Black Market Economics

Yes, you know where this is going: the War on Drugs. I almost titled this piece "War on Drugs: Enriching the Criminal", but that just seemed too long. Indeed, today's article is about how the government has given the criminals of the world an even more profitable enterprise than racketeering or prostitution.

First off let me assure you that, although I am a college student with shaggy hair, I am not a drug user. I can confidently say that I would pass any screening that could be thrown at me. I do, however, believe in adults having control over their own bodies and what goes into them. In fact, this may be a good time to note that if I were to choose a political party to associate with it would be the Libertarians. Please don't let this alienate you, I just believe in small government, free markets, and total personal freedoms. But I digress...

Drugs, love them or hate them, have been around (and in use) for many centuries, even millennia depending on who you listen to. Jefferson grew pot (and hemp, too) and wrote about it in his diary. Rail workers in the old West sucked on opium to get through the day. Millions and millions of people across the country are getting high as I write this. It's not just dumb kids either. There are businessmen doing coke, housewives taking speed, and your favorite entertainers doing a myriad of different stuff. Oh, and Johnny down the street is drinking a beer. Alcohol is, in fact, a drug.

So where does this diverse group of quiet druggies get their fix. Why, from their friendly local drug dealer of course! And they pay top dollar for it, too. Drug dealers make a pretty penny off of these people and do extremely minimal work. They never have to worry about marketing or writing receipts. They don't have to keep track of finances or pay taxes. The best part is that very few of them actually get caught. The profession is medium-low risk and very high return. Of course, like any group of people, some are out to make trouble. They carry guns and take advantage of people with horrible addictions. These are the dealers you see on the evening news.

Everyone wants drug dealers (and other criminals) out of the streets behind bars, so why is the War on Drugs a bad thing? Well, for one, it has strengthened the industry. It has also made it far more profitable. Organized criminals have all but given up on the classical methods of extortion, prostitution, and gambling in lieu of the more profitable drug trafficking industry.

You see, as government regulation on drugs and the people that sell them got more strict, supply went down. As you can imagine, demand did not. As we all know, as supply is reduced and demand remains constant, prices go up. Prices did rise, making traffickers all the more brazen. With the same production costs and higher wholesale prices, traffickers could actually afford to lose shipments and still turn a nice profit. This influx of new trafficking activity meant that supply actually rose above the baseline levels. The consumer, however, had assimilated to higher prices and the price level remains artificially high. So now you have an enormous flow of money changing hands, going into and out of the country, and no one is paying taxes on it. This creates an issue for the government, because that is a large amount of lost revenue. If, instead, all of these drug users were to get there fix from a bottle of vodka or scotch, the government would be raking in all kinds of money.

Another issue that the government does not like to address is that a larger proportion of the population is using drugs now than ever before. I credit government-sponsored anti-drug rhetoric for providing the dealers the marketing they need to continue to find new clientèle. I had to sit through a lot of that garbage in high school and let me tell you, half the time I was thinking "Wow, that sounds like a blast!" Additionally, I can say from my own experience (and others have agreed) that in high school it was far easier to score some pot than to get a case of beer. In fact, I could more readily get most common drugs of abuse than that case of beer. Why is this? Beer is regulated, you need a government ID stating that you are over 21 to buy it. Drugs are not regulated, anyone can buy them from anyone willing to sell them.

So, here is my solution. Many of you won't like this. Legalize it! And by "it" I don't just mean pot, but all drugs. Like I said, I believe in personal responsibility and personal freedoms. If someone chooses to do cocaine, they will get it from a drug dealer if it is not available legally. We saw this during the prohibition era; just because you make something illegal will not stop people from wanting it and there will always be someone willing to provide it.

Sell drugs at CVS and Walgreens. Make sure to check ID, though or you could be fined. All of the sudden, criminals will not have any business. The drugs you can buy in stores are regulated in strength, quality, and purity. They are produced by reputable companies. There will be a label on the box that has safe dosing instructions and a number to call if you overdid it. Most importantly, though, is that they are taxed like there is no tomorrow. Even with enormous taxes, legal avenues will easily be able to beat drug dealers in price. With these drug dealers out of business, they will be forced to get a real job and their income can be taxed, too. Now that drugs are properly regulated, kids won't have such an easy time getting their grubby little hands on them. The prison overcrowding problem will magically go away. They could even shut some down to save the government some coin. Organized crime will crumble as will it's ill effects such as drive by shootings and busted knee caps. Getting your pot will be as simple as getting your Jack Daniels and you will be a fine, tax-paying citizen.

But won't everyone start doing drugs and stealing cars? No, they won't. People are not stupid. The people that get hopped up on coke and rob a liquor store would have done that if drugs were legal or not. An everyday Joe who smokes a joint after work is less likely to start problems than his neighbor that just downed ten beers. As for the people that do get messed up and go commit a crime, treat them the same as if someone had gotten drunk and did the same thing. Charge people with crimes that effect the people around them. I fully support someone getting the book thrown at them if they drive on drugs or if they steal on drugs. But drugs are not the problem.

Stop Dropping the Interest Rate, Please

In all of it's infinite wisdom the Fed continues to drop interest rates. Did you think one percent was as low as they'll go? You're wrong. According to Mr. Bernanke, interest rates below 1% are "certainly feasible". Additionally, as of 1 December 2008, the effective fed funds rate is 0.52%.

