Russ Roberts

Tom Wainwright on Narconomics

EconTalk Episode with Tom Wainwright
Hosted by Russ Roberts
Your Favorite Episodes of 2016... Demand-Side Narconomics...

Narconomics.jpg When fighting the war on drugs, governments typically devote enormous resources trying to reduce the supply. But is this effective? Journalist and author Tom Wainwright of the Economist and author of Narconomics talks with EconTalk host Russ Roberts about the ways that the drug cartels respond to government attempts to reduce the availability of drugs. Like any business trying to maintain profitability, cartels look for ways to cut costs and maintain or grow revenue. Wainwright uses extensive on-the-ground interviews and reporting to understand the behavior of the cartels and argues that reducing demand would be a much more effective strategy for reducing drug use.

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Podcast Episode Highlights

Intro. [Recording date: February 2, 2017.]

Russ Roberts: Before introducing today's guest, I want to share your 10 Favorite Episodes of 2016 as revealed by those responding to our Annual Survey. Over 2000 people voted overall. I want to thank you all for participating. And I hope to do a bonus episode where I share some additional insights from the Survey and respond to your excellent comments and suggestions. So, thanks again. Here are the Top 10: .... I want to thank you again, everyone, for voting, and I hope to do some more comments on those results later.


Russ Roberts: Now on to today's guest. He is journalist and author Tom Wainwright. He is a reporter at The Economist. His book is Narconomics: How to Run a Drug Cartel, which is our topic for today's conversation. Tom, welcome to EconTalk.

Tom Wainwright: Thank you.

Russ Roberts: In many ways, your book is a tribute to economics. You look at drug dealers, wherever they are in the supply chain, as a business facing the same incentives, competition and constraints facing legal businesses. And I want to start with a mistake that you identify, or at least that you claim governments make in fighting the War against Drugs: and that's the focus on supply. What is that focus? What are governments around the world doing to restrict supply? And why is it a mistake?

Tom Wainwright: Well, I guess if you think about the War on Drugs, the kind of images that pop into your head kind of give you a clue as to the answer to this. You know, the sorts of policies that governments have been carrying out now for some decades. The ones which see police forces and armed forces trying to intercept drugs on their way to consumers. So, that could be anything from the programs that have gone on in South America in which tons of weed-killer have been dropped from airplanes and helicopters to try to destroy coca crops in countries like Colombia--coca being the raw material for cocaine. To operations in the United States or in, you know, in the United Kingdom, involving police officers trying to arrest drug dealers on street corners here. All of that is what I mean by supply side: It's the part of the business in which the drug makes its way from an Andean hillside to, you know, an American or British nostril, in the case of cocaine. That's where our efforts have been focused. And, you know, it's not entirely a waste of money. But what I argue in the book is that there is some reason to think that it might have a bit more success, they might get more success for every dollar spent, if they spent a bit more time focusing on the demand side. And, by the demand side, obviously I mean the consumption, if you like. So, the people who--we are talking about the people who actually take drugs. The parts of the business in which the drugs are actually consumed. I think there is some evidence that if governments spent a bit more time and money trying to dissuade people from taking these substances and giving them the help that they sometimes need--and they sometimes need as well to not take them--that might be more effective than just trying to intercept them on their way.


Russ Roberts: It's such a bizarre thing, actually, when you stop to think about the way--when you said it the way you said it, it just sort of jarred me: Government should just stop people from wanting to do this. And it does raise a question, which I'm going to push to the side, but I want to mention it, that one could question why government is involved in this at all. But let's stick with the question of efficacy and effectiveness. And I want to come back to the Demand side, because I think it's very interesting. But I want to stick with the efficacy of the Supply side part. It seems logical: What we're going to do, says the government or say the government officials, is, 'We're going to destroy these plants.' And that's going to do two things. It means there should be less of it, to start with. Because they've destroyed some of it. And the second thing it should do is it should raise the price; and that should discourage people. But you point out that both those are shockingly, perhaps surprisingly, ineffective. Why?

Tom Wainwright: Well, you are right. There is a bit of a paradox here. People who say the War on Drugs has been a failure: They are not entirely right. In some ways, actually, governments have been quite successful in eradicating crops. I mean, if you look at the cocaine business in South America, efforts to restrict the supply of coca leaf have, you know, actually had some big successes. These days, every year a gigantic area of land of coca leaves is eradicated. It's an area of something like 14 times the area of Manhattan. That's far more than used to be the case. People reckon that about half of all the coca leaves grown by drug cartels now are eradicated. So, they have had some success. And yet, at the same time we haven't seen any impacts on price. If anything, if you trace the price of cocaine over the past couple of decades during which all this eradication has been going on, it hasn't risen as you'd expect. If anything, it's fallen. It hasn't changed very much. But if anything the trend on the whole has been a downward one. And--

Russ Roberts: It's a bit of a paradox.

Tom Wainwright: Yeah. It's surprising, right? I mean, if you saw this nanny[?] of the market, you'd wonder what was going on. So I decided to try and find out a bit more about what was causing this. And I went out into Bolivia, which is one of the 3 countries that supplies cocaine. Those three countries being Colombia, Bolivia, and Peru. And what I saw down there and what I read about the business reminded me of a legal business. And the comparison I draw in my book is between the drug cartels of South America and Walmart. And it's kind of an odd comparison. And it's worth making clear that there's no implication that Walmart has broken the law in any way. But the thing that they seem to have in common is that both of them are arguably examples of monopsony--in other words, monopoly of demand. If you think of Walmart, you see, sometimes a similar phenomenon in which you see, for example, a reduction in the supply of a particular good. Let's say there is a failure in the harvest for apples or something like that. You might normally expect the price of apples to rise. But magically in Walmart, or indeed in any other big supermarket which has that kind of purchasing power, the price of n[?] remains about the same. And the people who take the hit are the farmers. And the reason that Walmart or other supermarkets are able to do that is that they have this extreme buying power: very often they are by far the dominant buying power in the market. And so they are able to save their suppliers: 'Sorry, but this is the price. And it's the only price we are going to accept.' The suppliers don't have many other people to sell to. So they have to take that price. The same thing seems to be happening in South America. If you go to Colombia or Bolivia, in any one area where the cocaine[?cotton?] crop is grown, there is only going to be one drug cartel buying it. It's not a proper competitive market in which coca farmers can sell their product to the highest bidder. There's really only one buyer in each area. And so, if there is a failure in the crop, you don't see the normal market response that you would normally expect. You might imagine that the price would go up. But you don't see that. And that's because the cartels are exercising this monopsony power and telling the farmers, 'Look, but sorry guys: We're the ones that--you set the price--and this is the price we're going to carry on paying.' So, it's not that restricting totally supply has had no effect or that no one is paying. The problem, I argue, is that the people who are paying this price, the people who are suffering, aren't the drug cartels. And it's not the consumers, either. It's these farmers in countries like Colombia who are earning a dollar or two a day. And they seem to me to be not the people who are really in our interest to be targeting. And yet the evidence seems to be that they are the ones who are paying for this, this program.


Russ Roberts: So, I'm a skeptic about that argument for a bunch of reasons. I'll just lay them out briefly and you can respond.

Tom Wainwright: Sure.

Russ Roberts: And there are other parts of it that I find utterly fascinating. We'll get to those. But, in my experience, talking to Wal-Mart suppliers, you are certainly correct that Wal-Mart puts a lot pressure on suppliers. I don't think they are anything close to a real monopsonist. There are lots of other places--grocery chains, other retailers, that these folks can sell to. But they certainly do want access to Walmart's market, onto Walmart's shelves, because they are very successful. They don't have a monopoly but they are very successful. So, what I've seen is that Wal-Mart relentlessly tries to squeeze cost out of the supply chain. So, when they go to their suppliers and say, 'We're only going to accept this price. We're not going to take a higher price.' Or, 'We're only one--if you if can give it at this lower price'--what that does is it pushes the suppliers to innovate and to find ways to cut costs and to do their work more efficiently. And I think that's one of the unseen benefits of Wal-Mart: Just things that are being produced at lower cost and they are being enjoyed also by the consumer. So, it's not like they are squeezing the suppliers. They are motivating the suppliers. Now, it may be different for the Drug Cartel. The Drug Cartel may actually have an actual monopsony, through the threat of violence: and you have to sell to them. And if they say you are not going to get as much as got last month, 'Too Bad.' So, that's my first thought. My second thought, though, is--I think your much deeper point, which I agree with--which I hadn't thought of, and which is fabulous. Which is: In my mind, Okay, the government restrains supply. Governments do around the world. But I'm mainly thinking of the United States. We restrain supply. We try to keep out supply. We intercept it at the border. We are constantly trying to do stuff. And we are encouraging other governments around the world to destroy the coca bush or the poppies, to try to keep the price high. And that, we think, we hope, so is the argument, we'll discourage consumption. But as you point out--this is so fantastic--the price is so, the effect on price is so small. And that's just totally ignored in all the discussions. So, respond to my monopoly/monopsony if you want; and then talk about why these supply changes are so ineffective.

