Monday, December 7, 2015

Bad Amateur Social Science

Many political arguments go as follows: “Social Problem X is much smaller in Country Y than it is in America. Therefore we should adopt Country Y’s policies.” Of course it’s a terrible argument. It’s a classic case of confusing correlation with causation. Often the speaker is literally comparing one single country to another (rather than comparing groupings of similar countries); this one-offing invites cherry-picking. Unfortunately this kind of amateur (pop-) social science is all too common.

To get this kind of argument right you have to compare likes-to-likes. Japan has less gun violence than the United States, you say? Do Japanese Americans have similar rates of gun violence to that of their home country? If so, you can’t credit the lower crime rates to gun policy. Norse countries have lower rates of poverty and child mortality than the United States, you say? What about Americans of Norse descent? Do these populations have similar rates of social issues to those of their home countries? Maybe it’s the deep cultural/institutional characteristics of these populations, rather than government policy, that drive the different outcomes. At any rate, it’s clearly not legitimate to simply point out a difference between two groups of people and attribute 100% of the difference to your favorite cause. 

This point is so obvious that it’s difficult to articulate it without sounding snarky or sarcastic, and yet somehow it needs to be said. People flout it all the time, including people who ought to know better.

Tuesday, November 17, 2015

Cost-Benefit Analysis on Accepting Syrian Refugees: A Back-of-the-Envelope Calculation

Disclaimer: All numbers below are estimates. Some or all are likely wrong. Please don’t get mad at me for using some estimate other than the one you would have used. Feel free to do your own Fermi estimates, if you like. I repeatedly disclose the fuzziness of my numbers below (as well as in the very title of this post!), so please, dear reader, don’t think I’m trying to pull one over on you.

220,000 people have been killed in the Syrian civil war, out of a population of about 22 million. Assume that an average Syrian has about a 1% chance of dying from the civil war. This is huge. Americans find this kind of risk intolerable. Most of us would flee from it, too, if we had the chance.

There are about 200,000 terrorists among the world’s 1 billion Muslims (and this is probably an inflated estimate). So a random person from the Muslim world has about a 0.02% chance of being a terrorist. Assume (crudely) that this is the proportion of Syrian refugees who are terrorists.

Using these estimates, if we let 10,000 Syrian refugees into our country, we save 100 lives and let in 2 terrorists. Assuming (generously) that each terrorist manages to kill on average one person once here, the balance is still favorable to letting in refugees. There is a great deal of room here for making the assumptions more conservative before you reach the opposite conclusion. Let’s go ahead and increase the “chance of being a terrorist” by a factor of 10; the resulting balance still favors letting the refugees in. Presumably terrorists are trying extra-hard to sneak in; then again, presumably we’re trying extra-hard to screen them out. Presumably those people seeking asylum are at a *greater* risk than the average Syrian, so the above estimate of “lives saved” is probably conservative. Also, we failed to account for the benefit to those Syrians who wouldn’t have died anyway, but who still escape daily terror and enjoy a vastly improved quality of life. (Quick quiz, what’s the GDP per capita in Syria and what is it in the US? Wouldn’t it be nice to increase your annual income by such a large factor overnight?) The potential gains in quality-of-life are enormous.

Suppose you accept the estimates in the first sentence of the previous paragraph. (I won’t call them “My estimates”, because I could just as easily convince myself of some other set of estimates.) There’s one obvious way to square the circle and reach the “ban all Syrian refugees” conclusion. You might say, “Well, I value an American life at 50 times a Syrian life.” Some people, explicitly or implicitly, take this position. That’s fine. I’m not going to denounce you or spew venom at you for taking that position. (You need to be part of the discussion, too!) But I do consider this radical discounting of human life kind of ugly. I want that ugliness out in the open for everyone to see. I don’t want it buried under hollow slogans. I don’t want it shrouded in clever-but-imprecise rhetoric. By all means, value an American life more than a Syrian life. But by a factor of 50? Something in the 1-4 range might be reasonable, but at some point this differential starts to look monstrous. (Of course, a different back-of-the-envelope estimate might reach a more modest answer. Feel free to supply your own figures and assumptions.)