There are many problems with this. For one, the Fed rate drops aren't positively effecting the economy. Look at each rate drop over the past six months or so. The rate dropped, the market went up for the day and then continued to spiral down the next. Dropping the rate is doing nothing but starving the federal government from interest income that it could desperately use. The low interest rate, even in combination with an astronomical bailout, is not inducing banks to lend. Unless you have a credit score above 750 and make over $100,000 a year, you're probably going to run into issues finding credit for anything. For example: A friend of mine works at a Chrysler dealership here in metro Detroit. She saw a man come in the other day returning the two cars he leased for his children. This man was a Chrysler employee for over two decades. He said that he understood that Chrysler was no longer leasing and wanted to buyout the leased vehicles. He had never missed a car payment in the twenty years he has owned or leased Chrysler vehicles, but alas, he was declined. We are talking about a man with a near perfect credit score whose income can be docked for a missed payment through Chrysler and he could not get a loan (and a small one at that). The mortgage industry is no better. If the Fed truly thinks that another quarter of a percent is really going to help, they are in need of some new management.

The second issue that I take with the persistently dropping Fed rate is a matter of creating another bubble. If the market does indeed begin to recover and rates remain low, we will quickly see an artificial credit bubble inflating. Banks will be falling over themselves to grant credit to every jackass that can fill in an application. We will return to the days when infants and family pets are being pre-approved for credit cards. Who would be stupid enough to fall back into that, you ask? The American consumer and the banks that provide the credit. It seems that no matter how bad we screw ourselves we eventually mend our wounds and ask, nay beg, for more. I mean really, did anyone at the Fed put two and two together with Greenspan's sweeping rate cuts and the housing bubble. They're running to fall into the same trap.

If you haven't figured it out yet, I do tend towards classical economics vs. Keynesian. I do have great respect for certain Keynesian concepts, however. I will concede that markets do not adjust rapidly and that monetary policy can work to our advantage. That said, I support a system of very limited monetary policy. Even a Keynesian will tell you that the market has no time to adjust if you make monetary policy changes on a weekly (OK, I'm exaggerating) basis.

Mr. Bernanke, it is time to stop. I respect you as an economist and I believe that you have done considerable positive work in the field. Hell, my current Macroeconomics textbook was coauthored by you. That said, stop. Please stop. Don't let everyone look back on your tenure and wonder how we let another Greenspan Bubble happen.

Fixing Unemployment in the Short-Run

As we all know, unemployment rates are reaching record levels. It is a dire circumstance because consumption naturally drops with employment levels. So, how do we remedy this problem? Decrease, or even eliminate, the minimum wage.

I know that this sounds crazy, but hear me out. The graph above illustrates the impact of a minimum wage on the labor market. If minimum wage is decreased, but the wage rate remains above the equilibrium, points A and B will move closer to the equilibrium rate. Point B will have little effect on the unemployment rate because many workers do not want to work below the current minimum wage. The number of unemployed workers eligible for unemployment benefits will fall, however, because these people will be forced to reject job offers below the current minimum wage or take the job anyway and thereby disqualify themselves. Point A is the primary focus. As you can see, as point A approaches market equilibrium the quantity of labor demanded increases. This very simply translates to more employed workers in the labor market. If minimum wage is eliminated, the market will reach equilibrium.

Do not fear, I haven't gone completely mad. If such a plan was implemented there are some key features that I would advocate:

• All employees currently hired under minimum wage laws have their wages protected and are protected from adverse employment effects (read: getting fired) because of their wage.
• The reduction or elimination of minimum wage is to be for a defined period of time. At the end of this time, minimum wage will be restored to current levels.
• Because of the resultant decrease in unemployment benefits paid, employers are given a nominal tax benefit for hiring new workers. This will induce hiring despite the time-limited nature of such a plan.

Are there some flaws in this plan? Yes. Do the benefits outweigh the flaws? In my opinion, you're damned right. At this point, in this economy, displaced workers are getting desperate. I, for example, am a senior student of Economics at Oakland University. Supposedly, we have one of the best economics programs in the state, better than Michigan State University. I have my Series 7 and 66 certifications and I am just finishing up my Life, Accident and Health licensing. I also do not have a job and I'm not making a dime. My savings have run out. I will most certainly take a job for $5.00 an hour even though a few months ago I was offered a job for $24,000 a year plus commissions and a full benefits package (the job never materialized). I need cash and I will work 60 hours a weeks for below minimum wage if it means being able to pay my bills. I'm not the only one either.

If the corporations are getting a greater marginal benefit from a drop in wages, you can be sure that they will be happy to eat it up. Go talk to the Big Three, they would love to drop the labor unions like a bad habit and pick up workers for six bucks an hour. No one would lose their job. Minimum wage is pricing the American worker out of their job the same way labor unions are pricing themselves out of a job.

So there you go. Unfortunately, being an economist and a businessperson does not lend very well to being a humanitarian. That said, it's much easier to protect my case when I am one of the masses at the bottom. For those of you looking for a job, I wish you good luck. If anyone knows of ANY employment opportunities in northern metro Detroit that would welcome a loon like me, feel free to drop me a line.