The Economics Of Crime

Americans are scared. The fear of crime permeates their lives. They worry about being mugged or raped in a parking lot or while walking home from work. They're afraid of being robbed at a highway rest stop or having their children kidnapped at a suburban mall. They put bars on their windows, alarms in their cars, and cans of tear gas in their pockets. And they should be frightened. All told, some 14 million serious crimes were reported to the police last year, a number that surely understates the actual magnitude of America's No.1 problem.

But the daily reality of muggings and murders that make the headlines and TV news shows is hurting the public in a far different, yet no less destructive, way. Crime in America is exacting an enormous economic toll on the nation--far bigger than anyone realizes.

New estimates by BUSINESS WEEK show that crime costs Americans a stunning $425 billion each year. That figure comes from a detailed analysis of all of the direct and indirect costs of both property and violent crimes, from emergency-room care for a mugging victim to the price of a new alarm system for a home to the income lost to the family of a murdered cab driver.

Human misery aside, from a purely dollars-and-sense perspective, the U.S. isn't devoting enough resources to the fight against crime--and is frittering away many of the resources it is using. The U.S. spends some $90 billion a year on the entire criminal-justice system. That includes $35 billion for police protection, less than the country is spending on toiletries each year. Indeed, anticrime policy over the years has been a series of quick, cheap fixes: New prisons are being built, but the number of police has barely kept pace with the growing population. Meanwhile, economic and social programs that could quickly bring down crime have been largely ignored.

Even the spate of crime-fighting legislation going through Congress falls far short of what is needed. The Brady Bill, just signed into law, simply requires a five-day waiting period for the purchase of handguns. And the highly acclaimed anticrime bill recently passed by the Senate would add a meager $4.5 billion a year to total criminal-justice spending.

TV VIOLENCE. Why is the nation underspending on crime-fighting? The public may well believe that there's little more money can do short of putting the Army on every street corner. Some have blamed crime and violence on the decline of "family values" or the loss of inner-city manufacturing jobs, neither of which can be solved by government action. Most recently, excessive violence on TV has been fingered as a key culprit by Attorney General Janet Reno and Surgeon-General M. Joycelyn Elders.

Economists, on the other hand, view crime as a choice that can be affected by changes in punishments and rewards. Recent research by economists shows that higher levels of anticrime spending, if well-directed, can make a big dent in crime. Crime can be reduced by increasing what economists call the "expected punishment"--the average prison time served for a crime, adjusted for the chances of being caught and convicted. Today, the expected punishment for committing a serious crime is only about 11 days--half what it was in the 1950s. At the same time, job prospects for young adults and teenagers have soured, lowering the economic rewards for staying straight. "Criminals are sensitive to incentives," says Morgan O. Reynolds, a Texas A&M University economist who studies the economics of crime. Adds Ann Witte, a Wellesley economist: "The carrot can work, and the stick can work."

What's needed is a cost-effective way of raising the punishment that potential criminals can expect, argue these economists. That means the U.S. needs to devote many more resources to every aspect of law enforcement, not just prisons. That means more police on the streets, tougher sentences for young criminals, and closer monitoring of criminals on probation.

At the same time, it's crucial that the U.S. boost spending for job training and other programs in order to give teenagers and young adults better alternatives to crime. Typically, these programs are cheaper than the $20,000- to $30,000-a-year cost of imprisonment. "We will never be able to afford enough prisons if that's our only approach to the criminal-justice problem," says Stephen Goldsmith, the Republican mayor of Indianapolis and a district attorney for 12 years. "You have to give people some hope for jobs and housing."

Such sentiments are far more common today than they were just a few years ago. In the 1980s, politicians were quick to call for longer, harsher sentences for all types of crimes. And one of the most damaging labels for a local politician in those years was "soft on crime." Yet for all the harsh rhetoric, few additional resources were devoted to fighting crime on the streets. Spending on prisons and the judicial system soared in the 1980s, but the number of police per 10,000 people barely rose. Indeed, in the second half of the decade, the total number of state and local police increased by only 16%, while the number of violent crimes jumped by 37%.

Now, fiscally strapped local officials find themselves begging for federal help and admitting defeat. District of Columbia Mayor Sharon Pratt Kelly unsuccessfully sought to deploy National Guard troops on the capital's streets, saying: "We're dealing with a war, yet people don't seem to want to win this war." After 300 stores were robbed and 52 people killed during holdups this year, Kelly's police chief recently suggested that a good way to cut crime was to close stores earlier.

