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What Really Caused Last Year's Bloodbath
Submitted by TheExpatriate on Wed, 01/02/2008 - 1:46pm.
Well, last year ended with 392 murders in Philadelphia, slightly less than 2006, despite a gruesome summer.
What was behind this violence, and its sudden decline. There is no one solution, but I think this NPR story holds some clues. What we saw was good law enforcement in action! Yes!
You see, according to federal drug enforcement officials, such as Drug Czar John Walters, there were major successes in curbing the amount of drugs, particularly cocaine, coming into the country early this year. One of the first places hit by the cocaine shortage was Philadelphia, where the scarcity started in May. In the following summer, there were massive amounts of violence.
Coincidence? I think not.
You see, drug shortages contribute to violence in at least two ways. First, drug gangs start competing more for territory, in order to make up for lost revenue. Second, drug addicts become more desperate for drugs, which means they became more violent and willing to rob people.
The story also contains a clue to why violence dropped later in the year. As one Philadelphia detective they interviewed notes, the shortage ended with the summer, creating less stimulus for violence.
Of course, this is not the only reason for the drop in violence. Violence always drops somewhat after the summer ends. Furthermore, the Philadelphia Police have been given impetus to crack down by the election of a reformist mayor, a new, tough police chief whom precinct captains will want to make a good impression on, not to mention a spate of Philly police officers getting shot.
Nonetheless, I think this is worth considering when we look at our nation's drug laws.
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Not sure this makes sense
If there is a shortage of cocaine, then why would drug dealers need to move into each other's territory to sell? I would think that they could sell the limited amount of cocaine they have in their own area.
And why does a desperate drug addict need to commit more crimes to feed his habit when there is a drug shortage? Perhaps prices for cocaine and crack skyrocketed? I'm sure someone here has a friend who could tell us if that happened.
The report suggests that the
The report suggests that the supply of cocaine shrunk, and the wholesale prices shot up, in the late spring. But the street price of cocaine has remained relatively stable ("price and availability of a $10-$20 rock of crack cocaine is unchanged, though the potency has dropped somewhat").
So essentially, the drug dealers' margins shrunk. If you can't make your profit targets with high margins, you have to go for volume, which means that you need more sales, i.e., new territory. Meanwhile, the middle men -- i.e., the guys who actually carry the guns on the street -- feel the greatest pinch, since they're limited both in their control of the supply (meaning they bear the brunt of the costs) and in how much they can sell (limited as they are in their ability to pass the costs onto the customer). That's a recipe for frustration and burnout.
This actually is the best micro/macro explanation I've seen yet for Philadelphia's fluctuating murder rate. Of course at this point it's purely theoretical -- we would need qualitative confirmation that this is actually what's happening on the street.
Uh, Because They Want to Expand Their Profits
This is basic supply and demand economics, Mr. Stier. If the supply goes down while the demand stays the same, prices rise.
Furthermore, drug dealers, like anyone involved in commerce, want to get the largest profit possible. The more people they have to sell to, the more money they make. With the cost of their cocaine supplies cutting into their profits, they would have greater motivation to go to war.
Finally, a drug addict who needs a fix NOW will do anything to get it, taking risks he or she otherwise wouldn't. Anyone who's lived in the inner city can tell you that.
The Expatriate
More questions about drugs and crime
This still doesn’t make sense to me.
Expatriate is not answering my question. If the supply goes down, then sure the price will go up. But your initial claim was that reduced supply lead dealers to move into each other’s territory. Assuming the dealers were selling all they could at the existing price, then a decline in supply and rise in price would not give them a reason to take over turf from other dealers. You can’t sell more than you have.
I also don’t understand how why wholesale prices would go up but street prices would not. I must be missing something in the structure of the cocaine economy. To the extent that the street level cocaine market varies from a perfectly competitive market—because dealers limit competition by holding turf—I would think it would give street level dealers more rather than les control over prices. So a wholesale price increase would be passed on to consumers in the retail market.
What am I missing?
Finally, there are many different kinds of addiction. Heroin addiction is different from cocaine addiction and both are different from tobacco addiction. When you stop using heroin you suffer withdrawal. That isn’t so with cocaine or crack. They are addictive in different ways. I’m not sure how that places into the relationship between drugs and crime.
