Economics of Smuggling

I'm writing this because it is a complex subject, and too much of what is being said and written about it is soundbites.

There is a long history of smuggling. I want to look at some examples of smuggling from American history. First, we will look at a recent and semi-humorous example. Then we will look at the first serious attempt at controlled substance prohibition in the US. Along the way, we will examine the effectiveness of seaborne interdiction.

First, the funny side of smuggling. Some of us may remember the days when Coors was a western regional beer, and any that showed up on the East Coast was smuggled. Many of us remember a Burt Reynolds movie, "Smokey and the Bandit." It shows us nearly everything we need to know about the economics of smuggling. Demand, restricted supply, and people willing to perform a service.

More seriously, from 1920 until 1933, it was illegal to make or sell alcohol for human consumption. We got even more movies during and after prohibition that either glorified the gangster life or rode on the coattails of the famous gangsters and the government agents who went head to head with them. There was a serious maritime component to all of this smuggling. Alcohol was brought in from the Pacific, the Gulf of Mexico, the Atlantic, and the Great Lakes. On the Atlantic coast, the money was so serious that the smugglers took the time and money to encode their messages to the people who were running it ashore. The Revenue Service hired a specialist code breaker, Elizabeth Friedman, to help them fight it.

It is instructive to remember at this point that Al Capone, though inconvenienced by Prohibition agents like Elliot Ness, went to jail for tax evasion, not alcohol. Yes, jailed not for making, transporting, or selling alcohol. Jailed for not declaring the money made from alcohol.

I had some personal experience in the narcotics interdiction game in the 80s and 90s; the Navy was used in support of counter-narcotics operations. My first round was providing support for a DEA team. Our job was to sail just off the coast of Nicaragua and use our air-search radar to identify traffic from a couple of airports. If the contact met certain guidelines, we passed it to the agent on watch, who then sent a message to a US-based action team that followed the flight. When the plane landed, the DEA would provide a 'welcoming committee' to arrest the flight crew and seize the cargo.

A few years later in the Caribbean, we repeated interdiction in a slightly different manner. We had a US Coast Guard Law Enforcement detachment on board, and when we found ships meeting a specific set of conditions, we would stop the ship, and the Coast Guard would board and search. We did not get the right to paint any marijuana leaves on our ship.

On the Nicaragua cruise, I took advantage of a lull in the inaction one day and asked the DEA agent how effective our work was. His response was that we were intercepting between 10 and 15 percent. That the cartels were writing off the loss as a loss by inventory and that the work was important but not particularly effective.

The essence of our drug policy is a reactive program where we are always playing catch up. For the smugglers there are a holes to exploit and new ways to get the drugs to the people who want them. Lets think about one critical point. At every point on our border where we are actively fighting the drug war there is no one engaged in smuggling alcohol across the lines. The reason for that is there is no money to be made in the alcohol trade.