The history of North Carolina is replete with smuggling activity and the lure (and lore) of illegal markets in its recent as well as its distant past. Most of the contraband involves activities or products that are, arguably ‘bad for you’ anyway, which makes regulation and prohibition, enforcement, etc., more acceptable. Without doubt, it is easier to regulate or prohibit products than to change individuals’ moral precepts and self-destructive habits. Unintentionally, though, laws can create powerful incentives that drive more, not less, of these unwanted activities. There are occasion exceptions, as I’ll explain.
“When good intentions collide with self interest, self interest almost always wins. You can’t go wrong betting on politicians, whatever their high-minded principles, to do what’s expedient.” The writer of this
statement was referring to a situation in his home state of Virginia that displays all of the characteristics of a classic Baptists and bootleggers scenario. In brief, it is often expedient for those who hold opposite world views to support the same policy (legal prohibition of alcohol sales, here) when it comes to regulation of economic activity.
Anti-alcohol, anti-recreational drug, and similar laws amount to trying to create, through law, a better moral sense in both consumers and suppliers of contraband goods. That’s seldom entirely successful, and even if so, it’s rarely quick. The expedient (or at least interim) alternative to such moral reconstruction is deterrence and punishment—fines, jail time, deportation, etc. Law enforcement achieves varying degrees of success with these. But because economic incentives change with the regulatory environment, stricter laws and greater enforcement may create greater economic incentives—for risk-takers—to pursue or even enter into illegal activities.
In a previous column I cited one such example. The added restrictions on access to non-prescription Sudafed were designed to make methamphetamine more difficult to produce and obtain. Whether this regulation has slowed the production of U.S.-produced meth to the domestic market is still under study. What is clear is that law-abiding consumers have suffered the inconvenience costs of restricted legal availability and second-best substitutes, while risks and rewards in underground markets that deal in Sudafed and in methamphetamine have risen. According to a substance-abuse study center at UCLA on the secondary consequences of placing Sudafed behind-the-counter:
[Secondly,] there was a shift in meth production-based markets from the U.S. to Mexico, where ephedrine was still available with few restrictions. The emergence of large-scale meth production just south of the border in Mexico has had an unforeseen consequence. Mexican drug trafficking organizations with established routes, smuggling strategies, and highly trained personnel for transporting marijuana and heroin into the U.S. have added meth to their “product line,” which introduced meth into medium-size cities in the western mountain region of the U.S. (e.g., Salt Lake City) and the Midwest (e.g., Des Moines). Expansion of meth in these geographic areas has not only impacted the rising and spreading rates of meth-related drug disorders in the U.S., but also increased the power and impact of Mexican trafficking organizations and their ability to subsequently further extend their commerce with meth into the Southeastern U.S.
The question one wants to ask in such cases is: Is there anyone who has been morally elevated by such a regulation? What is clear is that, contrary to what is intended, increasingly stringent laws both create and therefore chase ever-escalating profit incentives to serve the existing market. That naturally leads to greater risk and more extreme measures—on the supplier and the consumer side as well.
Once in a great while, however, regulators have a genuine entrepreneurial insight. Rarely is this a government function; even more rarely are government’s entrepreneurial ventures successful. When it is, the results can be transformational.
One rare example of this kind of entrepreneurial insight, or perhaps just expediency-meets-incentives comes from the Polish (yes) city of Lodz (roughly: “woodge”). Like Raleigh and other NC cities, Lodz has been the scene of illegal drag racing on its streets and local highways for years. Unsuccessful in eliminating these high-risk, high-status contests, authorities decided to turn the dangerous and illegal nighttime activity into a legal daytime attraction, making it a centerpiece of the city’s economic and tourist appeal.
It sounds a little nutty, but—it worked. Lodz is now known as “The City Where Racing is Fast and the Police Aren’t Furious.” With the advent of Street Legal, illegal racing is down by 80 to 90 percent, winning drivers can be recognized and make career advances in the official racing world, tourist and fan dollars generate city revenue, and fewer city resources need be devoted to (unsuccessfully) suppress an activity that drivers and spectators both support. In this case, the expedient move is both entrepreneurial (for government) and a win-win outcome.
This example is not an argument for less enforcement of statutes that are already on North Carolina’s books. What it does suggest, however, is that additional statutes may be counterproductive, as the Sudafed regulation is beginning to suggest, and that in some cases dropping a prohibition may be the expedient as well as the sensible route to take.