The current international standards for how a country should compute its GDP suggest that illegal activities should be included. Just how to do this, given the obvious problems in collecting statistics on illegal activity, isn\’t clear. The US Bureau of Economic Analysis does not include estimates of illegal activities in GDP. However, there is ongoing research on the subject, described by Rachel Soloveichik in \”Including Illegal Market Activity in the U.S. National Economic Accounts\” (Survey of Current Business, February 2021).
These three categories are not equal in their recent economic impact. Consumer spending on illegal drugs was $153 billion in 2017, compared to $4 billion on illegal prostitution and $11 billion on illegal gambling in the same year. Furthermore, tracking illegal drugs raises the average real GDP growth rate between 2010 and2017 by 0.05 percentage point per year and raises the average private-sector productivity growth rate between 2010 and 2016 by 0.11 percentage point per year. In contrast, neither tracking illegal prostitution nor tracking illegal gambling has much influence on recent growth rates.
To me, the most interesting part of the essay is about some historical patterns of spending on illegal activities and drug prices. For example, here\’s a figure showing spending on illegal drugs over time. The line to the far right shows spending on alcohol during prohibition. The very high level of spending in the 1980s is especially striking, remembering that you need to add the different categories of illegal drugs to get the total.
Chart 1 shows that the expenditure shares for all three broad categories of illegal drugs grew rapidly after 1965 and peaked around 1980. In total, this analysis calculates that illegal drugs accounted for more than 5 percent of total personal consumption expenditures in 1980. This high expenditure share is consistent with contemporaneous news articles and may explain why BEA chose to study the underground economy in the early 1980s (Carson 1984a, 1984b). Chart 1 also shows that illegal alcohol during Prohibition accounted for almost as large a share of consumer spending as illegal drugs in 1980 and changed faster. Measured nominal growth in 1934, the first year after Prohibition ended, is badly overestimated when illegal alcohol is excluded from consumer spending.
Here\’s a similar graph for total spending on illegal prostitution and gambling services. Spending on gambling was especially high up until about the 1960s, when first legal state lotteries and then casinos arrived.
Opioid potency has rapidly increased due to the recent practice of mixing fentanyl, an extremely powerful opioid, with heroin. Marijuana potency has gradually increased due to new plant varieties that contain higher concentrations of the main psychoactivechemical in marijuana, tetrahydrocannabinol (THC).
With those patterns taken into account, here\’s a figure showing estimated drug prices over time, relative to the prices for legal consumption goods. Drug prices for opioids and stimulants fell sharply in the 1980s, which makes the rise in nominal expenditures on drugs shown above even more striking, and have more-or-less stayed at the lower level since then.