Drugs, Immigrants

G. Friedman, The Next Decade

Compounding the turbulence along the border are the law of supply and demand and the cost of goods applied to the American appetite for narcotics. Heroin, cocaine, and marijuana, the drugs of choice, originate as extremely low-cost agricultural products—weeds, essentially, that require almost no cultivation. Because the drugs are illegal in the United States, normal market forces don’t apply. The legal risk of selling drugs drives efficient competitors out of the market, enabling criminal organizations to create regional monopolies through violence that further suppresses competition, which further inflates the cost of the drugs.

Illegality means that merely moving a product a few hundred miles from Mexico to Los Angeles will increase the price to the user by extremely high multiples. Official estimates of the amount of money flowing into Mexico from the sales of narcotics run from 25 billion dollar to 40 billion dollars a year. Unofficial estimates place the amount much higher, but even assuming that the 40 billion dollar figure is correct, the effective amount is staggeringly high. When you look at the revenue from a product, it is not the amount you sell it for that matters—it’s the profit margin. For a manufactured product, such as the electronic components that Mexico exports to the United States legally, a profit margin of 10 percent would be quite high. Let’s assume that this is the profit margin for all legal imports from Mexico into the United States. Mexico’s exports of 130 billion dollar would then generate about 13 billion dollar in profit.

The profit margin on drug sales is enormously higher than 10 percent, because the inherent cost of the commodity is extremely low. Marijuana needs no processing, and processing costs on heroin and cocaine are insignificant. A reasonable and even conservative estimate for the profit margin on narcotics is 90 percent, which means that the 40 billion dollar from the illegal trade generates a profit of about $36 billion. Drugs generate free cash, then, at a level almost three times greater than all of Mexico’s 13 billion dollar in legal exports.[..]

The American economy is too integrated with Mexico’s ever to allow a disruption of legal commerce, which means that large numbers of trucks will be moving between the United States and Mexico indefinitely. The volume of traffic is too high for agents at the border to inspect all cargoes, and therefore even if the border is walled off, both illegal aliens and drugs will continue to slip through at international crossings and elsewhere. Given the low cost of the narcotics before they reach the United States, the interception of cargoes has very little effect on trade. Cargoes are readily replaced with little impact on aggregate revenue.

It should be much easier to stop illegal immigrants than drugs, because it is easy to detect immigrants once they are in the country. The simplest means of doing this is to institute a national identity card with special paper and embedded codes that make it extremely difficult to forge. No one could be employed until his or her employer first cleared the card via the sort of system currently used for credit card transactions. Any alien without a card would be deported. Any employer who hired him or her would be arrested and charged with a felony.

But this simple method is highly unlikely to be employed [..] deeper reason this relatively easy step won’t be taken: the segment of society that benefits from large numbers of low-cost workers is greater and more influential than the segment harmed by it. Therefore, as with the Mexican government and drugs, the best U.S. strategy is to appear to be doing everything possible to stop the movement of immigrants while making certain that these efforts fail. This has been the American strategy on illegal immigrants for many years, creating a tension between short- and mid-term economic interests and long-term political interests. The long-term problem is the shift in demographics—and in potential loyalties—in the borderland. The president must choose between these options, and his only rational course is to allow the future to tend to itself. Given the forces interested in maintaining the status quo, any president who took the steps needed to stop illegal immigration would rapidly lose power. [..]

Similarly, the drug issue has a relatively simple solution that will not be implemented: legalization. If drugs were legalized and steps were taken to flood the country with narcotics, the street price would plunge, the economics of smuggling would collapse, and the violence along the border driven by all the money to be made would decline precipitously. Along with that there would be a decline in street violence among drug addicts seeking to steal enough money for a fix.[..] No significant political coalition in the United States is prepared to embrace the principle of crushing the illegal drug trade by legalization. So, like national identity cards, legalization simply won’t fly, for internal ideological reasons.