Tag: The New York Times

Categories
China Economics Financial Crisis

Theories of the Financial Crisis: The Chinese-American economic imbalance

[digg-reddit-me]John P. Judis summarized this theory of the crisis in The New Republic, “Economists know the fatal flaw in our system – but they can’t agree how to fix it.” Judis described how America has relied for decades on a “tortuous financial arrangement that knits together its economy with those of China and Japan”:

This informal system has allowed Asian countries to run huge export surpluses with the United States, while allowing the United States to run huge budget deficits without having to raise interest rates or taxes, and to run huge trade deficits without abruptly depreciating its currency. I couldn’t find a single instance of Obama discussing this issue, but it has been an obsession of bankers, international economists, and high officials like Federal Reserve Chairman Ben Bernanke. They think this informal system contributed to today’s financial crisis. Worse, they fear that its breakdown could turn the looming downturn into something resembling the global depression of the 1930s…

China depends on exports to the United States, and the United States depends on capital from China. If that special economic relationship breaks down, as it seems to be doing, it could lead to a global recession that could morph into the first depression since the 1930s.

Judis’s article seems to rely heavily on the analysis of Nouriel Roubini wrote most prolifically on this subject and predicted this system was approaching a crisis point in 2006. In a paper written with another prescient economist Brad Setser, Roubini pointed out the instability inherent in a system in which:

The US absorbs at least 80% of the savings that the rest of the world does not invest at home….[And] Social peace in China comes at the expense of political peace in the US.

Historian Niall Ferguson pointed the historical anomaly this represents as:

Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.

Mark Landler explained the dynamic at work – and how it led to the current crisis – in a New York Times piece that was part of that newspaper’s “The Reckoning” series looking in depth at issues that led to the crisis:

In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States…

By itself, money from China is not a bad thing. As American officials like to note, it speaks to the attractiveness of the United States as a destination for foreign investment. In the 19th century, the United States built its railroads with capital borrowed from the British.

In the past decade, China arguably enabled an American boom. Low-cost Chinese goods helped keep a lid on inflation, while the flood of Chinese investment helped the government finance mortgages and a public debt of close to $11 trillion.

But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.

“Nobody wanted to get off this drug,” said Senator Lindsey Graham…

As Chinese money flooded into the American market, it created bubbles in which prices were inflated.

The primary beneficiaries of these bubbles were the economic elite whose jobs were not being outsourced or undercut by Chinese manufacturing and who owned stock, housing, or other assets which increased in value due to the added funds sloshing around in the financial system.

The American government similarly benefited from this Bretton Woods II as they were able to engage in wars, increase domestic spending, and lower taxes all at the same time – all without paying a higher interest rate on their deficit spending.

Financial firms made huge amounts of money as the inflow of the world’s savings bid up the prices of the assets they were buying and selling – and of course, they took the first cut of any profits from the sales – and assessed numerous fees for whatever it was they were doing. With an excess of capital, borrowing is cheap – which allows firms to make massive leveraged bets – also increasing their profits as well as their risk of being wiped out.

Lower wage workers benefited to a lesser extent as cheap Chinese goods – especially as sold by Wal-Mart – increased their buying power even as their wages stagnated over the past decade. Coupled with the easy credit resulting from the excess of money in the financial markets, the majority of workers were able to approximate a rising standard of living even as their wages stagnated – undercut by competition from abroad.

Until now – as this whole house of cards is falling apart. 

China is hoping the solution is to jump start it’s own domestic consumption – which might be difficult due to a wariness on the part of many Chinese about their future prospects: 

China kicked off its own campaign to encourage domestic consumption, which it hoped would provide a new source. But Chinese save with the same zeal that, until recently, Americans spent. Shorn of the social safety net of the old Communist state, they squirrel away money to pay for hospital visits, housing or retirement.

This accounts for the savings glut identified by Mr. Bernanke.

