#Lukáš Kovanda, Ph. D.

Let’s Legalise Cocaine and Heroin 

“The Fed has steps into the unknown ahead of it.  It is a question whether it can prevent the escalation of inflation,” says RICHARD POSNER, an American judge, who is the most influential academic lawyer, a thinker combining the spheres of law and economics, and also a proponent of the legalisation of drugs.

Why should drugs be legalised?

In the Twenties, we experimented with laws that punished the production and sale of alcohol in the USA.  It was an immense mistake.  Of course, alcohol is a serous social problem, it causes various diseases, and it increases the number of deaths behind the wheel.  But preventing so-called “victimless crimes” is very difficult.  If theft is committed, for example, it is something else – the victim is known.  But when there is no victim in the case of alcohol or trading in it, everyone wants it.  I don’t think that drugs are much more dangerous than alcohol.  The use of most drugs does not have significant adverse health consequences, more psychological ones.  But we are spending enormous financial amounts on fighting them.

With what results?  Is this making hallucinogenic substances more expensive?

No.  Drugs are very cheap – which shows how inefficient law enforcement is in this area. 

How to change the laws, then?

It could be like with alcohol.  Very harsh punishment for selling drugs to children and youth and, at the same time, the legalisation of sales to adults.  Drugs could then be taxed similarly to how we tax alcohol and cigarettes.  That is an efficient and much easier way of reducing their consumption than is their eradication and prohibition.  Drug busts only serve to create a black market.  If fairly high taxes are levied on drugs, their supply will drop as well as demand for them, and we will gain much of what we are trying to accomplish when we criminalise them.

A STEP INTO THE UNKNOWN.  “The Fed’s strategy for pulling the rescue money back out of the system is clever, but has never been implemented before.  When something is happening for the first time, it is difficult to estimate the consequences,” thinks Richard Posner.

Will drug consumption drop, then?

No, it will most likely be higher.  But we have to compare the social costs of the somewhat higher drug consumption, and all of the health and psychological consequences that go with that, with the enormous costs that are expended every year on fighting them.

Can those costs be specified in any way?

Consider that in the USA there are about two million people in prison at the moment.  I think that about a half of them are there because of crimes connected with narcotics.  The cost of a million prisoners is tens of billions of dollars per year.  Add to that, that as long as they are behind bars, they are not economically active – that is another great loss for the entire economy.  So the comparison of the costs overall argues against fighting against drugs.

Do you put all drugs in the same bag, or do you distinguish, for example, between soft and hard?

Different drugs are, of course, differently destructive.  I don’t think that marihuana is more destructive than spirits, or that it is at all harmful to health.  Its prohibition makes no sense.  In the case of cocaine or for example crack, the body responds more intensely, and for example LSD evokes a condition of episodic psychosis.  If we examine them drug by drug, we will probably find some that should be eradicated – but the most widespread ones, such as marihuana, cocaine, or heroin, will probably not be among them.

Why then do governments still promote anti-drug legislation so strongly, often “without discrimination”?

Sociologists say that the reason for a differing approach to alcohol and cigarettes, on the one hand, and drugs on the other is that historically drugs have been connected to minorities, especially blacks, and various bohemians – mainly the lower classes of society.  Whereas cigarettes are consumed across the entire social spectrum, in all social classes.  Smoking has never fully become contemptible and cigars were even a sign of luxury, affluence, and a certain position.  I think that there is a lot to it – society has simply connected drugs with people who do not have their lives under control.  Furthermore, the outlawing of drugs has further stigmatised those people.

But that happened only relatively recently…

The eradication of drugs started at some point during the alcohol prohibition.  Before that, all these narcotic substances – for example morphine – were accessible.  And because morphine was used as a painkiller for soldiers injured during the Civil War, many people became addicted to it; reportedly, that addiction was far more widespread than drug addiction is today.  And people were not too alarmed by it; they considered it to be normal – like when many people drink alcohol nowadays.

Is any more extensive legalisation of drugs even conceivable? 

In recent years, many phenomena – previously unimaginable – have been considered quite normal, by which I do not mean desirable: for example, pre-marital sex or homosexual relations.  Drug addiction may also be accepted by society in the end.  Then perhaps many people will be addicted to drugs rather than alcohol; and I think that alcohol is generally more dangerous, as it is connected, for example, with deaths behind the steering wheel.  I would therefore like to see, if not an outright abolition, then at least a step towards the abolition of drug legislation – a reduction of sentences for drug crimes, the legalisation of marihuana, etc.  Then we would see whether this causes a catastrophe or not.  In that, I see the advantage of the federal arrangement of the United States.  Some states can come out with more liberal legislation, and if it catches on, it will spread across the country.

In terms of the American legal system, you also say – and you are often criticised for this – that judges are under political pressure and that nearly every decision is based on some kind of a political conviction.

First, I don’t think that it would be every decision.  But American law is very vague.  We have an old constitution, from the eighteenth century, which is very hard to interpret today – the written as well as the spoken language have changed, as has the understanding of culture.  We are lacking for state and federal legislators with party discipline, who are the foundation of the parliamentary system.  That is why the law is vague, full of various compromises, hard to interpret.  The outcome is that judges often decide ad hoc, according to their own discretion and thoughts, which is, however, strongly influenced by the ideology they adhere to, and their personal experience.  I am simply trying to view our legal system realistically.

Richard Posner (70)

An influential American lawyer and Judge of the United States Court of Appeals for the 7th Circuit, in Chicago, who lectures at the University of Chicago Law School and is a leading international thinker doing research on the boundary between law and economics.  He has written more than forty books; according to the academic Journal of Legal Studies, he is the most cited academic lawyer of all time; and in 1999, the New York Times ranked him among America’s most respected judges.  He is hard to classify: in terms of social topics, such as access to drugs or homosexuality, he places himself among liberals (in the American sense of the word), whereas in economic questions (he considers himself an eclectic) conservative attitudes prevail in his thought.  Posner is married to Charlene, likes cats and has one, has no hobbies, and drives a Lexus.

