Inside the economics of illegal drugs, from cryptocurrencies to Major League Baseball
May 31, 2019
by Clark Merrefield, The Journalist’s Resource May 31, 2019
Money and illegal drugs are inextricable. According to a 2014 RAND Corporation study commissioned by the White House Office of National Drug Control Policy, each year drug users buy about $100 billion combined worth of marijuana, methamphetamine, cocaine and heroin. The economic cost of opioid abuse, overdose and treatment alone reached $78.5 billion in the U.S. in 2013, according to one of the most recent and comprehensive studies from the National Institutes of Health.
The Internet adds a modern wrinkle to the image of the drug pusher on the street corner. Many buyers and sellers now transact anonymously on the darknet, a blanket term for hidden online networks where illegal marketplaces operate. But drug markets, whether virtual or real, also bear very real human costs. There were more than 70,000 drug-overdose deaths in the U.S. in 2017, the most recent year of data available from the Centers for Disease Control and Prevention — nearly double the number of road fatalities.
From exploding cryptocurrency markets financing the darknet, to OxyContin fueling the heroin epidemic, to hedonistic lifestyles and steroid-tinged baseball sluggers, this is our roundup of recent research exploring the wide-ranging relationship between economics and drugs.
Foley, Sean; Karlsen, Jonathan R.; Putniņš, Tālis J. The Review of Financial Studies. May 2019.
Each year, $76 billion worth of illegal transactions are made with the cryptocurrency bitcoin — not far off from the size of traditional illegal drug markets in the U.S. and Europe, according to the authors.
Cryptocurrencies like bitcoin are entirely digital and operate independently of official currencies, like the U.S. dollar. Each bitcoin has a unique identifier, in the same way each dollar bill has a unique serial number. Cryptocurrencies allow users to engage in secure financial transactions without having to go through a third party like a bank. Bitcoin is the largest cryptocurrency by market value.
But cryptocurrencies are not legal tender in the U.S. and the federal government does not insure them. Legal tender just means a currency is backed by law and can be used “for all debts, public charges, taxes, and dues.” A buyer and seller can still agree to transact using non-legal tender. Someone might be willing to exchange an antique table for one bitcoin, or a box of lightbulbs, or car washes for a month, or anything else.
The authors begin with a database of all bitcoin transactions from January 2009 to April 2017 — 815 million distinct transactions. They remove several million transactions from the total, such as transactions of less than $1 and transactions that represent a seller providing change for a sale. They’re left with 606 million transactions worth $1.9 trillion.
To identify a sample of illegal users, the authors start by matching bitcoin identifiers taken from law enforcement bitcoin auctions with bitcoin identifiers in their database — this method identified 1,016 illegal users. Law enforcement agencies often auction seized assets, like cars and houses, and bitcoins are no different.
The authors then use central accounts where darknet marketplaces deposit and withdraw cryptocurrencies and identify six million darknet users, who the authors assume are engaging in illegal activity by virtue of being on the darknet. Finally, the authors identify users from darknet forums, where users often post bitcoin identifiers, to capture users not caught by law enforcement or not otherwise identified through darknet transactions. In all, the authors build a sample of 6,223,359 illegal bitcoin users, accounting for nearly one-third of the 606 million transactions and 6% of all users.
Here’s some of what they found:
Each year there are $76 billion worth of illegal drug and other transactions that use bitcoin.
People who use bitcoin illegally often transact with the same parties many times. Their transactions tend to be smaller and they engage in more transactions than bitcoin investors.
As mainstream interest in bitcoin increases and other cryptocurrencies emerge, illegal bitcoin transactions decline.
Online illegal drug marketplaces promote drug use but there may be benefits compared to drug transactions that happen on the street, including reduced violence and safer drugs because online vendors rely on positive user feedback.
“Our paper suggests that a significant component of the intrinsic value of bitcoin as a payment system derives from its use in facilitating illegal trade,” the authors find. “This has ethical implications for those that view bitcoin as an investment, as well as valuation implications.”
Ladegaard, Isak. Journal of Drug Issues. December 2017.
Stories of drug dealers offering samples to lure new customers dot the news media. It’s a narrative that has existed for at least a century. But it’s a narrative that academia doesn’t back, according to Ladegaard. In fact, research shows the opposite: street drug dealers rarely provide samples except occasionally to established customers.
Online, however, the freebie is much more common than in conventional drug markets, Ladegaard finds. He collected data from an online illegal drug marketplace over 305 days in 2014 and 2015 and analyzed 2,218 posts about free samples in the market’s forum to explore the modern approach to this old story.
Sellers in the marketplace offered hundreds of almost-free samples or promos of nearly all major drugs — cannabis, stimulants, prescription drugs, ecstasy and psychedelics. These samples weren’t entirely free because customers were often asked to pay nominal fees, such as for shipping. Ladegaard also identified 89 almost-free samples of opioids. Thousands more samples were available across drug categories at low-but-not-free prices. Ladegaard capped low-cost samples at about $50.
Many drug sellers, in fact, do not provide samples in order to get users hooked and do not want to provide samples to people already addicted, Ladegaard finds. Sellers largely want reputable reviewers to try their product and leave feedback.
“Many vendors preferred to distribute samples to established reviewers, who make up a role that is not found in other drug markets: the drug critic,” Ladegaard writes. “Through critics, dealers can demonstrate product quality, adequate packing methods, shipping speed, and customer service, all of which are markers of a good dealer.”
Felson, Richard B.; et. al. Crime & Delinquency. September 2018.
