Vijay K. Mathur
Published in Standard-Examiner, May 27, 2010, Ogden, Utah
An Associated Press story recently concluded that U.S. has spent $1 trillion over 40 years on the war on illicit drugs, but there is no end in sight. The use of illicit drugs like marijuana, cocaine and methamphetamine (meth and/or crystal meth), and the accompanying violence, corruption and adverse health outcomes for the users still continues to grow. It appears that the supply side strategy has not worked.
Basic economic reasoning informs us that in any market, legal or illegal, the price and quantity bought and sold depends on supply and demand. Suppliers are driven by profit motive and are willing to supply more as price rises. The consumers want to buy the product because it gives them satisfaction and they are willing to buy more if the price falls. The transaction between buyers and sellers takes place at an agreed upon price. The price rises if demand increases more than supply and falls if supply increases more than increase in demand. Markets will thrive as long as there is a demand for illicit drugs and profits can be earned.
The prices of illicit drugs may change not only due to changes in their own demand and supply conditions, but also changes in prices of other illicit drugs. For example, if the marijuana price increases relative to cocaine prices, many consumers may switch to cocaine, hence increasing cocaine price as well.
Illicit drug markets are highly profitable. For example, the National Institute of Drug Abuse estimates that powder cocaine typically sells for $100 to $125 per gram, but costs $9 to $40 per gram. Prices and costs vary by locations. As profits increase we expect more entry by suppliers. In fact, wholesale suppliers have an incentive to spread addiction among the general population through an attractive pricing policy so they can increase their retail outlets, because each addict is a potential retailer.
Selling drugs at the retail level becomes an attractive option, especially among those who have less employment and earning opportunities in legal trades. In 2005, a UN report estimated that the worth of global drug markets is close to $320 billion per year. Reducing the flow of the supply by catching a few kingpins in the trade will not stop the flow because their places are filled by others waiting for the opportunity to enter lucrative markets. The risks are great but so are profits. There is also a tendency to use violent methods to monopolize the trade. Monopoly power gives the seller pricing power and a larger market share and hence more profit.
The supply side policy also results in many adverse societal side effects. In addition to law enforcement and judicial costs, it has increased the prison population at huge expense to taxpayers, thus depriving resources from socially beneficial programs. Violence is the natural outcome when competing suppliers attempt to squeeze others out from their markets. Violence also spills over to the general population, thus paralyzing other legal economic activities. An exhaustive review of scientific studies by the International Center for Science in Drug Policy confirms the association of violence and prohibition of drugs around the world.
Corruption of law enforcement personnel, politicians and judicial officials is another side effect of supply side policies. A study in 2008 by Edgardo Buscaglia, Columbia Law School, found that expected severe punishment without eliminating assets and supporting networks of organized crime leaves the criminals with the ability to finance continued and expanded corruption.
What can be done to minimize the drug problem? Make the trade unprofitable, legalize drugs with appropriate regulations on suppliers and consumers just like we regulate medical drugs. Tax drugs and dedicate that revenue and other savings from enforcement, judicial systems and prisons to educate children and adults about the harmful effects of drugs on health and general well being and treat those who are addicted.
The education process has to start early in childhood. Increased competition in the open market will dry up profit to organized crime and at the same time start us on the path of declining demand. The demand-based strategy is not made to condone negative behavior, but rather to change behavior. It is not claimed that this strategy will eliminate the black market in drugs, but it will minimize it. We still have a black market in legal and addictive medical drugs like Ritalin, Oxycontin.
Economist and Nobel Laureate Milton Friedman stated in Hoover Digest in 1998,"Compared with the returns from traditional career of study and hard work, returns from dealing drugs are tempting to young and old alike. And many, especially the young, are not dissuaded by the bullets that fly so freely in disputes between competing drug dealers -- bullets that fly only because dealing drugs is illegal. Al Capone epitomizes our earlier attempt at Prohibition; Crips and Bloods epitomize this one."
