Bastiat's Bastions

A few days ago I posted this comment on how local governments protect existing businesses from competition by erecting barriers to entry through occupational licensing.  That story reminded me of  another story along similar lines, about a pair of Washington, D.C. entrepreneurs, Taalib-Din Uqdah and Pamela Ferrell who started their small business, Cornrows & Co. in 1980, specializing in African hair braiding.  The pair came under fire by the DC cosmetology board for having a cosmetoloty license, which would require going through a cosmetology school and passing a test on methods of cutting, dyeing, straightening, and perming, but would cover their braiding techniques.  Here is the Institute of Justice’s “Backgrounder” on the case.

Last year, I posted this on the exams required for new florists that the Louisiana board that licenses florists uses to keep its numbers down and their prices up, mentioning other cases of occupational licensing, like the ones for CPAs and massage therapists.

Back in June of this year, John Stossel penned this article on local regulation of both taxi operation and hair braiding, and how it hits the poor, the people that politicians often claim to be fighting for.  Stossel makes a great case here against this sort of occupational licensing.

When it becomes more difficult to become a competitor than to go along with the status quo, both consumers and these competitors lose, all in the name of consumer protection.  What irony!  Or is it just that we don’t realize that Orwellian “NewSpeak“ has been here  for some time.

-MC

Well, just like the line of Cain’s accusers, these stories of special favors for political donors seem to have no end.  In this story, it seems that the White House has once again given out about a half billion dollars of taxpayer money to a political donor to provide a product that we can get at a better price elsewhere.  On top of that, it is not sure that we need this product.  This money is for a vaccine for a disease that was completely eradicted in 1978, smallpox, a virus only known to exist in locked freezers in the US and Russia.  On top of that, this new vaccine cannot be tested for human use and costs about $250 a dose, well more than the $3 a dose cost  our of existing vaccine stock. 

Maybe if I give them a lot of money, I could get the federal government to buy my product, a true technological breakthrough, a circular shaped object used to roll things on, something I call “the wheel.”

–MC

In case you haven’t noticed in the news these last several months, there are many life-saving and life-extending drugs in very short supply, here is a rather informative article on the issue from The Atlantic, originally from TheDoctorWillSeeYou.com, that should provide some background.

Normally, markets have a self-correcting mechanism for dealing with shortage and surplus problems:  shortages bring about a rise in prices that increase the amount producers offer and rising prices cut some buyers out of the market, as they turn to substitutes, and surpluses bring about the opposite market responses.   Why isn’t this self-correction response happening in these drug markets?  The article from Thedoctorwillseeyou.com offered a few reasons.  What is not the answer is that the market for drugs is somehow different.  In some cases, foreign drug suppliers may not be meeting our drug purity standards by lax quality control, but this could be handled through standard setting in contracts.

Any student in introductory economics sees that most shortages are caused by a lack of an incentive to produce what customers want and at prices customers are willing to pay.  Shortages usually occur because of either price controls or because of government or public production which lacks profit incentives.  Dr. Exekiel Emanuel, a medical ethicist, oncologist and former White House advisor, wrote this article in the New York Times back in August.  Dr. Emanuel cuts to the problem in the article.  He writes:

The underlying reason for this is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.

Historically, this “buy and bill” system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up “average wholesale prices.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.

The result is clear: in 2004 there were 58 new drug shortages, but by 2010 the number had steadily increased to 211. (These numbers include noncancer drugs as well. )

Just as Bastiat wrote repeatedly in such essays as “What is seen and what is unseen,” the law of unintended consequences lays waste to our plans and shows the stupidity of our poorly considered laws over and over again.    Unfortunately, we often fail to “connect the dots,” to see the consequences of our misguided actions, to see that the shortages are because of the price controls.  The 2003 legislation limited the ability of drug manufacturers to raise their prices and has kept more and more drugs from reaching patients.

Notice another result of the law.  Since it causes shortages, it raises what economists call “search costs.”  In this article from McClatchy, it is suggested that  the estimated size of these search costs for these drugs is $216 million per year.   So, under the 2003 legislation that expanded Medicare into prescription drugs, we keep prices from rising too quickly, but at the expense of patients dying and extra millions of dollars of search costs in attempts to locate drugs that are not to be found.