Tom Wainwright: Sure. Well they are both great points. I think on the monopsony argument--I think the distinction between Walmart or indeed, any other buyer squeezing versus motivating its suppliers is a nice one, and one that you'd have to question suppliers about, whether they squeeze or motivate. But, I mean, that, your general point: Of course you're right. Of course Walmart isn't a pure monopsony. All I mean by that is that in many markets is its a dominant buyer. I think it's reasonable to say. But I think you are right that in many cases it does lead to suppliers being more innovative. And indeed we do see that to some extent in the drugs' business as well. Constantly. In South America the cocaine business is innovating. And when I went to Bolivia I saw some of these new techniques. One of the things that they do in the--sorry--one of the things that they do in the Cocaine production business now is that they use old washing machines as primitive centrifuges to complete the process of extracting the active ingredient from the leaves themselves. And, whereas the laboratories where they used to do this in used to be based in the jungle. Which left them open to being raided by the government. They now often put these labs in the back of trucks which rumble around the jungle, not being captured. So there is innovation in the drugs business, just as in any other. On the second point you raise about the price--rather than the cost of the raw materials relative to the final price: Yeah, that's absolutely right. And I try and spell this out in the book by providing a few numbers. Just to give people an idea. That, to make a kilo of cocaine, for example, you need about a ton of fresh coca leaf. And that ton of coca leaf in Colombia is worth about $500. Now, by the time that's turned into cocaine in Colombia it's worth perhaps more like $1000. By the time it makes it to the United States it might be work $15-20,000. By the time eventually it's sold in tiny portions to a consumer, that kilo is worth the equivalent of about $100,000. So there's a very, very big increase as you go along the supply chain. So, imagine if those eradication methods are very effective in raising the price of coca leaf--and as I said, I think there are reasons to be skeptical about whether they are. But imagine they are so successful that they are able to raise the price of the raw material, the coca leaf, by 100%--they are able to double it from $500 per ton to $1000 per ton. That is transferred--eventually--let's imagine, to the consumer. But by that stage, it's such a tiny proportion of the final price that it makes very little difference. Imagine that $500 being transferred to the final cost of the kilo in the United States. It means that kilo is worth $100,500. So, in other words, a very, very effective program which is double the price of the raw material, has increased the price of the final product by less than 1%. Or to spell it out using a legitimate industry, which I think helps to clarify the point: Imagine if you were trying to raise the price of artwork, and you said, 'Okay, well, we want to try and raise the price of paintings, and the raw material of paintings is paint. And so what we're going to do is we're going to try to raise the price, drive up the cost of the box of paints from $50 to $100. We're going to double it. And on that basis, we reckon that the price of this $1-million-dollar painting is going to double from $1 million dollars to $2 million dollars. Obviously that's not going to happen, right? At the very most what you'd expect is that the artist might add that extra $50 onto the price of his painting. You are not going to double the price of the price of the final product, necessarily, by doubling the price of the raw material, if the raw material is a sufficiently small part of the eventual price of the finished product. So I think that's what we are doing in drugs: We're often making the mistake that if we drive up the price of the raw ingredients--whether that's coca leaf or opium poppy or whatever--we're going to have a big impact on the price of the finished product. Very often it seems that's not the case at all.


Russ Roberts: And that's just fantastic. And I want to talk about that some more. But before I do, one of the things that I thought about reading your book is, you talk about reading some of the extraordinary ways that governments in the three countries of Bolivia, Peru, and--what's the third one--

Tom Wainwright: Colombia--

Russ Roberts: Colombia. We are trying to get rid of coca plants. And you'd think: How hard can it be? So, in some of those countries, I think it was Bolivia in particular, it's like: They really don't like the whole idea of eradication. I think you said the head of Bolivia, at least when you were writing the book, was a former coca grower. And coca is a fairly mild thing in its raw form. And people kind of resent the idea that we are supposed to crack down on it. The tragedy here is that in doing so they are not really having much effect. But the other part, I wonder: Are they really trying very hard? Is it really that hard? Because the plants can't run away. It's not like the dealers who can--get in their car and speed off. Plants are kind of stuck in the ground. I'm just wondering: Is some of this just for show? Do you have a feel for that? How come they can't destroy more if they really want to?

Tom Wainwright: It's a good question. I think it probably is quite hard. I mean, if you imagine eradicating these, these fields of coca plants, it's not as if they are just being grown in big fields on the edge of big cities. I mean, we are talking about the Andes Mountains here, which are not all that well explored in some areas. We are talking about very, very remote parts of the countryside where these coca plants are grown secretly, and they blend in with the rest of the local vegetation. But the governments there have got some quite sophisticated ways of trying to track them down. They fly over the areas with planes and take photos of the land down there. They use satellite imagery, increasingly. And with technology improving, it's getting gradually and cheaper over time. I was looking at some images that were shared by the United Nations, which is involved in this work, showing the kind of satellite photos that they take of the coca-growing areas. And the improvement in their resolution of these photos, just over the past few years, really does make it easier to spot the coca fields as opposed to the, let's say the banana fields or whatever. But it's not all that easy. I mean, imagine using a photo taken from space and trying to spot the difference between one type of plant and another. It's not quite as easy as you might think. And then of course in many of these areas, Colombia for example, for many years those areas have been guarded by guerillas using everything from landmines to machine guns to rocket-propelled grenades. And so on. So, this isn't easy. And I think the success that governments have had in eradicating coca plants in some of these countries is in many ways quite impressive. That's why I think it's such a tragedy that they've been engaged in this activity which I think is ultimately in economic terms pretty futile.


Russ Roberts: So, the other part I want to explore about this observation you made about--that restraining supply is like trying to raise the price of artwork by raising the cost of paint--is to talk for a minute about the increase in markup that happens all along the supply chain. So, I think some people find it perhaps puzzling that the raw material--that the final price isn't closer to the price of the raw material. Certainly once it gets to the United States--and it doesn't have to be processed in other ways--you'd think the price would be something similar. And it's not. There's a huge markup. And you'll often hear that--you know--they dilute it along the way. And of course, this is an illegal market. But you might wonder about competition. Why isn't there is more competition that would keep the markup down? What are your thoughts on that?

Tom Wainwright: It's a good question. And you're right. The biggest market--if you look at the prices I quoted earlier for cocaine, you'll see the biggest markup isn't even in Latin America or even on the way to the United States. It's in the United States itself. That's when a kilo of cocaine goes from being worth perhaps $20,000 to perhaps more like $80,000 by the time a deal gets their hands on it, to more than $100,000 by the time it's sold to the consumer. So the really big jump is in that stage, between the sort of importation of very large quantities and the distribution of very small quantities. As to why that is--I think that the reason I would come up with is that this is the part of the business which--it may not sound like it, but it possibly is the hardest and riskiest part of the hole business. Imagine the job of the whole person who has to receive, say, several tons of cocaine in a port in Los Angeles or over the border. In a place like, I don't know, San Diego, for example. They have to receive a gigantic quantity of this stuff. And distribute it into much smaller quantities, giving it out to the mid-level dealers who then take it all over the country. This is a job which involves dealing with a large number of criminal contacts. Now, that's difficult in itself. Building up that number of contacts requires a long period of time in the game. It's also highly risky because of course the more people who deal with, the more risk you are exposing yourself to of being either exposed to law enforcement or attacked by rivals. So, there is a very high risk. And we are talking again about a country here, the United States, that has--by what people might sometimes say--it has what's by international standards an outstanding law enforcement agency. You know, very hard to escape from prisons. A justice system that works pretty well. Compare it with a country like Mexico, where the police don't often do their job properly. Where jails, as we've seen in the case of El Chapo [Joaquin Guzmán], are quite easy to escape from sometimes. And that's why the risk undergone by these people is so high, and why it's--you know, you have a relative lack of serious competitors in this part of the business. So, that would be my best explanation: The big, big price increase that you see there is because that actually is the part of the business that it hardest to do. And so the number of people able to do that is smaller than one might think.


