Reason Magazine - Staff

The Politics of Sky-High House Prices

info@reason.com (Joel Miller) — Thu, 20 Jul 2006 14:45:00 EDT

Lance Uyeda bought his first home in the San Francisco Bay Area almost 30 years ago. Today his oldest son rents an apartment and works in retail sales. But because the market is tougher now than when his father bought, he probably will need more than a good performance review and a raise to buy four walls and a set of shingles. Unless he "wins the lottery," says Dad, "he's not going to have a home to call his own."

The reason is that housing prices in the Bay Area and Silicon Valley have shot up faster and higher than almost anywhere else in the country. In 1985, according to the National Association of Realtors, the median price for a home in the San Francisco Bay Area was about $258,000 in inflation-adjusted dollars; today, it's over $720,000.

These rapidly escalating costs are sparking an exodus. Fully 40 percent of respondents in a 2006 survey by the Bay Area Council said they'd considered leaving the region; more than two-thirds of that number flagged high-priced homes as a major reason. Similarly, a 2004 survey by the Public Policy Institute of California found that more than 30 percent of people between the ages of 18 and 31 were considering new digs beyond the Bay.

Not everyone is sympathetic to the predicament of such people. Janet Yellen, president of the Federal Reserve Bank's San Francisco branch, argues that "high housing costs are a symptom of the Bay Area's success." Prices have shot into the stratosphere, she says, because the region "is such a magnet for certain kinds of high-skilled, high-tech companies."

She's correct, to a point. The booming tech industry in the Bay Area and Silicon Valley has created high demand for real estate in those regions, which has not just driven up prices but created a solid constituency for the huge price tags: people who bought low and are now millionaires because their humble stick-and-stuccos morphed into miniature mansions. But what about everyone else?

The Debtors' Prison

In their book The Two-Income Trap, Elizabeth Warren and Amelia Warren Tyagi use the term "house poor" to describe middle-class homeowners who stretch themselves too thin financially to buy the roof over their heads. They often become slaves to their mortgages because they over-borrow; worse, they're prone to default because they don't have enough savings to cushion the impact of a divorce or job loss—two fairly common occurrences.

Warren and Tyagi blame zero-down and sub-prime loans, the fruit of interest rate deregulation. But zero-down and sub-prime lending simply creates financing options for people who otherwise would be unable to borrow. And who can blame banks and mortgage companies for catering to a strong and otherwise unmet demand?

Not that there aren't problems here, principally in what many observers call the "housing bubble." In the words of former U.S. Labor Secretary Robert Reich, "Bubbles form when it's easy to get capital to invest in something, and when investors assume that somebody else will come along after them and pay even more for it." But Reich warns that when mortgage rates rise—when the easy money dries up—"buyers can no longer assume that future buyers will pay more, because some future buyers won't be able to." That's when the bubble bursts and people are stuck with more house than they can afford and no way of offloading it.

But cheap money and investor enthusiasm don't fully explain the problem. In many areas, housing prices were rising before the bubble began to bulge.

There is another side of the housing cost swell that Warren and Tyagi overlook. It is rooted not in deregulation but in limited supply and inelastic costs—the reasons people have to overextend themselves to purchase a home. These factors will remain even if the bubble pops, which means high-priced homes will survive the investor hype.

For Want of a Snake

Yellen is right about this much: Many people want to live near the hustle and bustle of a thriving economy, where they can enjoy vibrant job markets, decent commutes, good pay, fun play, lots of shopping, and a wide variety of leisure-oriented diversions. In or near big urban settings, variety and opportunity appear unlimited.

But land is limited. Soil stretches only so far, and there's a finite number of plots on which to plop a house. As any Econ 101 student could tell you, high demand for a limited good creates high prices as potential buyers try to outbid each other.

The way to mitigate this problem is to build more houses—either cram more of them in less space by constructing smaller or taller, more tightly clustered homes or build them further out by expanding the building area. The way to exacerbate the problem is to stop building, which is what planners in places like San Francisco have done. In so doing, they have artificially crimped the supply of land, creating higher property values for existing homeowners and higher prices for everyone else.