The consequences of treatments of price controls are well unknown, and the experimental trials have been conducted repeatedly over forty centuries, with the effects always being shortages.  Sometimes a problem can be poorly diagnosed, leading to the wrong treatment.  Sometimes, though, policy makers power fail to understand both the side effects of the treatments they prescribe and that those side effects can be worse than what they aimed to treat.  Such policy makers deserve to get their licenses revoked.

-MC

In any basic microeconomics class, the role of information, especially about prices for competing goods, is discussed.  In this article from NBC33 News, a Baton Rouge plastic surgeon, Dr. Jonathon Kaplan, has created a smart phone app for patients to search through the prices for local medical procedures.  By better informing patients about alternative sources and their prices, the local market for medical procedures, clearly a monopolistically competitive market, as every doctor’s services are different in some way from her competitors, the elasticities of demand for these services increases, making these markets more competitive.

-MC

This past Tuesday, President Obama delivered the annual “State of the Union” message .  His theme was “Winning the Future.”  He correctly noted that a major component of winning the future is investment in research and development, the production of new technologies, new ways of doing things.

President Obama noted:

 “The first step in winning the future is encouraging American innovation.  None of us can predict with certainty what the next big industry will be or where the new jobs will come from.  Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution.  What we can do — what America does better than anyone else — is spark the creativity and imagination of our people….

“Our free enterprise system is what drives innovation.  But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need.”

President Obama correctly suggests that innovation, the development of new technology, is crucial for our society, for our economy, and that the profit motive is behind such innovation.  He is also right in understanding that the profit incentive does not work well in providing the incentive for investment in basic research.

Economists have long made a distinction between goods that can be profitably produced and marketed to individual buyers and goods with benefits that are shared amongst the general public and cannot be sold through voluntary markets because once provided, others will free ride on those who provided the good in the first place.  The first type of good, a private good , is like a sandwich—if one person buys that sandwich, he can consume it and that means less for others.  Sellers of private goods can decline to provide their goods to those who are unwilling to pay for them.  Private goods can be profitably sold in voluntary markets. 

On the other hand, some goods have a shared consumption characteristic.  For example, in a city, air quality is mostly shared.  Protection from foreign invasion of military forces is a shared good as is protection from terrorists.  If I am protected from terrorist attacks, so are those who are near me.  This type of good, called a public good http://en.wikipedia.org/wiki/Public_goods, has benefits that cannot be denied to non-payers, not from some law, but because it is just too costly to do so. 

Similarly, research is divided into several types, one of which is referred to as basic research (http://en.wikipedia.org/wiki/Basic_research) and another as applied research (http://en.wikipedia.org/wiki/Applied_research).  Basic research delves into theories and generally cannot be kept from being used by others, but does not have immediate commercial use.  Some applied research has immediate commercial use, while some applied research has a commercial use.  Applied research is often patentable, while basic research is not.  Basic research is a type of public good, while applied research is a private good.

These distinctions help us understand why universities, especially large research universities, have more of an emphasis on basic research, while companies do most of the applied research, developing patentable products.  Private firms have what economists call a “comparative advantage” in producing private goods, because there is a profit to be made.  Comparative advantage (http://en.wikipedia.org/wiki/Comparative_advantage) is about producing at a lower opportunity cost (http://en.wikipedia.org/wiki/Opportunity_cost) than others, and in this case, lower costs than other types of entities, such as governments and non-profit organizations. 

A good example of the problem when tasks are inefficiently done, in other words, not done by those who can do them at least cost, not done according to what economists call “comparative advantage” would be to have a gifted athlete, such as New Orleans Saints star quarterback, Drew Brees, selling hot dogs in the stands at the games, rather than making spectacular plays on the field.  He might be better at selling hot dogs than anyone else, but he is so much better at the quarterback position and so valued at that position, the Saints and their fans would be worse off if he sold hot dogs in the stands instead.  (Be sure to read the Wikipedia definitions and explanations of these ideas that are given above in the provided links.) 

Private for-profit firms, because of the profit incentive, enabled by the use of enabled by constitutionally mandated patents, are much better at applied research that involves product development than governments.  The profit incentive induces profit-seekers to find ways of accomplishing things that are less costly.  This includes finding lower cost ways of providing incentives to supplier operators, such as the scientists whom they employ.    

