THE COST OF THE WAR ON DRUGS

Australian governments spend about $4.7 billion a year on the war on
drugs. This figure was arrived at using information from the
Australian Drug Law Reform Foundation and other sources and is an
estimate of how much the Government would save and get in tax revenue
if illicit drug sales were regulated and taxed the way tobacco is.

I compiled the figure because of a growing interest in the economic
consequences of the war on drugs launched by the US president Richard
Nixon in 1971. Dr Alex Wodak, director of the Alcohol and Drug Service
at Sydney's St Vincent's Hospital, observed in the Herald recently
that there is a growing belief - across the political landscape - the
war has been lost.

At the United Nations in 1998 there was acknowledgement that the war
was not going so well, and a pledged of a renewed effort in reducing
demand within 10 years. As the deadline approached, RAND Europe and
the Netherlands' Trimbos Institute reported to the European Commission
that they found no evidence the global drug problem had declined.
Interventions against drug producers, such as coca growers in South
America, caused local disruption but had little effect on global
supply. Drug prices generally declined, even in those Western
countries that toughened their law and order approach.

In 2005 a Harvard economist, Jeffrey Miron, produced a paper urging
legalisation of marijuana because the prohibition had minimal benefits
and could cause substantial harm, including the diversion of
government spending that might be better used. Five hundred economists
wrote to the American government supporting his call. They included
the Nobel laureates George Akerlof, Vernon Smith, and the late Milton
Friedman.

The debate in Australia could do with some economics. Dr Wodak said
this week: "After 40 years, it's time to consider just what the war on
drugs has really achieved, and at what cost. It would be very
interesting to know just how much Australia has spent on drug law
enforcement, and how much has been gained."

John Humphreys, an economist with the Centre for Independent Studies,
says: "It gets interesting when you try to do a cost-benefit analysis
on the prohibition. Basically, there aren't any benefits."

Others, of course, disagree. But in order to have a useful debate, we
need some idea of cost. I acknowledge my figure is an informed guess,
and invite comments and criticism. Neither this nor any other figure
necessarily means illicit drugs should be decriminalised.

The calculation of the annual cost of the current laws to government
is based on figures compiled by the economist Tim Moore (see box). The
two biggest costs are policing and imprisonment. I have excluded any
expenditure that would be expected to continue if illicit drugs were
decriminalised, most significantly health care.

Such expenditure might increase if decriminalisation led to a
significant increase in the number of users. Evidence from countries
such as the Netherlands and Portugal, which have in effect
decriminalised drug use, suggests there would not be a big jump. I
assume, therefore, that the level of drug use would remain about the
same.

Moore's figures give us a total of $2.79 billion, which I have
discounted by 10 per cent, a guess at the cost of enforcement
activities that would still be needed, such as policing a prohibition
on driving under the influence of drugs. This gives a savings figure
of $2.51 billion.

Tax revenue is much less certain, and involves major assumptions. The
starting point has to be the size of the current annual illicit drug
market. The best estimate I have found is in The Three Billion Dollar
Question for Australian Business report for the Australian Drug Law
Reform Foundation by a trio of professors, David Collins, Helen
Lapsley, and Robert Marks. Adjusted for inflation, this suggests the
market was worth about $11.4 billion last year.

What would happen if prohibition were repealed? Prices would drop a
lot: Collins and Lapsley estimate to about 5 per cent of current
levels, except for marijuana, which would drop to 25 per cent because
there's less risk now in trading it.

Others have suggested less of a drop. The economist Jeffery Miron
published a paper last month assuming a halving of current prices for
marijuana (because prices in Holland, where the drug is in effect
legal, are still between 50 and 100 per cent of American prices), 20
per cent for cocaine, and 5 per cent for other drugs.

My assumption here is that the return to drug retailers would drop to
an average 10 per cent of current prices, an annual total of $1.1
billion. I lack the expertise to know whether this is enough for
lawful dealers to cover costs and make a profit. Anyway, there are too
many unknowns. How might cocaine be produced if decriminalised. Would
it be imported from South America, or from New Guinea? Could it be
grown in north Queensland?

I assume sales worth $1.1 billion to retailers would be taxed by
government at the same rate as tobacco is now, where the "sin tax" is
about 200 per cent. This would boost the total cost of drugs to
consumers to $3.3 billion, of which tax would make up $2.2 billion.

Adding this tax take to the enforcement cost of $2.51 billion
mentioned above gives a total of $4.71 billion, the amount by which
government finances would be better off if prohibition were repealed.

Some financial implications have been excluded from the calculation
because of uncertainty or relative insignificance. These include the
cost of taxing the new industry, and the revenue from taxing companies
and individuals engaged in it. Personal income tax would also flow
from some people now in prison on drug convictions who would return to
the workforce.