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Failing Economics 101

Ray Fisman at Slate bring us Narco Economics. A new study that could help Mexico win its war on drug traffickers.

This article spends most of its time discussing the interesting concept of “forensic economics” being explored by student Melissa Dell, really mostly an academic exercise at this point, having to do with the effect of channeling routes through Mexico (controlling or not controlling towns/roads) on drug trafficking organizations.

But Fisman sees this and, having completely slept through Economics 101, comes up with a completely nonsensical conclusion:

Once you add up these various effects, it’s easy to see how Mexico’s drug war has cost more than 40,000 lives over nearly five years, and counting. It’s also easy to understand calls to bring the war to a halt: For all the human tragedy and billions in economic cost, traffickers merely reroute their smuggling operations around the piecemeal interventions of the police and military. Yet that is precisely the point of drug-interdiction efforts—not to eliminate all drug trafficking, but to raise its costs. Raising costs squeezes the margins of Mexican smugglers who, like all good businessmen, will scale back their operations, thus reducing the supply that reaches the U.S. market.

What???

Let’s see that again:

Raising costs squeezes the margins of Mexican smugglers who, like all good businessmen, will scale back their operations, thus reducing the supply that reaches the U.S. market.

I’ve tried re-reading the article to discover if Fisman is really being sarcastic instead of stupid, but I find no evidence to support that (feel free to set me straight if I missed something).

Let’s try the Economics for Dummies approach.

  • If there is demand, supply will follow.
  • Rising costs don’t result in reduced supply, but rather are passed on to the consumer.
  • The higher the price, the higher the quantity that will be supplied.
  • Squeezing suppliers merely results in pushing for more ruthless suppliers to rise to the top to take advantage of higher prices (black market economics)

Drug traffickers are used to having 10-20% of their product seized in the normal course of business and they simply plan to supply more to make up for it (at the source, the cost is ridiculously low). And yet, somehow making their route… inefficient is going to do them in?

Fisman then makes it even worse by using a variation on the ridiculous “more people dying means we’re winning” meme.

And even the rise in local violence may ultimately have a silver lining. The increased factional violence that has accompanied government crackdowns may ultimately weaken all of the government’s adversaries. And it’s not just rival cartels that take advantage of weakness to attack—it’s also led to a splintering among the dominant cartels as lower-level commandants split off to compete with their former bosses.

Gee, that might actually work long-term if the laws of economics were repealed and there were no black market profits involved in the drug trade. But since that’s unlikely, then all it means is a continual shifting of power to fill each vacuum that occurs.

When I took economics in college, it was at 8 am. I’m not a morning person and found it to be excruciating. I often fell asleep. Yet somehow I managed to get through that class without being entirely clueless.

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26 comments to Failing Economics 101

  • stayan

    Exponents of the drug war (like this fool) must not go unpunished.

    Too many have had to endure the horrors of drug prohibition to let it go.

  • Leonard Junior

    It’s obviously politically motivated spin. Are there people taking this guy seriously?

    • Duncan20903

      .
      .
      “Nobody ever went broke underestimating the intelligence of the American public.” ~ H. L. Mencken
      ———–
      Now I’m having flashbacks to when the Yippies nominated Nobody for POTUS. It makes good sense. Nobody can fix the economy, Nobody can wipe out crime in the streets, Nobody can end all wars, Nobody lives forever and Nobody works for free.

  • Offtopic for this thread, but interesting drug-related news nevertheless.

    Inspector highlights psych drug use among elderly

    (AP) — Government inspectors will tell lawmakers Wednesday that the Medicare health plan needs to do more to stop doctors from prescribing powerful psychiatric drugs to nursing home patients with dementia, an unapproved practice that has flourished despite repeated government warnings.

    So-called antipsychotic drugs are designed to help control hallucinations, delusions and other abnormal behavior in people suffering from schizophrenia and bipolar disorder, but they’re also given to hundreds of thousands of elderly nursing home patients in the U.S. to pacify aggressive behavior related to dementia. Drugs like AstraZeneca’s Seroquel and Eli Lilly’s Zyprexa are known for their sedative effect, often putting patients to sleep.

    But the drugs can also increase the risk of death in seniors, prompting the Food and Drug Administration to issue multiple warnings against prescribing the drugs for dementia. Antipsychotics raise blood sugar and cholesterol, often resulting in weight gain.

    An inspector for the U.S. Department of Health and Human Services will tell a Senate committee Wednesday that the federal government’s Medicare program should begin penalizing nursing homes that inappropriately prescribe antipsychotics, according to written testimony obtained by the Associated Press. /—/

    HHS Inspector General Daniel Levinson will propose that the government should force nursing homes to pay for drugs that are prescribed inappropriately, and potentially bar nursing homes that don’t use antipsychotics appropriately from Medicare.