Governmental entities, having no incentive to earn profits, and so, no incentive to cut costs, are ill-suited to developing products at a low cost.  Just as President Obama noted in his “State of the Union” message, we cannot predict where the “next new thing” will be, and so, it is better left to entrepreneurs to develop new products.  Public bodies, however, are better suited to financing basic research than for-profit firms, as firms will spend little time, effort and money on developing something that suffers from the free-rider problem.

So, what we see is that the development of new products is better carried out by private firms who have both the incentive to carry out this work at least cost and are better suited to risk-taking involved in deciding which research path to try, with many leading to dead ends, and only a few being profitable.  On the other hand, basic research which results in general findings which usually have no immediate applications in profitable enterprises, but sometimes lead to a host of applications, is best financed by government because private firms are not able to keep others from using their basic research, as it is not patentable.

Imagine, then, the surprise of many when it was recently announced in this Gadiner Harris New York Times article  that officials with the National Institutes of Health “have decided to start a billion-dollar government drug development center to help create medicines.”

The reason that the government should do invest in developing new patentable products, they claim, is because of the sharp slowdown in patent applications by pharmaceutical firms.  They also claim that a billion dollars is a small initiative when it often takes a pharmaceutical firm a billion dollar investment in research to create just one new product.   

If government experts cannot tell what the most promising area for research is, and if governments are ill-suited to developing new products, it seems that taking these funds out of other places, whether basic research or from private industry, such as the oil industry, as the President suggested as the place to get funds for his new research initiatives, and using them for government directed research into new products, is like taking Drew Brees off of the field and into the stands to hawk hot dogs.

What the Obama administration should ask before beginning this new quest into the drug development enterprise is “why have patent applications fallen so drastically from 2008 to now?”  Two possible reasons should be obvious and should be examined.  First, could it be that just as investment in other areas have dropped off because of the recession and the lack of confidence people have in the future, the same reluctance to invest may have hit the pharmaceutical industry.  A second possibility that the administration may not want to believe, but, nonetheless should be examined, is that the push for health-care reform by the administration, with its likely impact on lower profitability of pharmaceuticals, may have reduced the incentive to invest in new drug development so much that patent applications fell.  But whatever the reason, it should be clear that the government’s role in research is one of supporting basic research, while private industry is better suited to developing new products, such as new drugs.  We will be in a better position to “Win the Future” if we have the players in the process in the roles for which they are best suited, where they have a comparative advantage.

-MC

Years ago, I read Tom Godwin’s science fiction short story, “The Cold Equations.”  Wikipedia has a pretty accurate summary of the story here.  Sometimes in life we have to make decisions not to help someone, because by doing so, others will react in ways that bring harm to themselves and others. 

A fire department in Tennessee let a house burn to the ground and did nothing to put it out, but then put out a fire that spread to the neighbor’s house (read the story here).  Whoa.  Harsh.  But perhaps, the result of those cold equations.

Notice that the fire was in a rural part of a county, outside of the town fire department’s jurisdiction.  The fire department for years had offered to provide fire protection to homeowners in areas outside of their city limits, provided the homeowner had paid a $75 annual fee–sort of a form of fire insurance.

If they accepted the $75 fee when a fire was burning, no one in those rural areas would ever pay again for fire-fighting services.  Then, the fire department would not have the resources to fight fires outside of the city limits.  No one in the rural parts of the county would have fire protection after that.  This is a problem economists call the “free-rider problem,” where people expect to be able to let others pay for their goods or services.  The suppliers are not able to collect enough to be able to provide the service at all, and so they do not, even though it is worth what the sellers are asking for the service.  The result is that no one gets the service.

And while I do not like the Obama Health Care program, forcing people to pay ahead of time making them buy health insurance is just a reaction to a free-rider problem we have in health care, especially since emergency rooms in hospitals are not allowed to do what the fire department did, they must treat the patient.

So, while the decision of the fire department seems harsh, if they were to have gone ahead and put out that fire, they would soon have been unable to provide such services to their rural neighbors at all.

