Drugs: Are We Better off Legalizing Them? (Part 1)

The fundamental point behind making drugs illegal is that in addition to law abiding citizens, those who wish to abuse anyways face high production and sale costs which in theory should decrease demand. But illegal drugs are a special case in that their price is fairly inelastic because they’re addictive. The result is that unlike most other commodities, people are always going to be willing to pay any affordable amount to get high. So making drugs illegal simply limits the number of dealers to those who can overcome legal barriers, and in the process makes them richer and spikes crime rates.

So to test this beyond the theoretical economic mind, NPR’s Planet Money talked to Freeway Ricky Ross who after became a large scale crack dealer in Los Angeles was sentenced to life in ’96 only to be released on parole 13 years later.

So the first part: making drug sales illegal drives the price up. To judge take a look at Ross’ numbers. Ross went through up to $3,000,000 a day out of which he made between 200 and 400k off each million. Of this profit he estimates that the forbidden nature of his products is responsible is responsible for approximately a thousand fold spike in their price.

                Now onto part two, that part of this money funnels into higher crime rates. Rick worked with 30-40 guys each of whom at any given moment was required to be armed. This thug and armed environment had obvious effects.

Drugs: Are We Better off Legalizing Them? (Part 2)

Money was further distributed to uphold ties between groups that bought you a free pass in the otherwise fatal streets of LA. And these guys weren’t necessarily drug dealers but included an assortment of criminals be they robbers, “jackers” etc. Other major costs ranged from reserves to pay bonds to financing lawyers to hiring the so-called small timers involved in the intricacies of running a drug operation.  To these individuals, seeing such profitable business is a huge enticement to enter this world.

But the thing that economists don’t necessarily take into consideration that Rick can point out is pretty simple if you think about it. Drug dealing is different from any other job you could ever have. High risk jobs normally demand high compensation but to starting dealers, life in gangs is a slow transition from life at home so any compensation can be seen as a lot. Furthermore, the life involved and processes becomes a culture unto its own that can be more engaging than it is dangerous. The result, even if you weren’t paid as much as Rick, even if you were broke and hunted, it was a life that some just wanted to live.

The simple solution is to legalize these substances but that would spike addiction. So the choice really is would we rather have higher crime or more people addicted to drugs? But there is a third option and that is to destroy the motivation to use or sell drugs in the first place. And that’s what Ross addresses now by talking to youth and others about the life after prison or lack thereof if you’re killed. It’s not an easy task but it may be the only option in a business that’s otherwise economically and socially irresistible.

Too Big to Fail!

Over the past year or so you’ve probably heard the term “too big to fail”. The term implies exactly what it says; these companies are so large and interconnected to other services in our economy that the failure of any one of them would have significant implications on the entire financial systems. In fact some people believe that any one of these corporations could destroy our economic foundation as a whole. For this reason, the phrase became the backbone of government bailouts that took billions upon billions out of a heavily indebted treasury to support these businesses.

Though these bailouts were admittedly successful and will for the most part be repaid over the years, they placed immense stress on our fiscal system and often came very close to not working. And hence recent legislation, specifically the Dodd-Frank bill. Under the law, companies titled too big to fail would have to not only create a safety blanket of reserve capital but also create a sort of will that would detail their shut down process in case. Furthermore, all of this will be subject to extra scrutiny by regulators.

I personally completely agree with this proposition as it’s the first concrete and system-wide step in the right direction. Though many of us saw the negative consequences of the recession, little has been done in the way of preventing its recurrence on a large scale. For reorganization beyond the responsibility these times have instilled in us individually, I think legislation such as this is going to prove absolutely imperative.

So now the question for Dodd-Frank is who would fall under the category of too big to fail? At this point, any bank holding over $50 billion in assets immediately makes the cut. But other companies aren’t going to be nearly as easy to judge nor will deciding how many companies will be on the list going to be easy. Right now the primary contenders are insurers like AIG, hedge funds, asset managers and extremely large corporations. As the decision process continues however, lobbying persists as companies try to get themselves off the list. I find this absolutely terrible as I’m sure many of you do. For now we can simply hope that necessary reform takes place unaffected by money or power.

Should NPR be Publicly Funded? (Part 1)

NPR’s Planet Money recently did a story about the debate to cut federal funding of public radio. I know what you might be thinking that’s gotta be biased. I thought the same but nonetheless, NPR being the reputed source that it is, I thought I’d hear them out.