The analogy to war is a good one. By BUSINESS WEEK's calculation, the real cost of violent and property crime--when properly toted up--far exceeds the $300 billion defense budget. Spending by businesses and consumers on private security alone--including alarms, guards, and locks--comes to some $65 billion, according to William Cunningham, president of Hallcrest Systems Inc., a McLean (Va.) security-industry consulting firm. "People are more fearful, and they're taking a greater stake in their own protection." This has turned into a bonanza for companies such as Winner International Corp. in Sharon, Pa., which engineers and markets The Club, a steering-wheel lock to discourage auto theft. From 1990 to 1992, Club sales grew from $22 million to $107.3 million.

But Winner's bonanza is just another burden for business and consumers. "I call this the 'security tax' that business now has to pay because government hasn't been able to make us feel safe at home, work, or play," says Frank J. Portillo Jr., chief executive of Brown's Chicken & Pasta Inc., a 100-store fast-food chain based in Oak Brook, Ill. He had to install security cameras and hire guards for some of his stores in rougher neighborhoods after seven employees were massacred on Jan. 8 at a Brown's Chicken outlet in Palatine, Ill.

The security tax hits urban areas particularly hard. According to BUSINESS WEEK's analysis of FBI crime statistics, most large cities have violent crime rates from two to seven times higher than their suburbs. As a result, many businesses and residents of crime-prone areas move to safer surroundings. That can quickly become a self-perpetuating cycle, since as jobs move out, the area becomes even more hopeless for the people who remain. BUSINESS WEEK estimates that annual damage to large urban economies from high crime rates is about $50 billion.

MIAMI VISE. Because of Miami's dependence on tourism, it is probably the urban area facing the clearest threat from crime. The city "has two problems," says Joseph P. Lacher, president of Miami-based Southern Bell-Florida and chairman of the Greater Miami Chamber of Commerce. "We have a serious crime problem to deal with and an even worse perception of crime." Dade County, where Miami is located, has one of the highest crime rates in the country. "People are scared to come to Florida," says Roberto Willimann, owner of Specialized Travel Systems, a Miami travel agency that caters to Germans. His business fell to about half of last year's after the Sept. 8 murder of a German tourist.

But crime's most devastating impact is measured in more than lost jobs and added security costs. The victim of a mugging or a rape carries the physical and emotional scars for years. Moreover, the damage to friends, family, and society from every murder is enormous.

Economists are able to measure the economic value of such intangible damages of violent crime using techniques originally developed for the cost-benefit analysis of safety regulations. According to newly published estimates by Ted R. Miller, a health-and-safety economist at National Public Services Research Institute in Landover, Md., and two colleagues, the value of a human life cut short by murder is about $2.4 million. They estimate the economic damage of a rape to average about $60,000, while the typical robbery or assault costs more than $20,000. With more than 20,000 murders committed each year plus 2 million other crimes of violence, the so-called intangible damages come to a mind-numbing $170 billion, says Miller and his co-authors.

If America really wants to bring down violent crime, there's simply no way of dealing cheaply with a problem of this magnitude. "If you are going to have an effect, you have to spend a lot of money," says Wellesley economist Witte.

But in a time of belt-tightening, it's essential to make every dollar as effective as possible. The ultimate goal is to reduce the incentives for criminal behavior. "We need the positives from participating in the legitimate economy to go up and the negatives from participating in the criminal economy to go up," says Goldsmith. "We've got the mix exactly backward."

DIMINISHING RETURNS. Spending on corrections has quadrupled over the past decade, rising far faster than spending on police or the courts. In part, that has been because of court-ordered upgrades of existing prisons, but actual incarcerations in state and federal prisons have tripled since 1980. And some economists, like Texas A&M'S Reynolds, believe that this prison boom has helped boost expected punishment a bit, keeping the crime problem from getting even worse than it already is.

But now the law of diminishing returns is setting in. Building and staffing prisons is extremely expensive, especially as sentences get longer and older inmates require increased medical care. Imprisoning a 25-year-old for life costs a total of $600,000 to $1,000,000. So putting someone in prison for life puts a huge financial burden on the next generation--just as a big budget deficit does.

