Every American president since Nixon has engaged in a “war” on illegal drugs: cocaine, heroin, hashish, and the like. And every president without exception has lost this war. The explanation lies not in a lack of effort- indeed, I believe there has been too much effort- but rather in a basic property of the demand for drugs, and the effects of trying to reduce consumption of a good like drugs by punishing persons involved in its trade.
The war on drugs is fought by trying to apprehend producers and distributors of drugs, and then to punish them rather severely if convicted. The expected punishment raises the price that suppliers of drugs need to receive in order for them to be willing to take the considerable risks involved in the drug trade. The higher price discourages purchase and consumption of illegal drugs, as with legal goods and services. The harder the war is fought, the greater the expected punishment, the higher is the street price of drugs, and generally the smaller is the consumption of drugs.
Those suppliers who are caught and punished do not do very well, which is the typical result for the many small fry involved in distributing drugs. On the other hand, those who manage to avoid punishment- sometimes through bribes and other corrupting behavior-often make large profits because the price is raised so high.
This approach can be effective if say every 10% increase in drug prices has a large negative effect on the use of drugs. This is called an elastic demand. However, the evidence from more than a dozen studies strongly indicates that the demand for drugs is generally quite inelastic; that is, a 10% rise in their prices reduces demand only by about 5%, which means an elasticity of about ½. This implies that as drug prices rise, real spending on drugs increases, in this case, by about 5% for every 10% increase in price. So if the war on drugs increased the price of drugs by at least 200%- estimates suggest this increase is about right- spending on drugs would have increased enormously, which it did.
This increased spending is related to increased real costs of suppliers in the form of avoidance of detection, bribery payments, murder of competitors and drug agents, primitive and dnagerous production methods, and the like. In addition, the country pays directly in the form of the many police shifted toward fighting drugs, court time and effort spent on drug offenders, and the cost of imprisonment. The US spends about $40,000 per year per prisoner, and in recent years a sizeable fraction of both federal and state prisoners have been convicted on drug-related charges.
After totaling all spending, a study by Kevin Murphy, Steve Cicala, and myself estimates that the war on drugs is costing the US one way or another well over $100 billion per year. These estimates do not include important intangible costs, such as the destructive effects on many inner city neighborhoods, the use of the American military to fight drug lords and farmers in Colombia and other nations, or the corrupting influence of drugs on many governments.
Assuming an interest in reducing drug consumption- I will pay little attention here to whether that is a good goal- is there a better way to do that than by these unsuccessful wars? Our study suggests that legalization of drugs combined with an excise tax on consumption would be a far cheaper and more effective way to reduce drug use. Instead of a war, one could have, for example, a 200% tax on the legal use of drugs by all adults-consumption by say persons under age 18 would still be illegal. That would reduce consumption in the same way as the present war, and would also increase total spending on drugs, as in the current system.
But the similarities end at that point. The tax revenue from drugs would accrue to state and federal authorities, rather than being dissipated into the real cost involving police, imprisonment, dangerous qualities, and the like. Instead of drug cartels, there would be legal companies involved in production and distribution of drugs of reliable quality, as happened after the prohibition of alcohol ended. There would be no destruction of poor neighborhoods- so no material for “the Wire” HBO series, or the movie “Traffic”- no corruption of Afghani or Columbian governments, and no large scale imprisonment of African-American and other drug suppliers. The tax revenue to various governments hopefully would substitute for other taxes, or would be used for educating young people about any dangersous effects of drugs.
To be sure, there would be some effort by suppliers of drugs to avoid taxes by going underground with their production and distribution. But since there would then be a option to produce legally-there is no such option now- the movement underground would be much less than under the present system. As a result, the police could concentrate its efforts more effectively on a greatly reduced underground drug sector. We have seen how huge taxes on cigarettes in New York and elsewhere have been implemented without massive movement of production and distribution underground in order to avoid the taxes.
So legalization could have a greater effect in reducing drug use than a war on drug without all the large and disturbing system costs. How high the tax rate should be would be determined by social policy. This approach could accommodate a libertarian policy with legalization and low excise taxes, a socially “conservative” position that wants to greatly reduce drug use with very high tax rates, and most positions in between these two extremes. So if drug consumption was not considered so bad once it became legal, perhaps the tax would be small, as with alcoholic beverages in the US. Or perhaps the pressure would be great for very high taxes, as with cigarettes. But whatever the approach, it could be implemented far more successfully by legalizing drugs than by further efforts to heat up the failing war on illegal drugs.