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Should We Kill the Wasps and Hornets? The Economic Effects of Crime

January 8, 2017

Should We Kill the Wasps and Hornets? At first glance, the idea of crime producing any widespread benefits appears ludicrous. Crime has long been associated with the erosion of a society, and well-known economists and boisterous politicians alike have cited how a weak economy correlates, and can even be a cause behind a country’s crime index. Yet in light of recent statistics, one cannot see crime as a one-sided villain; instead, its tug of war on the economy is a complex battle demanding to be resolved. For example, while the annual cost of crime is estimated to be 45 billion dollars, the value of the privatized prison industry is a staggering 25 billion dollars more (Bureau of Justice Statistics, 2009).

 

Rather than merely presenting a threat to the economy, crime may in fact engender and propagate economic sectors of its own. In the midst of mixed data, one may even consider that crime has no effect on an economy. Thus, the question begs to be discussed: to what extent does crime affect the economy? It is uncomplicated to argue that crime and the economy have no relationship by assuming that the best measure of an economy’s prosperity is its GDP growth rate, a key example being found in the US. 2009 marked a recent minimum in its GDP growth, a plummet of 2.8 percent (World Bank), yet simultaneously, the violent crime rate reached an all-time low of 15 percent (US Bureau of Justice). To the present day, empirical analysis shows a countercyclical relationship between the crime rate and GDP in the US. On the other hand, another case study, that of France, proves differently. From a 2014 UNODC report, one can see that the homicide and GDP rates are strikingly similar from 2006 to 2014; a robust positive correlation exists here, as in the Netherlands. Due to the discrepancies between these variables’ relationships in different countries, one must explore other means of measuring crime’s effects on the economy.

 

In the global economy, investment is crucial; yet crime’s effects on investment are much less certain. Daniele and Marani empirically explored the relationship between crime and investment in Southern Italy, a region well associated with the mafia. There, the authors found an association between organized crime and decreased FDI inflows, the latter of which depends on a respectable domestic environment. Businesses operating in a region with higher crime levels are less likely to receive bank loans, resulting in lagging economic growth due to decreased human and physical capital stock formation. While domestic sectors are negatively affected by crime, international sectors are more likely to be immune, due to different factors predominantly influencing them than in domestic sectors. In a follow-up study by Detotto and Pulina in 2012, it was concluded that only violent crime lowers FDI inflows to the point of statistical significance, and even then, only in certain sectors of the economy. Nevertheless, crime still reduces the complexity of the economy. In a state-level study in Mexico, Rios assessed this statement, and found it true - with every 10 percent increase in crime, one economic sector in Mexico is eliminated. Even if the firms do not exit the region, females are 50% more likely to leave their jobs (Rios), thus removing a large amount of human capital from the circular flow model. Consumption, the largest contributor to GDP, decreases in the region by 6.3% (Rios) as a result. Thus in the long-run, as the economic diversity of a region falls, so does its economic growth. A geographic concentration of crime damages the regional economy, particularly the health care and education systems as well as the general labor market.

 

Yet while economic diversity is threatened by crime, the criminal justice system is incentivized by it, thriving in its growth. Since the mid-1980s, a multitude of varied corporations has privatized prisons to profit from crime. While this trend is not new - it traces back to the Industrial Revolution - its new mutation is incredibly dangerous, particularly due to the increase in criminal presence (as in Europe, over the past decade). The incarceration industry has branched into for-profit businesses, in so far that the two terms are entwined in the term the "prison-industrial complex". The prison industry has spread to encompass several realms of the economy; within the private prisons, detainees produce all military shirts and 92 percent of stove assembly equipment (Shapiro). The expansion of the prison system, as the circular flow model predicts, has created an opportunity several domains are eager to partake in to the extent that the industry is the “third largest employer in the world”. Several security providers (i.e. G4S), healthcare vendors, and food manufacturers have formed international prison contracts proven to be financially rewarding. Private prisons have attained massive economies of scale, becoming more cost-efficient than public prisons (Shapiro). The market’s response to crime - creating a business out of it - has indeed contributed to economic growth; as of last year, $4.8 billion worth of it, according to an IBISWorld Report. Yet a current profit is outweighed by increased recidivism rates, which while generating further profits for the private companies, harm the community. With a lack of concern for prisoner rehabilitation and community improvement, the prison-industrial complex weakens the economy as a whole.

 

Crime may also scar a community through its damage to the infrastructure market. An increased criminal presence in an area decreases property values and tax revenue from its homes. In a case study of 8 US cities, Shapiro and Hassett found that when homicides dropped 10%, the following year, housing values rose 0.83%. Moreover, people tend to practice aversive behaviors - results ranging from a decreased population to decreased tourism - around such neighbourhoods. The wider economic impacts of crime have also expanded to include preventive measures; for example, fewer businesses taking the risk of establishing a business locally. As a result, the community’s citizens may travel further for employment opportunities, burdened with additional costs. One must also consider the direct costs of crime prevention, measured to vary from 140,000 to 1,080,000 (Cohen) depending on the intensity of the crime. When faced with scarce resources, crime inefficiently allocates funds, goading communities to invest in security measures rather than in community development. Measuring the tangible and intangible costs of crime has often led individuals to say that “the true cost of crime is more than the sum of its parts” (Cohen). While it is true that the direct costs are broad - including criminal justice system costs, victim compensation, lost tax revenue and productivity - and amount to astronomical numbers ($450 billion in direct costs alone in the US), these costs are often overstated due to being measured incorrectly. A country’s annual police budget, for example, has tasks outside of crime regulation.

 

Moreover, all crime is not created equal; while white-collar and violent crime are incredibly damaging to the economy (Cohen), street crime is a force much less malignant. Once passed through the circular flow model, its costs can potentially be canceled out due to their reallocation. Crime’s net effect on the economy cannot be quantified without a clearer picture, which could be achieved through the use and development of contingent valuation methods. In conclusion: yes, crime can aid an economy. The industries arisen from free-market conditions have amassed billions in profits, ranging from private prisons to construction companies to cable television markets, who receive more attention and higher ratings when their headlines relate to crime. A cyclical relationship is found between the velocity of money and an increase in crime; in recent years especially, due to the growth of credit card usage. According to monetarist thought, an increase in money’s velocity promotes economic growth (Equation of Exchange). Yet, whether these benefits are clear benefits requires further empirical analysis - particularly with regards to the less tangible long-term costs of crime - and more accurate crime reports.

 

Furthermore, crime’s positive economic effects have been limited to short-run trends, potentially as explained by creative destruction ideology. By redirecting profits from a diverse economy to the domestic product and corrupt institutions created by violence, crime may seem to help the economy in the short-run. Yet, in actuality, crime can crowd out economic growth. In the long-run, due to reduced economic diversification, diminished FDI/domestic investment in local businesses, the rising costs of reallocation of inefficient resources (ex. crime prevention), and decreased property values, crime can leave the economy of a region barren of growth.

 

How crime affects an economy is perceived differently by its victims, taxpayers, offenders, and others. Moreover, the economy is more than just a production and consumption function; it is a network of people and the community they build. In that respect, crime is a substance that erodes at society’s pillars. Irish author Jonathan Swift once said that “Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through”. The wasps and hornets, rather than being criminals, are the wealthy institutions that exploit a populace’s rational aspiration for profit. The question, rather than being whether we should kill the wasps and hornets, should turn to how we should strengthen our cobwebs to prevent crime, an already complex institution, from branching further. In looking forward, nations in desire of a prosperous economy - one founded on morals rather than grown from seeds of corruption and decadence - would be wise in heeding this warning.

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