Legalization

I had to write the following short story after all the stuff I’ve been reading lately about connections between the financial world and the black market and pure free-market advocates. I’m totally against legalization of drugs, but then again, I’m a radical dissident.

Where Did We Go Wrong?
by Peter Groekmann
all material ©2025 The New York Tribune, all rights reserved

Legalizing drugs was supposed to be the panacea, the big cure-all for our economic woes early last decade. For a few years, it sure seemed to be that way. US GDP went up strongly, unemployment decreased, and most important for cash-strapped local governments, tax revenues returned to previous highs, no pun intended. We had it made, according to the free market proponents and their allies in Congress and the White House. The magic of the market had to be allowed to exercise itself in full freedom.

Yet, here we are again, staring down the depths of another depression. It’s all thanks to that supposed panacea, no less, and this time there’s no magic bullet left in our arsenal. Whenever the economy goes through the wringer, it’s the duty of every self-respecting economic columnist to ask the question that is the title for this op/ed and then walk his readers through the steps that led to the Great Fall so that This Won’t Happen Again. Again. As a self-respecting economic columnist, I shall be happy to avail myself of my deconstructing duties, even though my critics will no doubt fill up my comment pages with ideological babble that has no grounding in reality. So be it: I still like writing about the economy so my marginal utility of writing one more article exceeds the marginal cost. Therefore, even the most ardent free-market opponent of mine would have to agree that the laws of economics compel me to write on.

Many of us remember the chaos of the Great Recession of 2007-8. Banks froze up lending and a sovereign debt crisis emerged that threatened to wipe out the world economy in a deep and profound way. As we all searched for solutions – and I was one of those who searched desperately – the idea came forward that seemed to hold out a hope for all: legalize drugs, tax them, and return to normality. We could clean out our prisons, see a huge drop in violent and property crimes, and the public coffers would restore themselves from the sin taxes of those who enjoyed a taste of better living through chemistry. It was the Age of Consent in America and around the world.

I remember that I wrote an op/ed against the idea.

What kind of insult is this to the lives lost to addiction? What kind of abuse is this directed at the women and men who fought this plague – and let’s be honest, for plague this is – the women and men who died in fighting this assault on our freedom? Are we to charge an indulgence to the dealers and growers and then welcome them into the ranks of middle managers?

That last sentence caught me a lot of flak at the time. The law-and-order chorus ripped me up one side and down another about how there would be no mercy for murderers, about how criminals were still criminals, no matter what happened to the status of drugs. But when it came time to legalize, the free-market side of their brains proved dominant as they put a price on everything, including justice. Under the Narcotics Amnesty Act, anyone guilty of a drug-related offense could post a special bail and have the charge, no matter how tenuously related to drugs and no matter how brutal, placed on deferred adjudication status. It was as if the whole nation adopted the common Monopoly house rule of paying $50 to get out of jail, except that this public bribe – and let’s be honest, in the spirit of my older op/ed – ran a good deal higher than that. Murders, racketeering, rapes, assaults, and more all wiped off the ledgers with a stroke. Criminals with their cash stepped forward to confess crimes in advance of a deadline so that they could buy justice and help to reduce the local, state, and national debt in one go. How patriotic of them to do that!

We even got a big infusion of US legal tender from overseas as drug lords and cartel bosses sent in suitcases of money with their lawyers to wipe clean their slates, as well. We took in that blood money and thought that would be that: we gave them amnesty, they would stop providing money to terrorists and murdering people. They would be good little capitalists and play by the decent rules of society.

Except that those two things aren’t really compatible from a top-down perspective. One can be a good little capitalist and make a fortune, but that typically means behaving in a very un-decent way towards one’s workers and customers. And these guys were all ready to go with the un-decent stuff.

The first warning signs to pop up were the stories about forged tax stamps on a shipment of marijuana from Virginia to New York. The irony there was that the police were tipped off about a cargo of illicit tobacco cigarettes. Nobody had yet anticipated that the old tax ripoff scam would start so early with the formerly illegal drugs, but we shouldn’t have been surprised. Those drugs were legal, but they were also taxed, so tax evasion became the new vogue of criminal activity.