For that reason, much of the additional spending on law enforcement should go toward beefing up police forces rather than building new prisons. Indeed, evidence from economic studies shows that putting more police on the front lines has more of a deterrent effect than longer prison sentences. Explains Judge Richard Fitzgerald of Jefferson District Family Court in Louisville: "Most cops I know think that what really deters is the certainty of apprehension, not the sanction that would be imposed."

Even so, any concerted attempt to raise expected punishment will necessarily mean spending more on prisons. Every year, more than 60,000 violent criminals receive probation, largely because of overcrowding, according to Michael Block, a University of Arizona economist who was a member of the U.S. Sentencing Commission. That means one of the cheapest solutions to the crime problem, he says, is to "punish those people who are already captured."

FEW WORRIES. But the largest holes are in the juvenile-justice system. Violent-crime rates among young people have been rising far faster than among adults. "We are seeing juveniles committing more of the violent crimes at a younger age and with more destructive force and impact," says Judge Fitzgerald.

Part of the problem is that expected punishment for juveniles is very low. Young people often get little punishment for the first three or four felonies. "Juveniles have been getting the message that they can get away with anything," says Marvin Wolfgang, a criminologist at the University of Pennsylvania. Adds Mark A. Kleiman, an expert in the economics of crime at Harvard Universi-

ty:"It trains people to be criminals."

In addition, teenagers have little worry that crimes committed as juveniles will hurt them as adults. In most states, juvenile criminal records are permanently sealed. So a cost-effective way of identifying multiple offenders would be to unseal juvenile criminal records at the first adult felony conviction.

America's solution for dealing with illegal drug use has cost it dearly, too. In the 1980s, draconian sentencing laws were used to combat the drug problem, putting tens of thousands of people--and not necessarily the most violent ones--in prison. Currently, 60% of inmates in federal prisons and 20% of inmates in state prisons are there on drug charges. That helped drive up spending on prisons without doing much to deter violent crime.

One alternative strategy to keep down drug use and related crime without filling up scarce prison cells is to monitor more closely the nearly 3 million convicts on probation. Kleiman argues that regular drug-testing of criminals on probation could dramatically reduce drug use, at a cost of perhaps $5 billion annually. That can be combined with increased funding for drug-rehab programs like the one at DC General Hospital in Washington, which treats 900 people each year at a cost of about $1,800 per person. "Most people who are heavy users can and will quit if they are under heavy pressure," says Kleiman, "and you'll reduce the criminal activities of the people you're testing."

But by itself, increased enforcement will not be enough to stem the tide of violence. "Short term, we need more cops and more aggressiveness in enforcement and prosecution," says Louisville Mayor Jerry Abramson, chairman of the U.S. Conference of Mayors. "But when a police officer gets involved, that's too late. The focus has to be not just on catching criminals but on preventing criminals."

Moreover, giving young people alternatives to crime can multiply the effectiveness of the existing criminal-justice system. For every person not committing crimes, police can concentrate more resources on hard-core criminals. For example, if job training and education programs lowered the crime rate by 25%, that could mean an increase of as much as one-third in the expected punishment for lawbreakers.

Unlike many social programs, intensive training and education have already provided good evidence that they can reduce the crime rate. "Crime is a young man's game," says Witte. "Keep them busy and doing things that are not illegal, and they don't get in trouble."

For example, studies of the federal Job Corps, which is a residential program for basic education and hands-on vocational training, show a big drop in arrests for program participants. "There are few programs for young men that we can document as working well," says David Long, a senior research associate at Manpower Demonstration Research Corp., a nonprofit research organization in New York. "The Job Corps stands out as strikingly effective."

A NEW WORLD. The key to the success of the Job Corps and similar private programs is providing kids with a whole new environment. That makes such programs expensive to run: A year in the Job Corps costs about $22,000. Adding enough slots in these programs to make a difference could cost billions. About 650,000 juveniles were arrested in 1992 for violent and property crimes. To provide programs for half of them would cost about $7 billion annually.