The way things are going now – it seems we’re screwed unless the Chinese people stop being so responsible thrifty and start spending like drunken American sailors. A paradox of thrift indeed.

—–

It should be noted that while I – and most of the authors I cite – specifically talk about the Chinese-American relationship, the points being made apply to East Asia in general – especially Japan which has contributed to the imbalance nearly as much as China.

Continue reading “Theories of the Financial Crisis: The Chinese-American economic imbalance”
Categories
Barack Obama Politics The Opinionsphere

3 interesting short essays

David Brooks approvingly describes the attitudes of the market-state liberals of the Obama administration in the New York Times:

When the members of this new establishment are confronted with a broken system — whether it involves hospitals, energy, air pollution or cars — their approach is the same. They aim to restructure incentives in order to channel the animal drives of the marketplace in responsible directions.

William Ecenbarger in the Smithsonian magazine asks if “we take more risks when we feel safe”:

This counterintuitive idea was introduced in academic circles several years ago and is broadly accepted today. The concept is that humans have an inborn tolerance for risk—meaning that as safety features are added to vehicles and roads, drivers feel less vulnerable and tend to take more chances. The feeling of greater security tempts us to be more reckless. Behavioral scientists call it “risk compensation.”

…The phenomenon has been observed well beyond the highway—in the workplace, on the playing field, at home, in the air. Researchers have found that improved parachute rip cords did not reduce the number of sky-diving accidents; overconfident sky divers hit the silk too late. The number of flooding deaths in the United States has hardly changed in 100 years despite the construction of stronger levees in flood plains; people moved onto the flood plains, in part because of subsidized flood insurance and federal disaster relief. Studies suggest that workers who wear back-support belts try to lift heavier loads and that children who wear protective sports equipment engage in rougher play…

Walter Shapiro explains why “Americans like Big Government” in The New Republic, even though that old Ronald Reagan line about “I’m here from the government and I’m here to help” still goes over well: because when federally-funded projects are successful, local politicians take the credit – and when it fails – they pass up the blame:

Even if these projects turn out to be the greatest job-creation engine since the construction of the pyramids, Obama and the stimulus package would only receive marginal political credit. Governor Ted Strickland will undoubtedly brag about the new roads and bridges when he runs for reelection next year and Columbus Mayor Michael Coleman will bask in the success of the police academy’s Class of ’09. This is not ingratitude, but an illustration of how the political game works. The feds pay the bills (and sometimes take the heat), while state and local officials never miss a ribbon cutting.

Categories
Foreign Policy Politics The Opinionsphere The Web and Technology

Tweeting Revolution

In lieu of a substantial column on my part – I’m in one of those places where I’m stuck in the middle of three or possibly four longer pieces – here’s a quick collection of related thoughts:

David Brooks in the New York Times:

To me, the most interesting factor is the way instant communications lead to unconscious conformity. You’d think that with thousands of ideas flowing at light speed around the world, you’d get a diversity of viewpoints and expectations that would balance one another out. Instead, global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time.

Brooks is talking about instant communications in finance, but he’s onto something that has been evident to close observers of the internet social networking since it’s inception. The instantaneousness of the communication – the sharing – leads to conformity. It seems that instant reactions to events are more uniform that our individual reflective understandings. At the same time, the speed of the communication creates a kind of self-reinforcing wave as each individual reaction begins to affect the event itself – especially as related to markets or other systems that are open to individual input. Online instant communication then creates a kind of “conformity by sharing.” One excellent example of this is the flash mob. Flash mobs have an additional conforming pressure – the desire to be part of the in-crowd. They also seem to have a particular agenda – to shock the public with organized spontaneity. (Here’s two of my favorite flash mob events – in Grand Central, New York and Antwerp, Belgium.)

This conformity by sharing via the internet has already had more significant effects than the flash mobs. For example, the Obama campaign derived a large amount of energy from online organizing and networking – though this online component was balanced with a more traditional campaign. The Orange Revolution in Ukraine was said to be organized in large part by text messaging via a primitive social network. It’s interesting to see how this is playing out in the Twitter revolution in Moldova.  