Russ Roberts: Well I think it's absolutely right. And I think it's not just the number--it's--to encourage people in the business they have to have an incentive to take those risks. Those risks are large: 10, 20 years in prison. If you are caught. I don't know how long it can be. That's plenty. And so, the market is going to require compensation for those risks, if people are going to end up doing it--if it's worthwhile at the end, if you can find buyers for the product you are going to have to earn a price from those buyers that covers those costs. And the costs, I think it's important to remember: Costs are not always--it's an incredibly important example in economics is that the price of raw materials is a very small part of the product, often. And this is just a dramatic case where the real cost, the biggest costs, are totally unseen. It's the risk of being caught. You don't see it in time of people creating the product and fashioning it. Talk about the risks to you. As a journalist, you tell a number of scary stories. Of course, you have an incentive to make them dramatic and scary. But I think they really were dramatic and scary. So, talk about what you did to find out what you did in the book, when and why you were scared; and talk about the tragedy of the journalists in some of these poorer countries who get killed because they report things that drug dealers don't like. And the situation say, in Juarez that you mentioned. Let's talk about safety issues.

Tom Wainwright: Sure. Well, I guess dealing with any illegal business involves some risks that you might not undergo in other kinds of business reporting. The first thing I want to make clear is that the journalists who undergo the real risks and the ones who are really heroic in the work they do aren't the foreign correspondents like me. It's the local journalists, because if you're a Mexican journalist in a city like Juarez writing about the drug business, the people that you're writing about, the criminals that you are writing about, know exactly who you are, and they know where you live. And they know where your family lives. And they know that you can't just hop on a flight back home to Mexico City as I used to do. So they are the ones who really face the serious risks. I think as a foreign correspondent you're in a relatively privileged position: attacks on foreign correspondents are much rarer than attacks and murders of local correspondents. That said, researching the book and writing stories for The Economist was sometimes moderately hair-raising; and interviewing some of the guys who I feature in the book was a different experience from some of the usual business interviews that I do. So, I went to interview the head of one of the two big gangs in El Salvador, a guy named Carlos Mojica Lechuga, and he was in jail at the time, which was why I was able to go interview him.

Russ Roberts: That helped.

Tom Wainwright: Yeah, exactly. Well, you say that--El Salvadorian prisons aren't always much safer than being on the outside. But because of that I was able to go see him. And I went to go interview him, and he was this extraordinary guy--covered literally from head to toe in tattoos. We sat down and talked in this prison cell which he effectively used as his office. And he was a menacing kind of guy, you know, and he was in there for carrying out some pretty grisly murders. But the interesting thing was when I sat down and started talking to him, really the conversation was a business one, and the kinds of questions that I found myself asking and some of the answers he gave reminded me of speaking to regular business people in some ways.

Russ Roberts: Were you scared in that situation? In that one? There are a lot of stories in the book where you are on the street and it's somewhat at risk. In this situation, being that it was in a prison, were you uneasy?

Tom Wainwright: Yeah, I was. As you say, it's in a prison so it's a relatively controlled situation. But Latin American prisons are not terribly safe places. The murder rate inside them is often literally higher than the murder rate outside them. And so when I was in this jail cell and the prison guard brought the guy in and took off his handcuffs and shut the door behind us, I was sweating. And it wasn't just because it was so hot in there. So, yeah, it was an unnerving experience; and I'm not someone who has covered this stuff before. I went to Mexico expecting to write about regular kinds of business. I thought I'd be writing about NAFTA (North American Free Trade Agreement) or the tourism industry or fun kind of things like that. But it just so happened that when I got there the war on drugs was taking off, and the biggest story in town was the drug war. And so it seemed to me that this was an interesting business story. So, that's what I ended up writing about. But for me it was a very different experience. A fascinating one, but at times also rather a frightening one.

Russ Roberts: Why do you think he spoke to you in that jail cell? What was his--what was motivating him? Was it pride? Did he like the idea that The Economist was going to cover his activities? Was it because he felt he was supposed to--or the prison might be tough on him if he didn't cooperate? How voluntary was his cooperation?

Tom Wainwright: I think perhaps all of those things to some extent. I'm sure vanity was involved, up to a point. I think giving an interview to the international press about your sprawling empire is something that would have flattered a guy like that. And he had a real swagger to him and quite enjoyed joking. And on the way out he told me that he was a great admirer of the East End of London.

Tom Wainwright: Tried to create a rapport with you. That's so nice.

Tom Wainwright: Well, yeah, no, yeah--charming guy. But at the same time I think part of the reason I was able to get in and see him, because the government doesn't often grant interviews to journalists with prisoners, was because at the time this truce was going on between the two main gangs in El Salvador. Now, that's since broken down and the murder rate there has rocketed back up. But at the time, the two main gangs--his gang, which is called the 18th Street Gang, and its great rival, the Mara Salvatrucha, had signed an agreement which was effectively a kind of nonaggression pact in which they had obviously decided that from their point of view a period of collusion made more sense than the one of competition in which they'd previously been engaged. And so the government was trying to get some favorable coverage of this scheme that they were involved in, trying to get the gangs to talk to each other. So, I think they were more willing at that stage to allow journalists access to these people, who--you know, they are not normally great ambassadors for El Salvador, it has to be said. But at the time they were engaged in this experiment and willing to give it a bit of publicity. So I think that's how I was able to get in at that stage. I think if you try it again now, you might find it harder.


Russ Roberts: You tell the poignant story, going back to Juarez, of the newspaper writing the editorial, sort of open letter to the gangs, saying, 'What do you want from us?' after they'd killed some of their journalists. Talk about how the gangs like to use public relations and the cartels, which I found extremely interesting; and the role that newspaper plays, sort of wittingly and unwittingly.

Tom Wainwright: Yeah. It's an important part of their business, really. I mean, like other businesses, they care quite a lot about their public image--more than you might think. And the reason for the cartel really is that in order to survive they have to maintain a reasonable amount of support among local people. These guys make a living out of avoiding being captured, and that's much easier for them to do if local people aren't willing to report them to the police, and tell the police about their whereabouts, and so on. And so, they do this in a variety of ways. Some of it is very unsophisticated, very blunt: if you drive around northern Mexico, sometimes occasionally you'll see banners hung from bridges above freeways. And they are hung there by the cartels; and they often say things like, you know, 'The Sinaloa Cartel', or 'the Gulf Cartel, or whatever is an honorable cartel which only traffics drugs. This other cartel engages in extortion and rape and violence and kidnapping. But we don't do that. We're the good guys.' It's extraordinary that they do this--

Russ Roberts: Shocking. It's bizarre.

Tom Wainwright: Yeah. But they seriously think that this will help to improve their image. That's pretty blunt. But something they do which I think is sometimes more effective is that they intimidate or bribe local journalists into giving them favorable coverage. And this could take the form of bribery or it could take the form of threats. You know, they have this saying, 'Plata o plomo'--'Silver or lead.' In other words, a bribe or a bullet. And they employ that with journalists just as they employ it with public officials. And the rates of violence and kidnapping and disappearance against journalists in Mexico are frightening.

Russ Roberts: It's partly, as you document, the inability of the police to maintain law and order and to stop anything like these things from happening. There's a lot more power in the cartel often than in the state. But what kind of--talk about why they bribe. What's a good story? What would be a positive story about a drug cartel that would appear in a local newspaper? What are they hoping for?

