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4-8-09: Drug Subs and Defense Economics

By Mark Lawrence

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Columbia exports about 600 tons of cocaine per year with a wholesale value of about $12B. This is big business: if the Columbian drug cartel were a Fortune 500 company it would rank at about #200 near Cummins Diesel, Northwest Airlines, Kellogg and Eastman Kodak, and comfortably ahead of Southwest Airlines, Starbucks, OfficeMax, Campbell Soup, and Harley-Davidson. Their major problem is getting their product from the jungles of Columbia to the streets of the US and Europe. 600 tons of cocaine would fill 15 eighteen-wheel trucks. The US spends a lot of money and effort trying to block this.

The latest development in this war: drug subs. These are not actually submarines, as they never fully submerge. They run with about one foot sticking out of the water. They're made of fiberglass, painted blue-grey, and typically use a 350hp diesel motor which lets them run up to perhaps 15 knots. They're almost invisible on radar due to having little metal; it's very hard to pick them up on sonar as they don't move fast and their noise is masked by surface waves; and the color makes them very hard to spot from the air. These subs hold five to fifteen tons of cocaine, a crew of four, and enough diesel fuel to make 2000 miles. The drug cartels are building roughly 75 to 100 such subs a year. They're used once and then scuttled no matter what - sunk with the drugs if caught, sunk empty otherwise. We're catching about one a month, somewhere in the neighborhood of 15% of them.

We're told these subs cost about $500,000 to build - the drug cartels are surprisingly coy about releasing detailed financial statements. The crew is typically paid another $300000 to make the run. They're carrying about $120 million worth of cocaine at wholesale - again, the cartels are not very forthcoming on the production costs of their cocaine. So the cost of the sub and the crew is around 1% the price of the drugs. My UPS shipping costs are more like 6% the price of my windshields, so throw-away subs are quite cost effective. If you add in the captured or scuttled-with-cocaine subs, then the cost is more like 15%, which is still quite tolerable given the profit margins.

Of course these subs rarely approach the US: as you might imagine, we're very sensitive about unknown submarines near our coastline. They're used to get the drugs from Columbia to Mexico, then the drugs are imported to the US by more conventional means. Their other shipping options involve flying, which has proven quite unsafe for them, or crossing the Panama canal, an easily patrolled choke point.

Here's where economics come in: It has to cost less to capture or destroy one of these subs than it costs to build, load, and crew the sub. It's very expensive to keep sub hunters in the air covering both the pacific and the Caribbean. If the cost of finding a sub is higher than the cost of building another, then there's an underlying economic war where they can build more subs cheaper than we can find them. In the pentagon they call this a requirement that a defense be cheaper at the margin.

This exact same economic calculation was made during the cold war - how much does it cost to shoot down a missile compared to building another. In the 70s it started to appear that anti-missile defense might start to be cheaper. The response was MIRVs: Multiple Independent Reentry Vehicles. A modern missile carries around 20 war heads, not one, so to stop it you have to locate and shoot down 20 targets, not one. In the 80s Reagan announced that we had made a breakthrough in laser systems, and we were going to develop and deploy a space-based system that shot down missiles as they were launched, before they had a chance to MIRV. Star Wars promised to raise the cost of building more missiles by a factor of 20. Although it turns out the technology didn't work and we apparently still have no space based anti-ballistic missile defense, the USSR was bankrupt by their efforts to build more missiles, protect the ones they already had, and duplicate our laser research.

Terrorists have a huge advantage in the economics of guerilla warfare: AK-47s and dynamite are cheap, and the guys who use them can be mass produced by unskilled workers. Mao tells us that there are three requirements for a successful guerrilla force: 1) support of the people, 2) external support of money and supplies, and 3) a safe haven to regroup and resupply. If a terrorist organization has all three, they've a decent chance of winning. Although we have remarkable systems for night vision and reconnaissance, for ground attacks by marines or special forces, for ground directed air strikes, even for ground directed naval strikes, the calculus tells us we're in trouble: our attack systems are costing us tens or hundreds of billions of dollars per year, and we're attacking people and systems that cost thousands or even hundreds of dollars to replace. For a budget of a couple million dollars a year a terrorist organization can pin down 20,000 to 50,000 American soldiers costing several billion dollars per year to deploy and supply. This several thousand to one cost factor tells us that a straight on fighting approach is doomed in the long run to failure, just as was conclusively shown in Vietnam, and more locally the US war of independence.

Just as the most cost-effective way to stop Soviet ICBMs is as they launch before they have a chance to MIRV, the most cost effective way to stop drugs is at the factory, where the coca leaves are refined. The least cost effective way is to lock up individual drug users. Unfortunately, the US has chosen the least effective way: we have about 3.5M people locked up in federal penitentiaries on drug charges at a cost of about $23,000 per year each, for a total of about $80B per year. It would actually be cheaper for the US to simply buy all the Columbian cocaine for $12B. Personally, I'd negotiate a nice wholesale discount at those levels.

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