Getting Real About the Economics of Cocaine

"Less Gasoline Available to U.S. Consumers" might be how headlines would read in major newspapers if reporters covered recent decreases in the supply of gasoline in the same way they're covering recent decreases in the supply of cocaine. Of course, such a headline wouldn't pass the laugh test. The supply of gasoline may be down 10 percent from last year, but anyone wanting to buy it may do so (without getting in a long line). The same could be said of cocaine, but that hasn't stopped newspapers from repeating President Bush's myth that we're winning the war on drugs.

According to a declassified report by the Drug Enforcement Administration (DEA), wholesale cocaine prices increased 33 percent on average in the United States between January and June 2007. Retail prices (the price cocaine users actually pay) increased an estimated 15 percent. For comparison purposes, this is the equivalent of gas prices at the pump going from $2.50 a gallon to $2.87 in six months.

There are many factors that could be causing cocaine prices to rise. Bush's drug czar cites recent arrests and seizures in Mexico. He could be right. Major busts of key players in the drug trade can sometimes disrupt the supply of cocaine, at least until drug cartels regroup and new players step in. It's equally likely, though, that the price increase is just a normal market fluctuation. The U.S. cocaine market has seen many short-lived price increases over the last 30 years, but the price of cocaine always ends up falling again.

An economist might tell you that one of the biggest factors contributing to increased cocaine prices is the decline of the U.S. dollar. Latin American drug cartels are increasingly shipping their drug supplies to Europe instead of the United States. This could be a two-for-one business strategy for them. Build their market share over there, while boosting their profits through higher prices here. (To the extent that drug cartels can use violence to maintain oligarchical control over cocaine markets, they can increase their profits by reducing the supply of cocaine).

Regardless of why cocaine prices are rising, it is far from clear that it is a good thing. Consider the following:

  • Higher drug prices contribute to increased violence in our communities. While most cocaine users are nonviolent, the minority who commit crimes to support their habit will commit even more crimes to pay for higher prices. Increased prices will also likely spark turf wars between violent drug gangs. In their best-selling book Freakonomics, economist Steven Levitt and journalist Stephen Dubner review the scientific literature and conclude that falling cocaine prices resulted in a 15 percent decline in violent crime in the 1990s. Sustained increases in cocaine prices could drive crime rates back up significantly.

  • Higher drug prices tend to lead to decreased purity, which can have devastating public health consequences. As cocaine purity falls, some people may switch from smoking or snorting cocaine to injecting it, increasing the spread of HIV/AIDS, hepatitis C and other infectious diseases unless sterile syringes are made widely available.

  • When gasoline prices rise some people drive less, but almost nobody gives up their addiction to their car. The same is likely true of cocaine. Those cocaine users who do quit will likely switch to other drugs, with unpredictable consequences. Will increased prices cause some cocaine users to switch to methamphetamine? Will that lead to an increase in domestic meth production? How many people will take smaller doses of cocaine, but complement it with Ecstasy, Adderall or other drugs? What will the health impact be?

  • Perhaps most significantly, rising drug prices leads to greater trafficking, not less. As the price of cocaine increases, it becomes more profitable to manufacture and sell cocaine, which means more people will get into the market and more cocaine will be made and sold. This is one reason why supply-side drug policies are self-defeating.

The Bush administration is citing rising cocaine prices as a reason to give Mexico $1.5 billion for supply reduction efforts there. But even if successful, decreasing the supply would just make cocaine more valuable, boosting the profits of major drug cartels and increasing prohibition-related violence on both sides of the border. A more sensible approach would be to spend that $1.5 billion on drug treatment here at home. An estimated 20 percent of cocaine users account for 80 percent of the quantity consumed. Providing treatment to those who need it most could significantly reduce demand and make drug selling less profitable.

In one of the largest economic studies of the global cocaine market ever conducted, a RAND Corp. study for the U.S. Army and the White House Office of National Drug Control Policy found that drug treatment is ten times more effective at reducing cocaine abuse than drug interdiction, 15 times more effective than domestic law enforcement, and 23 times more effective than trying to eradicate cocaine at its source. Researchers concluded that, for every dollar invested in drug treatment, taxpayers save an estimated $7.46 in social costs. In contrast, taxpayers lose 85 cents for every dollar spent on source-country control, 68 cents for every dollar spent on interdiction and 48 cents for every dollar spent on domestic law enforcement.

President Bush announced his proposed "surge" in the war on drugs on Monday, and the new Democratic Congress now has a choice to make. Waste $1.5 billion on inefficient supply-side schemes that actually make drug trafficking more profitable, or hit the drug cartels where it really hurts by spending that money on drug treatment and reducing their customer base.

It should be an easy choice. As long as there is a demand for illegal drugs, there will be a supply to meet it.

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