Tom Wainwright: Well, I think there are a couple of things they do. Sometimes what they want is an absence of media. So, if they've done something particularly gruesome that they don't want people to know about, they will tell journalists not to report this; and there will be consequences if they do. Other times they want exactly the opposite. There are times when cartels want to really strike fear into the hearts of their rivals, and so they will make sure that journalists do give a particular massacre as much coverage as possible. There's one interesting case that we sometimes see in Mexico where cartels will deliberately do something outrageous on the turf of a rival cartel: you know, they'll dump a whole load of headless bodies in the middle of a busy street in the middle of the day, for example. And they'll do that precisely in order to draw police and army officers to that city, which is a city run by a rival cartel. They call it 'heating up the plaza'--in other words, it makes it harder for a rival business to carry on doing business in that area because there's a greater presence of police officers and soldiers. And so sometimes drug cartels will enlist the help of journalists in doing this. They'll say, 'Look, we just carried out this massacre and we want you to give it plenty of coverage.' And sometimes that works. But they've got even more sophisticated ways of getting the public on the side, and one of the other things I discuss in the book is corporate social responsibility. And this might sound totally outrageous. I mean, it's not something that you might expect from the Sinaloa Cartel. But it's quite a big part of what the cartels do. To people who might be watching series like Narcos on Netflix, which is all about Pablo Escobar, that is a good example of the kind of corporate social responsibility that these guys sometimes engage in. Again, it's crucial to them that they keep the public on side to avoid being reported and captured. And if you look at the life of Pablo Escobar, he did that very effectively. He spent what was for him a tiny proportion of his fortune on things like building sports facilities, public housing. He'd give out pensions. He'd do all kinds of things--give out presents at Christmas time. And all of this stuff meant that in certain neighborhoods in Colombia, he was more popular than he ever deserved to be. You know, although this was a guy who had caused the murders of thousands of Colombians and set the country back many years. His funeral eventually was attended by thousands of people. And you see the same thing now in Mexico: someone like Joaquin Guzmán, this guy better known as El Chapo, who has just been extradited to the States. The last time he was arrested there were protests against his arrest in his home city of Culiacán. And many of those people will have been there because they felt they ought to be there. But some people--and there's no doubt--do see cartel leaders as being kind of romantic outlaws who are not such bad guys after all. And much of that is because of these corporate social responsibility activities that they engage in, in parts of Mexico where the state is absent: where the state is not very much in the way of a proper social safety net. These guys are there giving out small amounts of money to people. And it's entirely cynical. I'm not trying to defend them for a minute. It's completely cynical on their part. But in some cases it's very effective at getting people on-side.

Russ Roberts: Works for legal businesses, too.

Tom Wainwright: Indeed.

Russ Roberts: As you point out, in many other cases in the book. There are a lot of parallels.

Tom Wainwright: Yeah. In a way, you find often the dirtier the business, the more concerned they are about [?]--

Russ Roberts: cleaning up their image.

Tom Wainwright: Exactly. And there's no business that's dirtier than the illegal drugs business. So it's not surprising that they are so into it.


Russ Roberts: So, you have a fascinating chapter on New Zealand, which sort of hit me out of the blue. New Zealand is really far away from a lot of these sources of drugs. So, how has the market there responded? Talk about the market for legal eyes[?], and how poorly and ineffectively the regulatory environment has tried to deal with it.

Tom Wainwright: Sure. Well, you're right: When you think of, you know, the great global sense is that the illegal drugs business, you probably wouldn't think of New Zealand as being among them. But it is an interesting case, because, as you say, it's out in the middle of nowhere, so it's not really worthwhile for regulatory cartels to bother shipping very much there in the way of cocaine or heroin or other drugs that people around the world--many people seem to enjoy taking. And so, New Zealand has come up with a different solution: They make many of their own drugs. And it's become a great center of synthetic drugs. To give one example: The number of meth labs there, methamphetamine labs--the number of labs discovered in New Zealand each year is greater than that in any country in the world after, I think, the United States and the Ukraine. And for a tiny, tiny country like New Zealand, that's extraordinary. It's because they make many of their own drugs there. And so, they started off with drugs like meth that--drugs like meth were banned. People there moved on to different varieties. And eventually New Zealand became a center of what are known as 'legal highs'. Legal highs--they are a strange part of the drugs business. They sound like they are probably, you know, one of the safer type of drugs, but actually it's quite the opposite: they are very often among the most dangerous types, because the only reason that these drugs are legal is that they are very, very quickly-evolving, new, synthetic drugs that are made in labs and which haven't yet had the chance to be banned by governments. So, it's not that they are legal because they are safe. It's only legal because no one has yet got 'round to outlawing them. And New Zealand has become a leader in this. And many of the most popular of the legal highs were first invented and first popularized in New Zealand. It's become quite a big industry there.

Russ Roberts: And, you point out that, because of this sort of arms race in banning and then innovating, and banning and innovating, it's actually made it a lot harder to produce safer drugs. And that that encouraged New Zealand to have an FDA-equivalent--a Food and Drug Administration--for recreational drugs and not just pharmaceutical drugs. And that did not work out so well. Talk about what they tried and why it failed.

Tom Wainwright: Sure. Well, the reason they did this was, as you say, the evolution of these legal highs meant that with every step people observed, the drugs were getting more and more dangerous. You might normally expect that with development of ordinary product, the people making it would improve the recipe every time and make it--you know, the better one for consumers. But with the drugs business, that's not really what's happened. The way that things have worked is that every time a new legal high is invented, eventually the government gets 'round to banning it. And so the manufacturers will tweak it slightly. They'll move the molecule here and there: Hey, presto, they've got a drug which isn't yet banned. So they'll start selling that. A few months later, that will be banned; they'll modify it again and bring out a new one. And so on. Over the years the various different iterations of these drugs have in many cases become more and more toxic. And so, synthetic drugs that people were using a generation ago, like MDMA (3,4-methylenedioxy-methamphetamine), which is the active bit in Ecstasy (sometimes called Molly), have given way to sort of mutant varieties of MDMA, which, you know, in some ways do a similar job but which are more dangerous. And so, the New Zealand government recognized this; and they came up with this plan--they thought: Okay, rather than playing this game of cat-and-mouse, this game of sort-of catch-up with the drug suppliers, what we're going to do is do things exactly the opposite way around. We're going to say: Okay, if you come up with a legal high, if you come up with a mind-altering substance, we will allow it. We will license it--as long as you can prove that it's not dangerous. So, if it alters people's mental state and it gets them high, that's fine. We're not going to ban it on that basis. We'll only ban it if it does them harm. And this was--you know, it seemed to me like quite an interesting approach. It seemed like a way of overcoming this kind of cat-and-mouse problem that has existed for many years in--well, in all countries. But the program hasn't got off the ground. And the reason that it hasn't is a very frustrating one. The FDA-equivalent that you talk about said that in order to license one of these legal highs and be confident that it wasn't harmful to humans, it would have to first be tested on animals. And this of all things--of all the possible objections that people might have to legalized drugs--this was the thing that failed to make it through the New Zealand Parliament. There were several members of Parliament that were animal rights activists. And so they voted against this part of the program.

Russ Roberts: Well, they didn't want to lose the votes of their constituents, their animal constituents. No, I'm kidding. They obviously had constituents who also cared about animals. That's presumably why they were animal-rights people. Carry on. Sorry about that.

Tom Wainwright: I don't know to what extent they were representing their constituents: whether animal or human. But for whatever reason, they voted against. And so, New Zealand now has the very frustrating situation of having this regulatory apparatus which is set up, which can't yet do its work because it hasn't got permission to do the animal testing that you would have to do before licensing any drug for use on human beings. So, it's an interesting idea which has yet to get off the ground. But, I don't know: could possibly be a model for other countries in the future if other countries find, as most countries it seems have found, that stopping legal highs is very difficult.

Russ Roberts: I wonder if it's really a very likely scenario down the road, just because--the economist in me always thinks that's nothing's safe. Things aren't either safe or not safe. Broccoli is not safe. Many, many things can be shown to be related statistically to causing cancer. Many are shown, even the same things, to stopping cancer. Anything in moderation is probably not so bad. There's going to be a level where the dose makes the poison and you're going to kill yourself. And so we have these mind-altering drugs which inherently are doing crazy, unknown things to your body, in your head. So I'm not sure that the strategy of safety is going to be a very reliable one. Obviously it would be useful to users to know, 'Oh, in 10 out of 45 cases this kills a person.' So, providing that information I presume would be useful. Maybe you'd want to use it to decide whether it's legal or not. But, I'm always skeptical of these kind of things, but it's fascinating that they even got close to it.

