Welcome to Finance and Fury. Do regulations solve any problems?

  1. To explore this concept, we will be looking specifically at drug regulations – because if the answer was yes, regulations would solve the problems of society and have the intended outcome of creating a better society, then there would be no drug use, no overdoses and no negative effects on society through crime, murders and prison time for those involved in dealing or purchasing drugs – but instead, what has imperially been seen, with regulations around drug use, it doesn’t solve the problem but make a greater negative detriment on society

To start breaking this down – it helps to understand markets 

  1. Markets evolve to solve a gap in demand – black market is any economy emerge as individuals or organisations see a gap in demand and go to fulfil it – if it is illegal due to regulations making it illegal, normally criminal organisations chose to fill the gaps, as they are already comfortable breaking laws – or you create a new class of criminal
    1. I’m fully aware that people have different perspectives on this topic – some are pro illegal drug regulations, some against – but just remember that many drugs are legal – and many are not – alcohol, nicotine, caffeine – all are legal – some are regulated, say alcohol and nicotine – which require you to be 18+ in many countries – but you have water at home, and can buy as much salt as you want, if I drunk 67g of salt I would die – or try and drink 20l of water in one go, then that can prove fatal as well – but there is no regulation around limiting the amount of salt or water that you can buy
    2. If there was a limit on how much water you could get each day, or salt, then a black market would evolve for provide the supply – but why doesn’t someone sit down and eat 70g of salt, or drink 20l of water? Because there are no neurological benefits to it – in school I was given the whole drugs talk by my gym teacher – he said someone that is as true as a statement can be – it wasn’t the abstinence talk to say that you should never do drugs – but he said that people do drugs because it feels good – but to know the consequences of what you are doing
  2. Now Look at drug laws – major introduction started in the USA and the western world followed – But was particularly US based was the prohibition laws that lasted from 1920 to 1933 – surely government regulations that ban alcohol would stop people drinking – and benefit society
    1. What ended up happening is that people intent on drinking found loopholes in the newly passed anti-liquor laws – in the process turning to illegal avenues to do so. An entire black market—comprising bootleggers, speakeasies, and distilling operations—emerged as a result of Prohibition, as did organized crime syndicates
      1. which coordinated the complex chain of operations involved in the manufacture and distribution of alcohol
      2. This law also introduced additional corruption in law enforcement and the political class – as politicians stocked up on alcohol before the ban – and within policing communities – corruption became widespread as criminal organizations used bribery to keep officials in their pockets
  • Prohibition was detrimental to society and the economy – it incentivised recent arrivals to the country to seek a means of income that was lucrative due to the illegal nature of the business
    1. Alcohol services in a legal sense had represented the fifth largest industry in America – so making this illegal created a lot of disenfranchised individuals – who now had to turn to crime to create an income, or change careers
    2. You also had the increase in murder rates and crime created through criminals trying to fill the market gap – Al Capone – wasn’t taken down from drug regulations, but from tax evasion laws years after the fact
  1. This whole period didn’t see a major reduction in alcohol served – but saw a massive increase in crime to meet the newly illegal demand for alcohol – many politicians were found out during their 13 year period to be harbouring their own alcohol reserves – they know the laws were coming but management or circumvent the new laws
  2. Also the health consequences of illegal alcohol was high – under a black market there was no quality control – ethanol poisoning rose and deaths from alcohol increased by 600% – this was in part due to government regulations that required industrial alcohol to be mixed with methyl alcohol – and bootleggers would use this and people would due – with many more blinded – so little benefit for major downsides
  1. The next major law against drugs was based around the roots of marijuana laws were rooted in making hemp illegal – which was a much superior product of cotton
    1. the United States Declaration of Independence was drafted on Hemp paper as this started becoming the dominate paper at the time -as it was the most sturdy and publicly available – so why was Hemp banned in the USA in 1937?
      1. Combination of Economic competition with Cotton, Timber and Synthetic Plastics – the major industries of the time