I think there’s a lot of low-hanging fruit here. We can probably select for those refugees who are almost certainly *not* terrorists. Families with young children, old women, people who can be credibly vouched for, etc. We can always be selective and exclude young single men or people with questionable histories. And we can always use the refugees themselves as intelligence assets. Who better to inform on ISIS terrorists than their former neighbors? And how great would it be to lure a known ISIS terrorist to our country and promptly arrest him? Crude as it is, I think my “100 lives saved per 2 lives sacrificed” is fairly conservative because we can do quite a lot to guard against the 2 lives lost. 

Wednesday, October 14, 2015

The Absurdity of the State

From Fair Play by Steven Landsburg:

Beware of those who pontificate about “the majesty of the law.”
We live in New York State, where they’ve outlawed those little clicky things on the gas pumps – the ones you use to keep the gas flowing while you walk around to check your oil. At some moment in the past, some New York State legislators must have gathered some colleagues around him and said, “We’ve got to do something about those little clicky things,” and they all nodded sagely. That’s the majesty of the law.
 I love this. It's a bit dated. The book was published in 1997, and as far as I can tell the law is no longer on the books. But it accurately points out the silliness of the people who write our laws. We like to think that government is a deliberative process, whereby upstanding citizens who most accurately represent their constituents aggregate the preferences and interests of the public. They wisely weigh costs and benefits and skillfully craft rules that optimize how our society functions. Instead we get laws against gas pump lever locks.

Monday, October 12, 2015

Private Governance

Private Governance by Edward Peter Stringham was an excellent and truly enjoyable book. The title by itself succinctly makes a libertarian point: governance does not have to come from the government. Too often unthoughtful commentators forget this very basic point. If the government fails to govern effectively, or if there is no governing entity, private institutions fill the gaps. How well or how poorly private institutions can provide governance is an empirical question. Stringham provides several real-world examples in which the government is totally absent, is indifferent to a problem requiring adjudication/enforcement, or is incompetent at policing a problem. His book explores privately supplied rules, private rule enforcement, and private adjudication, which are often perfectly adequate to solve existing problems.

Some passages that I highlighted:

Focusing on actual rather than hypothetical examples eliminates the need to speculate about whether certain problems could be solved. For example, one need not debate whether complex financial transactions can take place without external enforcement (something that Olson [1996] asserts is impossible), if one can observe them taking place for centuries.

It really is funny that there is so much navel-gazing on what is at its heart an empirical question. The relative performance of private vs government supplied governance is a question that can’t be answered without real world data and examples. Once again, the book provides several.

[The analogy of the ‘fox guarding the chicken coop’] implies that a stock exchange will create rules that help brokers at the expense of investors, an apartment complex will create rules at the expense of tenants, or a firm will create rules at the expense of its employees. The implication is that government , as a disinterested third party, is better suited to create rules than members of a given industry.
This is a very odd assumption, that someone is interested in effectively solving your problems for you just because they hold the levers of power. The relationships described in this passage are voluntary bi-lateral agreements. They are disciplined by the threat of exit by either party, so brokers, landlords, and firms are compelled to offer better terms than other brokers, landlords, and firms. (Investors, tenants, and employees decide which of these institutions make the best offer and choose to associate with them.) Government, on the other hand, faces only very weak feedback if it misbehaves or offers a terrible product. Many commentators get this exactly backwards and somehow reach the conclusion that government is *more* responsive than businesses to the needs of those businesses’ customers.

Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion, and reserve the name of infidel for those who go bankrupt.

This quote by Voltaire is at the intro of chapter 5. It’s a lovely comment on how commerce tames our baser instincts. Misbehaving tends to lose you money in the long run. Behaving yourself and developing a good reputation for fairness and honesty serve your long-run interests a lot better. Even someone motivated entirely by greed will tend to behave well, so long as they are governed by their long-term self-interest.

When the Securities Act and the Securities Exchange Act were implemented in 1933 and 1934, they simply mandated many of the requirements that the New York Stock Exchange had already adopted.

This passage comes from chapter 6, on the history of New York financial exchanges. As with many things, private governance came first. The legislated law simply codified an informal legal order that emerged in the private sphere. In other words, the law already existed. The government just affirmed it.