No problem, cried the free-market mafia. Lower the taxes and compliance will actually increase, they said as they pointed to buxom Laffer curves with arrows pointing at a maximum of revenue at some unnamed lower tax rate. The tax rates fell and, yes, the tax revenues increased. But was that due to increased compliance or simply increased consumption? Because we did see increased consumption when those tax rates fell. Stimulants were increasingly popular, since most employers looked the other way as their hopped-up workers tended to be really really productive on the uppers. Meth and bennies became the new coffee.

Then we heard stories about the abuse of migrant laborers in US marijuana plantations. But that wasn’t a problem with drugs. That was an immigration issue. I suppose so. But where were the law-abiding citizens in charge of the plantations? I suppose a leopard can’t truly change his spots, no matter how much money he may put down.

We had bleeding-heart stories about even worse abuse in the poppy fields of Afghanistan, India, Pakistan, Burma, Laos, and Mexico. They came one at a time and always seemed to only be featured in alternative press and my columns, but they all told the same story. Instead of a farmer choosing between subsistence growing legal wheat and some sort of profit growing poppies, now all the farmers in those regions faced the same dilemma: grow the poppies or lose your land. There were no illegal profits at all. Now, they were paid a pittance for the poppy harvest and starved slowly to death as the consumption economies inhaled the opiates at night and on the weekends, for we were too responsible to chase the dragon at work. Somehow, that non-denominational work ethic just kept going in the USA, and why not? We were enjoying the fruits of the free market, weren’t we?

Come to think of it, while the murder rate did drop nationally, it remained persistently high in areas that had once been wracked with drug problems. Once a neighborhood became a war zone, it never stopped. The new jobs in the narcotics industry were either rural, overseas, or in white-collar office jobs. They never touched the barrios and ghettos where street gangs once killed each other and bystanders over drug turfs. Now they just killed each other over other reasons, or often for no reason at all.

We also had stories about underage access to drugs. That wasn’t supposed to happen, but there we were. Somehow, we found a way to extend our lenient attitude about underage alcohol consumption and somehow make it work with underage crack smoking. It was the market at work, pointed out the free-marketers. We had to accept that people were just going to do what they were going to do and that we were actually better off putting a price tag on it and letting them do it anyway.

Except that we weren’t all that clever with our price tags. While we saw that dip in the murder rate, the DUI-related vehicular manslaughter rate more than made up for that. I suppose the free-marketers would have had us put in special toll roads that included a check for intoxication for motorists that wished to pay for the privilege of not driving alongside the completely stoned. I don’t know if such a plan was put forward, but I won’t question anyone if they say it was.

I’m sure we all remember the outrage among the VFW and American Legion crowds when narcotics went on sale at the base PXs alongside the smokes and liquors, but, hey, this was the new reality. Those things were legal, and how could we deny the boys in uniform access to those substances? If they were old enough to die for their country, they were old enough to partake of them.

And die they did. Legalization did not end the series of “little wars” that began in 2001. Petroleum remained scarce, so Our Boys had to go in to keep the oil fields safe for democracy. Except that so few of Our Boys were combat-ready that we had to send in the more sober portion of Our Boys and Girls to win the fight against the tyranny of someone else getting his hands on the petrochemicals. So I suppose I should eat a little humble pie and admit that, thanks to narcotics legalization, we got to see full gender integration in our armed forces. I’ll do that, but only with a side of I-told-you-so ice cream because we had to adopt such a policy out of desperation, not any sort of altruism. We also brought back the draft to fill out those ranks, remember?

And then Our Boys and Girls had to go back into Afghanistan, this time because of that century-old reason, “to secure US business interests.” Whose interests? Why those of the all-American opium and heroin manufacturers. A new wave of Islamic fundamentalism, this time stripped of the taints of drugs and child pornography of the truly base al-Qaeda, was burning the fields and killing the site managers. Americans were dying, and we had to Do Something. We’re still Doing Something in Afghanistan, but that’s not the only place. We’re numb from the headlines: we fight the Buddhists in Laos, the Hindus and Muslims and Marxists in India, and the Catholics in Mexico.

That last one was tough to swallow, but swallow we did. It’s hard to imagine a time when we didn’t look at a Catholic church and suspect it of being a shelter for Cristero terrorists. In the USA, the Cristeros would be hauled out of the churches. In Mexico, the army there just fire-bombed the churches indiscriminately, and Our Boys and Girls had to shoot a good number of those rockets themselves.

