Freeman

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An Economics Lesson for the Drug Czar

Is a Reduction in Illegal Drug Expenditure Good News?

JUNE 30, 2010 by E. FRANK STEPHENSON

A few years ago I heard a news report that then-drug czar General Barry McCaffrey considered it “good news” that Americans’ spending on illegal drugs had fallen to $57.3 billion in 1995 from $91.4 billion in 1988. The implication of the report was that the reduction was evidence of a successful anti-drug policy, presumably one that reduced drug usage. Elementary economics suggests otherwise.

The total expenditure on a product equals the number of units sold times the selling price. Other things equal, a lower selling price increases the number of units sold. Reduced expenditures on a product can be caused either by a lower price accompanied by a smaller percentage increase in quantity sold or by a lower quantity sold accompanied by a smaller percentage increase in price.

Which of the two scenarios applies to illegal drug usage? Illegal drugs, like the dreaded cigarette, can be habit-forming. Hence the amount people purchase probably does not respond strongly to changes in price. Thus the former scenario, in which total expenditure on illegal drugs falls because the unit price falls more than the quantity consumed rises, is correct. Consequently and contrary to what the drug czar wanted us to believe, the decrease in drug expenditure suggests that drug usage has increased.

If the drug czar can estimate the expenditure on drugs (no one willingly reports these transactions), he can certainly estimate drug usage. And if he can calculate drug consumption, then he could use the consumption data to directly report a decrease in drug usage (if one has actually occurred) rather than indirectly (and probably incorrectly) inferring a decrease in drug consumption using the expenditure estimate. (As an aside, McCaffrey suggested that the $57 billion spent on drugs could be used to send one million people to college; some would suggest that this might increase drug usage.)

In fairness it should be noted that other things may not be equal. It is possible that some external factor such as an advertising campaign has reduced the quantity of drugs demanded at each price, thereby reducing both the selling price and the number of units sold. Again, while this may be true, the expenditure data do not imply this conclusion. The drug czar’s evidence would be much more persuasive if he cited actual consumption data rather than expenditure data.

May Lessen Crime

Although the decrease in spending on illegal drugs suggests drug usage has increased, there was a bright spot in the drug czar’s expenditure numbers. Since the spending decline suggests that the price of drugs has decreased even if drug usage is up, the lower price of drugs reduces addicts’ need for drug money and as a result may lessen the crime committed to finance drug habits. Paradoxically, an increase in drug usage may be accompanied by lower crime.

This is not what the drug czar had in mind when he trumpeted the reduction in drug expenditure as good news. However, more than anything about the success of White House drug policy, what he revealed is a poor grasp of elementary economics. Perhaps even more depressing, the media reported the drug czar’s expenditure numbers without an iota of critical thought and, in the process, displayed its own woeful lack of economic knowledge.

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