Drive Down the Profits in This Business

Advance notices of the major drug policy speech that President Bush will make Tuesday evening say he’ll emphasize police and military firepower to bring pressure on criminals everywhere, from drug lords in Colombia to dealers on the mean streets of U.S. cities.

But profits in the drug trade have proved too attractive in the past for firepower to slow them down. And if Bush wants to succeed now, he’ll have to think about ways to reduce those profits.

Which means first he must follow the money--and that isn’t made in Colombia. The drug trade’s South American operations, from the growing of coca leaves in Peru and Bolivia to the processing of cocaine in Colombia--and even the profits of the drug lords themselves--account for maybe 20% of total drug money in the U.S. market. The North American end, smuggling drugs in and distributing them in the United States, accounts for 80%.

A lot of money is involved. The U.S. government acknowledges a total of $110 billion, and professor Bruce Bagley of the University of Miami, a drug trade expert, puts the total at $150 billion--with the wholesale, or South American, portion at $25 billion to $30 billion.

Rapid Appreciation

That makes illicit drugs a bigger business than legal pharmaceuticals, for which sales of all the major companies combined total less than $60 billion. It’s not that the illicit business sells more cocaine and heroin than the legal outfits sell penicillin and aspirin, but that the illegal stuff carries a risk premium.

The effect can be seen in the progress of a gram of cocaine. Cocaine that has been grown and processed costs $3,000 a kilogram--$3 a gram--when it leaves Colombia. But when it hits a U.S. port of entry--Miami, say, or Los Angeles--it is worth $12,000 these days--$12 a gram. What happened in between? The pilots and boatmen who brought it in charged a hefty premium for their risk of arrest and jail--or worse.

And from there, the chain of markups continues as the cocaine goes from hand to hand, getting diluted along the way with baking soda, or crystallized into crack. On the street today, that Colombian gram of cocaine might cost the equivalent of $130--43 times its Colombian price, or 11.6 times its price in Miami.

Legal products don’t appreciate that way. The $18 barrel of oil, for example, is refined and sold in gallons of gasoline for a total of about $54--three times the original crude oil price. Legal cocaine, which is used as a local anesthetic in eye surgery, costs less than $100 an ounce, or $2.85 a gram.

Risk Premium

Clearly, a lot of middlemen are raking in big money in the drug trade--including supposedly respectable bankers who launder drug money through sham corporations or secret bank accounts in Switzerland, Hong Kong and Panama. The commission for turning criminal money into spendable or investable cash is 5% to 10%--a very high fee for money handling. Legal money managers, who invest billions for mutual fund and pension fund investors, typically earn commissions of less than 1%.

Bluntly stated, the reason that drug trafficking goes on is that it’s immensely profitable.

So how to reduce the profit? Legalize the drug business, say some law makers and academic experts. Steven Wizotsky, a professor of criminal law at Nova University in Florida, argues that keeping drugs illegal and trying to stamp out the trade with police action, only raises the risk premium, and thus the profit for criminals. Ethan Nadelmann, a professor of politics at Princeton University, argues that a legal business, regulated by government, would reduce the violence of today’s drug scene.

New York State Senator Joseph Galiber, whose district is in the crack-ridden South Bronx, agrees. Galiber has introduced a bill to legalize drugs, tax the proceeds and use the money for education and rehabilitation.

But Galiber’s bill has received no support, and legalization won’t happen because the drawbacks are too serious. Usage would go up, as drinking did after the repeal of Prohibition in 1933. And this time, the users wouldn’t be adult drinkers but kids able to buy highly addictive drugs.

That’s not to mention that it would be dumb--legal alcohol and tobacco notwithstanding--for the government to legalize destructive substances such as cocaine and heroin. Its goal should be to curb this junk, not spread it. So Mayor Kurt Schmoke of Baltimore takes a middle course: He doesn’t favor legalization but does want education and community support emphasized as much as law enforcement.

Education? Isn’t that a little soft? Not at all. The fact is, education has done more than firepower to put a cap on U.S. drug usage. The University of Michigan’s annual survey of high school seniors has now shown two straight years of decline in usage of marijuana and cocaine. Simply put, word has gotten through of the dangers of drug use, and students are paying attention. There are similar reports of declining drug use among adults--although sadly not in the poorest neighborhoods.

What’s the point? That the drug war need not be a losing battle. If drug usage declines in the United States, both the profits and the menace of the drug lords will wither. So Bush and drug czar William Bennett have a real opportunity to clobber the drug trade--if in their program this week they emphasize helping those poorest U.S. neighborhoods more than chasing the Colombian cartel.