Edward L. Glaeser and Joseph Gyourko explored the problem in a paper prepared for the Federal Reserve Bank of New York, which hosted a conference on affordable housing in 2002. Glaeser, an economist at Harvard, and Gyourko, a professor of real estate and finance at the Wharton School of Business, wanted to find out whether the country was facing a shortage of affordable housing and what might be causing such a shortage. What they discovered was that the nation as a whole has no real shortage of cheap digs; it's just that the cost of land and homes in certain areas has gone through the roof, mainly because zoning and other land use restrictions have made usable land scarcer.

Examining 45 metropolitan areas around the country, Glaeser and Gyourko studied the time it takes builders to apply for and receive a permit for a "modest-sized, single-family subdivision of less than fifty units." They found that in the areas where zoning is strict and approvals are slow, the price goes up considerably. Permit lags of six months can add nearly $7 per square foot to the price of a house. That's more than $10,000 added to the cost of a 1,500-square-foot home. Double that for a 12-month lag.

"Measures of zoning strictness," Glaeser and Gyourko write, "are highly correlated with high prices." In fact, "Almost all of the very high cost areas are extremely regulated." In some places, especially California, the impact of these restrictions is dramatic. They've been instrumental in making housing prices in San Jose, 50 miles southeast of San Francisco, triple the prices in comparable cities elsewhere.

It's not just zoning and growth restrictions. Environmental impact laws raise the purchase price of homes as well. Planners in California, for example, required developer Marvin "Buzz" Oates to pay more than $2,000 extra per acre of a Sutter Basin property because it was home to roughly 40 giant garter snakes. The total "mitigation" fee was $3.8 million—$93,950 per snake. On other projects, Oates says he lost millions of dollars due to delays prompted by concerns about the fate of fairy shrimp.

A February 2005 study by the U.S. Department of Housing and Urban Development identified complex environmental regulations as one of the factors raising home prices. "A number of trends indicate that since 1991 poorly designed environmental procedures and regulatory processes have become more significant barriers to the development of affordable housing," says the report. "Major trends include the proliferation of national mandates, the increasing complexity of urban environmental regulations, layering of additional local environmental laws, and the misuse of environmental regulations by those opposed to affordable housing."

Additional impact fees such as park, wetland, and transportation mitigation expenses add up quickly, as do the costs of permits and utility hookups. Add all those factors to a price tag, and prepare for sticker shock.

In Seattle and surrounding King County, Washington, home prices have jumped more than 10 times the rate of inflation in a single year. As in the San Francisco Peninsula, an influx of new homebuyers and a fast-growing economy are partly responsible, but a study by the Vancouver-based homebuilder Taseca Homes shows regulations play a significant role as well. "The company's managers carefully itemized and tracked all the actual costs that go into some of the homes the company has built recently," writes Paul Guppy of the Washington Policy Center, pointing to the results for one particular house. "They found at least $40,486 of this home's $223,600 selling price can be attributed to government regulation and fees…an increase of 22 percent over the cost of building the actual house."

Guppy says many of the rules that raise home prices are "good and useful, and serve the public interest." But he also notes that homeowners are kept in the dark about these added expenses, which go beyond the sales and property taxes they already pay for city services. "The overall result," he says, "is that for many working families, the dream of becoming homeowners is only pushed farther and farther out of reach."

Critics of finance options such as sub-prime loans should ask why these instruments are so popular in the first place. Regulation-fueled price hikes are making it harder for many Americans to buy houses. As a result, many are turning to creative and sometimes precarious loan packages. With housing prices so high, an interest-only loan with no money down can jack up someone's purchasing power by 25 percent, according to Brett Vratil, a realtor who works in Southern California. "Often that's what it takes to get someone into a home in Los Angeles," he told Bankrate.com last year.

But while the market is busy adapting to escalating home prices, the government is making the problem worse.

Winners and Losers

With housing costs far outside most people's reach in San Jose, at one point the city offered affordable-housing subsidies totaling $180 million. The program barely dented the problem, because the city's actual burden from increased housing prices came closer to $100 billion, according to calculations by Randal O'Toole, an economist with the Oregon-based Thoreau Institute.

Now those subsidies are long gone, and San Jose home prices are still rocketing. Glaeser and Gyourko conclude that benefits from subsidized housing are "trivial...even if well-targeted toward deserving poor households."

