Monday, August 4, 2014

Enforce, then Reform? Three Simple Lessons You Need to Know about Legalization.

"Let's enforce the laws we got on the books, and then we can talk about reform."

Surely you've heard (or even said) some variant on this abundant sentiment. Its appeal lies in the natural respect for law and order. In a peaceful, just society, citizens agree to the rules and constrain their behavior accordingly. If laws are routinely broken, the risk is degeneracy, chaos, and destruction. Reforming poorly enforced legislation sends a message that the Republic tolerates lawlessness and her citizens will kowtow to assaults against her integrity. In war, rout is worse than defeat, as it combines both weakness and cowardice. Altering or repealing poorly enforced legislation invokes the same moral intuition as a rout on the field of battle, so it quite naturally offends the sensibilities of the virtuous citizen.

I agree that enforcing just laws is the proper role of the sovereign. However, I do not agree that this implies a strict order of operations on legislative reform. Let me explain why using an example.

The Republic of Mungertopia is notable for its lush forests, verdant hills, blue skies, and well-tempered citizenry. 'Tis a productive nation, with sparkly factories churning out modern delights powered by the clean light of the dazzling sun. The Mungertopians are happy, but they've got one small problem. They thirst. Specifically, they thirst for the juice of the Squamous Cactus, a rare desert succulent that only grows in the low-lying deserts of Spivonostan. When combined with certain anurial secretions, the resulting cocktail is not only delicious, but highly psychoactive, and as it turns out, a bit addictive.

Spivonostan is, and has been for many years, plagued by a notable lack of a functioning rule of law. Bandits run amok in the lowlands, and so it has become that there are exactly three, no more, no fewer Squamous Cactus plantations in the whole of the land, the rest having long since burned.
  • Art runs El Rancho Perfecto, a highly scrupulous operation. Art is a bit of a perfectionist, and absolutely refuses to allow any chemical adulterants into his product. All his frogs are certified free-range, organic, butterfly-fed specimens, massaged daily by a cadre of young Spivonostani workers paid a fair wage.
  • Betty owns the Comme Çi, Comme Ça, and cares for product quality insofar as it contributes to her bottom line. She's not actively out to poison her customers (drumming up new business is expensive, after all), but neither is she above watering down her output, maybe peppering in a little strychnine to give it a tiny extra kick from time to time.
  • Carl is heir to Il Cattivo and he's actually quite a (please forgive the coarseness of my language, but naught else shall suffice) crumb-bum. He regularly and with malice spikes batches with chemicals designed to at once make its ingestion both more unpleasant and more addictive. He employs goons to ambush Art and Betty's teamsters, he mashes his frogs in wire cages with scarcely enough room to wiggle their toes, and rather than rotating his crops, he slashes and burns his way through the Spivonostan rainforest to sow anew.
Citing the troublesome aspects of cactus juice, Mungertopian voters successfully petitioned the sovereign to ban the sale, possession, trafficking, and consumption of the stuff close to a century ago. Today, the only cactus juice that streams across the border does so under cover of darkness, contraband in the eyes of the many Mungertopian interdiction agents.

Let's say that Art, Betty, and Carl can produce ten gallons of cactus juice apiece per annum. Let's also say that with P=1, a gallon of Art's juice delivers 1 unit of pleasure to thirsty Mungertopian clients. With P=0.5, a gallon of Betty's juice produces 1 unit of pleasure, and with P=0.5, produces 0 units of pleasure. And with P=1, a gallon of Carl's juice rewards customers with -1 units of pleasure. Let's also say that Mungertopian interdiction efforts do not discriminate: cactus juice is cactus juice, regardless of quality. Let's also say that the Mungertopian CJEA (Cactus Juice Enforcement Agency) is reasonably effective and captures half of all incoming cactus juice shipments. Let's also say that Carl's violent nastiness intercepts an additional two gallons each of both Art and Betty's juice before it reaches the border.