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Friday, May 28, 2010
Sunday, May 9, 2010
Myths about public debt
By Vijay K. Mathur
Published in Standard-Examiner, Ogden, Utah, April,28, 2010
Since the enactment of the stimulus package, the Obama administration is under attack by conservatives and tea partiers for increasing public debt. If the administration had not injected public spending to offset the precipitous decline in private spending, the economy would have faced depression and worsened debt situation. Some concerns are valid, however many advanced by tea partiers and their sympathizers are not grounded in reality.
The most common myth is that government debt should be treated the same as individual debt. Public debt arises when the government accumulates budget deficits, an excess of spending over revenues. Budget deficit is financed by the Treasury selling Treasury securities (bonds, for simplicity) to anyone who wishes to buy them. Interest income on bonds is highly reliable source of income to many buyers, including those who are retired. Interest rates on Treasury securities also serve as a benchmark for other interest rates.
Assume for a moment that only Americans buy those bonds. Hence, even though the government incurs the liability of debt, Americans are asset rich. When bonds mature, the government pays the face value of those bonds to investors by issuing new bonds to raise money. One can also sell those bonds before maturity at their market price.
What if we are also indebted to foreigners, such as China? If China dumps our bonds they will suffer as much from lower bond prices in their portfolio and decline in dollar value as we will. I do not see this happening. Chinese and others invest in the U.S. because it is a safer, more profitable investment and at the same time it supports our imports and their exports. Moreover, if we stop constantly climbing on the import-consumption escalator and start saving and exporting, we can reduce our foreign debt. Tea partiers should campaign for "buy, produce and export American."
What if the public does not buy Treasury bonds? Federal Reserve and other government agencies would continue to buy Treasury bonds. In addition, money can be raised by increasing taxes, although seldom done and not advised in recessions. And, public debt allows the public to defer tax liability and, at the same time, earn interest on asset holdings. It is the economy's health which ultimately matters to make our bonds a good investment.
In recessions, when private spending declines, the federal government must fill the gap by increasing public spending to stimulate economic activity. Deficits, and hence public debt, will shrink when the economy is on a robust growth path. Deliberate action to reduce the deficit should be postponed until the economy has fully recovered.
Another myth is that public debt will bankrupt the U.S. Bankruptcy implies that the debtor can not meet the demands of creditors. Besides the authority to raise revenues from taxes, as long as investors are willing to buy Treasury bonds, U.S. government can always meet creditors' demands. If the accumulation of public debt is used to make the economy grow, as stimulus has done, bankruptcy is a non-issue.
Often repeated myth by politicians, partly because of its impact value on the electorate, is that debt is a burden on our children and grandchildren. If our children and grandchildren pay our debt, they will pay a large fraction of the debt to themselves and to other children and grandchildren. If they also pay to foreigners, then wealthy foreigners will divert at least part of their income to us by buying our goods and services as well as bonds. We have to save more and become more competitive in the world market to increase our exports and hence lessen our children's foreign obligations. Using debt to invest in technologically advanced infrastructure, education, research will provide benefits to current and future generations and will lower future accumulation of public debt in the process.
Real adverse affects of public debt arise when it crowds out private investment by increasing interest rates, contributes to higher inflation (although inflation also lowers debt liability), and/or necessitates a substantial increase in tax rates, thus causing the economic growth to decline. Another real effect, where there is no consensus among economists, could be reduced national saving. So far we have not faced these adverse effects even though debt has increased since 2008. Once the economy is on a firm growth footing we can start reducing (not eliminating) public debt by strategically reducing spending to the point where it does not pose any real threats to the economy and at the same time provides a cushion to handle future contractions.
Why is zero public debt not a good idea? Complete elimination of public debt deprives people and investment funds an assured source of income and a benchmark to other debt instruments. As opposed to taxes, public debt, with no side effects as outlined above, does not discourage private capital formation and provides continuity in funding government projects beneficial to society.