Other solutions are even worse. Seeing that zoning laws have the power to destroy, city planners have decided to see if they can also restore. "Many local governments have turned to 'inclusionary zoning' ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable to people with lower incomes," explain the San Jose State University economists Benjamin Powell and Edward Stringham in a 2004 paper for the Reason Foundation, the nonprofit that publishes this magazine.

Forced to sell these discounted homes, builders offset their losses by upping the prices on surrounding homes. "We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $22,000 to $44,000," Powell and Stringham report. "In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home."

The effects ripple through the market after the initial hit. After home prices go up to accommodate the mandated discounts, they typically go up again, thanks to the increased scarcity caused by builders building fewer homes—something Powell and Stringham discovered when examining the long-term impact of inclusionary zoning. Builders leave cities that impose such mandates and construct homes in areas with better business climates.

The upside to high-cost homes is high property values. Homeowners in such cities as San Jose, Seattle, Los Angeles, Santa Barbara, and Portland benefit from soaring prices. In San Mateo County, California, a person can make $2,000 a day just watching his house appreciate. In San Francisco a person can make more money simply owning a home than working a median-income job or playing stocks. Between March 2004 and March 2005 the median price for a single-family home "soared $106,000, or 21 percent, hitting $605,000," according to San Francisco Chronicle reporter Kelly Zito. "That appreciation far exceeded the $74,124 the typical Bay Area household earned last year."

Housing for the Rich

With so much wealth created by government-exacerbated scarcity, the housing market has become increasingly politicized, to the detriment of the people who can least afford it. "A century of experience with regulation of various kinds has taught us that regulation typically favors the affluent and the organized over the less affluent and less organized," said American Enterprise Institute fellow Steven Hayward, testifying before the U.S. Senate Environment and Public Works Committee in 1999. "There are few groups less organized or represented than the people who would benefit from houses and jobs that do not yet exist.…I think we are being naïve if we fail to recognize that growth management schemes can easily become the machinery of negation by existing residents."

Hayward provided an example of "negation by existing residents": Several months before his Senate testimony, homeowners in Fairfax, Virginia, protested at a county commission hearing that their prices were stagnant because the government was "allowing too many houses to be built." This tendency is especially problematic when you consider that planning commissions and other local government bodies tend to be dominated by the more powerful, established members of a community. New homebuyers, especially younger families, may be denied a house or forced to move further out principally because planners want to artificially enhance their own property values.

Think of the Children!

Across the country, households with children are either migrating out of city limits or never settling there to begin with. San Francisco, where falling enrollments last year prompted the city to close, merge, or relocate more than 20 schools, is the most extreme example. But similar trends are evident in other cities, including Boston, Honolulu, Miami, Denver, Minneapolis, Austin, and Atlanta.

Seattle Weekly columnist Knute Berger calls kids born and raised in Seattle an "endangered species." In Portland, Oregon, there are so few kids that city officials have been forced to close schools right and left. "After interviewing 300 parents who had left the city," Timothy Egan of The New York Times reports, "researchers at Portland State found that high housing costs and a desire for space were the top reasons."

Egan also notes Seattle's attempt in the 1980s to make the town more family-friendly. "It included marketing the city's neighborhoods to younger families, building a small mix of affordable housing, and zoning and policing changes to make urban parks more child-friendly," he writes. It didn't work: With home prices in Seattle going way up, the junior head count is way down.

The possibility that cities are trying to solve a problem they helped create through misguided regulations is rarely considered by social critics who bemoan the housing squeeze. The solution offered by Warren and Tyagi in The Two-Income Trap isn't to cut back on regulations, zoning restrictions, property taxes, and impact fees. It's to reregulate interest rates so people can't take out "bad" loans.

Regulators and special interests can focus on enacting rules that have specific, narrow benefits for one particular group or another. (In the case of housing, that would be people who already own property and benefit from the price hikes.) But regulations are like pharmaceuticals: Even the beneficial ones have side effects. As the housing market shows, those side effects can pack a heavy wallop. "It is clear," write the authors of the 2005 HUD study, "that the costs of regulation in suburban and high-growth areas are causing large numbers of households to forgo their dreams of homeownership or to make difficult tradeoffs involving very long commutes."