Tom Wainwright: Sure. You're right: there's no such thing as an entirely safe substance. I suppose it would just have to depend on exactly how their rules and definitions were drawn up. I guess they could look at other existing drugs. There was an interesting paper I read recently which looked at the ratio between an effective dose and a fatal dose of various different drugs, everything from heroin to alcohol to marijuana. And it laid them out. So, I believe with alcohol--I forget. It was something like--

Russ Roberts: It's in your book. I think it's 10 to 1.

Tom Wainwright: Is that right? So I guess it's--

Russ Roberts: Or 20 to 1. Ten or 20.

Tom Wainwright: Maybe that was it. I imagine it was 20 to 1. Let's say 2 pints of beer is enough to get you nicely drunk; 20 pints might be enough to kill you in that case [which would be 10 to 1--Econlib Ed.]. And with heroin I think it's very low: it's sort of 7 to 1, 6 to 1, something like that. Which, given the, of course the purity of illegal heroin varies so much, it's very easy to overdose. Maybe the New Zealand model could set up rules along those lines: perhaps they would deem safe anything with a ratio of 50 to 1 or less. Who knows?

Russ Roberts: That's interesting. There's always the purity issue, too.


Russ Roberts: Let's talk about people-smuggling. I said it so cheerfully, 'Let's talk about people-smuggling.' But, it is a somewhat cheerful thing, depending what side of the argument you are on. This is a case where people pay to get into America, typically, say, from Mexico. The people who do the smuggling are called coyotes. Talk about how that market has changed and why it persists so effectively despite those changes.

Tom Wainwright: Well, I first got interested in this because it seems to be an example of the way in which cartels would diversify that business, again in the same way that regular companies, you would expect would eventually begin to diversity. Cartels, it seems, are doing a bit of that, as well. And people-smuggling is an obvious one for them to get into: it relies on many of the same skills. Getting a person across the border, rather like getting drugs across the border, will often rely on bribing the relevant officials both on the Mexican side and on the U.S. side; rely on good knowledge of the border and where the easy places are to cross. It could rely on the use of tunnels, which in some cases have been used for smuggling both drugs and people. So, it's an obvious one for cartels to get interested in. And one of the things that I found out while researching this chapter of the book was that in some ways, cartels have been handed a bit of an opportunity by the Border Patrol, because it used to be--if you go back and look at the border as it was in the early 1990s, for example, it used to be that crossing the border illegally in some parts along the Mexican border wasn't all that difficult. In a place like Tijuana, people would sometimes run across the border in big groups. It wasn't that hard to get past the border guards. That, as we know, has changed quite dramatically. If you go to Tijuana now and look at the fence there, it's quite a thing to behold. I went there; and you look at the old fence, which is a kind of 6-foot high thing that I reckon even I could climb over with, you know, standing on a box or two; and then you look at the new fence, which is a little bit behind it, and it's a much, much bigger thing topped with razor wire. They use ground-penetrating radar. They use--you've got guys patrolling on quad bikes with night vision goggles. It's a much, much more difficult thing to cross than it used to be. And incidentally, it makes me wonder how the Wall is actually going to different from the fence in some parts of the border.

Russ Roberts: Yeah, it's a semantic difference.

Tom Wainwright: Yeah. It may be a wall which is made of wire anyway. So, anyway, the point is it has become harder to cross the border, at least in some areas. The number of guards patrolling the border at least has increased dramatically as well. And so, what it means is that the business of smuggling people isn't the kind of amateur affair that it was in generations past. It used to be that these coyotes were amateurs who would get people across the border for fairly low fees. It wasn't a particularly difficult thing to do. Nowadays it's hard. It requires real knowledge of the best places. It requires them in some cases to be armed because of the security situation in Mexico. It requires this technology--sometimes the tunnels. It's a difficult thing. And so the fact that it's so difficult means that there's a gap for the relatively well-organized groups in Mexico--and this means the drug cartels. And there's evidence in Mexico that drug cartels now are playing a bigger and bigger role in the business of people-smuggling, which used to be something that was left to relatively small-time crooks. So, it's a big business that has emerged for them, partly thanks to the actions, unwittingly the well-intentioned actions, of the American Border Patrol, which has transformed this from being an amateur criminal business into being a rather sophisticated one.

Russ Roberts: And, as you point out, it's much more expensive now to get across. This is one of the effects of that higher vigilance. And yet people continue to come, paying that price that's going to be more expensive now to get a professional rather than an amateur, because it's more likely that they'll be able to succeed. And those people, again, have to be compensated for the risks they are taking in getting across. Yet people still come. And why is that?

Tom Wainwright: Well, you are right. They still come, despite the fact that it's more expensive. And the reason is that the fee that they pay to get themselves over the border is not very much at all compared with the relative gain that they can make from being employed in the United States. You compare average wages, even working illegally in the States, with the average wages in a part of rural Mexico, it's night and day. You can make, in a day working in America what would take you a week or more in the countryside in a place like Oaxaca. And so the fact that the cost of crossing has gone up--I forget the figures but they're in my book--from perhaps a few hundred dollars to many thousands of dollars--isn't really enough to put people off because the gains that they can make are so great. And in many cases, those fees can be paid, at least on a temporary basis, by relatives who are already in the United States and perhaps have access to that kind of money. And people also--don't forget, people aren't just moving in order to make more money from working. I mean, in some cases I talked to women who had just been deported over the border and had to leave their children behind in the United States. Now, the idea that those women are going to lose interest in going back because the cost of crossing legally has risen by a few thousand dollars strikes me as not wholly plausible. They've got a huge incentive to go back, which is to see their families quite apart from anything else. So, I think the idea that you can, you know, dramatically deter people from making that crossing by simply making it harder and therefore more expensive is one that we should question. The evidence seems to be that people are just as likely to want to cross. It's just that they're going to have to pay more to do it; and they're more likely to pay a serious criminal outfit to help them do it than they were in the past.

Russ Roberts: 4854 So, this idea that we could do a better job, say, people from crossing: It is a 2000-mile border. Reminds me a little bit of the Coca Eradication Project. It's hard to understand why we can't make that border secure. I'm not sure a fence or a wall is going to make that happen. But it does raise the question: How is it that tons--tons of drugs are getting across that border? As well as thousands of people? And we recently had Sam Quinones, author of Dreamland, on the program, where, you know, his claim is that most of the heroin of middle-sized American cities come from one place--which is Xalisco--the city, not the province. And it's--how are they getting it all here? How are they getting that much product across a border that is so seemingly patrolled? And the people who they need to get across to sell it? Do you have any thoughts on that?

Tom Wainwright: Yeah. When you talk about tons and tons of cocaine, or heroin, or any other substance or [?] people going across the border, it does sound extraordinary that these kinds of quantities are able to make it over without being spotted. But, consider the volume of trade between Mexico and the United States--the volume of legal, legitimate trade that crosses the border every day, every hour. And it's absolutely vast. When you compare the relatively tiny quantities of illegal drugs going over with the huge, huge quantities of legitimate commerce--whether it's cars or televisions or food or anything else--you are really talking about a needle in a haystack--

Russ Roberts: A lot of opportunity to, yeah, to mix that in.

Tom Wainwright: Absolutely. You've got hundreds and hundreds of trucks crossing. Imagine in each of those they are absolutely laden with legitimate products. And somewhere in there, hidden, you've got a relatively small package of drugs. For one thing, it's difficult to spot. For another thing, the kind of money involved in this business is so great that actually bribing someone isn't that hard. And, you know, we all know, or we like to think that we know about the corrupt Mexican police officers. But there's corruption on both sides of the border, too. And indeed in the United Kingdom. I'm not trying to say this is just a North American phenomenon: You know, law enforcement agencies all around the world have this problem. And you just look at the news and you'll see a sort of regular trickle of Border Patrol agents being prosecuted for their own involvement in smuggling drugs. You know. The money is such that it's fairly easy to bribe anybody. And bribing an American officer is going to cost a bit more, probably--

Russ Roberts: Yes, it is--

Tom Wainwright: than bribing a Mexican officer. But, you know, they have their price, too. So, the quantities going over the border, they are small as share of the total trade crossing the border, which makes them hard to cross. And their value is huge compared with the salaries of the people in charge of trying to stop them. Which makes it fairly easy to bribe those people into looking the other way.


Russ Roberts: You had some fascinating observations about how the legalization of marijuana in a handful of American states is changing the production process. There's a lot there to talk about. Let's just talk about the economies of scale issue. Talk about how legalization changes that production process, and the threat that poses to the drug cartels.

