…The surest measure of the success of drug interdiction and enforcement is price: if drugs are made harder to come by, the price must increase. According to the “Fact Sheet,” however, the average price of a gram of pure cocaine dropped from around $300 in 1981 to around $100 in 1997; for heroin the price fell from $3,500 to $1,100.

Much the same reasoning appears in recent testimony of Eric Sterling (2000) to the House Committee on Appropriations:

In the streets, our policy is a failure. As best we can reckon, the street prices of heroin and cocaine are near historic lows. A pure gram of cocaine was $44 in 1998, down from $191 in 1981. Heroin prices have fallen from $1200 per gram to $318 per gram over the same period. This means traffickers are discounting the risks they face. This means the traffickers are finding it easier to get drugs to our streets, not harder.

Analysts cognizant of the many forces acting on the drug market are aware that juxtaposition of spending and price trends does not suffice to evaluate supply-reduction policy. Clearly interdiction and domestic enforcement have not made cocaine and heroin prohibitively expensive. At the same time, the fact that the prices of illegal drugs have remained well above the prices of similar legal commodities suggests that policies seeking to reduce drug supply have had some effect on prices. It is difficult to go beyond these broad statements in the absence of a deeper understanding of the manner in which drug markets have operated in the past 20 years.

Moreover, it is essential to keep in mind that the only meaningful conclusions about the effectiveness of past drug policy are ones that compare this policy with some well-defined alternative. When considering the effect of supply-reduction policy on drug prices, one needs to specify an alternative policy and predict the counterfactual path that prices would have taken under this alternative. Any conclusion about the effectiveness of recent policy necessarily depends on what alternative policies one entertains and what one predicts the counterfactual price paths would have been.

Suppose, for example, that spending on domestic enforcement and interdiction had been much below its 1980s level. Would the 1998 price of a pure gram of cocaine have remained at its 1981 level of nearly $400, would the price have fallen to its observed level of around $200, or would it have fallen further? Research to date on supply-reduction policy does not provide a basis for answering this basic counterfactual question.

What Explains the 1980s Price Drop?

The sharp fall in illegal drug prices during the 1980s has long perplexed analysts of drug policy, and this committee as well. It is easy to cite

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