      2. 1930’s anti-hemp propaganda caused a moral panic, persuading Americans to believe Hemp and Marijuana were the same – Movies like reefer madness in 1936 spread propaganda for this purpose – portrays a man killing his family with an axe after smoking marijuana
  • So by 1937 to public had a say but most said that it was for the best
  1. War on drugs – During the 1970’s, President Richard Nixon declared war on drugs. This marked a significant shift in policy relating to drugs – like any way, Billions of dollars were earmarked for this fight. The legal and judicial system was overhauled to make drug use and sale, a serious offense with grave consequences – after five decades, drugs are winning – you think it would be time to pack it in
    1. This is where the government has been dragged into a conflict which has no end. Both the human costs as well as the economic costs of this unwinnable war are staggering –
      1. From the late in just the last 30 years the United States government has spent a total of $1.5 trillion in its war on drugs – let alone the rest of the world
    2. In Australia – Spend between $1.2bn and $1.5bn a year on drug enforcement – not counting drug related crime which is unquantifiable
      1. The results – there are barely any – sure, the government and law enforcement does have several major wins – to show for it – but has it really hurt supply
        1. It’s estimated that drug enforcement agencies are successful in stopping less than 1% of the drugs that are transported
      2. Drug abuse has increased in America instead of reducing – 60k to 100k deaths per year – that is an epidemic
  • Not to mention groups like the CIAs involvement in the drug trade – from cocaine in Columbia to heroine in Afghanistan and fentanyl from China – all to help fund their black budget
  1. the main reason that it is unwinnable war is due to human adaption compared to government regulations and enforcement
  2. The demand stays the same – but the supply, which across the world are crime syndicates keep changing – each nation has different crime groups who fill the supply of drugs
  1. Supply-Side Policy – From an economic point of view, the whole war on drugs was destined for failure
    1. This is because the government was only focusing on the supply side economics – i.e. shutting down those supplying drugs – obviously holding drugs is illegal even if you are supplying – but charges for intent to distribute carry a far greater sentence
      1. In theory the policy to stop the problem at the source make sense – but like with any market, be it a black market or legal market – the problem is that when demand remains the same, and supply falls, the prices start to go up – if prices go up, then the incentive to provide additional supply increases – it is economics 101 – so the war on drugs incentivise criminal syndicates to move into the distribution and supply of drugs – the same thing that happen with alcohol in prohibition
    2. So, the government is incentivising crime due to the massive amounts of money that can be made – then the government also adopted a policy that focuses also on the demand side – punishing non-violent users
      1. Most of Australian drug arrests were for cannabis around 61,011, or 65% of drug arrests. Around 80% of those were for possession – so most of the criminal chargers are being levied on users now – but again, usage doesn’t go down
    3. This brings us to the Real Cost – The real cost of the war on drugs is far greater than the $1.5 trillion that has been spent by the US federal government.
      1. Mass Incarceration and criminal records – The war on drugs has led to a massive increase of incarcerations
        1. In this US this is the worst – Even though the United States has only 5% of the world’s population, they have more than 25% of the world’s prison population – being the land of the free – across the board, around 15% of the prison population is in prison due to non-violent drug offences – in the USA that represents 200k people
        2. Not only is this costing the government billions of dollars – it is running the lives of these young adults who have to go to jail for these non-violent crimes – so once they have these crimes on their record, they have very limited sources of legitimate employment and hence are forced to turn to a life of crime.
  • The economic impact is therefore threefold – First, there are expenses related to incarceration that need to be borne by the state. Second, the government has to forego the tax revenue that these otherwise normal individuals would provide. Thirdly, the government has to spend more money on law enforcement since they have converted a bunch of teenagers into criminals who have no other source of employment.
  1. Violence and Destabilization: The cost of the war is even higher when you consider the amount of turmoil that is being borne by the countries that are in the front line of this battle. Countries like Mexico and Colombia have seen violence like the world has never seen before.
    1. The violence and destabilization have led to lost economic output and increasing law enforcement expenditure in these countries as well.