–MC

As we should all know by now, there is an outbreak of swine flu spreading around the world. While this strain of flu has proved rather deadly in Mexico, it has not yet been so fatal in its U.S. cases. While most of the response in the U.S. and the rest of the world has been cautious, some voices have been on the panic end of the scale. Vice President Joe Biden, always ready to open his mouth wide enough to fit his foot, told the press that he advises his family to avoid air travel, and any other mass transportation mode, such as trains and buses (see the USA Today’s “Today in the Sky” air travel blog by Ben Mutzabaugh).

The problem is that many people will take Biden’s advice. But shouldn’t that reduce the spread of swine flu? Maybe. But there is something else that people need to keep in mind that may not occur to them. By thinking that air travel is now more costly, in terms of one’s health and the risk of getting the flu, this increase in the non-monetary cost flying will reduce the amount of miles traveled by plane and will surely increase the miles traveled by automobile if there is a significant positive cross-elasticity of demand between air and auto travel. Shane Sanders, Assistant Professor of Economics at Nicholls, had a paper published recently in the Journal of Economic Education that should help us think about value of Biden’s advice.

In his paper with Dennis Weisman and Dong Li, Sanders discusses the substantial cross-price elasticity of airline and automobile travel, which suggests that higher prices for airline travel induces people to substitute auto for air transportation. Of course, health fears, as they raise the perceived cost of air travel, should also induce substitution into auto travel.

The problem is that auto transportation is not as safe as air travel, and it is not even close. According to the Department of Transportation’s statistics (shown and cited in the Sanders, Weisman and Li paper), for every 100 million air passenger miles traveled, there are .3 fatalities, while for every 100 million auto passenger miles traveled, there are .97 fatalities, so passenger mile for passenger mile traveled , auto transportation is over 32 times as deadly.

So, without realizing the relative safety of air and auto transportation, when people hear that Vice President Biden is suggesting to his own family that they avoid air travel, some people will switch from air travel where the chance of a fatality is very small, even after factoring in the very minute chance of getting swine flu, and passing it on to family members. In this case, the number of fatalities, including swine flu, is likely to increase.

-MC

As I discuss in my Health Economics class, hospitals are, in most places, the largest employers of nurses.  With the nursing profession still dominated by women, often as second earners in their household, nurses tend to be less mobile than many other professionals.  In addition, in many communities there are few hospitals within commuting distance, giving those hospitals in commutable distance what economists term as a “monopsonistic” position in wage determination.

A monopoly is a market type characterized by having only one seller or by a very dominant seller. A market that is monopsonistic, or simply a “monopsony,” on the other hand, is a type with just one buyer.  The “mon” (from Ancient Greek “monos”) part of the word means “single,” while the “opsony”  (from Ancient Greek “opsnia”) part means “purchase,” so “monopsony” means a single-purchaser market.

When a market has a single buyer, that buyer has an extraordinary amount of bargaining power and can strongly influence the market price.  To get more nurses, better pay and/or better benefits must be promised or the hospital will be unable to attract more people to be nurses at their hospital.  That is, the supply curve of nurses is upward sloping, so if a hospital wants more nurses, they would have to increase nurses’ pay, new and incumbent nurses alike, or incumbent nurses may just quit to be rehired later at the higher pay.  Or they may just make things difficult for the hospital administration that pays new nurses more than loyal workers.

Let’s look at a simple numerical example.  Suppose that a hospital could attract and maintain a workforce of 500 nurses by paying them each $50,000 a year, for a labor cost of $25 million a year.  Now suppose in order to increase this workforce up to 600, pay would have to go up to $60,000 a year to attract the next 100 nurses, often from greater distances.  In this case, labor costs increase from $25 million to $36 million, or 44% more in labor costs for a 20% larger force.  This is because both the additional 100 nurses had to be paid more, but so did the 500 incumbent nurses.

How can the higher pay be limited to just those new nurses without paying more to the existing nurses?  This is where nursing contractors come in.  The contractors work for someone else and usually commute great distances.    The pay is higher for the contract nurses and the hospital’s nurses do not revolt.  In this case, the labor costs are the $25 million for the hospital’s 500 nurses and another $6 million for the contract nurses, pushing costs up to only $31 million instead of $36 million, or by 24%, not much more than the increase in nurses.

This past Saturday I, along with some colleagues and a student of mine from Nicholls, attended the Louisiana Political Science Association meeting at the Grambling State campus.  The meeting was helpful and very cordial, even though many of us strongly disagreed with one another.