Well-intentioned or not, those tradeoffs are diminishing some people's quality of life to pay for other people's politically enhanced life-styles.

Crank Hypocrisy

info@reason.com (Joel Miller) — Mon, 27 Jan 2003 00:00:00 EST

When it comes to the government and its war on drugs, sometimes the right hand doesn't know what the left is peddling. This is especially true regarding the use of amphetamines.

From the Drug Enforcement Agency we hear that speed can lead to "addiction, psychotic behavior, and brain damage...Chronic use can cause violent behavior, anxiety, confusion, insomnia, auditory hallucinations, mood disturbances, delusions, and paranoia." Sounds like terrible stuff, right? Not if you listen to the U.S. Air Force.

As it happens, American flyboys are given dextroamphetamine—a drug the DEA compares to methamphetamine and which military personnel affectionately refer to as "go pills"—to help them fight battle fatigue and stay knife-edge sharp during their long and difficult shifts.

During the war in Afghanistan, "Pilots were allowed to 'self-regulate' their own doses and kept the drugs in their cockpits," reported the unfortunately named Andrew Buncombe for the London Independent. "When they returned, doctors gave them sedatives or 'no-go pills' to help them sleep. Pilots who refused to take the drugs could be banned from taking part in a mission."

All well and good—use was so uneventful that most Americans were probably unaware that our airmen were popping pills more potent than aspirin. But then came the event.

On a routine air-cover flight in April last year, Majs. Harry Schmidt and William Umbach dropped a quarter-ton bomb on a clutch of Canadian soldiers after seeing what they claim was gunfire from the ground. The friendly fire killed four Canucks and wounded eight others.

Now in the middle of an "Article 32" commission hearing—much like a grand jury—the defense is blaming the bombing on the fog of drugs rather than the fog of war, claiming the two were jacked up on speed. If eventually court-martialed, the dope duo could be booted out of the service and spend the next 60-plus years in orange jumpsuits. Of all possible alternatives, one of the best ways to duck responsibility would be to pin the blame on military pill-pushers.

This has painted the government into an interesting corner, as it has now been forced to come out and publicly defend the drug. Last week the Air Force Surgeon General sent one if its physicians to do something that no doubt gave people in the drug reform movement more laughs than presidential candidate Clinton's confession to smoking pot but not inhaling: Air Force Dr. Pete Demitry actually praised speed.

"He told a news conference the Air Force has used the stimulant safely for 60 years and that it is better than coffee because it not only keeps users awake, but also increases alertness," reported Reuters. "There had been no known speed-related mishaps in the Air Force, whereas there had been many fatigue-related accidents, Demitry said."

Because of the danger of drowsy Red Barons at the stick of F-16s and the like, Demitry said that the need for amphetamines "is a life and death issue for our military."

Given such a vital need, how much drug use is going on? Col. Alvina Mitchell, chief of Air Force media operations, has told reporters she doesn't know the current rates, but if previous wars are anything to go by, the numbers are quite substantial. "A survey of pilots who took part in the 1991 Desert Storm operation suggests 60 percent of them took [dextroamphetamine]," according to Buncombe. "In units most heavily involved in combat missions, the rate was as high as 96 percent. During Desert Storm, the standard dosage of [dextroamphetamine] was 5mg. In Afghanistan it was 10mg." This is nothing big; usual doses for adults can range from 5 to 60mgs a day, depending on need.

Ironically, the drug, branded Dexedrine, carries the warning that it "may impair judgment or coordination. Do not drive or operate dangerous machinery [like F-16s, for instance] until you know how you react to the medication." Once a user knows how he reacts, however, the presumption is that the drug is relatively safe. After all, the Air Force trusts tired men to zip through the air with extremely lethal, million-dollar equipment.

The obvious follow-up: If it is good and safe enough for pilots, what about the rest of us? With "no known speed-related mishaps" why shouldn't taxicab drivers, swing-shifters at NEC, or bleary-eyed night-school students be able to take advantage? It's not as if only pilots must battle fatigue, and these folks are certainly not in the position to drop 500-pound bombs on innocent Canadians. A government that punishes people for using a substance it praises as vital seems worse than hypocritical.

