Thursday, 11 August 2011

The Fiscal Significance of Drugs

Reblogged from the Beckley Foundation, with thanks.

These past ten years, the war on drugs has led to repeated demands from academics and economists (including 3 Nobel Prize winners) to change the current flawed strategy that seems to ignore the laws of supply and demand. Milton Friedman has long advocated the legalization of drugs; indeed, the world famous economist even said that “if you look at the drug war from a purely economic point of view, the role of the government is to protect the drug cartel. That’s literally true.” And he isn’t the only one defending this point of view: Gary Becker (Nobel-Prize economist), George Shultz, the U.S. Secretary of State from 1982 to 1989, or National Humanities Medal winner Thomas Sowell have also endorsed the liberalization approach.

It has become clear that the war on drugs is not only ineffective, but expensive too, as a lot of money spent by governments is used to catch the people who buy or sell illegal drugs, to prosecute them in court, and to send them to jail. In the US, under current rules regarding parole and probation, a positive urine test for drugs can send a parolee or probationer to prison, regardless of the original offense. Over $100 billion is spent globally each year on enforcing the war on drugs[1] – the following figures are indeed quite thought-provoking:

Between 1919 and 1933, alcohol was illegal in the United States; historians believe that the decision to end prohibition on March 23 1933 was partly fuelled by the desire to raise tax revenue in the 1930s when the depression started. Today, the risk of a double-dip recession is very high, and cuts are necessary in many parts of the world. Yet the President’s Fiscal Year 2011 Nation requests $15.5 billion to reduce drug use in the United States. This represents an increase of $521.1 million (3.5%) over the FY 2010 enacted level of $15.0 billion. In the European Union, state expenditure on the drug problem costs about €34 billion [2] – in other words, an incredible amount of money that could be saved and used to address the economic difficulties faced by Western countries nowadays.

The illicit drug market, on the other hand, seems to be doing very well. According to the UN World Drug Report (2007), the market was estimated at $322 billion, and that despite the seizures and losses, the value of drugs increase substantially as the move from producer to consumer[3]. A study of drug dealers in Washington in the 1980s concluded that they could earn up to $30/h – compared with the $7/h average from legal employment.[4] Robert Neild, a Cambridge University professor, asserts that third world states are often “undermined, sometimes destroyed” by the violence and corruption that goes with this lucrative market. Clearly the war on drugs affects not only the economy of Western countries, but the stability of many developing countries as well, especially in South America. A regulated and legal market would “fix” many of these problems.

Legalisation is now more than ever necessary, and it is important for governments to address the problem in order to avoid other long-term socio-economic risks such as the “cyclic creation of permanent underclass”, as theorized by Eric Blumenson and Eva S. Nilsens[5]. The CATO Institute’s “The Budgetary Impact of Ending Drug Prohibition” estimates that drug legalization would yield tax revenue of $46.7 billion annually; assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco.

“A monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs”. – Gary S. Becker, Kevin M. Murphy and Michael Grossman, “The Economic Theory of Illegal Goods: The Case of Drugs”.

It is thus clear that money is being spent excessively, ineffectively and sometimes even dangerously. The billions of dollars spent by governments each year fail to address economic realities, and ignore the exponential demand for policy change.
– Sebastien Krier, Amanda Feilding


* Annual enforcement costs based on 2008 figures by researcher Timothy J Moore.

National Drug Intelligence Center, “National Drug Threat Assessment 2010,” - ------(Johnstown, PA: February 2010), p. 1.
Jeffrey A. Miron – “Making an Economic Case for Legalizing Drugs”




[1] Transform Drug Policy Foundation estimate, 2011: cf. ‘Estimating global spending on drug enforcement’ –
[2] Annual Report 2008: “The State of the Drugs Problem in Europe,” European Monitoring Centre for Drugs and Drug Addiction (Luxembourg: Office for Official Publications of the European Communities, 2008), p. 21.
[3] Drug War Facts, 6th Ed. – Common Sense for Drug Policy
[4] The Economist, July 28th – August 3rd 2001 (The case for legalising drugs)
[5] Blumenson & Nilsen – “How to construct an underclass, or how the War on Drugs became a war on education“

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