Economics of Crime
By TorchStone VP, Scott Stewart
As the second Trump Administration takes office, there is a lot of focus on promises made by the candidate during the 2024 campaign to deport undocumented aliens and stop the flow of fentanyl and other illegal drugs across the U.S./Mexico border.
While political will and law enforcement initiatives can have some influence on crime trends, they are simply not as powerful a force as the economic factors that serve as the true drivers of criminality. When it comes to regulating the illicit flows of goods and people, to quote political consultant and commentator James Carville, “It’s the economy, stupid.”
Demand and Supply
While many of us remember learning about “the law of supply and demand” in high school or university economics courses, when it comes to criminal economics, we need to think of it more in terms of “the law of demand and supply.” Quite simply, if the demand for an illicit commodity is strong enough, it will drive up the price for that commodity to a point at which the profit margin for the commodity is sufficiently large to entice people to run the risk of breaking the law to reap that profit. All criminals, consciously or unconsciously, conduct a risk vs. reward equation—and if the profits to be made from an illegal act are large enough, they shift the calculation toward the reward side.
Another result of criminal economic forces is that the profits from illicit commodities can also serve to significantly bolster the strength of any criminal organization(s) that can manage to gain control over a significant portion of the profit pool of that commodity market. The economic impact of the United States’ political and legal “war on drugs” on organized crime groups in Latin America is a perfect illustration of this.
The Economics of Dope
As cocaine became a very popular recreational drug in North America in the 1970s, demand for the drug drove up prices, profits, and efforts to meet the demand. The first beneficiaries of the cocaine profit pool were Colombian organized crime groups such as the Medellin and Cali cartels. These groups profited incredibly from the flow of cocaine across the Gulf of Mexico and became powerful criminal insurgent groups capable of challenging the government’s ability to govern large portions of Colombia.
During this period, Mexico served as a secondary route for the cocaine trade, mainly serving as the gateway to West Coast markets. However, as the Reagan administration’s efforts to stem the flow of cocaine across the Caribbean began to take effect, Mexico became increasingly important as a smuggling route. The flow of cocaine across the Caribbean never really stopped, but there was a significant shift from Caribbean smuggling routes to those transiting Mexico due to enforcement efforts.
However, the same geographic and economic factors that made Mexico a critical part of NAFTA, also made it the primary route for cocaine to enter North American markets. This shift in the volume of the cocaine flow caused Mexican organized crime groups such as the Guadalajara and Gulf cartels to become increasingly important in the cocaine supply chain and gave them leverage to demand a greater share of the cocaine profit pool. This resulted in a huge cash infusion that propelled the growth of the Mexican cartels, and following the collapse of the Medellin and Cali cartels, Mexican criminal organizations became the senior partners in the cocaine trade.
This shift in smuggling routes illustrates the elasticity of the drug supply chain and its ability to adapt to enforcement efforts. I like to think of enforcement efforts like efforts to stop a river. If you place a rock in the river, the flow of water will divert around the rock. If you build a dam, the flow will eventually top or bypass the dam. As long as demand remains, the criminals will find a way to meet that demand and reap the profits. The flow will continue.
These same factors allowed Mexican criminals to subsequently dominate the heroin trade into the U.S., surpassing their Asian and Colombian competitors. As drug demand changed, Mexican criminal organizations were also able to corner the market in North America for synthetic drugs such as methamphetamine and fentanyl.
The profit margins for synthetic drugs are even higher than those for cocaine and heroin. A kilogram of pure fentanyl that only costs a few thousand dollars to synthesize can be divided into hundreds of thousands of doses—and those doses can bring in close to a million dollars in profits when sold at retail prices.
As I have discussed elsewhere, the profits reaped from these illicit drug markets have driven brutal competition for control of illicit profit pools among Mexican criminal organizations, and have also allowed the larger groups to become better-funded, more powerful criminal insurgents, challenging Mexico City’s ability to govern areas of the country.
Not Just Drugs
While I used the example of drugs, this same principle applies to other illicit flows, including the flow of people. So long as there are employers willing to pay undocumented aliens to work for low wages, people will continue to find ways to enter the country to meet that demand, because the benefits of doing so outweigh the risk in their risk/benefit equation. Consider that the average annual income for a worker in Guatemala is ~$5,400. It is not difficult for an undocumented Guatemalan to make 8 or 10 times that much working as a farm hand, nanny, lawn care worker, or chicken processor in the U.S. Thus, the economic incentive for entering the U.S. without legal permission to do so is readily apparent.
This economic principle was proved true during the COVID-19 epidemic in 2020 when demand for undocumented laborers plummeted and risks increased due to the Trump Administration’s implementation of Title 42. These factors tipped the risk/benefit equation toward the risk side and the number of undocumented immigrants plunged dramatically.
Not all illicit commodities smuggled across the U.S./Mexico border are flowing north. There is also a substantial flow of guns leaving the U.S. destined for Mexico. This flow is also in response to significant demand, and the demand is largely driven by the criminal cartels, but not entirely.
There is only one government-controlled gun store in Mexico, it can take many months to get permission to purchase one, and the type of guns citizens can purchase is strictly limited. Because of these factors, many ordinary citizens also purchase firearms for self-defense from the illicit market, and a firearm can be sold in Mexico for 5 times its purchase price in the U.S.—or even more. That considerable profit margin tempts many people in the U.S. to risk smuggling firearms south. Many cartels also launder some of the drug proceeds earned in the U.S. by paying Americans to buy guns for them as “straw buyers.” In this model, the cartels smuggle the guns across the border, lowering the risk for the buyers who can pocket thousands of dollars simply for purchasing a firearm and passing it to the cartel operative.
Lessons
One lesson the now 55-year-old “war on drugs” has taught us is that no matter what laws we pass, and no matter how many law enforcement and military assets we deploy, as long as Americans are willing to pay top dollar for illegal drugs, creative and flexible criminals will find a way to meet their demand. The same holds true for other illegal commodities.
If brutal totalitarian regimes and high-security prisons can’t prevent contraband from entering their tightly controlled environments, what chance does an open society have of stopping the flow? The best democratic governments can do is work to reduce the impact of the illicit flows and the criminal groups profiting from them.
Geographically, culturally, and even genetically, there is very little difference between the communities straddling the U.S./Mexico border. The same criminal organizations also operate across the boundary. However, there is a dramatic difference in the way those organizations behave in Mexico and the way they operate in the U.S. You don’t see heavily armored cartel “monster trucks” patrolling highways in Texas, or busses and semi trucks burned to block roads in a “narcobloqueo” after a drug dealer is arrested in California. This is because the rule of law and lack of impunity on the U.S. side of the border forces the cartels to behave in a much more restrained manner.
The second lesson is that when physical barriers become sufficiently difficult to bypass, people become the weak link in the security chain and criminals bribe security personnel to allow contraband to pass. People often focus on the corruption that runs rampant in Mexico, but the same forces are at work in the U.S. Security officials ranging from local sheriff’s deputies to FBI Special Agents in Charge have been convicted for accepting bribes from Mexican cartels. However, like the application of violence, it is smaller in scale and more constrained on the U.S. side of the border due to the lack of impunity.
In the end, the Trump administration’s efforts to seal the border and stop the illicit flow of goods and people will fail unless there is a decrease in demand that changes the economic equation.