Tom Wainwright: Sure. Well, it does make it very different. And, again, this does make it like the border Wall situation. This is something that could change rather a lot in the next few years. We'll have to wait and see. But, the legal process is quite dramatically different from the illegal process. If you imagine the marijuana manufacturing process, illegally, in the United States, you are talking a very, very small scale, relatively small scale operations--you know, sometimes people literally growing the stuff in their closets at home. Very, very small operations. Whereas in Mexico, you are talking about people growing this stuff outside, you know, in relatively basic conditions. If you visit one of the places in a state like Colorado, where marijuana is now being grown legally, it's just extraordinary seeing how they grow this stuff. It's so high-tech--they use all kinds of advanced techniques. They have probes measuring the acidity and alkaline levels of the soil. They--you know, they have halogen lights that go on and off at exact times. They've got their laptops measuring the precise amounts of growth of the plants in different periods. They've really, really professionalized what until recently was a very amateur business. And it's not that surprising in a way. I mean, what kind of skills that you need to survive in the illegal drugs business are completely different from the skills that you need to make a success of marijuana in the legal drugs business. So, look at the illegal business. The kind of skills you need there are an ability to corrupt police officers; an ability to threaten or project violence. You know, skills like that. An ability to cross borders illegally. The kind of skills that you need in the legal business, totally different. You know, you want someone who knows what they are doing multiculturally you want someone who is good at marketing. You speak to the people who are running the pot businesses in Colorado or Washington or any of the other states that have gone ahead and legalized, and you find these are business people like others: they have MBAs (Masters of Business Administration); they are people who previously worked in agribusiness. And they've really transformed the business. You know, the average purity of legal pot in Colorado is about 3 times that of the illegal stuff that's smuggled in from Mexico. And they've got a whole range of new products. I Colorado, for example, you can get marijuana-infused drinks. Or, chocolates. Or all kinds of different things. These are products that just didn't really exist before. You know, really, the cartels aren't in the business of making marijuana-infused tea in the way that these businesses are in Colorado. So, it's transformed it. And the legal, very professional legal businesses, are to a large extent driving the illegal sorts out of town. In Colorado, they reckon that now something like 80% of all the marijuana sold in the state is the legal variety. And already it seems that the cartels in Mexico are suffering in this sense. And many of them are growing less marijuana and switching to other lines of business. Including people-smuggling, as we were talking about earlier.

Russ Roberts: And the price, of course, has fallen. I have to confess, I am one of the few people I think over the age of 60--I'm 62; I know two others over my age who have not tried marijuana. I'm not advocating trying marijuana or using marijuana. I'm against--very strongly against mind-altering drugs. My mind is one of my favorite organs so I try to kind of leave it alone. I don't like to take aspirin that much. But one has to observe that the move from illegality to legality--which also is true in the Prohibition Era in the United States when we went from legal to illegal and back to legal alcohol--the customer gets served. You can debate whether the customer should be served, whether it's healthy that the customer has these preferences. But the quality goes up and the price comes down. So, it's a beautiful--for an economist it's a beautiful experiment.


Russ Roberts: The thing I was struck by in your write-up of this is that your description of visiting this processing plant, this giant arboretum or whatever you want to call it--greenhouse of indoor growing: There was something secretive about it. It's not marked on the outside.

Tom Wainwright: Yeah.

Russ Roberts: I lived in St. Louis for 14 years. Budweiser proudly has a big plant with big signs and lots of tours. Why isn't that happening in marijuana? Why is it sort of gray rather than out in the open?

Tom Wainwright: Yeah, good question. It's partly to do with security, I think. I mean--

Russ Roberts: But why?

Tom Wainwright: these facilities?

Russ Roberts: But why? What's the security issue? If you're a legal business? You don't have to have a security issue if you are making iPhones; 'Let's not have a sign out front that we're Apple. You know. Because it's really profitable. We've got to be careful.' I don't get it. Explain it.

Tom Wainwright: Well, okay. One reason is that the legal status of the marijuana business is still a bit weird. So, states like Colorado have legalized it, but it's still illegal at the Federal level. And this means among other things, it's very, very difficult for these businesses to use banking services. Banks are very, very reluctant indeed to do business with these guys. And so, if you go into one of these marijuana shops in a place like Denver, you walk around the back; very often you will find a very, very big safe full of cash. Because this is an overwhelmingly a cash-only business. It's very, very hard for them to do their banking electronically. And I was speaking to the head of the, I believe it was the Department of Revenue in the State of Colorado; and she was telling me that she has actually had to hire extra security people since legalization, because she has to do so much business now in cash: so much of the collection goes on in cash that they are collecting very, very large sums of money each month from these businesses in cash and transporting it around, which they didn't previously used to do. And it seems odd to me. There are various ways in which the reluctance of the Federal government to legalize marijuana--which I think is understandable; I don't think it's a kind of easy question at all--but its reluctance to legalize it in some ways is making the business more dangerous. The cash side of it is one aspect. Another aspect, which, again, I mention briefly in the book, is the regulatory aspect. You would have thought that when you are dealing a brand new, or at least brand new in legal terms, drug, you would want an organization like the FDA (Food and Drug Administration) to be involved in determining, for example, how much it's safe to have before you can drive. You know, these are difficult questions that no one really yet knows the answer to. And yet the FDA, which is the most powerful regulator of drugs in the world, is sitting on its hands. It's not involved in this stuff. It's not allowed to be involved in this stuff, because it's still Federally illegal. And so you have relatively tiny bureaucracies in states like Alaska, trying to draw up these very complex regulations about how to test the purity of marijuana, how to limit the amount people can have while driving. All of these questions on relatively tiny staffs. And the expertise of organizations like the FDA is not being drawn on. And that strikes me as a mistake. So, I think, you know, what looks like a kind of cautious, wait-and-see approach being taken by the Federal government in some ways is actually quite reckless. Because it means that the rules which are being laid down now--which I expect are the rules which eventually all of us are going to end up following in some way--are being drawn up by, you know, relatively small, in some cases inexperienced state governments. I think it's a question, it's a serious, difficult question in which you might want the expertise of the Federal government to be involved.


Russ Roberts: Yeah. I have a lot of skepticism about the FDA. But I'm going to leave that to the side. I want to make just one quick point; then I want to close with a deeper point to hear your side of it, deeper question. The quick point is: You encourage demand-side rather than supply side. Which seems logical. I think the issue there is that it's very hard--I don't think we know so much--we know how to burn down a coca bush, and we know how to set a big pile of marijuana on fire if we capture it, the Feds. I think we're not so knowledgeable about how to get people to not want to take drugs. Do you think we should be more optimistic about that? And I would also add--it's kind of awkward because I said at the beginning: it's not clear we want, I want the government trying to help people to do things that they want to do, stop people from doing things they want to do. I might prefer more private and more cooperative, voluntary programs along those lines, funded by people who maybe have different motives.

