Goldman Asks The Big Question: What Does The Opioid Epidemic Mean For The Economy?

America is slowly waking up to the opioid epidemic.

And it’s been a long time coming.

Later today, we’ll publish a letter from a reader that sheds a bit of light on just how late the government and the mainstream media truly are when it comes to recognizing what’s going on.

Basically, it’s a “you think you know, but you have no idea,” type of deal.

Opioid painkillers have been an epidemic for more than two decades in some parts of America. In Appalachia, for instance, oxycodone and hydrocodone have been ruining lives since at least the late nineties. One common treatment (suboxone) is almost as bad as the problem. An entire black market has grown up around it and the process for obtaining it if you’re an addict is akin to a racket.

And it’s not just opioids. There’s a benzodiazepine problem that in many ways parallels the opioid issue. Again, this has been prevalent in Appalachia for longer than you probably care to imagine.

Contrary to what you’ll read in the papers, almost none of this has anything to do with Mexican drug cartels and indicting “El Chapo” won’t do one goddamn thing to stop it. Indeed, in many cases heroin addiction is a consequence – not a proximate cause.

We’ve been planning to publish the above-mentioned letter for days, but somehow, July 4 didn’t seem like the right time and yesterday we were just too busy.

But as it happens, Goldman has given us a fantastic introduction to what we’ll bring you this evening.

On Thursday, the bank is out with a note called “The Opioid Epidemic And The US Economy,” excerpts from which can be found below…

Via Goldman

By now most people have seen at least one astonishing headline about the opioid epidemic: Opioid abuse kills about 100 Americans per day. There are as many opioid prescriptions written annually in the US as there are adults. With just 5% of the world’s population, the US consumes 80% of its opioids. In today’s note, we ask what this crisis means for the US economy and the labor market in particular.

The National Survey of Drug Use and Health reports that 97.5mn Americans used prescription pain relievers in 2015, of whom 12.5mn misused them during the year and 3.8mn were currently misusing them. Misuse is more common among men, non-Hispanic whites, and those below the poverty line.

Opioid abuse has been the main contributor to the sharp increase in the rate of drug deaths since 2000, as shown in Exhibit 1. Initially, most of the increase came from misuse of prescription opioids. But the spike over the last five years instead came mostly from heroin and illicit fentanyl users, most of whom previously used prescription opioids, but switched to these cheaper, more accessible drugs. This has resulted in a tripling of the age-adjusted rate of drug deaths since 2000 to unprecedented levels.

The obvious backward-looking economic question is whether the drug crisis is a product of the Great Recession. The short answer is that the recession likely made it worse, but the relationship between the economy and the opioid epidemic is more complex.

Exhibit 2 shows that the increase in the rate of drug deaths since before the recession is only modestly correlated with the average unemployment rate since then, though the correlation is stronger for opioid deaths. Carpenter et al. find mixed evidence on the cyclicality of drug abuse but stronger evidence that prescription pain reliever abuse rises in downturns, and Hollingsworth et al. find that a 1pp increase in the state unemployment rate raises the opioid death rate by 0.33 per 100,000. This would imply that the cycle explains at best a minority of the increase in drug deaths.

The state-level data suggest that economic factors, or at least the unemployment rate alone, are only part of the story. As recent Nobel laureate Angus Deaton noted, “There are many documented links between the economy and health, not always in the same direction, but neither the opioid epidemic nor the broader epidemic of deaths of despair can be matched to patterns of unemployment or income over the past 20 years. In particular, opioid deaths, and deaths of despair more broadly were increasing year on year prior to the Great Recession, and continued to increase year on year afterwards.

The key forward-looking economic question is what the drug crisis means for the employment prospects of US workers. Does the drug epidemic imply that many of the remaining pool of non-working Americans are nearly unemployable? Could the unemployment rate now overstate true slack?

The increase in the number of prime-age people, especially men, who are not in the labor force is well-known, and this story does intersect with the growth of opioid use. Krause and Sawhill find that counties with more “deaths of despair” have lower prime-age male participation, and Alan Krueger has shown that nearly half of prime-age men who are not in the labor force take pain medication daily, two-thirds of whom take prescription pain medications. Data on substance abuse treatment episodes also reinforce the narrative: of admissions of individuals not in the labor force, 58% described themselves as being out of the labor force for “other” reasons–meaning they are not students, disabled, retired, inmates, or homemakers–and 47% of these admissions were for opioids, well above the average rate.

It is tempting to assume that drug abuse must also be a rising barrier to work for the remaining pool of unemployed workers. The Fed’s May Beige Book offered a hint in this direction, noting that several contacts reported that job applicants were unable to pass drug tests.

In fact, however, we see drug problems as at most a modestly larger barrier to employment for unemployed workers, for three reasons. First, the rise in the drug death rate gives an exaggerated sense of the prevalence of illicit drug use. The spike in deaths is mostly due to drugs that account for a small share of all drug use, but are much more likely to cause overdose deaths. Illicit drug use–including misuse of prescriptions drugs–has not risen dramatically, as shown on the left side of Exhibit 3.

Second, drug test data show only a modest increase in the percentage of positive results. Data from Quest Diagnostics show that positivity rates on pre-employment tests have risen only slightly and that the increase in positive results for opiates has been very small. At least for applicants who make it to the drug test, passing does not seem to be a massively higher hurdle than in the past.

Third, data on both illegal drug use and legal prescription pain reliever use by the unemployed suggest at most a modestly larger problem. While one might expect the share of the unemployed who use illicit drugs to rise as the unemployment rate falls due to composition effects, the increase from the recession through 2015 was less than 2pp, as shown on the left side of Exhibit 3. In addition, the right side of Exhibit 3 shows that medical use of prescription pain relievers is only slightly more common for the unemployed than for the employed.

In short, the relationship between the opioid epidemic and the labor market is complex. Use of both legal prescription pain relievers and illegal drugs is part of the story of declining prime-age participation, especially for men, and this reinforces our doubts about a rebound in the participation rate. However, we see little basis for writing off the remaining pool of unemployed, whose rate of drug use has not risen nearly as much as one might think from the surge in drug deaths.

The economic consequences of the opioid epidemic extend beyond the labor market. Recent studies by Birnbaum et al., Rice et al., and Florence et al. estimate sizeable costs of health care, criminal justice, and lost worker productivity. The most recent study put the total cost at $78.5bn in 2013 and the crisis has grown significantly since then, implying substantial costs to both employers and the public sector.