The key question they point out is whether or not NPR is a public good. Government spending goes to public goods which by definition are things that everyone benefits from that the private sector may not afford at the moment. So fundamentally we ask ourselves if everyone benefits from NPR. Now this question isn’t as subjective as it might seem in that it’s not really about if you like NPR as much as if it’s available to you and anyone else. And in this aspect there little dispute. Even if you don’t contribute to public radio’s fundraisers and hate it to your very core, you still have the option to at any time to turn on your radio and tune in. Furthermore, it is a non-rival commodity in that usage and external factors don’t make it more or less available to any one person or group.

So NPR is a public good but that isn’t by any means a case closed for funding. There are a lot of things that technically fall under the category of public good such as that fart that nobody paid you for but yet you so graciously released for everyone’s smelling pleasure. This is when the real question of whether that public good is worth it comes into play; would people actually potentially be willing to pay for it. This is the far more difficult question to answer. Unlike normal things, public goods receive little in the way of market feedback which is the essence of assessing demand. When people buy a car they are endorsing its value over its cost but how do you know if the same holds true for NPR?

Should NPR be Publicly Funded? (Part 2)

The other question that comes to mind is why the government funds NPR but not other radio stations or the TV etc.  In this case the answer seems to be that these other products have transformed their playing fields. Through the use of commercials, they have made us the listeners the product which the station sells to paying advertisers. In this way, by creating rivalry among businesses for our attention, such programming is not a public good. From this perspective, though NPR is founded in principles that classify it as a public good, it does receive some commercial funding. But NPR isolates this to only the money it needs (non-profit) so that the vast majority of content is publicly provided and therefore the situation becomes extremely delicate. And by publicly provided I’m not referring to the government but rather the so called economic K group. Or simply people with large purchasing power who are willing to pay for those who can’t or who exploit as “free riders”.

And some argue that this minor advertising and major K group together should exempt NPR from federal backing. As newspapers and other goods adapt to our world, a lot of their content is available for free online and they have to find new ways to earn revenue so why shouldn’t NPR. In fact some believe that public radio would receive even more money and do better if it weren’t perceived under the government. But what if radio would be even better if it could avoid fundraising drives by getting more taxpayer money.

                If nothing else, you get the point that there are a lot of ifs and buts. No one knows for sure what to do and I honestly can’t say I have an opinion on what should be done. On the one hand NPR in my opinion is extremely valuable and ought to be supported no matter what. But on the other hand, in today’s technological age, I agree that it is public radio’s responsibility to support itself and find a sustainable outlet for its content. Feel free to share your views in the comments and stay tuned as we look towards what the final verdict shall be.

Happiness? That'll be $75,000 sir

NPR’s Planet Money team recently investigated whether money buys happiness and recent evidence says that yes, it does. Shocking right? I mean after everything we grew up hearing, how could this possibly be true?

Throughout history, rich people have always seemed happier than poorer populations. But the key observation was that this only holds true within a country. An American with a billion dollars is a lot happier than the American with a million dollars but not necessarily more than the Englishman with a million dollars. Economists reasoned that this was because of relative comparisons; being richer than your neighbor was all that mattered, not the guy living a mile away. But this theory was soon disputed by the fact that money isn’t worth the same everywhere as we can see in the example of the middle class New Yorker who would be rich in the plains of Iowa. And he isn’t necessarily going to make the move. So we decided that instead of being relatively wealthy, people enjoy being absolutely wealthy, or rich on a level field.

Under these new terms, Justin Wolfers an economist at the Wharton School plotted happiness levels and GDP per capita and lo and behold, he found a 0.8 correlation between both factors. In fact, a 10% income rise in any given country buys some more happiness. And this statistic doesn’t stop when people have met their basic needs and even some luxury wants. Nope it just keeps on going.

However this doesn’t hold true for all measures of happiness. When looking specifically at affective measures like if you smile a lot yesterday or things along those lines, we find that rises with income are small and generally stop when we hit approximately the $75,000 mark. But even in this case, far fewer the 1% of the people in the world ever cross this income level. So in nearly every way, money can buy you happiness.

But why? From our current knowledge, it all comes down to how you view that higher income of yours. Being wealthier isn’t as much being able to buy the nicest new car as it is say affording the medical advancement to successfully deliver and nourish a baby into childhood and adulthood. These amenities offer a security that is often key to avoiding traumatizing hardships. Other strong evidence has found that how respected we feel increases with income. And there are several other obvious factors; fewer things to worry about, greater health, freedom of choice.

Yet another part of it is the evidence that in many lower income regions, family ties take precedence to personal happiness. This means that working a little longer takes the backburner to spending a couple of extra hours with even distant relatives. Whereas in well developed countries, the opposite is often true.

The broad implication of this is that living a happy life may not be the most important thing. Happiness may not be as vital to life satisfaction and fulfillment as we ever designate it. So yes money can buy you its weight in happiness, but who knows, life just may not be as great as you thought it’d be.