Somewhat related to the Twitter revolution, Joshua Keating makes a wise observation regarding protests in a short piece entitled “Do protests ever work?” in Foreign Policy:

Rather than organizing around a specific political goal, ending the war, these marches tend to devolve into general lefty free-for-alls encompassing everything from Palestine to free trade the environment to capital punishment. 

I would add that, at least in democratic societies, protests that demand accountability or consistency from “the system” tend to be more effective than one that seek to overturn it.

Keating was referring to the G-20 protests in London.

Categories
Law Mexico National Security Pakistan Political Philosophy

The Soft Underbelly of the Modern State

[digg-reddit-me]In other periods of history, opponents of a state would assassinate leaders to force changes in policy. The leader was invested with such power that removing him or her from his position would create an opportunity to change a government’s policies and overall posture towards the world. Today, although assassination is still a tool, the focus of opponents of the state – who are mainly identified as terrorists today – is to attack the Rule of Law. The Rule of Law – the primacy of laws over all individuals, including those in power, a principle which prevents authoritarianism, the arbitrary use of power, and anarchy – is perhaps the most valuable and vulnerable asset a state can have. Without it, there can be no democratic discourse or free elections and no free market. Yet the Rule of Law is especially vulnerable as it relies upon a wide range of institutions and conditions – all of are required to achieve the public trust needed: an independent judiciary; a professional police corps; a relative peace; the transparency of laws and law-making; the right of every individual to be given a fair hearing if they are being held by the state; a sense of basic justice within the society. A single rogue cop, a corrupt judge, or an unjust law undermines the Rule of Law – and if it is not well-established, can destroy it.

Reading about Mexico and Pakistan – the two major nations the U.S. Joint Forces Command listed as major nations that could suddenly collapse in the next year – one is confronted again and again with what each has in common: the Rule of Law is being deliberately subverted by major groups within these nations. If either nation is not able to maintain some semblance of the Rule fo Law within it’s borders, they will have effectively collapsed.

In Mexico, the Rule of Law has been undermined for years but is perhaps now finally reaching a tipping point. As Marc Lacey reported in the New York Times:

The cartels bring in billions of dollars more than the Mexican government spends to defeat them, and they spend their wealth to bolster their ranks with an untold number of politicians, judges, prison guards and police officers — so many police officers, in fact, that entire forces in cities across Mexico have been disbanded and rebuilt from scratch.

Steve Fainaru and William Booth reported in the Washington Post that:

The government is attempting to vet and retrain 450,000 officers, most at the state and municipal levels, employing lie detectors, drug tests, psychological profiling and financial reviews to weed out corruption and incompetence. Nearly half of the 56,000 officers vetted so far have failed.

Police corruption is clearly endemic in Mexico. It is for this reason that President Felipe Calderón has tasked the military with taking on the drug cartels – and it is also for this reason that many local police forces are now run by former military officers. But as the Lacey article makes clear, even the military is compromised – both from within by informants paid off by the cartels – and by the army-sized force of former soldiers that works for the cartels:

Although Mexico’s military is regarded as significantly less corrupt than the country’s police forces, defense officials estimate that 100,000 soldiers have quit to join the cartels over the past seven years.

As evidence that Mexico is even more compromised, Lacey reports that:

The reach of the drug kingpins has even the army fearful. Many soldiers cover their faces while on patrol to avoid being identified and singled out by the drug cartels. The army also recently began allowing soldiers to grow their hair longer, because military-style crew cuts were believed to be putting off-duty soldiers at risk.