It's about market share
But the only way you can control prices is by holding turf. Let's suppose you try to raise prices to maintain your profit margins. Unless you have near-perfect collusion among dealers, a nearby competitor willing to live with smaller margins can steal your customers away by either offering a more potent prduct or selling the product cheaper. At that point, you can either watch your volume reduce, further shrinking your profits, you can drop your prices and accept lower margins, or you can kill or chase off your competitor. The last solution is appealing because not only does it eliminate the pressure on your existing trade, it increases your volume, your ability to control prices and (potentially) your purchasing power.
That makes sense
If turf were more or less already controlled, then you wouldn't need collusion among dealers to control prices.
But what may make this scenario sensible is if there are roughly speaking, two kinds of retail dealers, lets call them established dealers and shaky dealers.
So the scenario is:
Wholesale cocaine prices go up.
Retail dealers with control over their turf try to raise retail prices so as to keep their margins up
Other retail dealers, perhaps those who already have shaky turf or who are tring to get into the business or expand their market share, decide to accept lower margins so as expand their market.
The result is turf wars and higher murder rates.
Given that retail prices did not go up, we can assume that the wars disrupted control over turf enough that retail margins and prices were forced down.
I guess this makes sense, although I'd like to some more empirical evidence about what was going on in the street would be helpful in confirming this theory. As you know, Tim, spinning out economic theories is, if not easy, sometimes easier than confirming them.
It's a story that fits the
It's a story that fits the data, or at least what we think we know. A pinch on supply sent wholesale prices up; street prices (for whatever reason) stayed low; plenty of homicides, by and of people with histories with drugs and crime. With shrinking margins, Wal-Mart (the dealers who can go large) forces the mom-and-pops (dealers who can't) out of business.
But you're exactly right -- what we would need is empirical confirmation of the story, as it plays out in one neighborhood or citywide. Since virtually nobody seems to really know what's happening on the streets -- you know, other than the conversations I sometimes hear riding the bus or trolley -- it's just playing with the variables.
But
if the Wal-Marts force the mom and pops out of business, street prices should then rise. Did that happen?
No. Wal-Mart's prices
No. Wal-Mart's prices haven't gone up either. They just sell worse stuff at low margins and high volume.
Then the metaphor doesn't work
Walmart doesn't try to control prices. It tries to lower them. Our presumption was that the big established dealers use force to control their turf and keep prices high.
Right. Walmart's primary
Right. Walmart's primary method is to lower prices. Big drug dealers can also murder or intimidate their competition. Walmart also has vastly more control over their wholesale costs than local dealers.
The relevant value for the analogy is margins, not prices. The dealers who fight and win more turf are willing to accept lower margins (by keeping the prices stable) at higher volume and lower quality. They also don't treat their customers or employees very well.
See the Freakanomics Study for Your Answers to Cocaine Pricing
While it does not have all of the answers for the economics of cocaine sales, most of the questions asked here are addressed in the Freakanomics study I mentioned earlier. Wal-Mat is a bad analogy, their model is totally different, and is based largely on squeezing manufacturers for lower prices, efficiency in operations and logistics, and volume of sales.
Measuring Cocaine Use and Economics
Freakanomics has studied the economics of drug sales, focusing on crack cocaine. For the key study go here. A focus of the study and subsequent studies by the Freakanomics crowd is that illegal drug sales actually has a business structure and a hierarchy that replicates many for profit businesses, notably franchised fast food restaurants. This is to say that illegal drug sellers, notably gangs, somewhat unknowingly follow certain business models. One could assume and infer that based on the Freakanomic studies on illegal drug sales that gangs will try to expand their sales and territory in certain cases, notably when they see an opportunity under certain times and conditions.
Part of the original study (by Roland G. Fryer, Jr., Paul S. Heaton, Steven D. Levitt, and Kevin M. Murphy) notes (at least in the example in the study) "drug revenues fall almost in half in war months. The quantity of drugs sold falls 29 percent, and price falls 25 percent." The study goes on to state "gang wars induce large, adverse demand shocks. Customers are afraid to come purchase drugs . . . The rivals to the North who are eventually vanquished use violence in their competition’s turf as an explicit strategy for shifting demand to their own territory."
There actually is a way to determine the usage rate of cocaine in a city, as shown by an offshoot of the Freakanomics economists. The way is to test sewage for levels of benzoylecgonine (BE) from cocaine and using the data determine usage levels on a per person and on other scales including over time. Anyone want to contact the PWD and see if they will start testing for this?