    A report by Levinson’s office issued in May found that 83 percent of Medicare claims for antipsychotics were for residents with dementia, the condition specifically warned against in the drugs’ labeling. Fourteen percent of all nursing home residents, nearly 305,000 patients, were prescribed antipsychotics. The HHS Inspector General’s office Medicare claims during a 2007 six month period.

    • darkcycle

      Ohutum, mis-prescribed psychiatric medications are a HUGE problem. I knew a psychiatrist who regularly prescribed powerful adult psychiatric medications to children as young as three. Including medications which carry lableing that clearly states the drug has not been tested or approved for use in children.
      I cannot tell you how heartbreaking tardive dyskinesia is in a six year old. T.K. is a permanant movement disorder that occurs as an unwanted side effect of therapy with neuroleptic (anti-psychotic) drugs. It’s symptoms are facial twitches,(un controllable grimacing or lip pursing, sometimes toungue thrusting) unstable gait (ataxia), rapid movement of the extremities, impaired finger dexterity, etc, etc. It is permament and it is ONLY caused by neuroleptics. I could not imagine being a teenager with TK. Let alone a child. And that stuff should not even be given to a kid. Says so right in the PDR. The psychiatric (and this goes for much of my kind, too) profession is….well, let’s just say the last thing you ever want to do is wind up in their care. One of the reasons I left the field and began teaching and running a testing office.

  • claygooding

    The drug czars has seen the reduction in tobacco use accomplished by raising taxes on tobacco and is attempting to do the same thing with marijuana,,since he can’t tax it he is trying to cost the users more money with treatment fees and probation fees.

  • Jake

    “Viewing Mexico’s drug cartels as calculating, profit-maximizing business operations, Dell’s model provides a framework for understanding how traffickers have adjusted their operations in response to President Felipe Calderón’s war on the drug trade. According to Dell, the cartels have behaved like textbook economic actors, shifting their trafficking routes in predictable ways to circumvent towns where the government has cracked down and raiding towns where competing cartels have been weakened by government efforts.”

    The article is absurd. Textbook economic actors who have a high demand product will give up the game because costs rise..?! What planet.. It is like saying that the cost of producing a Ferrari keeps rising due to increased material costs so Ferrari may as well give up.. if it wasn’t for the DEMAND that is.. which just allows them to pass the cost onto the consumer.. I want to sit Ray down and explain with a book full of bright happy pictures and size 50 font why he is wrong, and then elongate my very vocal ‘Duuuuuuh’ until he gets it!! By the sounds of his article I might be there for a while.

  • Francis

    “Rising costs don’t result in reduced supply, but rather are passed on to the consumer.”

    Actually, I think you can technically say that an increase in input costs results in reduced supply, i.e. it shifts the supply curve to the left. Shifting the supply curve to the left means that sellers will supply less of a product at any given price. (The higher input costs mean that any given price now represents less profit at that particular price.) Of course, when the supply curve shifts to the left, the market clearing price (i.e., the price that actually prevails based on the point at which the supply and demand curves intersect) increases. But the amount sold at that (higher) price will be less than it would have been without the raised input costs.

    The simpler way of saying all that is: higher costs –> higher prices –> less purchased. But the war on drugs is the most asinine, wasteful, and destructive way of raising the price of a product ever conceived. If that’s your goal, higher prices to discourage consumption, for the love of God, just legalize drugs and tax them! (You know, kind of like we do with booze and cigarettes.) Then, instead of spending billions of dollars (in borrowed money) on a failed policy that empowers organized crime, fuels gang violence, promotes official corruption, etc., drug sales would become a huge source of revenue for the government.

    • Jake

      Aren’t drugs normally described as an ‘inelastic commodity’? So as long as the price doesn’t increase exponentially then even higher prices will just be offset by selling less at a higher price (which also makes the trade more attractive as there is a higher reward for less product moved/sold).

      The problem, to get the price to be high enough to massively reduce sales to the point that selling is just not profitable you need a police state then some. That is why prices will never grow too high for any extended period of time (under a ‘democracy’, or even repressive regiemes) to reduce purchases. In fact fashion trends with drugs dictate purchases far more than interdiction and policing. All this means is that the WoD is futile as it isn’t even able to achieve its stated aim once demand is established – it just isn’t able to increase the price enough to reduce purchases.

      • Price elasticity is definitely the concept missing to make sense of this. For actual addicts drugs are certainly inelastic commodities, for others not necessarily so. Young and poor people are more sensitive to price changes, generally speaking.

        However, elasticity is often not linear in nature, and I think that’s what we’re seeing on this market. Economists, the vocation most supportive of drug reform, get it. Dabblers and wannabe economists seem to don’t get it.

        Lots of drugs could double their prices from today and still be in high demand, because the prices are nowhere near the place on the curve where elasticity changes and consumers begin to demand less of the product due to higher prices. Drugs are dirt cheap to produce, and if the 17,000 percent price increase from opium poppy farmer to Western consumer doesn’t push prices into this region … what will?

