Thursday, June 19, 2008

Egocentrism in The War on Drugs and Supply-Side Economics

Supply-side economics and the war on drugs have had an enormous impact on our national consciousness and government policy for the past 30+ years. They are also both based in large part on the same flawed logic – that the driving force of the economy is the supplier. Instead, I believe the failure of the war on drugs highlights the role of the “invisible hand” in our economy and the peril of ignoring it.

The War on Drugs in 180 Seconds

Both supply-side economics and the war on drugs find their intellectual roots in the 1970’s. Nixon declared a “war on drugs,” a phrase he coined, in 1971. Nixon’s method of fighting was a bit different than the later war and the one we are continuing today. For example, Nixon’s administration was the only period of the war where the majority of funds went toward treatment rather than law enforcement. The DEA (Drug Enforcement Agency) was founded by Nixon.

Though later presidents made Nixon look “soft” on drugs by comparison, he exemplified the typical law-and-order approach that has come to define the war on drugs. For example, he appointed a commission to look into the best ways of dealing with the menaces of pot and heroin. When the commission recommended decriminalizing minor possession for marijuana, Nixon (and Congress) ignored them.

The war on drugs as we know it – distorted sentencing laws, lots of jail time for users, multi-billion dollar anti-drug wars in far flung locals – is a product of the later administrations. In 1986, Reagan signed a drug enforcement bill that set up a system of minimum sentencing standards and the extremely disproportionate sentencing for crack and powder cocaine. George H.W. Bush doubled the war on drug’s budget to $12 billion and spent most of the money on military machinery to battle drug cartels. After flirting with drug treatment in the first two years of his administration, Bill Clinton followed these failed policies by targeting growers in Bolivia and other South American countries.

The problem, as Adam Smith and countless other economists to follow have taught us, is that if there is a high demand for a product, the price will rise. The same thing occurs when there is a short supply. In the case of the war on drugs, we continue to remove producers from the streets and throw these deviants into jail. However, as Wallace-Wells points out, “We have nearly 500,000 people behind bars for drug crimes - a twelvefold increase since 1980 - with no discernible effect on the drug traffic.” As long as the demand for drugs remains high, new dealers will always fill the place of those we kill or put in jail. Even if we could instantly remove half of the drug supply and dealers from the market, this would only serve to drive prices up, further increasing the incentives for new producers and dealers to enter the already lucrative market. The consumer – not the producer – drives the market, and until we reduce the demand for illegal drugs, the market will create one.

This isn’t just theory. Wallace-Wells points to an early 1990’s study by RAND researcher Susan Everingham that the only cost-effective strategy to reduce drug use is drug treatment. Other studies have shown the same thing. But Everingham’s study, and Clinton’s drug tsar Lee Brown’s requests for more drug treatment funding, were ignored. After the Republicans took control of Congress in 1995, Clinton gave up on treatment and began sending the U.S. military against South American growers.

For a great article on the war on drugs by Ben Wallace-Wells, (from which I have borrowed liberally), go here: How America Lost the War on Drugs

All in all, the war on drugs has cost $500 billion over 35 years. Although many of the old drug cartels have been broken up, the availability and use of drugs hasn’t changed much.

While I’m on the topic, here is another article that points out some of the insanity regarding our current drug regulatory system.

Supply-Side Economics

The phrase “supply-side economics” was coined by journalist Jude Wanniski. At its most basic level, supply-side economics is based upon the theory that if tax rates were set to 0% or 100%, no money would be collected (I personally don’t see the logic behind not collecting any money with tax rates at 100%. Its not likely that this will ever happen, but I believe the government would collect something). Under this theory, there is a point between 0% and 100% where the maximal amount of tax revenue will be collected. Though I cannot speak for the original economists who put forth this theory, supply-sider politicians usually believe this number is lower than current tax rates.

Regan (from what I’ve heard) and Bush II both used supply-side economics to justify their tax cuts, and both policies led to massive government debt due to a reduction in taxes collected. Bush II has argued that by cutting taxes, we put more money in the pockets of businesses and individuals, which in turn stimulates growth, creating more revenue sources for the government which in turn make up for the money lost due to the tax cuts. While tax cuts stimulate some growth, the government only recoups 15-20% of its tax losses.

The rational behind supply-side economics puts the emphasis on the producer of economic goods. If producers have more motivation to produce, say supply-siders, then they will produce (and sell) more, boosting the economy. It is true that marketing has created some societal desires that might never have been present otherwise. However, there are limits to the ability of producers to determine how much they can sell. Overall, consumers determine what is sold and how much of it.

Neither the war on drugs nor supply-side rationalized tax cuts have realized their stated objectives. So why do we continue on with these failed policies?

The Producer-Centric Mindset

Why do these programs perpetuate despite the overwhelming evidence that they have by and large failed? The answers, of course, are complex, multi-faceted, and different for each. The war on drugs is heavily moralized, dating back to prohibition and the culture wars of the 1960’s. Drug users are believed to be morally corrupt, which helps justify jail time instead of rehab. It is also politically difficult for politicians to say it is our failing, our addictions that have created the problem, and much easier to blame foreigners, racial minorities, and the morally corrupt. Supply-side economics, on the other hand, has found an invaluable ally in small-government conservatives and their “starve the beast” mantra.