In Leonard Wibberley's The Mouse that Roared, the national symbol of the duchy of Grand Fenwick is "a double-headed eagle saying 'Yea' from one beak and 'Nay' from another." When next looking for a spokesperson to discuss amphetamine use, perhaps the U.S. government should lease the bird.

Happy 90th to a "Hero of Freedom"

info@reason.com (Joel Miller) — Fri, 26 Jul 2002 00:00:00 EDT

Not too long ago, I wrote a column about Milton Friedman's position on the drug war (he wants to end it). A conservative reader, in a huff about the Nobel-winning economist's libertarian side being so prominently aired, wrote to tell me that political scientist Harry Jaffa was far more important than Friedman.

No offense to Jaffa or his fans, but if Friedman hadn't come around the mountain when he did, Jaffa would be unemployed.

Friedman, who turns 90 on July 31, was recently toasted by President Bush in honor of his life's achievements. This "hero of freedom," said the president, "has used a brilliant mind to advance a moral vision: the vision of a society where men and women are free, free to choose, but where government is not as free to override their decisions... All of us owe a tremendous debt to this man's towering intellect and his devotion to liberty."

Unfortunately, fellows like my rankled conservative reader are quick to display something else: ignorance and ingratitude.

If you're looking for the father of the 20^th century libertarian renaissance, start your paternity tests with Uncle Milty. Certainly fingers should point in the direction of Mises, Hayek, and other such luminaries. Murray Rothbard and Ayn Rand were both making sizeable waves as Friedman was wading into the pool. But Friedman really deserves the brass ring for creating both academic and popular support for the idea of reducing government controls and increasing individual freedom.

Mises and Hayek got the ball rolling after World War II, but Keynes and his cronies had all the loot and influence. The libertarian economic position was muffled and marginalized. Something had to shake it loose. That something was Friedman, who helped create a massively influential free-market academic network based at the University of Chicago.

In 1962 Friedman published Capitalism and Freedom, a book that laid the foundation for his popular works to follow. In books such as Capitalism and Freedom and Free to Choose, his Newsweek columns, and various TV documentaries, Friedman effectively argued against Social Security, government monopoly control of education and the post office, military conscription, drug prohibition, subsidies for farming and housing, rent controls, high taxation, tariffs, occupational licensing, reckless government spending, Keynesian inflationary meddling, and the reams of regulatory red tape so adored by bureaucrats and statist desk jockeys.

"It is testimony to Milton Friedman's tireless, good-natured efforts and the vigor of his arguments that economic ideas once regarded as hopelessly out of date are now being seriously discussed again," said Playboy when it interviewed him in 1973 (one of the reasons why the old "I read Playboy for the articles" protest carried any weight). Nearly 30 years on, these ideas are more than seriously discussed-they now carry the day.

Friedman was instrumental in sacking military conscription and getting a rein on marginal tax rates. His basic monetary position was proven right in the '70s when stagflation put the lie to Keynes' theory and had folks looking to wooden nickels as a safe haven for their money. Friedman's case for drug legalization is increasingly popular as the culture shifts to understand that political, economic, and civil liberties are indivisible. And his school voucher evangelizing, started almost 50 years ago, has even won converts on the U.S. Supreme Court.

Give what he has achieved, it's hard to overstate the importance of Milton Friedman's role. This makes scarier still the thought that he once wanted to become an accountant.

The reason for his influence? Certainly the political seas were increasingly churning with libertaria in the '70s and '80s, but Friedman stood out. In a 1995 Reason interview, Associate Editor Brian Doherty asked Friedman why he had the respectability and presence he has. Answer: "That's because of only one thing: I won the Nobel Prize. What, are you kidding yourself?" I can appreciate some humorous self-deprecation. But the real reason is that Friedman saw what was attainable and lunged for it.

"The difference between me and people like Murray Rothbard is that, though I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction," he told Doherty. "So while I'd like to abolish the Fed, I've written many pages on how the Fed, if it does exist should be run."

Another example? Friedman is opposed to public money in schools, but led the voucher charge. "I see the voucher as a step in moving away from a government system to a private system." Vouchers are a good answer, however partial, to government involvement because they are attainable. The best answers are the ones you never achieve because they put Uncle Sam out to pasture.