The net pleasure provided to the juice drinkers of Mungertopia is calculated thus: The quantity produced by Art, less the amount intercepted by Carl, multiplied by the probability of interdiction by Mungertopian agents, distributed by the probability distribution function of the payoffs. Lather, rinse, repeat for Betty and Carl. Sum that all up, and you get:

(10-2)*(0.5)*(1)*(1)+(10-2)*(0.5)*((0.5)*(1)+(0.5)*(0))+(10)*(0.5)*(1)*(-1) = 4+2-5 = 1

So in my carefully constructed example, the net payoff to Mungertopia is 1. Astute observers will note that I've left off any consideration of prices or frictions in the system for now (interdiction services are not free), but I beg you to hold your complaints for the moment.

Note the details of the probability distribution. 13 gallons of cactus juice end up on the streets of Mungertopia. If the product is undifferentiated (or if branding is unenforceable through international treaty or tort proceedings), a Mungertopian customer has a 6/13 shot of getting the good stuff, a 2/13 shot of getting a dud, and a 5/13 chance of ending up with ditch drool (and possibly landing in either the hospital or an early grave). The overall population is still better off than they would be without the cactus juice trade, but try telling that to the folks who got a bad batch... or to Art or Betty's gunned-down mules.

Mungertopians rightly see this horrific trade route as an unacceptable breach in the rule of law. They advocate the "enforce, then reform" trope in the hopes that increasing the probability of interdiction will reduce the frequency of unwanted outcomes. That is, they hope that by changing the numbers I have in red boldface above, their society will be better off. Oddly, by strengthening the efficacy of interdiction so that 3/4ths of deliveries are interrupted, we get 2+1-2.5 = 0.5 units of net social pleasure, with a relative increase in the probability that consumers will obtain some of Carl's nasty juice.

Contrast this, dear friends, with a legalized regime. By allowing the free flow of cactus juice which, evidenced by its continued import despite legislation to the contrary enjoys robust demand by Mungertopians, we observe the following effects:
  • Art is able to sell his product freely and without undue constraint. He has access to the legal institutions of Mungertopia, and may even be eligible to contract with Mungertopian security agencies to protect his shipments against Carl's banditry. He can enforce his brand in the courts and can prove the purity of his product with independent laboratory testing, all above board.
  • Betty now has a strong incentive to compete on the margins that are relevant to her customers. If Mungertopians demand cheap cactus juice at lower prices, she's equipped for that. If the salient market is more upscale, she can operate there too. And like Art, she can take the guesswork out of it, relying on legitimate certifying agencies to assure her customers that the claims she makes about her cactus juice are reliable.
  • Carl is now the sole focus of interdiction efforts. Since he sells poison to the people of Mungertopia, there truly is a public interest in preventing trade in his wares. Under a liberal cactus juice regime, the only smuggling operation that remains is the one that is wholly unscrupulous. Carl may find that since Mungertopians can now enjoy perfectly legal cactus juice in peace, tranquility, and with ease, demand for his subpar treacle has evaporated. He will seek more profitable ventures and the Spivonostani rainforest will breathe a deep sigh of relief. Well, that is, so long as the Mungertopian government can exercise enough temperance not to tax legal cactus juice too heavily. The price differential is what keeps him in business. After all, what is a ban, but an effectively infinite statutory tax rate? Think of smuggling as tax evasion from now on, my gentle readers.
And of the Mungertopians? Will they not become addicted to cactus juice in greater numbers than ever before? Perhaps. That's an empirical question. But thoughtful public policy is a matter of weighing risks. The heavy burden of violence, illness, and death supported by enforcement agencies that grow more overbearing by the year must be judiciously compared to the costs of increased rates of addiction. Citing the rule of law as justification for more interdiction when it is the law herself that causes much of the grief should give pause.

A nearly identical argument holds for immigration on the southern border of the US. It decidedly is the province of law enforcement to make sure that criminals, terrorists, and other miscreants do not make their home on our shores. By treating ordinary peaceful migrants the same as people with ill intent, immigration statutes reduce the relative probability that genuinely harmful people are caught. Finding a needle in a haystack is hard enough without having the haystack squirm across the desert on a moonless night.

To enforce the law, we must first reform it. Trade barriers, even for goods that may not be strictly euvoluntary, may well produce more harm than good.

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Do you have suggestions on where we could find more examples of this phenomenon?