The government officials were hardly experts. [Peter Thiel] stated, “The level of incompetence we dealt with was amazing.” At the time he stated that the FBI did not “even have a working email system.” In one case PayPal conducted an internal investigation and determined that a man named Mr. Yagolnitser was defrauding the company of money. After reporting the culprit to the authorities, law enforcement was of little help.

The above passage is from a lovely anecdote about PayPal’s exploits in the world of fraud detection. Pay Pal was lightyears ahead of the FBI in detecting fraudulent transactions, but the FBI was apparently uninterested in investigating actual crimes. This was a very clear case of a private for-profit company solving a problem that the government was uninterested in solving, even though this is exactly the kind of problem government is charged with solving.

I am sure some people will think, “It is unfair that paying customers receive service and people without money to spare for the service do not.” Do not forget that for issues that government considers unimportant, nobody receives responses.
The above passage is from a section on San Francisco’s Patrol Special Police, an entirely private police force. It’s often asserted that *only* government can supply the police. It’s important to remember that we have instances (historical and current) that disprove this assertion.

The next two passages dispel a common man-on-the-street economic notion: that big institutions can get their way on account of their “big-ness” and the little guy just has to take their terms as given. This is the notion that “market power” allows the big guy to trample the little guy.

Even if one party is larger and offers the terms of adjudication on a take-it-or-leave-it basis, the requirement for a compromissum creates incentives to maximize joint benefit and minimize potential problems such as bias or waste. Suppose, for example, that buyers on eBay accurately predict a 10 percent chance of the seller not delivering and that eBay adjudication always found in favor of these delinquent sellers (and suppose for the moment this 90 to 10 percent ratio is stable). Here a $ 100 tie would be sold only for $ 90 (or less if we add risk aversion), meaning the cost of any proseller bias would be borne by the seller. Whether the sellers are big corporations and the buyers are little guys is irrelevant. Rules that harm buyers negatively affect their willingness to pay for a transaction.

Whether we are talking about potential disputes between stockbrokers and clients, banks and customers, cell phone carriers and users, or landlords and tenants, attempting to stack the deck against one side does not pay when that party can adjust his willingness to enter an agreement. The cost of biased rules or procedures is borne by the party that the rules were intended to bias.

In other words, a big retailer, employer, bank, or landlord can make rules that are biased in favor of themselves, but not without compensating their customers, employees, lenders, or tenants for the burden of those biased rules. It’s worth understanding this argument. Even if there are some special circumstances in the real world where “market power” is real and significant, a modern enlightened thinker needs to understand that there are competitive forces working against it. There is a great deal of populist blather that totally ignores the role of competition.

The following part was a big surprise to me, even though it's not obviously connected to the book's general thesis:

The value of mortgage-backed securities fell during the economic downturn, but because most underlying mortgages continue to pay, they have actually performed quite well in the long run. Figure 11.4 shows the growth from 2004 to 2014 of $ 10,000 invested in mortgage-backed securities funds from BlackRock, JP Morgan, Legg Mason Western Asset, PIMCO, Prudential, and Vanguard (BGPAX, OMBAX, SGSYX , PTRIX, TGMBX, and VMBIX). While a $ 10,000 investment in high-yield municipal bonds would have increased to $ 14,334 during this time, a $ 10,000 investment in mortgage-backed securities would have increased to between $ 15,964 and $ 16,540 depending on the fund chosen.
Read the entire chapter for the details and nuance, but in short those awful, toxic assets that supposedly destroyed our financial markets were actually pretty decent investments.

Credit default swaps have been vilified by economically illiterate comedians such as Jon Stewart and scores of politicians.

If you’re someone who’s been “educated” by Jon Stewart (on this topic or some other), ask yourself if you’ve really been exposed to a contrary viewpoint. “Private Governance” has it. As a former (perhaps recovering?)  Jon Stewart fan, I found this cheap shot amusing. 

A couple quotes on the Bernie Madoff affair, which is in my opinion a glorious failure of the federal government’s attempt to govern:

The more important lesson, however, is that many mechanisms of private governance that easily could have prevented such fraud were available to investors, and they chose not to demand them. Despite the fact that Madoff’s returns were questioned by many, none demanded the private third-party administration and accounting services that other hedge funds were using.