Others in the libertarian world did not have the same impact on policy because they demanded 200-proof antistatist measures to which only a handful of people would assent. Hence the early definition of libertarians: 12 guys selling newsletters to each other.

Friedman, by being pragmatic--and principled--with his message, expanded that pool of people far beyond a dozen. In the 1980s his ideas were smuggled into the Reagan White House, followed in the '90s by the statehouses of the globe. Said Bush in his toast, "the rest of the world is finally catching up with Milton Friedman."

Let's hope we do more than that. Let's push his work forward so we have plenty of good news to report when he turns 100.

Cigarette Stash

info@reason.com (Joel Miller) — Fri, 05 Jul 2002 00:00:00 EDT

Demonstrating that it learned nothing from colonial American smugglers dodging duties and tariffs, Tony Blair's Britain is currently burdening its smokers with cigarette taxes so preposterous they have spawned a black market for tobacco mirroring the one for illegal drugs.

Official Customs and Excise stats place the number of smuggled cigarettes at £17 billion in 2000-2001, costing the government some £2.8 billion in lost tax revenue, with another £890 million going up in smoke in the form of smuggled hand-rolling tobacco.

The trade is fast becoming more than a cottage industry. Considering the numbers, we're well into "force of nature" territory.

Calculating contraband is always difficult, but last year Customs estimated that one in five cigarettes were smuggled. Andrew McKie, writing in the London Spectator, suggests that figure might be low-balling it and cited an informal but more likely one-in-three figure.

In fact, the black market is so flush right now that it has even lowered the dimmer switch on "legitimate" shops, which are reportedly losing £50,000-plus annually to illegit salesmen. According to the Tobacco Alliance, an organization which represents more than 20,000 independent retailers, smuggling has lopped off revenue by 25 percent, forcing many shops to sack some of their staffs.

Even someone who flunked geography will be able to guess that most of the smuggled cigs come from mainland Europe, principally Belgium and other nations with ports close to Albion. And what a difference a few miles can make.

As Ananova.com reported last month, a pack of 20 cigarettes in Belgium costs only £1.81. Buying the same pack in the UK will cost you nearly two and a half times the brass.

But if you really want to save money (or make it, depending on your scruples), rolling tobacco is where the big money is. As McKie notes, "The British price is almost £9 for 2oz; in Belgium it is £2.08. A product manufactured in Bristol or Nottingham and shipped to Ostend can be brought back to this country and sold at a 100 per cent mark-up at comfortably below half the official British price."

This tactic is supposedly used by even the big tobacco companies.

The British government is currently nipping at the heels of Gareth Davis, head of Britain's Imperial Tobacco, because it suspects him of skirting the taxes.

"He needs to explain why the company he runs ships so many billion cigarettes to countries where hardly anyone smokes their brands, but the most obvious customers are major organised crime syndicates that smuggle them back onto the UK market," said the head of British antismoking group Ash in the London Independent.

The government's response to the problem has been just as ho-hum as government's usual response to problems. Authorities have sworn to get serious, crack down on smugglers, take no prisoners, etc., etc., etc. They've pulled out all the stops, from adding new customs officials to seizing vehicles used to shuttle contraband to posting menacing posters.

Not that it's helping much. With borders far less porous than the U.S., it is somewhat humorous to see how manifestly bad John Bull is at keeping a few cigarettes off his soil.

The cigarettes and rolling tobacco come across in vehicles through the tunnels, stowed away in luggage aboard planes, on individual persons aboard ferries, stashed in the cargo holds of boats, and heaven knows where else. Smugglers are always crafty. Customs officials at the Manchester Airport were stunned to find nearly 26,000 cigarettes taped together in the shape of two surfboards and tucked inside carrying bags.

"It was rather a shock," Customs spokesman Matthew King told the Manchester Evening News. "It was the most ingenious concealment and shows the extent to which smugglers will go."

No. They'll go further.

Smugglers bringing an illicit load from Eastern Europe, for instance, utilized a set of hydraulics to hide cigarettes between the body panels of a truck. When officials figured out the trick, they flipped the switch to watch the outer shell of the vehicle rise five feet and display its freight of forbidden fags.

"It was like something from a James Bond film," said Customs spokesman Nigel Knott. The price tag was sexier still -- £1 million for the single load.

