Agency for International Development (USAID) to reduce Afghanistan’s opium production. And every year, we would heavily subsidize the introduction of one or more new crops: one year it would be asparagus, the next year, maybe flowers for the European market. And every time, once the subsidy stopped, the farmers went right back to poppies – they made much more money growing poppies.
Felipe Calderón, Mexico’s outgoing President, sees what is happening in his country. He is quoted in the Economist:
“…countries whose citizens consume drugs should find ‘market mechanisms’ to prevent their money from getting into the hands of criminals in Latin America. Are there still drugs in Juárez [a violent northern border city]? Well of course, but it has never been the objective…of the public-security strategy to end something that it is impossible to end, namely the consumption of drugs or their trafficking.… [E]ither the United States and its society, its government and its congress decide to drastically reduce their consumption of drugs, or if they are not going to reduce it they at least have the moral responsibility to reduce the flow of money towards Mexico, which goes into the hands of criminals. They have to explore even market mechanisms to see if that can allow the flow of money to reduce. If they want to take all the drugs they want, as far as I’m concerned let them take them. I don’t agree with it but it’s their decision, as consumers and as a society. What I do not accept is that they continue passing their money to the hands of killers.”
Calderón has reasons to be upset: more than 21,000 Mexicans are dying every year in the drug wars resulting from efforts to supply the US market.
With criminals supplying the US market, do lessons from Prohibition fit? Yes.
Domestic Penalties – Incarceration
With 730 prisoners per 100,000 population, the US has by far the highest incarceration rate of any country in the world. It is telling that 25% of the prisoners are non-violent drug offenders.
Richard Nixon signed the Comprehensive Drug Abuse Prevention and Control Act in 1970. Ronald Reagan passed the Anti-Drug Abuse Act in 1986. The result: incarceration for drug offenses has increased 12-fold from 40,000 in 1981 to nearly 500,000 by 2010. This accounted for two-thirds of the rise in the Federal inmate population since 1985. By 2006, 49% of state prisoners, or 656,000 individuals, were incarcerated for non-violent crimes. In 2008, 91% of Federal prisoners, or 165,457 individuals, were incarcerated for non-violent offenses. By 2003, 58% of all women in federal prison were convicted of drug offenses.
Lessons from Prohibition Revisited
The US bans illicit drugs. Has it worked? No. Recognizing that no country has come even close to doing as much as the US has to reduce illicit drug use, the US rankings on prevalence of use (among countries with populations of 1 million and up) are Cannabis – 4th, opium – 1st, Amphetamines – 5th, Cocaine – 5th, and Ecstasy – 11th. In fact, The US “drug war” is worse than Prohibition because it has created a criminal element resulting in nearly 100,000 homicides per year.
What Should Be Done?
Bans don’t work when there is a market. Illicit drugs should be legalized. The best we can do is what we do with cigarettes, a real killer: legalize them, restrict their sale to minors, tax them heavily, and run campaigns about their dangers. Of course, drug induced deaths, now running at 40,000 annually, will increase as will drug addiction.
But there will be real benefits. Pharmaceutical companies, rather than criminals will sell the drugs. That means the drug wars will stop. We will not longer send people caught with drugs to jail. In 2011, US jails had 2.3 million prisoners, with 25% in on drug-related offenses. US prisons cost $70 billion to operate or about $30,000 per inmate. If we freed half of them, prison costs would fall by $8.75 billion. Federal drug control efforts are costing $15 billion annually. We could eliminate them.
Cigarettes are heavily taxed. In the US, taxes levied per pack are the equivalent to a 71% rate. US governments collect about $24 billion in cigarette taxes every year. What if drugs were taxed at the same rates as cigarettes? Out of the $550.4 billion in global cigarette sales, the US share is approximately $79 billion. My sense is that the US share of illegal drug sales is much higher. So with global drug outlays of $874 billion, probably $400 billion is ending up in the US. If drugs were made legal, prices would come down dramatically: much of that price is a premium paid for illegal trades. So let us suppose that at lower prices, $100 billion of now-legal drugs were sold in the US. If the same effective tax rate was levied on drugs as cigarettes (70%), this would generate $70 billion in revenues for Federal, state and local governments. The states could certainly use the revenue. If the Federal share was the same as it is for cigarette taxes, drugs would generate $20 billion in taxes for the Federal government.
In summary, legalizing drugs would result in government savings of almost $25 billion. $70 billion in new taxes could be collected annually. With these savings and new taxes, we could afford to increase drug treatment programs, now costing $8.9 billion annually.
Above, I have laid out the economic arguments for legalizing drugs. But the most important point is there is nothing we can do to prevent their use. The lessons of Prohibition fit illicit drugs perfectly: banning them does not end consumption – it just creates a criminal class as suppliers.
“Those who cannot remember history are condemned to repeat it” – Santayana.