At the center of these two policies lies a common thread – the importance of the producer. Both policies place the producer at the center of the system. On the one hand, we believe that if we can prevent drugs from being produced, our problems will be solved. On the other, our salvation lies with the entrepreneur and business owner. If their life is easier, so the logic of our policies go, our lives will be better.

In our market system, the consumer is the driving force, the engine that drives the entire system. The producer plays a critical role, it has no role in the system without demand, where as demand may exist without a product (i.e. flying cars).

I fear that the same mistake that was made in the war on drugs is being made in the latest war, the war on terror. Much of our military policy has been about killing the terrorists and assassinating their leaders. If we destroy the producers of terror (whatever that may be – I’m not arguing that the war’s philosophical groundings make sense to begin with), then we end terror. Our policies do not recognize, however, that the terrorists fulfill a demand for an ability to fight, a demand for empowerment, a demand to fill power vacuums, a demand to fulfill Allah’s word as interpreted by some Muslims. There are a variety of demands that feed our declared enemies, and I think that a concerted effort to eliminate these demands instead of merely eliminating the producers of violence will lead to a more robust and sound solution.

So how do we get ourselves out of this producer-centric rut? Some answers depend on the issue. Part of the problem in the war on drugs is, I hope, generational. The association between drugs and “hippies” seems to largely reside with conservative boomers. Perhaps my perceptions are skewed, but I feel that a large majority of under-40 year olds don’t see drugs as distinctly within the right/wrong moral prism. Similarly, I hope the tax-and-spend-liberal vs. the small government conservative dichotomy is generational as well. God knows Bush has shown its inherent falsehood to many.

Finally, a bit of humility. The United States has a long and hallowed tradition of idealizing the producer. Rockefeller, Carnegie, Ford, Disney, Buffet, Gates – despite their flaws, the king producers are figures of awe. Even the nameless small-business owners and family farmers bask in the same rays of admiration. It is nicer to see ourselves in their shoes, to see our production as the thing of import. Yet these men would have been nothing without the demand of millions of individuals who consumed their products.


Daniel said...

First of all, this is a very interesting linkage; I am completely sold on the relationship between the war on drug's focus on producers and suppliers and the failure of that war. Furthermore, I am intrigued by the move to liken that linkage to what is occuring on the war on terror; I definitely think that there is some truth in the matter. Personally, I am inclined to believe that much of terrorism is a response to the hegemony of the United States and the bandwagon of Western (and increasingly Eastern, as well) Europe. Thus, I agree that terrorism currently fulfills some psychological need(s) and that the use of the all-powerful military fist of the United States to destroy the current "producers of terror" will only serve to place terrorist leadership into new hands. However, I'm not sure that I can really accept this fact as a flaw in the war on terror, because I don't believe that the ultimate goal of this war is to end terrorist activity. This war is really about so many other things and terrorism is really just a very marketable excuse. I consider one of the primary aims of the war to be a style of militarily-compulsed democratic nation-building in order to produce nations that are more amenable to joining the bandwagon and thus supporting US hegemony. Thus, the goal of the war may be to decrease the level of international dissent, but not by destroying terrorists, but by using terrorists as an excuse to remove particular governments.
In any case, I would also like to say a few things about supply-side economics and the policy decisions of this country of ours. Most importantly, I would like to suggest that the perpetuation of supply-side theories has more to do with the concentration of power in the hands of our nation's wealthiest citizens than with any libertarian influences. As you noted, our nation has a tendency to canonize successful producers, without recognizing the huge sacrifices that labor unions and the general public made in order for such men to achieve these high levels of success. Our nation's heroes are crooks, and we love them for stealing from us. Now, as ever, they are indoctrinating our youth with the glory of producers, those very people who own all of the means of production, those people who are reducing the American public to a mass of simplistic, uneducated wage-slaves. Supply-side economics is just a ploy by the rich to continue to use government to their advantage (and the detriment of the general public) by insinuating that economics is too complex for the ordinary citizen to understand, allowing them to assert this bullshit theory effectively.
Also, I just want to note that I think that it is unfair to pin blame on proponents of smaller government (libertarians); they are not typically supply-siders (or at least not ideologically). Libertarians are not the ones that have instituted and perpetuated tax structures that reinforce class inequality. Largely, they are the ones fighting (yes, for less taxes, but also) for fair taxation. In fact, their ideals ultimately suggest that the wealthiest citizens contribute the most to government projects like education, the highway system, the military, and the police system because they have the most to gain from such institutions and the most to lose in the absence of such institutions. Now, I will of course recognize that theirs is a flawed vision of human nature and thus a flawed system, but they are hardly to blame for these economic issues.
Lastly, I would like to point out that while I am not a supply-sider, they have developed some very strong arguments in their favor, some of which have some truth to them. First of all, I don't think that anyone since some real crazy-crazies in the first Reagan administration actually believed that the increased economic growth would be sufficient to completely offset the tax-breaks, and I really don't think anyone still believes such nonsense. (God, I hope no one does.) However, providing additional capital to producers does increase their ability to produce, and while demand is the ultimate economic driver, increased production creates a surplus of goods, driving down the price of said goods and thereby increasing the demand. Furthermore, increased capital in the hands of producers fosters greater risk-taking, which has been influential in the rapid development of new technologies.
Now, this is by no means to say that the same money could not achieve similar ends in the hands of the little guy, the consumer, the worker, the ordinary citizen, the wage-slave, but only to say that economics is very complex (which has allowed the rich and powerful elite to use it effectively as a tool).
I think that I've said enough for now.