There was a panel of undergraduate papers with two papers from Centenary students (my student and I presented a joint paper with Dr. Sanders in another session).  There was another panel of graduate student papers.  Both of these undergraduate papers were very interesting.  Allison Saylor an undergraduate student at Centenary had a nicely done paper titled ““The Bush Administration, Private Military Contractors, and the War on Terrorism,” in which she examined the substantial growth in the use of military contractors in the war in Iraq.  She posed a very useful question, “why would the war in Iraq require so many more contractors than we saw in previous wars?” (Quote marks are used here for my interpretation of her paper rather than a quote from her.)

During the discussion period after her presentation, I think the presenters, discussant, session chair and the audience arrived at a reason for this large expansion of contractors.  The last protracted war that the U.S. was involved in was Vietnam, and soldiers could be drafted then.  Any “desired” expansion (by the Administration) was met by increases in the number drafted. To expand under a voluntary force, we need to either attract more soldiers by increasing their benefits or by outsourcing non-combat roles to civilians.

The latter solution, outsourcing to private contractors, is likely to be less costly for two reasons.  Many of the non-combat requirements of a military force are things that many private sector companies are already doing and things where they have particular expertise, such as warehousing and goods distribution, food services, accounting services and construction.  Soldiers are no better at doing these activities and are probably worse than trained civilians at these sorts of  activities.  While this was also true during earlier wars, these activities in those days could be manned with soldiers who were drafted and forced to work below their opportunity cost or their voluntary wage rate.

The other reason for outsourcing certain tasks often performed by soldiers is exactly analogous to the nursing monopsony story told above.  The market for warriors is a monopsony market with the Department of Defense just about the only buyer in the market.

How can the higher pay be limited to just those new soldiers without paying more to the existing soldiers?  The contractors fill certain non-combat roles, while the military personnel perform the combat roles.    The pay is higher for the contractors, and the combat troops do not revolt.

While it might have been the case that certain contractors got sweetheart deals, no-bid contracts or cost-plus contracts, it is likely that troop increases with a voluntary force may have to increase pay to all rather substantially to get only a few more warriors.

I should point out that the return to the draft is not a solution to this high incremental cost of troop expansion, because the real opportunity cost of a draft is that some people are forced to do military jobs, often giving up positions where they are far more valuable to the country than what it pays its soldiers.  This social cost of the draft is hidden from presidents, congressmen, taxpayers and voters and they often do not consider such costs in their decisions.

Finally, it is almost ironic that those who kill (though often saving other lives and protecting freedoms) and those who heal face the same sort of labor market issues, and those who hire them face similar incentives to price or wage discriminate.

-MC

We are told by politicians that the way to reduce health care costs is by getting more people covered with health care insurance and getting more preventative care. Maybe. Maybe not.  When we look at the numbers, we have to conclude that the problem is that demand is shifting up faster than supply.  The only thing that will bring health care prices down is if we are able to get supply to increase faster than demand.

Recently, the White House hosted a Health Care Summit. C-SPAN had some good coverage on it that you see at their website. The links to the events are:

Summit Opening Remarks, Breakout Session, Obama and Kennedy: Closing Remarks on Healthcare Summit, BilyTauzin Interview on Pharmaceuticals.

Most of the discussion centered on health care coverage–insurance. I would suggest that the problem that most Americans face is not whether or not they are covered, but the high cost of coverage.  Premiums are very expensive. A lot of the productivity gains of the American worker in the last 20 years has been paid to the employee, not in wages, but in the employer’s share of health care premiums.

I plotted some health care data and came up with an interesting picture. I based this picture on two date sources: 1) National Health Expenditures 1960-2007 from the Centers for Medicare and Medicaid Services (http://www.cms.hhs.gov/nationalhealthexpenddata/ downloaded 3/10/2009) which provides estimates of the total expenditures in the US on health care and 2) the Consumer Price Index (CPI) subindex on health care (just like there is one on energy and another on food) which comes from the Bureau of Labor Statistics. I got a relative price of healthcare by dividing the Health Care CPI by the complete CPI (all goods and services). This tells us which is going up faster, general prices or health care prics and if HC is becoming more scarce (more in demand relative to what is going on with supply).