That led to the San Patricio/St. Patrick movement in the USA, with sympathetic movements in Ireland, Spain, Poland, and Italy. We all know how well things went for the St. Patrick dissenters. Treason used to be a rare charge in our nation, now it’s on the news every night as this soldier or that sailor faces the charge after shooting up his base or bunkmates in the name of defending his co-religionists, with spikes of activity around March 17th. There used to be a time when the worst thing people did on St. Patrick’s Day was get drunk on cheap, green beer. Now we all beware the ides of March.

So why did I go down a list of social woes when I’m supposed to be writing an economics piece? Aside from the two being intimately connected, it’s to illustrate that legalizing drugs didn’t cure one set of ills that it was supposed to, so we shouldn’t be surprised to discover that it didn’t cure the other set of ills, either.
I mentioned the initial surge in government revenues with the legalization of narcotics. That proved to be what we in the profession call a “one-off event.” Flush with cash, our Congress found a way to cut a little spending and actually balanced the budget for the first time in… well, a long time. On the heels of that, the stock market perked up.

And what caused that big bull run? Narcotics, of course. The prospectuses about heroin and cocaine funds promised great returns over time. Why not? Addicts would continue to buy those drugs, no matter what, so why shouldn’t they be harnessed to rescue the struggling retirement accounts across the nation? They were a safe investment because there would always be addicts and, hence, there would always be a cash stream flowing from the addict to the narcotics producer. Unlike the subprime mortgage situation, an addict only defaulted when he died, and then there would be another addict to replace him.

Right around that time, budget hawks in Congress and the narcotics lobby found common ground to kill federal funds for rehab programs. It should be no surprise that the financial lobbyists also supported that move. It just made good sense, financially, to leave things as they were: no need to upset the apple cart with a sudden wave of sobriety. With the deregulation of drugs and the introduction of narcotics funds, it was only a matter of time before we saw a run-up in the prices of the new hot items, the narcostocks.

Remember the hoopla surrounding the debut of X+Plus? How about the mania over New Boutique? The insanity about Karl R, Ltd.? Not a penny of earnings, but they had capitalizations that reached to the stars. Classic bubble, I warned. Bubbles don’t exist, responded the free-market mavens, complete with their rationalizations about how it was government interference, not market irrationality, that brought down the housing market in 2007. I suppose it was natural for them to put the “rational” in “rationalization.”

The endgame was all too familiar for this economic historian: people borrowed money to buy stocks on margin and left themselves exposed to even the slightest dip in share price. The only thing different about this time was the area of speculation. Everything else, down to the crowd of rationalization-market economists crying out, “this time is different,” was exactly according to a script established back in Holland in 1637, where tulips were the intoxicant of choice.

The ongoing wars helped to fuel drug share prices: if the poppy supply were threatened, that would make them more valuable, right? The soldiers died, and the prices went up. The lack of rehab meant that there would be an increased demand for drugs, right? Up went the prices. The economy was booming, so people wanted to party more, right? You know the story. Everything went up if it was connected to narcostocks.

And then came the news from Oaxaca. Our Boys and Girls in the 3707th Battalion had had enough there and refused to carry out orders. It was not only the largest single mutiny in US history, it was the first such mutiny in a combat area. This was no erosion of morale and incidental fragging. This was no distribution of flyers around the base. This was an armed resistance to orders, followed by other soldiers being ordered to fire upon positions of the 3707th Battalion. Then word came back that it was private contractors from overseas and Mexican Army units that dished out the punishment to the 3707th and that other US units had refused orders to take action against their brother soldiers: they had had enough, as well.

I don’t need to go into detail about the rest of the story of the Oaxaca Mutiny: we’re living with the results today. The only detail I need to harp on is that it shook the market. The US Army had faltered in its duty to make the world safe for rising share prices. If it didn’t fight in Mexico, maybe it wouldn’t fight in India, or Laos, or Afghanistan. If it didn’t fight there, forget the opium crop turning scarce: it would be gone. Now we all know that the reality is nothing like that, but rumors are like crack for Wall Street: they can’t get enough of them, no matter how much they cloud the collective judgment. Faster than the 3707th “went Patrick,” traders were first selling their own shares and then trying to short those very stocks as their clients were pushing sell orders.