The Securities and Exchange Commission ( Kotz, 2009 , p. 5) reports that “numerous private entities conducted basic due diligence of Madoff’s operations and … came to the conclusion that an investment with Madoff was unwise.”

Madoff’s $ 13 billion shortfall also pales in comparison to the $ 20 trillion by which Social “Security” is underfunded ( Kotlikoff, 2012 ). I have no respect for Madoff, but he at least had decency to trick investors into his fraudulent scheme, rather than force investors to hand over their money or force workers to “invest” 12.4 percent of all earnings in a retirement scheme.

In 2000 Markopolos and colleagues sent a report to the Securities and Exchange Commission stating that “the entire fund is nothing more than a Ponzi Scheme” ( Kotz, 2009 , p. 7) and followed up with additional complaints, including Markopolos’s 2005 report to the Securities Exchange and Commission titled “The World’s Largest Hedge Fund Is a Fraud.”
In other words, Madoff was handed to the SEC on a silver platter. Private entities that scrutinized Madoff’s fund found irregularities, if not slam-dunk proof of fraud. The policing function was being supplied by private institutions, but Madoff’s investors couldn’t be bothered to pay attention. It's not at all clear that the Madoff affair was a failure of the market to regulate itself. The self-regulating framework was clearly in place. It successfully identified the problem and even alerted the authorities. Neither Madoff's investors nor the federal government heeded the warning. It's patently bizarre to frame this episode as a failure of free markets. 

I’ll share the following two passages without commentary, other than to say I liked them:

Readers who have not had to deal with financial or business regulations are invited to read the Code of Federal Regulations. At 150,000 pages, it’s wildly interesting reading and not too hard to keep up with: just read one hundred pages each day, and you can get through the existing set of regulations in five years, and hope that they haven’t added too many others by the time you are done. Many of my friends work as compliance officers on Wall Street, and they say that although the regulations all but guarantee them employment, they would not wish the regulations on their worst enemy.
With little way to evaluate the goodness of any given rule or the performance of any individual judge, the public will be left wondering if the judge’s opinion or the legislature’s laws are simply personal opinions shrouded in false cloak of justice. Without profits and losses providing a feedback mechanism, judges and legislatures have little way of determining Hayek’s nomos or law of liberty.

The book closes with the following beautiful passage:

Private governance, in all of its forms— driven principally by the reliable engine of self-interest— brings people together to cooperate and to expand the scope of mutually beneficial exchange. With so much at stake and so much to gain, providers of private governance constantly experiment and collaborate to discover ways of eliminating problems. The mechanisms of private governance are potentially limitless. They facilitate cooperation in close-knit groups and among relative strangers. They facilitate cooperation between billions of people across political boundaries and anywhere where the government legal system is not capable of or uninterested in facilitating exchange. Private governance is responsible for cooperation in simple informal markets as well as the most advanced markets: stock markets, insurance markets, futures markets, and electronic commerce. Private governance makes markets work. Private governance replaces threats of coercion with numerous noncoercive mechanisms that expand the scope of trade, and it should be seen as one of the most successful peace projects in the history of the world.

I'm a self-identified anarcho-capitalist. I think almost everything the government does could be done better by private institutions. I have lingering doubts that you could privatize absolutely *everything*. But I have little doubt we could move 90% of the way there and things would get better and better without getting worse. I'm comfortably agnostic on whether things would deteriorate somewhere on that final span of 10%. I know that this is a fringe belief and that many people are uncomfortable with it. Reading Private Governance reminded me that my anarcho-capitalist beliefs are intellectually respectable.

