ECON 4415: Participation Assignment 2

Review by: Tanveer Singh Chandok

AN ECONOMIC ANALYSIS OF A DRUG-SELLING GANGS FINANCES Steven D. Levitt and Sudhir Alladi Venkatesh This paper serves as a study into the economic activities of drug gangs after crack became widely available in the mid-1980s. The corporatization of street gangs leads to an interesting economic analysis of the day to day operations of its members. This paper concentrates on one gang in particular, for which the authors have detailed financial information. The paper looks into the background of the communities from which gang members come, and those communities within which gangs are active. The paper talks about the competitive environment within which gangs operate, and this correlation to violent crime rates. The study finds that the environment within which these gangs are usually operating is quite homogenous along socioeconomic lines. While this seems to be a simple statement, the implications are vast. One would believe that gang violence arises in those areas where there are vast socioeconomic gaps, but this is mostly untrue. The study shows that it is the homogenous neighborhoods within which gang violence is rampant. This leads to the conclusion that people join gangs for reasons other than unfair living conditions or discrimination based on relative poverty. The study also finds that the neighborhoods that harbor gangs generally are 99.6% black (U.S average is 12% black) and consist of a high percentage of unemployed men (35.8%, U.S average is 6.5%). The median income in these neighborhoods is less than half that for the rest of the U.S ($15,077 compared to $35,225 U.S average). Most citizens within these neighborhoods have at educational attainment (at age 25) of less than high school. All of this leads to children not being brought up within the correct surroundings to be deterred from gang related activates. It is within the youth that the tides of change lay, this is discussed towards the end of the paper. Structurally, gangs seem to be organized in a very corporate-like scheme. With central leadership branching off to local leaders, money (power and security) moves up the chain of command. Under the local leaders are different officers who take up various duties based on skill levels (Enforcer, Treasurer, Runner, etc.). Under the Enforcer are the lowest-of-low gang members: the Footsoldiers. While it is the foot-soldiers that are responsible for most of the physical activities of the gang, they not do benefit (monetarily) proportionally. The paper then goes on to providing data sets and descriptive statistics. The data set contains detailed financial information on the activities of the gang described. This data was provided by an informant in the gang researched. The gang currently does not exist after a police raid exposed its activities. From the data (and analysis), it can be seen that gang members (at a lower level) are not making enough money to justify their actions. Lower rung gang members make minimum wage (or slightly above), while higher tanking members make around $50,000 - $130,000 (local gang leaders). Out of the entire gang, there are very few members who make this kind of money. As mentioned earlier, power, safety and money, moves up the chain. Even though the foot-soldiers risk their lives (literally) every day, they only see a small fraction of the income they generate by selling drugs. The members who make the higher bracket of money can never expect to command such incomes working legitimate jobs. This is attributed to their dismal education and skill levels. This is why higher-up members stay within their gangs and make it their lives. One intriguing question still remains though: why do members who earn subpar incomes still stay within gangs? These members risk their lives every day and are more prone to violent crime than regular citizens. The answer to this is uncovered by removing typical consumption and demands of a normal society. Lower gang members find comfort in the fact that they can maybe one day command the

ECON 4415: Participation Assignment 2

Review by: Tanveer Singh Chandok

salary of a local gang leader. This sort of pyramid scheme attracts youths and makes it lucrative enough to sell drugs even though they are in tremendous amounts of danger. Promotions do take place in gangs (much like in a corporation) hence gang members think that it may be their turn next. This causes members to accept the low hourly wage, the imminent threat to their lives and the backward living conditions. Gang wars are of great concern to law makers, police officers, and every day citizens. This paper however looks at the effect of gang wars on the gangs themselves. It was found that the gang was at war 25% of the time. During these time periods, expenses were high, and income was very low. Regular customers would stay away in times of war, fearing their safety. Gangs have to protect their members, and this is an expensive task. When a member is killed during a war, gangs are obliged to take care of their families (monetarily) for a few years. This adds up when wars are turn out to be worse than usual, and gangs can be crippled by their economic losses after a war ends. The paper discusses causes and consequences of gang war in all its gory detail. Towards the end, the authors suggest methods to curb the growth of gangs. The first suggestion is to make life outside the gang much better for high-risk youths. This is a difficult proposition and generally would vary on a case by case basis. An alternative would be to ensure that joining gangs is even less profitable than current situations. This would include mandating harsher punishments towards drug purchasers. The paper suggests purchasers and not sellers because it is the only way to curb demand and lower the costs. This would not generate enough income for gangs and that could help deter youths from joining them. Lastly, the authors suggest that drug legalization could create so much competition that gangs would have no reason to exist. All of these suggestions must be taken with a grain of salt as there are plenty of unintended consequences that would arise by implementing these ideas. In closing, the authors suggest that the only way to understand gangs is to obtain further data and analyze them on a more macroeconomic scale.