But critics say that as a judge, your seeming realism and reasonability mask the radicalism to which you are inclined in reality.

(Laughs.)  I think I am reasonable, that is no pretence.  I am no fanatic.  I am not a radical judge; it’s more that I don’t hide anything.

Even many of your critics were surprised that your book of this year, about the economic crisis, is called A Failure of Capitalism.  You are close to the “pro-market”, so-called Chicago School, are you not?

I should have explained the name better in the book.  The economic system is unstable.  The decisions of many people are to a large extent coordinated by interest rates.  They determine how much people can borrow and under what conditions.  The basic institution of capitalism is therefore the central bank, which sets those rates.  And that institution failed, primarily at the beginning of the millennium.  It is a failure of capitalism, because the central bank is a central institution of the capitalist system.

Why did regulation, for example, not fail?

That, too, failed, especially in the sphere of bank regulation.  The combination of careless regulation and low interest rates, erroneously set by the Fed, led to a real estate bubble and the collapse of the banking sector, which had previously erroneously invested into real estate.  It is not, therefore, capitalism in itself that failed, but the institutions on which the capitalist system rests.  But we could just as well say that it is a failure of regulation, or of the government.  The capitalist system today cannot function without a government that fundamentally regulates the economy.

So is it a failure of regulators or regulation rather than of markets?

Yes.  I will put it this way: entirely unregulated markets can encounter very serious problems and lead to recessions or depressions.  After all, depressions were here long before there was banking regulation, before central banks were created – and even before money created by governments was used for paying.  In order for the capitalist system to avoid frequent and heavy depressions, it needs regulatory authorities, central banks, banking oversight, and others.  If these institutions function poorly, the entire capitalist system functions poorly.

But that book makes me think that it is a failure of the market as such, and now, we need more regulation and more government intervention in the markets.

As I have said, if the right regulation is not available, a well-thought out system for determining rates or the money supply, then a market that is left to itself gets out of control.  Banks operated in an environment when the taking of risk was very profitable, but also very dangerous.  If the environment created by the government encourages the taking of risk, people will take risks.  They will, for example, take mortgages that they in reality cannot afford, on the faith that house prices will go up.  This conduct is, however, rational at first – risky, but rational.  But the risk is taken not only by individuals, for later, the entire system subsequently finds itself face-to-face with it, and that is why a government is required to eliminate that risk.  But the government increased the risk: by regulation that was not thorough and by excessively low interest rates, as I have stated.

Should interest rates be set by central banks at all?  Certain economists think that they should be the outcome of the work of purely market forces.

The problem lies in that certain countries – China, Germany, Japan, and the oil states – have promoted a pro-export policy for several years.  For them, this leads to very favourable trade balances.  And they therefore also accumulate significant dollar reserves.  China sells to the United States far more than we sell to it.  It gets excess dollars, it accumulates them, and then reinvests in the US.  This influx of capital into the United States reduced interest rates.  And if there is no government control over interest rates, interest will be very low, which creates the conditions for risky loans.  It could have increased interest rates in the first years of this millennium, and had it done that, mortgages would have been more expensive, which would have led to a lower demand for real estate.  Real estate prices would have been lower and the bubble would not have occurred.  Yes, true, interest rates can be left to market forces, but that is very dangerous.  That is, after all, one of the reasons why we have central banks.

Do you, then, agree with the hypothesis of the so-called “savings glut”, according to which the Fed kept interest rates low because there were massive cash flows to the US from savings economies, such as China and the oil states, anyway?

The “savings glut” is a bit misleading.  On the worldwide level, savings and expenditures are in balance.  The excess of savings in countries such as China, Germany, or Japan is offset by a deficit of savings in countries such as the US and certain West European countries.  But it is true that if there are many countries accumulating dollars that they would like to lend or invest, then the US & Co. will have to borrow from those countries to a large extent, which will lead to low interest rates – because there will be sufficient capital around for borrowing.

The spring fear of deflation in the US and other countries was replaced by the autumn fear of inflation; however, the Fed, for example, claims that it has effective instruments on hand for pulling out the money pumped in during the rescue measures – the potential source of inflation.

Inflation is the ratio of the amount of money in circulation to the goods and services in the economy.  If the volume of money is reduced, the ratio will drop –and with it inflation.  Eight hundred billion new dollars in cash is available to banks, which they can lend.  And the representatives of the central banks say that if the Fed – when it is required – pays interest to banks on that money, on those reserves, then banks will not lend that much.  And all the more so, the higher the interest is.  They will hold that money, because they will make the most that way, and they will not let it go into circulation.  The problem is that as soon as the economy revives, the demand for loans increases, and if the Fed discourages banks from lending by high interest rates on reserves, people will start to complain about “needing loans for their business”.  That could lead to political pressure on the Fed to increase lending.

Is this, then, a potentially effective strategy at all?

The idea is very clever, but it has never been implemented before.  When something is happening for the first time, nobody knows precisely what the consequences will be.  One of the risks is that for the Fed, and the government, it may be extremely expensive to pay that interest.  The other thing is that if the central bank is paying that interest out to “freeze” the eight hundred billion, commercial banks can say to themselves, ‘let’s accumulate even greater reserves’.  And then not only will that new money not go into circulation, but on the contrary, even the money that is in it now will be pulled back.  The strategy is therefore a step into the unknown.

An abbreviated version of this interview, obtained in Chicago, was published in the Týden Yearbook on 30 November 2009.

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