Sam Quinones writing for Foreign Policy described how thoroughly Mexico had changed in the past decade, recounting anecdotes about the flagrancy of the cartels’ violation of laws.  Mayor José Reyes Ferriz of Ciudad Juárez lives across the border in Texas because he is not safe in the town he was elected to govern. The cartels have brought Mexico almost to a breaking point because they have undermined the Rule of Law through large portions of the country. The law is obviously a barrier to their illegal activities. Fainaru and Booth reported a senior advisor to President Calderón explained the motivation behind the desire to use the military to attempt to combat the cartels:

The executions, the decapitations, the confrontations between the drug gangs. There was a perception in society of lawlessness, that there was no state.

This perception is enough to destroy a nation – which is why the Mexican government has taken such drastic measures to combat it. At the same time, the steps taken by President Calderón – using the military – have themselves undermined the Rule of Law. As Monte Alejandro Rubido, a senior public security official explained the tradeoff:

It can be traumatic to have the army in control of public security, but I am convinced that we don’t have a better alternative, even with all the risks that it implies.

It is good that Calderón realizes that there is a tradeoff. His judgment remains that this is the least worst option – and his goal is one that we in America must share – the restoration of the Rule of Law in our neighbor. 

Similarly, in Pakistan, the Rule of Law has been undermined by the central government – as former President Musharaff disbanded the Supreme Court, as President Zardari refused to restore Chief Justice Iftikhar Muhammad Chaudhry for a time and seemed to use the Court for partisan purposes – while at the same time, the Rule of Law is being directly attacked by the religious extremists who have now taken to attacking police academies.

The Rule of Law is a nation’s most valuable asset – and unfortunately it is also most vulnerable. It faces threats from government overreaction, from rogue forces within the government, from unjust laws, from corruption, and from extremists who violently oppose the state itself. Mexico and Pakistan are becoming destabilized because large groups are attacking the Rule of Law – and each government’s own reaction to these groups additionally undermines the Rule of Law.

Categories
Barack Obama Domestic issues Economics Financial Crisis Health care The Opinionsphere

The Master Plan Always Has Flaws

Daniel Drezner at Foreign Policy summarizes my feelings about Krugman in almost as complete a way as Evan Thomas did:

The fundamental question is whether Krugman is a brilliant hedgehog, an insecure pain in the ass, or – as frequently is the case – both at the same time. 

One suspects that Krugman is at least part right – and that Obama and his team realize this. Obama’s response to the financial crisis has been significant – and more than any government response in history – but it is dwarfed by the scale of the crisis, as Krugman is fond of pointing out. Nicholas Lemann in the New Yorker tries to explain why Obama seems to be ignoring Krugman’s advice so far:

[Obama] has to address the crisis, and he is trying to add enough new controls to the system to prevent a repeat of it, but it looks as if his heart is with the big new programs in his budget and with his foreign-policy initiatives. Bank nationalization would drive the stock market down and increase theagita of people with 401(k) plans. Moderate Democrats in Congress would further soften in their support for the Administration’s legislation. The price of bank nationalization might be Obama’s super-ambitious plans in other realms, which, if history is a guide, are likely to pass only in this first year of his Presidency. If they do pass, he will have generated tax revenues from affluent people for social purposes far beyond those of the House’s tax on A.I.G. bonuses, and he will have significantly eased the distress of people who can’t get good health care or education. That is a lot to put at risk.

At the same time, Obama’s team seems to think that, to quote my post of yesterday:

[I]n the short term, the Geithner plans will work to restart the “old” economy. In this moment before that happens though, pressure from Europe and internal critics as well as a desire to avoid a repeat of this fiasco will enable enough forward-looking, gradualist regulation and legislation to correct the long-term problems with high finance.

E. J. Dionne Jr. in the Washington Post explains where the administration’s focus is:

Obama’s top budget officials seem confident that they can deal with this immediate difficulty. His larger challenge is to take on the politics of evasion promoted by those who would indefinitely delay health-care reform, energy conservation and the expansion of educational opportunities. Already, his lieutenants are signaling how he will cast the choice: between “taking on the country’s long-term challenges” or just “lowering our sights and muddling through,” as one senior aide put it.

