One of the very best articles on the AD shortfall

by on July 8, 2011 at 7:58 am in Economics, Law | Permalink

From The Irish Times, the implicit economics are excellent throughout, here is one paragraph:

First, the Irish criminals the Spanish gang were supplying were finding it harder to sell drugs, as pay cuts, tax rises and job losses left recreational users with less money. The Irish gangs were unable to shift larger hauls and, in any case, lacked the resources to buy in bulk, so they were ordering smaller quantities. This liquidity crisis was an unfamiliar problem for criminals used to having a river of money at their disposal.

Yet it’s not all driven by a sticky wage effect, wealth elasticities matter too:

The value of drugs seized in 2010 was the lowest for 15 years, at €30.9 million, indicating a return to the levels of activity common before the boom. Long term, the drug-seizure trend has mirrored the wider economy: after rising steadily from the mid-1990s, it peaked in 2007 and 2008, with Garda seizures of more than €100 million worth of drugs in each of those years, before declining rapidly.

Garda sources point out that most people who use drugs do so for recreational reasons and are not addicted. “It means that when they have less money in their pockets to buy drugs, they are able to stop. And that’s what we’re seeing now all over the country,” says a senior garda.

We are not as wealthy as we thought we were, and that’s especially true for the Irish.

1 Kenton A Hoover July 8, 2011 at 9:12 am

Since there is little reason to think that the US drug consumption patterns are different from those in Europe, is this the reason for the last two years of Mexican drug wars? Research project for someone?

2 ad*m July 8, 2011 at 1:10 pm

Because the US government is supplying Mexican cartels with semi-automatics through the ATF operation Gunrunner
It was partially funded by the American Recovery and Reinvestment Act of 2009, see at H.R. 1-16, third paragraph:

3 Bill July 8, 2011 at 9:14 am

The Irish Federal Reserve should buy up all the depressed price drugs to raise the capital asset values of drug holders in order to avoid a deflationary spiral.

4 Thomas July 8, 2011 at 9:40 am

Are fewer drugs being produced?

5 TallDave July 8, 2011 at 9:44 am

It’s strikingly odd how seldom the notion of not diverting a river of cash to criminals is seriously considered.

6 Scott Sumner July 8, 2011 at 11:41 am

I’m puzzled by this post. The term “Yet” seems odd, as there is no discussion of sticky wages in the opening section.

And what does this post, or the attached article, have to do with AD? Zimbabwe suffer a huge drop in wealth a few years back, and yet their nominal expenditure rose faster than in any other country in the world. I presume Tyler means real wealth, but that is just as likely to fall from a big drop in AS. I don’t see anything that relates to sticky wages, or to AD.

And it’s also strange to put sticky wages and and wealth together, as it seems to suggest that these are two factors that can both affect some economic variable. Yet sticky wages reduce AS, and less wealth does . . . what? Less wealth might reduce AD, and that’s probably how most people would read Tyler’s post. But Tyler makes the argument that less wealth reduces AS, as workers have to shift from making mansions and yachts, to digging up potatoes in the Irish countryside. Re-allocation. Monetary policy can’t fix that problem by boosting AD. That’s fine, then the sentence makes sense, both sticky wages and less wealth reduce AS. But then why put AD in the post title?

To me, the entire article (and post) has nothing to do with macro. It’s about the income effect in the law of demand. As people get poorer (for some mysterious reason not mentioned in the article) then people buy less of normal goods like cocaine. That’s microeconomics.

What am I misreading here?

BTW. Deep philosophical question, is there a difference between how rich we are, and how rich we think we are? The answers not as obvious as it seems.

7 Dale July 8, 2011 at 12:06 pm

I don’t see the macro either – and that is a good thing. Micro is the only stuff that makes any sense to me anyway. AD and AS are perfect examples – we can draw the diagrams by the shapes are unknown (and endogenously change) and the shifts are unpredictable. After the fact we can draw a diagram to match what happened, but that is hardly a theory unless it can be repeated in a predictable way. Getting poorer, and feeling poorer, and the resultant decreases in demand (other than dollar stores), however, is something I can believe in.

8 Andrzej smith July 9, 2011 at 6:53 am

Its very great and desire article for Drugs.In the modern day there are many human face the problem of Drug.

9 Daniel Boulet July 10, 2011 at 5:06 am

The article doesn’t seem to talk about prices at all. I wonder to what extent the reduction in demand has led to a drop in prices at either the retail or the wholesale level? Assuming prices have dropped, I wonder if they have been taken into account when the authorities estimate the value of a seizure?

10 techreseller July 11, 2011 at 9:51 am

So our drug war is wrong? Use does not necessarily lead to addiction? I am shocked shocked to find drug use declining when people have less money. Apologies to the writers of Casablanca.

But wait ending the drug war causes job losses for police, DEA, ATF, prison guards, courts etc etc. Never mind, keep it up.

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