Friday, July 31, 2015

Uber vs the Taxi Companies

I used Uber for the first time recently when I was in Colorado. It was pretty great. My ride from the airport to the hotel arrived within 2 minutes of my summoning the car. My ride back to the airport took a little longer, but I was kind of far from the middle of the city, so that was understandable. The ride was about $18 both ways; a cab would have been closer to $30. Both drivers were former cab drivers. Both told me that working for Uber was better. One said it definitively paid more, and the other said she made about the same but had more flexible work hours with Uber. One of the drivers gave me some good dirt on her former employer. Apparently some cab companies put out cars that have bad brakes and tell the driver, “F*ck you, go drive this. Fill this dangerous piece of sh*t with passengers and make me some money.” My driver told me she once refused to drive until her boss fixed the brakes on her car. Some cab companies “self-insure” rather than buy a commercial insurance policy, but then they weasel their way out of paying claims when their cars injure someone. They tell the injured party, “Sorry, we don’t have insurance.” Yeah, Sleazy Cab Company, but by deciding to self-insure, you assumed responsibility for those liabilities. Uber has been criticized for supposedly inadequately insuring their drivers on the physical damage coverages (the coverages that cover the Uber car itself), but I don’t think anyone questioned the adequacy of their liability coverage (which covers people injured or property damaged by the Uber car). The driver also told me how common it was for cab companies to hire ex-convicts. She told me about several instances of drivers at her company ripping off or robbing their passengers. Uber is sometimes accused of being potentially dangerous, of inadequately screening its drivers, or of having inadequate insurance. Only someone who is clueless about the actual operation of taxi companies can make these kinds of accusations. These aren’t new problems that didn’t exist until Uber came along. If anything, Uber has a better handle on these issues than the industry it is displacing.

Some people think that Uber is a problem because it’s not regulated like the cab companies. I think this reflects a naïve worldview. Supposedly in a regulated world, the government tells us what we’re supposed to do and we obediently follow instructions. In an unregulated world, without the government telling us what to do, we simply do as we please. The contrast between Uber and the cab companies dispels this naïve view of how regulation works. If anything, the taxi companies are actually sheltered from their wrongdoing. They have a government-enforced monopoly, so they aren’t subject to the kind of competition that governs other industries. Competition keeps you honest. I get the strong sense that ideology drives a lot of the Uber-bashing (just as it probably drives much of the Uber-boosting, to be fair). Uber has indeed flouted the regulations governing taxis, which is a good thing. Uber has shown us that passengers are better off without the regulations and licensure restrictions governing taxis. Passengers have the option of insisting on the “safety” of the regulated taxis, and they are opting for Uber instead.

I’ve seen some pretty bad opinion pieces bashing Uber. As far as I’m concerned, every single one of them should end with the line, “Of course, all things considered this is a huge improvement over what we had before.”

Friday, July 24, 2015

Political Power

Beware a dangerous drug known as political power. You should learn to spot the warning signs:
  • Unlike most other drugs, use of political power is always abuse.
  • Political power is a powerful aphrodisiac.
  • People who experiment with political power often become lifelong users.
  • Political power affects speech, sometimes causing individuals to ramble incoherently and with a total lack of self-awareness. Affected individuals may speak in sentences that, while grammatically correct, lack any content. Unwary audiences often get a “contact high” from such rambling individuals and become intoxicated themselves.
  • Political power can cause arrogance, overconfidence, and delusions of grandeur.
  • Political power can cause otherwise ethical individuals to commit crimes such as theft, assault, kidnapping, and even murder.
  • Political power can cause otherwise intelligent people to completely lose their facilities for reason.
  • People under the influence of political power often have “mind-blindness” and are often unable sympathize with other human beings.
  • Individuals who abuse political power are often adept at evading the law.
  • People who use political power may appear charming to observers, but they are actually very manipulative and dangerous. Like serial killers. Also, many of them are serial killers.

Monday, July 13, 2015

Chart Inconsistency

Mathematical presentations of arguments, whether in science or economics, not only make  [arguments] more compact and their complexities easier to follow than a longer verbal presentation would be, but can also make their implications clearer and their flaws harder to hide. For example, when preparing a landmark 1931 scholarly article on economics, one later reprinted for decades thereafter, Professor Jacob Viner of the University of Chicago instructed a draftsman on how he wanted certain complex cost curves constructed. The draftsman replied that one of the set of curves with which Professor Viner wanted to illustrate the analysis in his article was impossible to draw with all the characteristics that Viner had specified. As Professor Viner later recognized, he had asked for something that was “technically impossible and economically inappropriate,” because some of the assumptions in his analysis were incompatible with some of his other assumptions. That flaw became apparent in a mathematical presentation of the argument, whereas mutually incompatible assumptions can co-exist indefinitely in an imprecise verbal presentation.