If Geithner is responsible for fixing the current crisis, Peter Orszag is responsible for the long-term outlook – of balancing Obama’s plans to expand government’s role and stabilizing our deficit spending. As Jodi Kantor in the New York Times explained:

Mr. Orszag embodies the administration’s awkward fiscal policy positioning: big spending now, with a promise to scrub the budget of waste and a bet that economic recovery and changes to health care will gradually reduce the deficit.

A lot of pieces need to fall together for this to work. I have confidence in each piece of this plan – but together, the venture seems a bit bolder than is wise.

Perhaps this is a perfect moment in history for Obama’s plan – and Obama has the insight to see this; perhaps Obama is a master of politics who is able to get all of these items through; but it’s hard for me not to be discomfited by the manner in which everything is coming together.

Categories
Politics Prose

The elation of victory is fleeting and the burden of responsibility is enduring

Bob Gates in his 1996 memoir From the Shadows:

The White House is a poignant place. I spent more years working there than any President but Franklin D. Roosevelt. And it seems to me that for those who live and work there, if they are completely honest with themselves, with rare exception the most vivid memories are not of victory but of crisis and defeat — and, for a fortunate few, of one or two occasions of historical importance. This is why character counts for so much in a President. In the White House, the elation of victory is fleeting and the burden of responsibility is enduring.

H/t Elizabeth Bumiller in the New York Times.

Categories
Barack Obama Economics Financial Crisis Politics The Opinionsphere

Is This Downturn a Crisis of Confidence or a Fundamental Error?

Prefacing my thoughts on economics, as always, with the warning that I am not an economist, but only an amateur…

My non-professional observation is that when a disproportionate amount of money is controlled by the financial sector, a crash soon follows. This observation isn’t original. As Paul Krugman observed a few days ago in the New York Times:

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

Krugman concludes that this structural issue is at the root of the problem – rather than a liquidity issue with the banks:

I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

Simon Johnson, an economist formerly with the IMF, agrees with Krugman in a long piece in The Atlantic Monthly, and he echoes another point I’ve been making:

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail.

Reading both of these men, I find myself hoping they are wrong while sensing that they are at least partially right. Evan Thomas of Newsweek captured this balance nicely in his cover piece from the current issue:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he’s wrong, and you sense he’s being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking.

At the same time as Establishment defenders such as Robert Samuelson are uneasy about the scope of what Obama is proposing, other members of the Establishment are uneasy that he may not be doing enough. We don’t know who is right.

To some extent we can discount Krugman’s opposition due to his personal fantasy of how his life might work out:

Krugman says he found himself in the science fiction of Isaac Asimov, especially the “Foundation” series—”It was nerds saving civilization, quants who had a theory of society, people writing equations on a blackboard, saying, ‘See, unless you follow this formula, the empire will fail and be followed by a thousand years of barbarism’.”

His critique of Obama’s plans seems to follow this model – as his warnings take on more prophetic tones.

But there is real intellectual weight to this theory of the financial crisis as something more than a liquidity or confidence crisis. Krugman outright rejects this explanation:

[T]he banks [are] really, truly messed up: they bet heavily on unrealistic beliefs about housing and consumer debt, and lost those bets. Confidence is low because people have become realistic. [my emphasis]

In other venues, Krugman describes the problems as extending far further than this – as above when he discusses the trend towards increasing the influence of American finance and increasing income disparity. This stands on contrast to the approach of both Hank Paulson and Tim Geithner who believe that the crisis is primarily one of confidence. They are treating the crisis as a more technical and esoteric version of a bank panic solved by a show of strength, as for example, the Panic of 1907:

Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, “owing,” reported one paper, “to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic.” During a panic, confidence is almost as good as gold.

Today, the government has taken the role of “the strong men in American finance” who are seeking a show of strength to boost confidence.

On the one side, you have economists – from Simon Johnson to Paul Krugman to Nouriel Roubini – who have been predicting doom for some time claiming that there are fundamental problems with our finance industry – and as a result of the size and influence of our finance industry – our entire economy. On the other you have men and women with power – in both finance and government – who are acting as if the problem is mainly one of a lack of confidence and a broken mechanism. 