        Much has also to do with usage patterns. Most drugs aren’t consumed daily, and since most people “go to a fine restaurant & have an expensive bottle of wine” from time to time it wouldn’t be so bad to shell our fifty or even a hundred dollars for a single decent LSD og MDMA trip. It’s a trifle in most people’s private economy.

        Another thing that really fraks up current control efforts is the easy substitution of drugs. Crack down on amphetamines with scarce, inefficient drugwar efforts and consumers can easily switch to something that’s in less focus yet delivers the buzz they demand.

        This means that while one drug might actually exhibit all the usual signs of decreased demand following price increases consumption just switches and the elasticity of general drug demand will remain highly inelastic.

    • darkcycle

      That assumes a price point is inflexible. At a 10,000% markup, there’s a lot of latitude to absorb additional business costs, w/o the consumer being priced out of the market. And if the cartels are making less profit per pound, they have the option of just moving more. And this doesn’t address the fact that interdiction efforts are aready priced into the equation, with considerable padding. Like any good business men they figure in ALL the costs on the front end. And higher costs because of pressure on large cartels will just incentivize smaller, non targeted operations.

      • darkcycle

        …and economic theory does not inform human behavior. When’s the last time you knew an addict who needed a fix and looked in his wallet to find insufficient funds, and then said “Oh well. Guess I’ll just do without.”?
        No, the money for that fix will be diverted from another segment of the economy…perhaps in the form of a stolen credit card number, or a stolen car, or as has become popular here with meth heads, stealing the electrical wire out of unoccupied houses to sell as scrap.

        • Francis

          Yep, those are all good points. The demand for drugs is almost certainly inelastic, so it’s not like doubling the price will reduce by half the amounts consumed. And artificially raising the price (presumably in an attempt to account for externalities of substance abuse) may create NEW externalities in the form of addicts stealing to support their habit.

  • I think this can be very helpful:Econ 101, Hayek, and Why We Are Losing the War against Drugs

    http://dolanecon.blogspot.com/2011/03/econ-101-hayek-and-why-we-are-losing.html

  • kaptinemo

    Another moronathoner, doomed to fall flat on his face 1 inch from the finish line. Shouldn’t have run the race to begin with if he didn’t have the logical shoes required.

    Another product of the ‘dumbing down’ so prevalent in US public schools. I despair of my nation…

  • ezrydn

    Kap,

    You hit the nail exact center. The “Dumbing Down” of the American Education System. Look at your kid’s school/classes/rules today and compare to when you were there. I can even take it back further. I saw it while working on my doctorate. The best class i had in college was the first semester, Logic 101. I often wondered why it wasn’t offered in High School.

  • claygooding

    Our entire education system needs to be trashed,,we spend too much time trying to teach ditch diggers how to be philosophers.

    I am sorry moms and dads,,but your kid ain’t the reincarnation of Einstein and he is going to be a welder or a forklift driver.

  • warren

    Fisman was born with a silver spoon stuck up his ass. Another on the very long list of the clueless.

  • Duncan20903

    .
    .
    But if we build a very long, big tall fence with razor wire on top surely they won’t tunnel underneath or build submarines and bring it in around either end. Nor would any of them dare to grow it in our National Forests!

    How long does it take for idiots to realize & admit that they’re wrong? Is such a thing actually possible?

    • darkcycle

      There was a great cartoon of the border fence, where the hieght is clearly marked as 20ft’. and there is a shanty storefront directly under the wall, with a sign that read “Phillipe’s 25 foot ladders”

  • Servetus

    Economics 101, really? Most prohibition apologists are lucky if they can count past 20.

    How many times do prohibs get wholesale and retail drug prices right? Inflation and outright lies are the only numbers drug agents know. One day the Mexican cartels get 60% of their income from pot smuggling, the next day it’s 10-or-20%, all because reformers are using the 60%-number in an effective marijuana legalization argument.

    Prohibitionists claim they only stop 10-20 % of the cross-border drug trafficking (they need added funding to seize more, of course). Maybe they’re really only stopping 1-or-2%. Billions spent on piddling busts? Could it be that as much as ten tax-dollars are needed to stop a single dollar’s worth of drug revenue? A license to lie covers it up. Noblesse oblige at the lowest levels of corrupt government.

    • Duncan20903

      .
      .
      Never let the facts stand in the way of disseminating an effective piece of hysterical rhetoric

      ~ The motto of the Know Nothing prohibitionist

  • vickyvampire

    I’m watching weed Wars tonight on discovery Bill O’Reilly had on the deangelo brothers yesterday he treated them like crap I wanted to slap Oreilly his new Abe Lincoln book had so many errors in it yeah no wonder he can not get the truth about pot straight either.

    • Duncan20903

      .
      .
      Mr. O’Reilly may in fact be everything everyone thinks he is or even worse, but there’s no such thing as bad publicity as long as they spell your name right. Particularly when you have the truth on your side.

      Confuzzled says, “For if a fool persists in his folly, he may become wise”