I divided the expenditure data by the Health Care CPI to get a quantity measure and then divided through by the population, to look at the quantity in per capita terms (more people means more buyers, but more suppliers too). Price and quantity combinations observed in the diagram below do not show a supply curve or a demand curve, but rather show where supply and demand intersect–the “equilibrium” values.

On the diagram above, the price is the Medical Care component of the Consumer Price Index (CPI) divided by the general (all goods and services) CPI, and multiplied by 100. 1983 is used as the base year (1983=100 for both all prices). The Quantity axis measures Health Care Expenditures per capita (Expenditures divided by the population) for that year and then divided by the Medical Care CPI, which gives us a measure of quantity for that year. Then, this quantity figure is “standardized” by 1983’s quantity (all years quantities divided by 1983’s quantity. The above should not be thought of as a demand or a supply curve, but showing the path of equilibrium prices and quantities for the years from 1960 (point furthest to the left) to 2007 (point furthest to the right). Think about how supply and demand must be shifting to give such numbers.

By the way, the 1960 point is at the lower left and the 2007 point is at the upper right. For things to look like this though, the demand must be growing or shifting out to the right faster than supply is increasing. And why has this occurred? Expanding health insurance coverage. The more someone else is paying our bills, the more we spend and the less attention we pay to our costs. Ever notice all those scooter store ads on TV, ads you never saw before Medicare started paying for scooter chairs? And all the ads say buy this and let Medicare pay for it (“If we approve it and Medicare turns you down, you get to keep the chair”), not a cent out of your pocket.

So, health care is way too expensive, because we have pushed up demand with all of our health insurance–and the politicians’ answer is more of the same, more HC insurance, more 3rd party payment, less individual responsibility. The folks at the Health Care Summit routinely avoid talking about doing anything on the supply side of the market–getting more doctors, more nurses more hospitals, more pharmaceuticals for the same prices (shifting supply out). Here are the questions we should be asking: How do we get the FDA to speed up its approval process? How do we get the med schools and nursing schools to open up their doors a bit wider? These are the things we need to get affordable health care, as universal health care increases demand without doing anything about supply.

-MC

One of the important points made in an introductory economics class concerns a measurement of demand, of buyer behavior, called the “elasticity of demand.”   Elasticity of demand measures how buyers respond to price changes by reducing their purchases.   Here are two possibilities to consider:   1) buyers respond so much to price changes, that when the price of the good increases, total spending on that good goes down;

2)   buyers cut back some when the price goes up, but not by much, so that price increases lead to more spending on the good.

The first case occurs when buyers can easily buy replacement good usually referred to as substitutes.”    An example of this first type of good might be something like chicken thighs, as there are other parts of chicken available, other types of meats and other types of foods, all of which substitute for chicken thighs to some degree.  This type of good is said to have an “elastic” demand.   The second occurs when there are few substitutes for the good under question, such as with an addictive substance, like tobacco or heroin, which are said to have inelastic demands.  

A way that some economics instructors drive home the importance of understanding elasticity of demand is by using the example of heroin and effectiveness of U.S. drug policy.   Heroin, being highly addictive, has a highly inelastic demand.   Higher prices lead users to cut back some, but by such a small amount that overall spending on heroin rises when prices go up.   When the U.S. DEA is able to reduce the supply of heroin into the country, the price of heroin naturally increases.   Since heroin has an inelastic demand, higher prices lead to increased spending on heroin.     Heroin addicts seldom have great jobs and so much of an addict’s source of spending is from money-making criminal activities, from prostitution and pornography production to thefts, ranging from car theft to burglary to mugging.  

What all this means is that higher heroin prices because of more effective interdiction of heroin imports leads to higher rates of money-making crimes even though the amount of heroin flowing into the country is reduced, because the street value of heroin coming in increases.   This suggests that giving heroin away, instead, would cause crime rates to fall.  

Well, that is exactly what happens.   In this article about legalizing heroin in Switzerland, it is noted that crimes by heroin addicts “have dropped 60 percent since the program began in 1994….”   In addition, if the government is supplying safe heroin, so that there is no possibility of running a profitable heroin trade, there will be no wars among rival heroin suppliers.That certainly should give us something to think about.-MC