My bet – based in no small part on my innate optimism as well as a respect for people on both sides of this debate – is that in the short term, the Geithner plans will work to restart the “old” economy. In this moment before that happens though, pressure from Europe and internal critics as well as a desire to avoid a repeat of this fiasco will enable enough forward-looking, gradualist regulation and legislation to correct the long-term problems with high finance.  Already, there are some signs that this is what is happening.

Categories
Economics Financial Crisis Foreign Policy Politics

Stimulus and Stability (cont.)

Nicholas Kulish in The New York Times explains how “Europe, Aided by Safety Nets, Resists U.S. Stimulus Push.” 

I wrote a few weeks ago that:

…there seems to be some sort of inverse relationship between a society’s social safety net and the amount of stimulus spending they are proposing. 

This makes sense on a number of levels. Automatic stabilizers which should take some of the pressure off a need for a stimulus are not included here. On another level, these nations without a strong safety net must rely more heavily on economic growth for societal stability. 

If this is true, China and America would be more reliant on constant economic growth to relieve social and political pressure and would be more likely to have larger stimulus packages. France and Germany with stronger safety nets would feel more insulated and be less likely to push for large stimulus packages. This is exactly how this matter is playing out on the world stage today – with some exceptions due to political leadership. 

But both states with strong social safety nets and those without them are dependent on growth over time. But those states without strong safety nets feel the economic bumps more strongly – and downturns end up being more disruptive.

Kulish writes now that:

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate…

Mr. Posen and others argue that while Germany may be doing more stimulus spending than others in Europe, it is counseling other European countries — many of which share the euro as their common currency — not to spend their way out of recession either, but to count on their safety nets to do much of the job.

Nothing groundbreaking on either of our parts – but it’s an example of how fundamental societal agreements – the social bargains underpinning the state – affect everyday policy.

Categories
Foreign Policy Iran Politics The Opinionsphere

Signs of Hope: Iran

Roger Cohen in the New York Times has become a major supporter of engagement with Iran. After describing the continued provocations by Ayatollah Khamenei in response to Obama’s latest peace offering of sorts, he explains:

Khamenei also quieted the crowd when it began its ritual “Death to America” chant and he said this: “We’re not emotional when it comes to our important matters. We make decisions by calculation.”

Cohen sees the same opening with Iran that the esteemed foreign policy expert Les Gelb as interviewed by Barbara Slavin does (h/t Andrew Sullivan):

Iran as a society is more middle class and more prone to democracy than any other country in that part of the world. Within ten years, Iran will be our closest ally in the region.

Categories
Colombia Foreign Policy Mexico National Security Politics The Opinionsphere War on Drugs

The Price of Prohibition I: Propping Up The Mexican Cartels

[digg-reddit-me]We are keeping the finger in the dike.

Sgt. David Azuelo of the Tuscon, Arizona police force as quoted by Randal C. Archibold in The New York Times.

I’ve been arguing for some time that the War on Drugs and the prohibitionist policies underlying it must be ended for the sake of our national security. I’ve made the argument from a civil libertarian point of view; I’ve made the argument that the War on Drugs is interfering with the fight against terrorism; and I’ve made the argument based on the fact that this war is destabilizing our neighbors. 

Here’s a parallel argument:

The Pentagon listed Mexico as a country that might collapse suddenly into a civil war between the central government and the cartels. A top cabinet official in Mexico claimed that “unless [the cartels are] confronted, ‘the next president of the republic would be a narco-trafficker.” The levels of violence in the country now are astounding – with higher rates than those in Iraq in recent months – and they are continuing to spill over the border into America. We are currently supplying both sides of this conflict with weaponry and funds – and the conflict is escalating. Mexico is now following the route of Colombia by militarizing it’s approach to the problem of drugs. For decades, war raged in Colombia to stop the drug smugglers – inflicting an enormous cost on the country as they – in the words of an influential and prestigious report by former Mexican, Brazilian, and Mexican presidents, “implemented all conceivable measures to fight the drug trade in a massive effort whose benefits were not proportional to the vast amount of resources invested and the human costs involved.” The report explains that the “traumatic Colombian experience” should teach other nations “not to make the mistake of adopting the US prohibitionist policies.”