From Thomas Sowell’s Basic Economics. I love this story. I’ve always loved a good bull-session. I remember in college trying to tell a friend (probably on more than one occasion) to write down their argument on paper, rather than allowing it to be a jumble of ideas existing entirely in one’s head. An incoherent thought can survive a long time in your own head; writing it down makes you confront any obvious inconsistencies. Everyone can benefit from this simple exercise: write down what you believe such that you might convince an honest skeptic; do NOT write as if you are preaching to the choir. Admittedly, some people are immune to this test and embrace any nonsense that spews forth from their pen or keyboard. “Diarrhea of the pen” can be fine, so long as you clean up after yourself.

Thomas Sowell is describing the next step in this process – converting your argument as far as is possible into a purely mathematical or logical statement. I applaud anyone who takes it that far. Sometimes nonsense passes the “state it in plain English” test, but then fails the “convert it to math” step. I am sometimes irritated with people who have expressed a strong opinion without going through any of these steps. I consider it rude to waste people’s time with half-baked nonsense. If you don’t have an informed opinion about something, you probably should spend more time learning and thinking about it and less time talking about it.

Friday, July 10, 2015

The War on Drugs is Logically Incoherent

I have read many criticisms of the War on Drugs, but I never see it pointed out that it is internally inconsistent. It truly requires inconsistent assumptions to work.

Are drug users rational or irrational? If they are rational, then they are already accounting for the built in deterrents of drug use and the current rates of use are appropriate. If they are irrational, then legal punishments will fail to deter them.

One can think of this as asking two yes/no questions and filling out a grid with the four possible combinations of answers. The first question is: Is drug use harmful? The second question is: Are the users rational? The combination of answers can be used to set the optimal drug policy. If the answer to the first question is “No,” then your job is done. Legalize the drug for use. It doesn’t matter if people are rational or irrational if they’re doing something that isn’t harmful.

So what happens if the answer to the first question is “Yes”? Consider the “drug use is harmful/users are rational” combination. There isn’t a problem here, because the users are already accounting for the risks of drug use, taking appropriate precautions, and using appropriate amounts. “But what about costs to third parties?” you say? Those are also already accounted for. If taking “Drug X” might turn me into a murderer (or burglar or rapist), then as a rational user I would already be accounting for that probability. Not liking the prospect of a long prison term, I’ll have moderated my drug use or decided against use entirely. And in any conceivable regime DUI would remain a crime, regardless of the legal status of the drug. In the “rational user” scenario, drug use has some costs *to me*, but all the “external” costs are internalized, because all the ways I might harm somebody under the influence are already criminalized (and rightly so!). In this scenario, drug users will respond to criminal sanctions against drug use by reducing use, but that’s overkill because they are already accounting for the costs and have already moderated their behavior appropriately. You’ll achieve some additional deterrence, but it can hardly be worth the cost of needlessly punishing the users who are caught. Keep in mind that “drug prohibition” means “occasionally ruining the lives of a few random drug users.” This is a cost that shouldn’t be taken lightly.

Now consider the “drug use is harmful/users are irrational” scenario. In this case, users are not deterred by the pharmacological risks of drug use. However, they are also not deterred by the legal risks of drug use. So you can “ban” drugs and punish a few random drug users, but the deterrent effect is too small to matter.

In none of these scenarios can any serious person recommend drug prohibition as a policy. You either fail to achieve any significant deterrence, or you succeed in deterring something that’s not a problem. You don’t get to assert that drug users are too irrational to respond appropriately to one set of risks (the pharmacological risks of drug use) and yet rational enough to respond appropriately to another set of risks (the legal risks of drug use). Such an assertion, implicit in all advocacy for drug prohibition, is logically incoherent.

Of course this is all a little too glib. These things aren’t binary. Drugs vary in the degree of harm they might cause. People vary in their degree of rationality. The severity of the legal sanctions can vary. And not all the external costs of drug use are truly internalized (think of the spread of AIDS from IV drug users to their non-using sexual partners, which isn’t effectively criminalized). Still, it’s hard to tell a story where the punishment achieves any significant deterrence.

