Archive for September, 2005

War on drugs misunderstands microeconomics

Monday, September 26th, 2005

If you reduce the supply of something, the price goes up. The more successfully the US destroys coca crops, the higher the price goes, and the greater the incentive for tropical farmers everywhere to simply grow more.

If you instead reduce demand, the price goes down. The more successfully the US reduces coca demand (whether by moral suasion, education, re-education, imprisonment, testing, etc), the lower the price goes, and the less the incentive to grow, refine and distribute it.

If you focus on demand reduction, you also:

  1. Starve bad guys of profits.
  2. Automatically reduce a variety of related domestic social problems.
  3. Reduce the incentive for corruption of US officials.
  4. Stabilize Mexico’s border regions, reducing violent crime in the US.
  5. Become a model of self-restraint, worthy of self-respect and the respect of other nations.
  6. Save money. Projecting military power is immensely expensive — much more than fixing domestic problems.

Supply reduction accomplishes none of these. Microeconomically, the 20-year “war on drugs” is not only a failure — it is a surprisingly dumb idea.

Can modern industrial nations safely project power?

Friday, September 23rd, 2005

The megastorms of recent weeks revealed that certain industrial resources of the U.S. are highly concentrated geographically. To choose just one example from dozens, the New Orleans flood inundated 25% of the world’s stockpile of zinc, sending commodities markets reeling (source: Financial Times).

More generally, it appears accurate to say that the forms of economic advancement of the past several decades bring lower resistance to infrastructure shocks. Intricate supply networks make us more dependent upon transport, communications and energy delivery systems. At the same time, scale economies and the benefits of industrial clustering both drive geographic concentration.

The result is that our economic status depends upon the joint probability that none of these myriad components will ever fail. That sounds pretty darn risky, over time.

The risk is much greater if we get into fights unnecessarily. Hawks take pride in past US military glory, but may forget it was facilitated by industrial invulnerability. Conditions are different today, and not just because the enemy can reach us more easily. The simple fact is that we can’t take a punch as well today as we could in 1950.

If the port of Long Beach were destroyed in 1950, would the toy industry have collapsed? No. Today? Yes. 85% of toys come from China.

If Manhattan were destroyed in 1950, would the national home mortgage market have collapsed? No. Today? Yes. The entire mortgage business is built around securitization.

If the border with Mexico were closed in 1950, would the U.S. auto industry have collapsed? No. Today? Yes. Key components are built over the border.

The list of such dependencies is almost endless. We are exposed everywhere. As a result, globalization is simply inconsistent with the projection of military power against a determined opponent with little to lose.

Ironically, it’s the isolated economic also-rans that are least exposed, and hence the most dangerous to tangle with. Arab nations. Iran. North Korea. Cuba. Integrating these places into the global trading system would expose them to the same global dependencies that we face — and render it unprofitable for them to threaten anyone.

China, our supposed military rival, is perhaps the most exposed of any large nation. They would be crippled by global industrial network disruption. Thus it’s perhaps not sensible to worry about them from a military perspective — they simply have too much to lose.

Japan’s government may understand this better than ours or China’s. As the first practitioner of many of these modern industrial methods, they have decades more experience at such dependence, and presumably more willingness to prepare for shocks. Is their relative neutrality in world affairs one such preparation? Do they recognize, better than we do, that their way of life depends upon the function of those intricate networks?