Yet, that is what Mexico is doing. For decades, America has waged a war on the suppliers of drugs and on drug users at home and abroad. The casualties have been high – but no matter the body count or the number of arrests has gone, the War on Drugs has remained “an utter failure.” This failure has allowed the reach of the Mexican cartels to extend far into America:

United States law enforcement officials have identified 230 cities, including Anchorage, Atlanta, Boston and Billings, Mont., where Mexican cartels and their affiliates “maintain drug distribution networks or supply drugs to distributors.”

As Stephen Walt explained in Foreign Policy:

[O]ur policy helps enrich drug lords and make it possible for them to destabilize whole governments, as they are now doing in Mexico and Afghanistan. 

As The Economist reported:

[P]rohibition has fostered gangsterism on a scale that the world has never seen before…[T]he war on drugs has been a disaster, creating failed states in the developing world even as addiction has flourished in the rich world. By any sensible measure, this 100-year struggle has been illiberal, murderous and pointless…

At the same time, the harm reduction strategy of the European Union, while mitigating the effects of drugs locally, has exacerbated the effects of drug production and smuggling elsewhere.

The failure of both the War on Drugs and the harm reduction strategy has created an enormous market incentive for smuggling, for money laundering, and for corrupting government officials. Together, these and other effects of the Drug War create a sense of lawlessness which is exactly where the cartels thrive. The cartels are able to thrive in part because the scale of their operations and the enormous profits generated give them both incentive and means to experiment with different methods of smuggling, money laundering, and corrupting officials. If there were a way to reduce these profits, it could undercut their successes in all of these areas and undermine the incentives that drive them to take these steps. The cartels might no longer be able to acquire military-grade weaponry; they might not be able to afford to buy subs to smuggle items in; they might not be able to afford to buy off the top Mexican drug enforcement official. 

We have reached the point that The Economist has characterized as a choice between “A calculated gamble, or another century of failure.” The calculated gamble is to legalize drugs, or at least marijuana.

People have asked me if legalizing marijuana would really make a difference in undercutting the Mexican cartels.

Marijuana represents 60 to 70% of the profits that fuel the Mexican drug cartels. Legalizing it would take away one of the main props holding them up – just as legalizing alcohol helped rollback the gangs that dominated American cities in the 1920s.

Violence in Mexico stemming from the drug war is destabilizing the country and spilling over into America. With a single move, we could remove the monopoloy which gives them 60 to 70% of the cartels’ revenue – in a single move, we could take away their “king crop.” Without the enormous profits of marijuana propping up the rest of the drug market, the costs of smuggling would increase. The distribution network would be pressured. The cost of bribing officials would likely increase as harder drugs would be the only things being smuggled and enforcement could focus more on these drugs. The pressure on our criminal justice system that is currently imprisoning a higher percentage of our people than any nation on earth would be eased. Border guards would be able to focus more on harder drugs, or even on serious threats to our security, rather than searching teenagers for pot. All of this would undermine the cartels – most of all, taking away 60-70% of their profits.

We have reached a point where one of our most aggressive drug czars has publicly stated that he “wouldn’t care” if marijuana were legalized! Where another former drug czar has acknowledged that marijuana “pose[s] no significant public health problem.”  These are men who led the fight against drugs. A massive propaganda campaign, $40 billion a year, millions of arrests, and untold casualties and – and the price of drugs has remained the same and the extent of drug use has barely been affected.

Why are we continuing a failed policy that only serves the interests of the Mexican cartels it is propping up?