Assume for a moment that people are rational enough to be deterred by legal sanctions. To figure out how much deterrence you are achieving, you have to now compare the costs intrinsic to drug use to the legal penalty for drug use. The intrinsic costs include things like the possibility of death, serious health problems, alienation of friends, loss of social status, loss of a job, and the time and money spent acquiring and using the drugs. (You would have to discount the “severe but unlikely” items, like death, by considering the small probability of realizing those costs. Also, note how some of these “intrinsic” costs can be exacerbated by the black market status of the drug.) Seen this way, drug prohibition doesn’t raise the cost of drug use from “zero” to “something positive”. It raises the cost from “something substantial” to “something somewhat more substantial.” You can achieve a great deal of deterrence by threatening drug users with life in prison or the death penalty, but with severe penalties you risk doing more damage than the drugs themselves are doing. In this case the cure is worse than the disease, so what’s the point? You can expect significant deterrence ONLY in a regime where the expected harm from legal sanctions is comparable to the expected harm from drug use. If a government DOES achieve any kind of significant deterrence, its lawmakers and technocrats should suspect that the penalty has been set too high.

Let’s consider another set of two binary questions: Are the intrinsic costs of drug use high or low? Are the legal costs of drug use high or low? If it helps, think of these costs as something concrete. A “low” cost might mean a 0.1% chance of ruining your life, or perhaps the loss of a week’s income. A “high” cost might mean a 5% chance of ruining your life, or losing a full year’s income. Use whatever measure you like, and use whatever differential between “low” and “high” you like (I’m using a factor of ~50). In the low/low and high/high scenarios, you can probably assume there’s some degree of deterrence. The intrinsic costs of drug use (those costs that would be present in the absence of legal sanctions) are comparable to the legal costs. If you’re roughly doubling the price of something, you should expect to see a decline in the quantity demanded. But in both cases the added (legal) harm is comparable to the (intrinsic) harm deterred, so it’s hard to declare “victory.” In the “low intrinsic cost/high legal cost” regime, you can say with some certainty that there is a great deal of deterrence, but the harm done to the few random users who are sanctioned is difficult to justify. Naturally if you take an activity that is mildly dangerous and make it 50 times as dangerous, you’ll surely achieve some deterrence. But surely it’s not worth it. In the “high intrinsic cost/low legal cost” scenario, you don’t do much additional harm, but you don’t really achieve much deterrence either. (If you use the cost differentials I give at the opening of this paragraph, the increase in cost is about 2%.) So you achieve a completely insignificant amount of deterrence, and to do so you still have to harass a few drug users. In none of these cases can you confidently claim that the deterrence is worth the costs imposed by legal sanctions. Ideally you could achieve a great deal of deterrence in return for doing a small amount of harm to existing users, but it’s hard to imagine a scenario were this actually happens. If you’re an economist drawing someone’s demand curves for drugs, you’d have to specify that there’s an inexplicable discontinuity that the legal penalty exploits perfectly.

To properly do this analysis someone would have to specify everyone’s demand curves for drugs and show what happens when you add the costs imposed by legal sanctions on top of the intrinsic costs. That said, it’s worth exploring this exercise in plain English. I’d be very surprised if anyone came to a substantially different conclusion by drawing explicit demand curves and doing a formal cost/benefit analysis of imposing legal sanctions.

In this entire discussion, it may seem that I’m ignoring the legal sanctions on the supply side. For the most part, drug users get a slap on the wrist and drug dealers, smugglers, and producers get heavy penalties. These supply-side penalties simply serve to drive up the market price of illegal drugs. In my above discussion of the legal costs of drug prohibition, the cost includes both the legal penalty applied to the user and the increased market price. As a side note, this entire regime of extreme legal penalties on the supply side is terribly inefficient. If a government wishes to increase the market price of drugs, it should do so with a tax that it can collect. You have far less collateral damage in terms of drug dealers killing each other, tainted product, inconvenienced motorists being subjected to unnecessary searches, and terrified residents being subjected to no-knock raids. And in the case of a tax, the costs imposed on producers actually *go to* someone. They become a “transfer” instead of a “dead-weight loss.” The “tax” regime is infinitely preferable to the “criminalize producers” regime. But that could be another post all on its own.

Note that all of the above discussion is broadly consistent with the empirical record of drug prohibition. We have over a century’s worth of evidence covering very different anti-drug regimes (mild to severe punishment) and we see very little change in overall drug use. The War on Drugs is busted. It's time to move past it.