Mark said...

First, I want to clarify a point: I didn't mean to imply that libertarians as a whole were responsible for supply-side economic practices. What I meant was that supply-tax pushers latched on to the rhetoric of small-government conservatives/libertarians to build political support for their policies. For better or worse, I have also noticed many people with conservative political philosophies (many of which overlap with classical libertarianism) support supply-side policies. But yes, it wasn't libertarians who put forth the policies in general - it was the producers.

I would also say that the economic side of libertarian ideology, with its emphasis on the individual, tends to lead to policies that favor producers. Maybe I'm wrong about what is "libertarian," but it seems that one of their classical policy proposals is the flat tax, which would help to funnel wealth to the rich at an even greater rate than the current tax code does.

As for your "war on terror" comments, I think I will make this week's entry. Stay tuned.

I do seem to remember people arguing that the recent tax cuts would help grow the economy, but I might remember people just arguing that it wouldn't and assumed that there was someone in particular they were arguing against, which you CANNOT do with most professional pundits. So many of them use straw enemies its sad.

Daniel said...

I agree that libertarian ideology may ultimately (in favoring the individual) favor the producers (or rather the bankers, because our nation's wealthy citizens are largely those people who don't PRODUCE anything but merely supply capital and own the means of production). However, I don't have a big problem with this because they do not wish to create a government that is under the control of the wealthy, or one that institues policies that benefit the wealthy (as our own government so often seems to do), but rather they want to eliminate the inequality created by governmental practices in the hopes of creating a level playing-field for all citizens. Now, I recognize that they fail to understand the importance of the inequalities that have already been created and which will persist if not battled against (i.e., the advantages of those born into wealth), but these inequalities persist in our current system despite the attempts of government to intervene.
Also, I would like to note that a flat tax would be a step up from our current situation as evidenced by the data presented in your very own "Tax Inequality". If the government were to decide that the income tax rate would be 30% across the board, then perhaps the burden of the highest taxes would not fall on the middle class, as it does now. Liberals tend to argue against the idea of a flat tax because they believe that a graduated tax would be more fair. Well, maybe that it is so... if the tax were graduated from a lower percentage for the poor to an increasingly large percentage as one moves up income brackets. However, a flat tax is far more fair than one in which the tax rates for the richest of the rich and the poorest of the poor are low and the tax rate on the middle class is the highest. Perhaps my understanding is skewed or misinformed, but it seems to me that a flat tax would be a step in the right direction even if it is not the fairest tax structure.
Finally, I didn't mean to imply that people don't believe that tax cuts for the wealthy wouldn't contribute to economic growth, but rather only that no one any longer believes that the growth stimulated by such tax cuts is sufficient to offset the loss in tax revenues by creating enough additional taxable wealth. People still believe that it will stimulate economic activity (and to a certain extent, it does), but not as much as the Reagan administration did when it first instituted such policies. Now, it is all the more clear that it is just a thinly-veiled attempt at allowing the rich to become richer at the expense of the middle-class.
As for more on the War on Terror, I can't wait.

Mark said...

When I said the flat tax would be a step in the wrong direction, I was specifically thinking about flat tax policy as I have seen it proposed over the last 5-10 years. A 30% flat tax would be interesting. The problem is that the actual flat tax proposals were 15% (Sen. Brownback, 2005) and 17% by Steve Forbes (ongoing, but he ran for president in '96 or '00 I think). In addition, Brownback's proposal wouldn't tax capital gains at all! These are the proposals I had in mind when I bad-mouthed the flat tax.

I don't think many rich people consciously say, "I want the rich people to rule the slave-wage poor." But I do think that they tend to favor policies, on the average, that benefit themselves, as most people do. And this leads toward policies that favor the rich. I am very reluctant to separate the actions of the government from the desires of at least some people, as I don't think the government is all that separate. In fact, if you look at the jobs many government officials hold before and after their terms in office, you will see that they are not.

I don't think that its fair to look at government policies and say, "This creates disparity." Instead, we should look at how government policy favors one group of people over another. There will always be inequity, and government policy should always, in my opinion, be trying to strike a balance between civil liberties and equality without being overbearing. I recognize that many libertarians don't want to favor rich people when they eliminate government policies, but that is going to be a common side effect. I doubt there are many people at all, let a lone libertarians, who would support a 100% estate tax. But if the only objective was to create a level playing field for individuals, I think that would certainly help.