Tom Wainwright: Sure. Well, look, on the first point, you are right: the question of how to stop people wanting to take drugs is a tough one. And it's all very well for people like me to say, 'Oh, you know, we want more projects to try and get less teenagers to take less drugs.' But how do you actually do it? Well, it's difficult. But there's some good evidence out there that actually these demand-side interventions are more effective than some of the supply-side ones. There was a good study done some years ago by the RAND Corporation, the think-tank, in which they studied the impact of spending a million dollars on trying to reduce the amounts of cocaine taken in the United States. And they compared spending $1 million dollars on, first of all trying to intercept cocaine in South America. And they found that for every $1 million you spent doing that, you reduced the amount consumed in the States by about 10 kilograms. They then looked at if you spent a million dollars trying to dissuade teenagers in the States from taking cocaine, you can reduce the amount consumed by about 25 kilos. So, it's, you know a little more than twice as effective. And then they looked at if you spent a million dollars providing treatment to people who were already addicted to cocaine; you can then reduce the amount consumed by about 100 kilos. So, it's about 10 times as effective as trying to intercept stuff in South America. So, there's already evidence out there which suggests that the programs that we're doing on the demand side are more effective--more cost effective--than the ones that we use on the supply side. And I agree, there's plenty more work to be done in determining which ones work best, and there's no very easy answer. But there is already some fairly straightforward evidence that shows that it's more effective than the kind of flying around the Andes in a helicopter school of drug control. And then, the second question you asked I think is a really, really tough one about the extent to which the state should get involved in telling people, particularly adults, people over the age of 18 or 21, what they can and can't do. And I--I think it's difficult. But most recently what we argued in The Economist--and it's worth just noting we've been in favor of legalizing drugs for some time on the basis that it's the least-bad way of controlling them--but, I think the point that we made is that it's reasonable that the government should regulate and try to dissuade people from taking these substances. Because it's not always a free and informed choice that people are making when they decide to take these drugs. It's not always entirely informed, because as you've said in the course of our discussion, the research on these subjects is, you know, pretty murky to say the least. And so it's not always a very well-informed choice that people are making. And I think you can also argue that it's not always a free choice, either. Because very many of these illegal drugs are, to some extent at least, addictive. Even marijuana, which is, you know, not a drug that people generally think of as being physically addictive in the way that crack cocaine, for example, is. Even marijuana does seem to induce dependency in a sort of fairly large minority of the people who take it regularly. There's some interest stats on this, that people, when it comes to alcohol and tobacco markets, people talk about the 80-20 rule in which about 80% of all consumption is done by about 20% of all users. And rather worryingly, we see that already in the legal marijuana market in the States--you see this 80-20 ratio going on in which, you know, a minority of people consume a very, very large quantity. So, given that to some extent these drugs do seem to induce dependency, I think you can argue that it's not entirely free choice that people are making. And on that basis, I think it is legitimate for the government to do things like tax these products to try to persuade people to take less of them. To ban advertising, for example, is one thing it might do. To restrict the places in which they can be sold, I think is another. So, you know, my position, after looking at this for a while, is that legalization is probably the least-bad way of regulating these potentially harmful substances; but it should be a pretty controlled type of legalization. It should be a pretty heavily-regulated type, if we are to avoid making the same mistakes that we've made in the past with alcohol and tobacco. So, my advice to the United States and other governments like Canada that are just starting to legalize now would be to be pretty cautious at first. You know, to legalize in a pretty heavily regulated way to begin with. And if you then want to loosen those regulations, go ahead and do so. But you'll find that if you do the other way around and try and tighten those regulations later, you might find it rather hard, as governments have found in the case of alcohol and tobacco. So, I think many, many more arguments to be had about this in the future.


Russ Roberts: I just want to respond to the point about people not being fully informed or free. Of course that's true. And it's true of chocolate, and love; and Twitter. There are a lot of things in life that are hard to avoid and stay away from that might not be so good for me. But I think it's important in a free society that people have the opportunity to make their own decisions. Particularly because--if all of that's [?] an ideological, you are just a libertarian--I am--but the real reason, one of the reasons I argue that is that I don't have any confidence that the government is going to do it well. So you can make the case that there is a case for government intervention, because people are, say, ill-informed or imperfectly informed. And you can even make the case that providing information is not enough--that the government should go beyond that. But you have to then assume that the government is going to do the way Tom Wainwright thinks they should do it. They don't. So I want to close with this point, which struck me--and you didn't address it, but it came to my mind as you ended your book. You open your book with some of the common mistakes governments make. And you close your book with that point. And you give lots of--I mean, it's a fantastically interesting book along lots of interesting dimensions of these phenomena we are talking about. But you presume, implicitly, that the goal of government policy is to reduce the amount of drugs. And, maybe it's not. That's what they say it is. They say they are fighting a war on drugs. Of course, when you fight a war that spends $1 trillion dollars or so with little or no impact on, in fact, rising levels of, say, heroin death in the United States over the last 10 years, 20 years, you have to start wondering that maybe what they say is the goal is not actually the goal. That, maybe the goal is just to destroy a lot of stuff, do a lot of dramatic public relations stuff that doesn't really have an impact on the phenomenon and keeps some people happy who profit from it. Like the police. And the people who provide all the machinery of the night goggles and that. They love that. It's just great for them. But I'm not so sure the goal is to get rid of drugs. In fact, on the surface it looks like that has nothing to do with the goal. I'll let you have the last word, Tom. Go ahead.

Tom Wainwright: Okay. Maybe I'm very naive. But I've met a lot of the people who are involved in this war on drugs. Which, as I make clear in the book I think is misguided. But my impression on meeting them, on the whole, is that they are people who are sincere in what they are trying to do; and they are just doing the wrong thing. But I don't see it as being quite as cynical as you think it is. But, I think that--just one other thing I want to say. You say that the implied message of my book is that the goal ought to be to reduce drug consumption. And that's partly true but not entirely. I think the goal ought to be to reduce the amount of harm done by drugs.

Russ Roberts: Fair enough.

Tom Wainwright: And very often I think that will be done through reducing consumption. But in the case of marijuana legalization, which I endorse with some reservations, I would personally be willing to accept somewhat higher levels of marijuana consumption if that reduced the amounts of harm done by the drug. And I expect that's what you will see, actually, if you legalize it. I find it hard to imagine that you won't see consumption go up somewhat. But I think that's a price worth paying for a market that is properly regulated, taxed, and in which cartels, which cause so much murderous violence in Mexico and other countries are put out of business.

Russ Roberts: Well, I just want to clarify one thing. I said, 'The real goal of government.' I think that's the wrong way to think about it. I shouldn't have said that. There is no government with a goal--there is no central mind or brain that says, 'Oh, let's do this work intelligently.' Instead, it's an emergent phenomenon. There's the enormous, complex set of emotions and desires of the people, some of whom want to take drugs, some of whom like me don't; some of them want people to be free to take drugs, some people think they should be stopped. We have all this emotional turmoil that translates into political action, that translates into a legal environment through the political, complex political process. And so, the people you talk to on the ground--of course they want to--they think their job is to do x, y, or z. But if they actually did it well, what they are trying to do, maybe there would be other forces that would be set in motion that would start to counteract that. So, I think it's very complex. I just--I just want to make a general point that it's wrong to think of governments having motives. And so, I didn't mean to say that the government wants to make a show of it. I'm not that cynical. It's a different kind of cynicism: that the process itself isn't designed to lead to the outcomes that we write about as if they were designed that way--that is, to get rid of drugs or to save, you know, the American people, or whatever. It's so much more complicated than that.

Tom Wainwright: I'm sure that's right. We can agree on that.

COMMENTS (14 to date)
John Alcorn writes:

Thank you for another fascinating EconTalk podcast.

Mr. Wainright advocates legalization with stringent regulations, in order to achieve harm reduction.

Two sets of questions for Mr. Wainright:

1) Shouldn't any policy calculus about recreational drugs consider benefits as well as harms? Would you give strict priority to harm reduction, through regulatory restrictions, if those restrictions place an undue burden on people who consume drugs without harm? How do you conceptualize and calibrate the trade-off?

2) Isn't there also a trade-off between stringency of regulations and compliance? Would you insist on stringency, if an unintended consequence of stringency is the persistence of a black market and its attendant harms?

I would like to point EconTalk readers to a sharp article by Jim Leitzel, "Toward drug control: Exclusion and buyer licensing," Criminal Law and Philosophy 7 (2013) 99-119. An ungated draft is available here.

Rob Walkingshaw writes:

How effective is treatment, and how rigorously has it been studied? This is the kind of area that can suffer from a lot of wishful thinking and over-reliance on observational studies that poorly establish cause and effect. I don't have a particular bias one way or the other, but it seems to me to be an important question.

The Rand study he refers to was a 'modeling' study. I'm not sure what that means, but reliance on models has often been a recipe for trouble.

Vincent Dovydaitis writes:

Great episode. I just happened to read the following article the same day as listening to the podcast In Iceland, teenage smoking, drinking and drug use have been radically cut in the past 20 years. This is a variant of the demand side thinking expressed in the podcast and it appears to work.

Jon Berner writes:

"We don't know a lot about how to treat drug use". Yes, we do...

Involuntary subcutaneous buprenorphine and/or naltrexone currently legal under Supreme Court review (Harper v. WA) could essentially eliminate criminal activity driven by out-of-control heroin or other opioid use. The drugs work by blocking the addictive heroin signal on the mu opiate receptor. The rise of an entrepreneur who could coordinate the voluntary medical market and the involuntary governmental monopoly of criminal justice provision is thwarted by a thicket of ignorance and established interests....

Supply controls don't work. Even in WA state prisons, about 5-10% of inmates were still scoring opioids occasionally despite a very competent and dedicated custody staff.