The problem for Britain -- and other tax-happy governments -- is that as long as profits outweigh punishment, smugglers will figure out ways around the new controls. The Brits of all people should know better. Not only did their upstart American colonies declare their independence 226 years ago, partly over such issues. That was also the year that Adam Smith published The Wealth of Nations, which included this pearl of wisdom: "Not many people are scrupulous about smuggling when... they can find any easy and safe opportunity of doing so." "Easy" and "safe" are just questions of risk aversion, and with substantial payoffs people are willing to incur loads of risk.

It seems as if the Brits have yet to learn that when taxes become too high, people don't submit -- they smuggle.

Seized by Failure

info@reason.com (Joel Miller) — Wed, 02 Jan 2002 00:00:00 EST

Walking through an airport with a stash of hash is getting harder and harder these days.

Since the September 11 attacks, tighter security at airports, shipping yards, and border crossings have bumped up total drug seizures 66 percent, according to the December 16 New York Times. U.S. Customs positively blushes as it hypes how seizures among commercial traffic along the Canadian border are up 326 percent.

"There has been a definite unintended consequence of the effort against terror: We are doing a better job of keeping illegal drugs out of the United States," gushed Customs Commissioner Robert Bonner. But are they?

"Experts have no clear evidence that the increased seizures have created a shortage of drugs on the street or raised their price there," notes Times reporter Fox Butterfield.

The connection between more seizures and less drugs on the streets only holds true if you assume that incoming supplies of drugs are static. They don't appear to be. For one thing, more seizures mean that heightened security isn't scaring off traffickers. You'd expect seizures to decline if Customs' teeth were adequately sharp. Instead, a boom in narco-nabbing might simply signal that traffickers are tossing more product at the borders to make up for what they expect to get pinched.

"Law enforcement officials are uncertain whether the increase in seizures means only that they are intercepting a larger proportion of the narcotics...or whether the traffickers are...increasing the number or size of their shipments as a way of overwhelming the tighter security," writes Butterfield. The trend over the past decade indicates that the latter is more likely.

Global Illicit Drug Trends 2001, one of those info-clutter publications from the United Nations, shows how genuinely meaningless the seizures are. The U.N. says that total potential production of illicit opiates (raw opium, heroin, morphine, etc.) in 1999 was 576 metric tons, nearly double what it was in 1989. The amount seized has ratcheted up as well, from 9 percent in 1989 to 15 percent in 1999.

But that still leaves 491 metric tons of illicit opiates available for consumption -- 182 metric tons more smack than when the first President Bush was reassuring the nation that the U.S. would prevail in the War on Drugs. We're grabbing more all right, but only because there's so much more to grab.

Two simple graphs in the U.N. report make this embarrassingly clear. The first (on page 107) shows global seizures of heroin and morphine from 1989-99. The number of seizures more than doubled, with 27 metric tons seized in 1989 and 61 in 1999. Keep that in mind as you flip to page 207, where a chart tracks the wholesale and retail prices of heroin over the same period. Where a gram of heroin would cost you more than $275 in 1987 (using 1999 dollars), 12 years later the same gram would set you back less than $50. While less dramatic, the downward slope for cocaine is just as obvious.

Even short-term seizure gains aren't promising for drug warriors. Traffickers are making up for shortfalls by simple redirection. Because the Coast Guard has shifted its efforts away from interdiction to anti-terror duties, Butterfield points out that cocaine seizures are down by one-third, and marijuana seizures are only one-fifteenth what they were last year at this time.

Sometimes the banal things are the truest: Where's there's a will, there's a way -- and this is true for both sides of the drug war.

As T.W. Arnold explained about alcohol prohibition in his 1937 book, The Folklore of Capitalism, "When men wanted to pretend that the nation was dry, a vast and complex organization of bootleggers became a necessity in order to meet the demand for liquor."

But at the same time, "There was also an elaborate ceremony to be celebrated, i.e., that the nation was dry." As evidenced by all the rumrunners, it wasn't, but the government put on the necessary airs, just as it does now.

Drug warriors bluster and bellow about how the latest seizures are some sort of victory, but as the numbers demonstrate, it's all a show. By jailing a few drug runners and pinching their product, drug warriors can continue to claim their well-loved token successes while drug dealers continue to claim the real ones.