Oh, the tales of the fateful Black Saturday! The exchanges had only recently added weekend sessions, only for them to end in tears! Small traders were locked out of their accounts while the big boys maneuvered behind the scenes. Big banks succeeded in getting their short sells through when nobody else’s seemed to even register. Everywhere, we heard anecdotes about the little guy getting ripped off while the fat cats avoided disaster and we knew they were true. After all, this was a collapse very much like the other ones the USA has endured.

Now we’re in the slow dread of the aftermath. In a way, this is what should have happened in 2008. Had it happened then, we would have had a tough decade, sure, but we would be on solid ground by now. Instead, we found that one more bubble to inflate after S&Ls, tech stocks, real estate, and sovereign debt. Why should we have taken our medicine then more than now? The answer, ironically, is in the legalization issue.

We now know that the only thing that kept banks liquid in 2008 was the supply of cash from money launderers, most of them drug merchants. When everyone else pulled their money out of the banking system, the drug lords had to keep their money in the system to legitimize it. We should have listened to then-head of the UN Office on Drugs and Crime, Antonio Maria Costa. He said that the illegal drug money was the only source of liquidity for many banks. Government bailouts were nice, but the banks needed cash, thank you very much, and the only source for a good number of them was from the black market.

We had that black market in 2008. We didn’t have it in 2025.

All the profits from the narcotics sector? They were in the banking system legitimately this time and served to make the narcobubble bigger than the ones before it. The boost in GDP wasn’t real growth: it was from reclassifying the 8% of the economy that was built around the narcotics trade as legitimate and, therefore, properly a part of GDP. The spike in employment was a similar sort of mirage, as most jobs created were de facto slave labor positions, with no benefits, no full-time employment, and no hope of any sort of future.

In addition to those illusions, we lost the concrete cash in the banking system from illicit trades. Now we’re watching as bank after bank freezes up and dies in the worst banking collapse in US history, and that is no exaggeration.

Worse, the sovereign debt crisis is beginning anew. We didn’t learn from the scares of 2010 and 2011. We increased our commitments abroad, and that didn’t come cheap. Our trade deficit found a way to stay high, in spite of a drop in oil prices, thanks to those commitments abroad. We had years of plenty and did not believe they would be followed by years of famine. Now we have to look at cutting that deficit and facing the pain with a nation that’s diverting a good chunk of cash to feed its habits instead of investing in its future. We don’t have the money to meet our obligations as is and, guess what? Now we’re being told that our privatized Social Security is a failure, thanks to the collapse in the markets.

I honestly don’t know where this will end. One day, it’s a downgrade of US government debt, another day it’s another army unit on “emergency rotation” (translation: isolation from mutineers), and the next day it’s a new sort of turf war as local marijuana growers try to secede from their parent organizations and control their own end of the business.

The death toll from those battles is only beginning to mount, mark my words. Remember what I said about leopards and spots? Well, we’re seeing those spots in spades as they put a new spin on “hostile takeovers.” The former kingpins don’t have time for warrants or courts or some country sheriff keeping the peace: they’ve got their own security forces, and they’re going to secure their property rights, no matter the cost in lives.

One wonders, though, if the private goon squads can keep the peace on the retail side, as well. I’ve just read over reports coming in from separate parts of the nation about anti-addict pogroms. People have had enough, and they’re acting out of violent desperation. Since the government is not behind them, I’m wondering if this is actually a market solution, with people deciding that the opportunity cost of not killing the addicts is somehow too high to bear. Honestly, I’d like there to be a rational market explanation for this, but I’m at a loss. Perhaps my colleagues from that school can help me to explain these mob behaviors in their terms, because all I’ve got are behavioralist models, and they’re not pretty.

So will the narcotics sector security forces start patrolling the streets, escorting addicts as they go about their daily business? Will they provide cover for unemployed addicts that are stealing to get money to pay for their habits? And who will provide security for the CEOs of the narcotics firms remaining after the recent market shakeout when those security forces realize they don’t really have to take orders from their masters?

We’re in a depression for sure, and there’s no drug that can cure it this time.

2 thoughts on “Legalization

  1. LEJ

    Interesting approach. Hadn’t thought about the end game in regards to legalization, and I don’t think it has to go as far as you make it, but I would also be hard pressed to argue against all the other times our government has done similar things (we’d never take over a sovereign country like Hawaii for corporate interests, would we?)

  2. deanwebb Post author

    Indeed. 🙂 I read an article by Richard Bowden from 1998 that Juarez is where the world is heading. I think he’s right.

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