Trent writes:

Another very interesting podcast.

After listening & reading the comments to date, I recall hearing anecdotal evidence that the 1980's "Just Say No" campaign was effective in reducing demand for drugs. Was wondering if anybody knows of any research that we can trust about that program's efficacy.

Russ Roberts writes:


My memory of the data is that drug use fell steadily after "Just say no." Just as steadily as it was before the campaign began. I used to use this as an example of how to lie with statistics. If you looked at the data after the campaign you didn't get the full picture. That doesn't mean the campaign had no effect. But it had no apparent effect in the raw data.

jw writes:

Some interesting points. Notes:

- In a slow growth/cheap money world, consolidation of large industries is rampant. This provides more monopsony power over their suppliers than we have seen in a long time (which is a shame because I can neither spell nor pronounce "monopsony"...). As a supplier, one has to weigh their long term potential benefit over a short term price reduction being forced upon you. The trick, like a losing stock in the stock market, is knowing when an adverse short term condition has morphed into an unsustainable long term condition.

- I saw a documentary a few years ago on illegal pot production in Oregon. They drove past dozens of plots to get to the plot where they had a warrant. They lamented the situation, but there were simply too many plots and not enough officers.

- I don't have a solution, but the solutions offered did not convince me. I do not believe that a short term experiment with designer drugs can show long term safety. Even marijuana MAY cause long term psychosis issues in a subset of the population, the long term science does not appear to be conclusive either way yet, but there is a risk. Of course, in the early 20th century, no one fully understood that 10-20% of smokers would die a horrible death from lung cancer 40 years later. Now they do and they still smoke.

- Cocaine and art are examples of $100K and up price-to-cost extremes. More mundane are Wheaties. For that $4 one pound box of Wheaties, you can buy a full bushel (60 pounds) of wheat (OK, there is also some sugar and corn syrup - see Taubes).

Markups due to transportation (mules), distribution (cutting), channels (cartels) and marketing (one to one relationship with dealers) are significant for everyone.

And if you are really masochistic, think of the 3 ozs of Chanel perfume that you bought for your wife for Christmas. Somewhere in France, next to a 5,000 gallon vat where they make the stuff, some Frenchmen are laughing hysterically.

- The cash problem is actually quite hilarious. Liberal states pass laws in direct violation of federal laws, the Feds do not enforce their drug laws but MAY enforce their banking laws (no one is sure that they will, but they don't want to bet their money that they won't) and the result is massive amounts of cash concentrated in state-level legitimate businesses. (And I am fully confident that these cash only transactions are being carefully accounted for in their tax returns...).

Add to that the call by some well known liberal economists to ban cash "because it contributes to the criminal drug trade".

And, like "sanctuary cities/states", all it takes is a new administration to start enforcing Federal laws' precedent over state laws and you are in for a very entertaining battle.

Nick Ronalds writes:

Very enjoyable and informative podcast. However, Wainright mangled the logic of monopsony, and Russ, you missed it. Wainright says the street price of cocaine didn't rise because the drug cartels could dictate the price to the producers, and refused to raise their prices despite reduced supply. Hence, argues Wainright, the street price didn't rise either because the margins through the supply chain were already so fat. But this overlooks the fact that the decline in supply presumably means reduced supply at the street level. That should affect the street price, or quality, unless the demand curve is flat, which seems unlikely given the nature of addiction. That's where his analogy of the cost of paint breaks down. If the price of paint doubles or triples for whatever reason, that will have 0 impact on the supply of paintings, at least those that can command high prices--just as Wainright argues. But if cocaine production declines the supply on the street will decline, and street prices should rise. In short, even if the producers' selling prices were capped by powerful drug cartels the street price should have risen. And that should have raised profits for someone in the supply chain, most likely those of the strongest and most ruthless in the chain--the drug cartel.

This implies that the steady price of cocaine at the street level means that the lost supply was replaced by other sources. Am I missing something?

jw writes:

Nick Ronalds,

You are assuming constant demand. Cocaine use has been declining in the US. It is being replaced by a large increase in marijuana, heroin and opioids.

Whether this is price driven substitutability or simply changing tastes, I don't know if there is a way of knowing.

Dallas Wood writes:

I enjoyed this discussion, but you both seem to be assuming that the price of all other inputs into cocaine production will remain constant in the face of coca eradication.

But why should we expect that?

Coca is the key ingredient in cocaine with no apparent substitutes. So all other inputs are likely complements. Thus increase in the price of coca will lead to a decrease in the price of all inputs. So even in a competitive market, the price of cocaine will rise by less than the increase in the price of coca. Maybe much less depending on the elasticity of supply of other factors.

Thanks for the interesting podcast!

Nick Ronalds writes:

With the death of Kenneth Arrow the day after this episode was released, Russ's final comments about the emergent nature of government policies were particularly apt. How about an episode dedicated to Arrow's insights and place in the development of public choice theory? The fact that its insights are the least acknowledge both inside and outside economic science doesn't detract in the slightest from their power.

Michael Byrnes writes:

Nick Ronalds wrote:

But if cocaine production declines the supply on the street will decline, and street prices should rise. In short, even if the producers' selling prices were capped by powerful drug cartels the street price should have risen. And that should have raised profits for someone in the supply chain, most likely those of the strongest and most ruthless in the chain--the drug cartel.

This implies that the steady price of cocaine at the street level means that the lost supply was replaced by other sources. Am I missing something?

jw wrote:

You are assuming constant demand. Cocaine use has been declining in the US. It is being replaced by a large increase in marijuana, heroin and opioids.

Whether this is price driven substitutability or simply changing tastes, I don't know if there is a way of knowing.

It is an interesting question, for which I would imagine that there are many partial answers. Here are some possibilities:

1. Start with jw's point - there is a whole range of illicit drugs and presumably there is some degree of price-driven substitution. That's a major factor that would tend to stabilize prices. This can partly be done by consumer choice, but also may be done partly by producers (via cutting the product with other substances).

2. Is all of the product exported to the US or is a significant portion consumed domestically or exported to other markets? Maybe the US as a whole is the "preferred customer", so the impact of increased supply on prices is more stronlgy felt in other markets.

3. Maybe there are ways that supply can rise to meet demand. Plant more crops? Process innovation to reduce waste? More efficient extraction?

4. Maybe more money is invested to improve the efficiency of smuggling operations?

Daniel Barkalow writes:

The idea of New Zealand licensing recreational drugs that pass safety review, but being unable to conduct safety reviews makes me wonder if they shouldn't just start by licensing old recreational drugs with known safety properties and then see if anyone cares to synthesize new ones any more. If you're going to permit any phenethylamines, it doesn't make sense to allow one other than MDMA just because MDMA was known before this program and the other one doesn't have any regulatory history; MDMA has an LD50 over 100 times the effective dose, assuming you're only talking about direct physiological effects and not poor decisions (which are mostly not dose-dependent). LSD, by that metric, has a ratio of around a million-to-1, which means you'd probably be fine (physiologically) if you consumed the entire aggregate demand for LSD in New Zealand. Most of the classics, with the exception of the opiates, have ratios comparable to OTC pain relievers. (For opiates, it's probably best to leave discovery and regulation to the prescription drug area, since they're having enough trouble finding substances that are good enough to use for clear major medical benefits.)

Of course, this isn't looking at psychological effects; obviously, safety in the modern world depends substantially on people knowing when to take your keys away and keep you from sitting on a roof ledge. And it doesn't consider long-term effects, which are poorly studied and heavily correlated with skipping character-building forms of entertainment. But neither of these are going to be significantly informed by animal studies anyway, so you might as well start with phase II.

Bogart writes:

Has any investigation been done in areas where a milder and safer substitute like marijuana becomes legal? We have several states where marijuana is somewhat legal and several states where it's prohibition is not enforced as violently or as aggressively as in the past.

I am confused as to how one could come up with the logic that the only organization trying to stop the epidemic is the US Federal Government? They are the ones that control the whole system through medical licensing, Medicaid, border control, federal enforcement, the prohibition and regulation of safer alternatives(marijuana, alcohol, MDMA, tobacco, etc), the Federal Reserve System, etc. The opinion that seems most logical to me is that the whole war on drugs and on opiates in particular is a product of the US Federal Government meddling what people put in the own bodies.

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