Does a drug-fueled lifestyle lead to economic crime — crime committed for financial gain — or is it the other way around? The authors examine data from 715 male offenders locked up in Nebraska and find that hedonism and economic crime often exist in a cycle where it is difficult to suss out the chicken from the egg.
They distinguished offenders who use marijuana — “because it is less addictive and less likely to pose a financial burden” — from those who use hard drugs, like crack and heroin. They also identified offenders as heavy or less-than-heavy alcohol drinkers. This is some of what the authors found:
Offenders who used hard drugs every day were more likely to commit property crime in the following month. Those who used hard drugs less frequently were no more likely to commit property crime than those who abstained.
Likewise, those who committed property crimes were more likely to use hard drugs, marijuana, and alcohol in the following month. “We suggested that the money offenders earn from economic crimes increases their consumption of both legal and illegal goods and services,” the authors write.
Offenders who sold drugs were more likely to use drugs than those who committed property crime, but they were no more likely to use alcohol.
They do not find explanations for how motives and opportunity drive the cycle. “We think it is reasonable to assume that some offenders are motivated to commit economic crime for drugs and other hedonistic activities and then use their proceeds for that purpose,” they write. “We think it is also reasonable to assume that some offenders may have committed the economic crime without any idea of how they were going to spend the proceeds.”
These results are not generalizable to the general population. The data describe serious offenders, and most people in the U.S. are not serious criminals.
“Note that the reciprocal relationship between economic crimes and drug use has policy implications,” the authors write. “The results suggest that reducing economic crime would reduce drug use and reducing drug use would affect the frequency of economic crime.”
Rowan, Zachary R.; McGloin, Jean Marie; Nguyen, Holly. Justice Quarterly. April 2017.
The authors explore the economic benefits of having an accomplice to commit crime, including illegal drug sales, and the relationship between young people who abuse drugs and their likelihood to commit economic crime. The authors use data from a longitudinal study of 1,354 14-to-17-year-olds who committed a serious offense in Maricopa County, Ariz., or Philadelphia County, Penn. They focus on 892 young people who committed a crime with someone else.
Two things they find are positively associated with earning money through crime: being around peers who are criminally active, and drug dependency. They cite previous research showing that offenders who are drug dependent tend to earn more from illegal markets than legal work.
“Individuals who are dependent on drugs may also be more enmeshed in criminal networks, including suppliers and fellow users, and therefore may have access to a larger pool of potential accomplices for co-offending,” the authors write.
Alpert, Abby; Powell, David; Pacula, Rosalie Liccardo. American Economic Journal: Economic Policy. November 2018.
A shock hit the illegal opioid market when Purdue Pharma reformulated OxyContin in 2010. The reformulation made it harder to crush the pills. Previously, recreational users would crush OxyContin to get a 12-hour dose of oxycodone — the main active ingredient — all at once. In this research, the authors explore the supply-side disruptions that followed after the new OxyContin hit the market. JRcovered this research when it came out, but it’s worth repeating the topline findings:
OxyContin misuse declined by about 40% over the 4 years following the reformulation.
With less supply of crushable OxyContin, users turned to other drugs, including heroin.
States with high rates of OxyContin misuse before the reformulation saw a statistically significant increase in heroin deaths. Each percentage point higher initial rate of OxyContin misuse led to 2.2 more deaths from heroin per 100,000 people in 2013.
Across states, each percentage point reduction in OxyContin misuse led to an additional 3.1 heroin deaths per 100,000 people.
Nationally, as much of 80 percent of the threefold increase in heroin deaths from 2010 to 2013 may be due to OxyContin reformulation.
“This combination of results demonstrates that the reformulation simply shifted deaths from one drug to another without reducing total mortality — suggesting that consumer-side substitution completely unraveled the benefits of the reformulation,” the authors write.
Brave, Scott A.; Roberts, Kevin A. Journal of Sports Economics. December 2018.
Steroid abuse in Major League Baseball was arguably the biggest sports story in the U.S. during the late-1990s and early 2000s. Sluggers like Mark McGwire and Rafael Palmeiro testified before Congress in 2005, facing lawmakers who grilled them on their alleged use of steroids and other performance enhancing drugs. “We’re long past the point where we can count on Major League Baseball to fix its own problems,” then-Representative Henry Waxman said during the hearings.
But MLB did eventually build a robust drug-testing program, “one of the strongest of its kind in professional sports,” the authors write. The performance-enhancing drug testing program MLB enacted in 2005 has restored integrity to America’s pastime, but there has also been a bottom-dollar impact.
The authors take financial data for each major league club as reported in Forbes to conduct a cost-benefit analysis of performance-enhancing drug testing. Based on past research, they assume that a major league suspension negatively impacts attendance and gate revenues. A team saves some money because it does not have to pay a suspended player, but that player won’t be contributing to wins, and fewer wins typically means less gate revenue. Suspended minor league players don’t directly impact the major league club’s current profits, but they can impact future profit potential, according to the authors.
Here’s a bit of what they found:
From 2005 to 2016, about 500 players were suspended — 86% were minor leaguers.
The suspension of a minor league player means the franchise will lose 1.3% of its value. A major league player being suspended leads a franchise to lose 2.2% of its value.
In 2005 dollars, the average major league franchise loses $10 million in value per season due to performance-enhancing drug testing.
The franchise value loss varies widely by team, from a high of $35 million per year for the New York Yankees to a low of $4 million per season for the Toronto Blue Jays. The Yankees had more suspensions than average from 2005 to 2016, while the Blue Jays had fewer.