The government has created a monopoly on drugs through the pharmaceutical industry – $550bn in USA on pharmaceutical drugs – illegal drugs at $150bn – in Australia it is $42bn vs spent $13.5 billion on illicit drugs – ratios of about 30% – where methamphetamine and cannabis accounting for over 70% of purchases

  1. Instead of pushing harder if the government made it easier and legal to sell drugs – the violence around drugs would reduce
    1. Instead of spending money fighting the drug war – the money could be spent on treating drug addiction as a health condition – as history has down, prohibition has never worked
  2. Legalising drugs – crime and cartels will not go away – Cartels in Mexico with avocados and limes have entered the market – when there is a tax or incentive to fill a market demand, illegal operations will always exist
    1. But even legalising and then regulating the market will result in a black market for the product
    2. Looking at marijuana in the USA – the cartels have moved into states like California and now supply weed grown on state land – So the black market under legalisation has also grown –
    3. Even though legal options are available for marijuana producers and consumers, the black market is still thriving in states where recreational marijuana has been legalized – due to the regulatory framework which fails to effectively keeps both producers and consumers in the legal market – Instead, strict regulations and high cost of compliance have created an environment in favour of a few big players, creating more of a monopoly in the supply – while driving small-scale businesses into the black market – even large scale providers are moving out of California due to the higher costs in the form of taxes and compliance to other states  
    4. But for those who want to operate in the black market -If the legal risk has now gone down, then the incentives to provide a supply have gone up – there is a black market for tobacco – to avoid the taxes the government imposes
    5. Whilst the government can make money out of legalising and taxing – this would not get rid of a black market – but depending on the level of tax and compliance costs through licencing and legal fees, potentially increase the black market
  3. Decriminalisation isn’t perfect – Has downsides – because it is illegal still –
    1. Drugs destroy lives – Enforcement of laws destroys lives – there are no perfect solutions at the societal level
  4. But one solution to lower the negative effects on society is decriminalisation for all drugs – no legalisation but at least making it no longer a crime that carries gaol time – the evidence comes from EU – in 2001 Portugal decriminalised the personal possession of all drugs as part of a wider re-orientation of policy towards a health-led approach.
    1. Possessing drugs for personal use is instead treated as an administrative offence – so drugs are confiscated and possession may result in administrative penalties such as fines or community service – but no criminal record
    2. Overdoses and death rates – Prior to 2001, Portuguese drug death rates were very similar to the EU average – after the decriminalisation, death rates fell in Portugal following reform, but they increased across the rest of Europe in the same timeframe.
    3. Doesn’t making drugs decriminalised increase use? Levels of drug use in Portugal have been consistently below the European average over the past twenty years. This is particularly the case among younger people: Portugal has some of the lowest usage rates in Europe among those between the ages of 15-34.
      1. In the first five years after drug policy reform, use of illegal drugs rose slightly among the general population but fell again in the following five years. Use among 15-24 year olds fell throughout the decade, and among the general population was lower in 2012 than in 2001.
      2. NZ at 15% and Aus at 12% – lower than Netherlands – where in Amsterdam you can buy it legally
    4. A key feature of the new Portuguese drug policy, alongside decriminalisation, was the expansion of treatment services. Spend less on the criminalisation, reduce the stigma and help those with addiction problems

Summary – Regulations and government control don’t solve all problems – they may be able to help for some things – but particularly when demand is present, they fail to regulate a better position

  1. When government regulations destroy supply for goods that people want, it creates a black market – increasing costs for consumers and increasing crime – Happens on any good – There is a black market in Venezuela for toilet paper
  2. The drug war is a failure – but the government keeps fighting it – not their money, don’t care about the consequences
  3. There are negative health consequences for drug use – but if this was the concern why is alcohol and tobacco legal? Two of the more detrimental drugs to individuals health
  4. First step is decriminalisation for all drugs – and legalisation for low risk, low harm drugs – anything that grows in the ground – cannabis, mushrooms – if government wants to regulate – it may be a worse market than under a pure black market – but the black market would still exist

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