Rather than fearing public debt, it would be more productive to intelligently discuss in town-hall meetings how the nation should invest its private and public resources to renew our economy and to effectively compete in the world market, and at the same time improve our and future generations' standard of living.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Published in Standard-Examiner, Ogden, Utah, April,28, 2010
Since the enactment of the stimulus package, the Obama administration is under attack by conservatives and tea partiers for increasing public debt. If the administration had not injected public spending to offset the precipitous decline in private spending, the economy would have faced depression and worsened debt situation. Some concerns are valid, however many advanced by tea partiers and their sympathizers are not grounded in reality.
The most common myth is that government debt should be treated the same as individual debt. Public debt arises when the government accumulates budget deficits, an excess of spending over revenues. Budget deficit is financed by the Treasury selling Treasury securities (bonds, for simplicity) to anyone who wishes to buy them. Interest income on bonds is highly reliable source of income to many buyers, including those who are retired. Interest rates on Treasury securities also serve as a benchmark for other interest rates.
Assume for a moment that only Americans buy those bonds. Hence, even though the government incurs the liability of debt, Americans are asset rich. When bonds mature, the government pays the face value of those bonds to investors by issuing new bonds to raise money. One can also sell those bonds before maturity at their market price.
What if we are also indebted to foreigners, such as China? If China dumps our bonds they will suffer as much from lower bond prices in their portfolio and decline in dollar value as we will. I do not see this happening. Chinese and others invest in the U.S. because it is a safer, more profitable investment and at the same time it supports our imports and their exports. Moreover, if we stop constantly climbing on the import-consumption escalator and start saving and exporting, we can reduce our foreign debt. Tea partiers should campaign for "buy, produce and export American."
What if the public does not buy Treasury bonds? Federal Reserve and other government agencies would continue to buy Treasury bonds. In addition, money can be raised by increasing taxes, although seldom done and not advised in recessions. And, public debt allows the public to defer tax liability and, at the same time, earn interest on asset holdings. It is the economy's health which ultimately matters to make our bonds a good investment.
In recessions, when private spending declines, the federal government must fill the gap by increasing public spending to stimulate economic activity. Deficits, and hence public debt, will shrink when the economy is on a robust growth path. Deliberate action to reduce the deficit should be postponed until the economy has fully recovered.
Another myth is that public debt will bankrupt the U.S. Bankruptcy implies that the debtor can not meet the demands of creditors. Besides the authority to raise revenues from taxes, as long as investors are willing to buy Treasury bonds, U.S. government can always meet creditors' demands. If the accumulation of public debt is used to make the economy grow, as stimulus has done, bankruptcy is a non-issue.
Often repeated myth by politicians, partly because of its impact value on the electorate, is that debt is a burden on our children and grandchildren. If our children and grandchildren pay our debt, they will pay a large fraction of the debt to themselves and to other children and grandchildren. If they also pay to foreigners, then wealthy foreigners will divert at least part of their income to us by buying our goods and services as well as bonds. We have to save more and become more competitive in the world market to increase our exports and hence lessen our children's foreign obligations. Using debt to invest in technologically advanced infrastructure, education, research will provide benefits to current and future generations and will lower future accumulation of public debt in the process.
Real adverse affects of public debt arise when it crowds out private investment by increasing interest rates, contributes to higher inflation (although inflation also lowers debt liability), and/or necessitates a substantial increase in tax rates, thus causing the economic growth to decline. Another real effect, where there is no consensus among economists, could be reduced national saving. So far we have not faced these adverse effects even though debt has increased since 2008. Once the economy is on a firm growth footing we can start reducing (not eliminating) public debt by strategically reducing spending to the point where it does not pose any real threats to the economy and at the same time provides a cushion to handle future contractions.
Why is zero public debt not a good idea? Complete elimination of public debt deprives people and investment funds an assured source of income and a benchmark to other debt instruments. As opposed to taxes, public debt, with no side effects as outlined above, does not discourage private capital formation and provides continuity in funding government projects beneficial to society.
Rather than fearing public debt, it would be more productive to intelligently discuss in town-hall meetings how the nation should invest its private and public resources to renew our economy and to effectively compete in the world market, and at the same time improve our and future generations' standard of living.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Subscribe to:
Posts (Atom)
