GETTING REAL ABOUT THE ECONOMICS OF COCAINE

President Bush's Plan for Battling the War on Drugs Will Only Cost
Taxpayers Dearly and Make Trafficking More Profitable.

"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.