These programs are cheaper than the prisons they could replace, though. Average per-inmate cost for all juvenile facilities nationwide runs at about $30,000 annually. That's far more than the yearly cost of a slot in the Job Corps. In some cases, the difference can be even bigger. Take City Lights School in Washington, with 100 inner-city adolescents, many of them violent juvenile offenders. According to Stephen E. Klingelhofer, development director at City Lights, the $53-a-day cost is a bargain compared with the $147 daily tab at Lorton Reformatory Youth Center in Lorton, Va. Treatment at City Lights can be as simple as setting a good example. "A lot of these kids have never seen anyone getting up in the morning and going to a job," says Klingelhofer. "A lot of them come here not knowing any other way to settle disputes than by


More and more police departments are focusing on prevention as well. This new philosophy goes under the name of "community policing," which means reorganizing police departments to put more officers in the field and focusing on helping neighborhoods prevent crime rather than just reacting to emergencies. That approach may include having more police out walking beats, working with social service and community agencies, and generally getting to know the residents. "We want to improve the quality of life in the neighborhoods," says Jerry Galvin, police chief of Vallejo, Calif., which has used community policing for six years and seen violent crime drop by 33%.

If combined with organizational reforms, a shift to community policing need not mean a huge expenditure of new resources, advocates say. "Community policing has nothing to do with new officers or more money," says Galvin. "But you have to remake the department to make community policing work." In Vallejo, 80% of police officers are in the field vs. the national average of about 60%.

New Haven, Conn., has had the same experience. In early 1993, New Haven shifted to community policing rather than just having officers answer 911 calls. That required more police on the street. The solution: substitute civilian staff for cops who used to pump gas into police cruisers and hand out billy clubs and clip boards. It's cost-effective as well. An officer costs about twice as much as a clerical worker and is much more expensive to train.

VICIOUS CYCLE. Part of what's scary about the latest wave of crime is not just the numbers but the brutality involved, especially the rampant use of firearms. From 1986 to 1991, robberies increased by 27%, but the use of a fire-arm during a robbery increased by 49%. And in a vicious cycle, crime is escalating the number of guns in private hands, as frightened Americans search for protection. At Colt Manufacturing Co. in Hartford, Conn., commercial handgun sales are running about 25% higher in 1993 than they were in 1992. "A whole gamut of industries are supplying the services that are being created by the crime statistics," says Colt Chairman R.C. Whitaker.

Can this spiral of violence be broken? Certainly a federal law making handguns illegal would sharply decrease the number of guns being sold and make their street price much higher, though, like Prohibition in the 1920s or the war against drugs in the 1980s, it might be very expensive to enforce. But with 60 million handguns already in private hands, even an effective ban on guns might not be enough. One intriguing possibility is to return to an approach that has been tried successfully in the past--buying back handguns. In 1974, the City of Baltimore decided to offer $50 per gun. In three months, 13,792 guns were turned in. A similar program today could help get illegally owned guns off the street, especially if combined with national gun


Some groups are trying to stamp out juvenile crime before it starts by teaching kids that violence simply is not the only way to settle disputes. That approach can be cost-effective, experts say, if it is started early. For example, Howard University's Violence Prevention Project is trying to teach 40 troubled 4th, 5th, and 6th graders to cope with boredom, frustration, and anger without reaching for a weapon. "Is it working? It's too early to tell," admits Hope Hill, director of the program. "It appears to be, but it will take several years to know."

In the end, no one solution will work, and no cheap and easy cure is possible. But the tremendous cost of crime to Americans demands that we not give up. The country's great wealth can surely be harnessed in an effective way to provide the remedies that will allow people to walk the streets without fear again.

      PLAN FOR
      Removing the incentives for criminal behavior can make Americans safer. Here's 
      Boost spending on police and courts by one-third, or $15 billion, to make 
      apprehension and conviction much more certain. Increase spending on prisons and 
      jails by 20%, or $5 billion.
      Release juvenile records at the first adult felony conviction so that longtime 
      offenders can be quickly identified. Increase use of boot camps for 
      youthful offenders.
      Test convicted criminals on probation for drug use on a regular basis, which 
      could cut down on repeat offenders. Boost spending on drug rehabilitation.
      Give teenagers an alternative to crime by doubling the size of the Job Corps, 
      which has a proven crime-reducing record. Expand funding for privately run 
      remedial education and socialization programs.
      Encourage a shift to community policing, which puts more cops on the street 
      instead of behind desks. Use police to prevent problems, not just respond to 
      Expand violence-prevention and conflict-reduction programs in the schools. 
      Toughen federal gun control, and buy back illegally owned handguns in cities.