A revenue and legalization lesson from FDR

By J Saft
February 25, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own. –

(Correcting name of academic to Peter Reuter on Feb 27)

Want to help fund the bank bailout, ease California’s budget crisis and shore up strained U.S. finances? Legalize drugs, tax the trade and save on interdiction, domestic enforcement and the prison and court system.

I’m only partly joking.

It won’t solve all of the U.S.’s problems and lord knows will cause some new ones, but the money is undeniably big enough to make a dent.

After all, it certainly helped Franklin Delano Roosevelt, who legalized alcohol in 1933 in the midst of the Depression and after more than a decade of prohibition, thus bringing a half a billion in 1933 dollars into public coffers in the form of tax revenue. By 1936, alcohol taxes were 13 percent of Federal revenue.

California Governor Arnold Schwarzenegger has a similar opportunity. He is facing a $42 billion budget deficit, his prisons are filled to bursting, in substantial part with people in on drug-related crime, and he will soon be forced by judicial edict to start freeing people. He also has an offer from a group call Let Us Pay Taxes, which claims to represent the marijuana industry and is willing to pay $1 billion annually in taxes if only he will legalize. No doubt they are low-balling.

The U.N. estimates the value of the U.S. cannabis market at $64 billion annually, while a paper by academics Jonathan Caulkins and Peter Reuter calculates that about half of the costs of drugs are in one way or another attributable by factors linked to interdiction and its perils (click here to read Render’s paper in pdf format).

But even if you cut the U.N. number in half and only tax it at 50 percent, a lower tax than many states and localities put on tobacco, you’d still get more than $15 billion nationwide. If California consumes its 13 percent share, in line with GDP, and I am betting it does, you are looking at something on the order of $2 billion even before you take account of lower costs. Harvard economics professor Jeffrey Miron has a lower estimate, at $7.7 billion annually nationally in lower spending and $6.2 billion in extra revenues.

Of course, these figures could fluctuate wildly depending on levels of compliance and market factors.
But why stop at cannabis? Just as Roosevelt decided that prohibition of alcohol was a failed policy the U.S. could no longer afford, perhaps the costs of re-building the U.S. banking system and lifting the country out of a severe recession will prompt another radical plans. I wouldn’t bet on it, but strange things are happening all over.


And if we start including other drugs the billions will only mount. There is another $100 billion in annual illegal drug sales in the U.S. outside of cannabis, which might produce another $25 billion annually in revenue by the same maths. The U.S. Federal government alone spent $13 billion on the drugs war in 2002, not counting prison costs.

Then there are other costs of the American drug interdiction efforts internationally, not least in Afghanistan, where opium revenue fuels the Taliban. The U.S. spends more than $1 billion a year there on anti-drug efforts, but opium money undoubtedly raises the total costs for the U.S. by much more.

The stream of income from all of this extending into the future is very valuable indeed and would go a way towards paying the price of fixing the banking system.

This brings us to another point of weakness for the U.S.; namely its ability to fund all of the costs it has already taken on and is likely to have to shoulder in the next several years. Moody’s credit rating agency did what everyone has pretty much taken for granted for a while not long ago, acknowledging that the U.S.’s AAA credit rating is being “tested” and falls into a category below those on the top shelf like Canada and Germany.

It’s not all wine and roses though. Cheaper legal drugs may lead to a spike in use, which might hit productivity and impose lots of costs, such as higher health and other welfare costs. All of those prison, military and law enforcement jobs are a huge source of stimulus, and the cut backs implied by legalization would raise transitional problems.

Moreover, drug legalisation, just like for alcohol, is essentially a moral and political decision about which reasonable people can disagree. It’s also, to put it mildly, not very likely.

Still the war on drugs rolls on, costing billions, creating huge incentives for violence and crime, imprisoning hundreds of thousands and seemingly never much closer to victory. The waste and misery involved must make it rival the sub-prime bubble as a misallocation of resources.

Perhaps one stone will end up killing two birds.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click here. –


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a society based on ‘scarcity’ is what we currently have. a society based on ‘abundance’ is a better solution. abundance based on ‘sustainability’ is socially just and offers a ‘living’ paradym that can give meaningful context to peoples’ lives. what is the primary reason for substance use/abuse? most would say “lack of meaning”
which often leads to feelings of hopelessness, rage, mental illness. a society based primarily on financial gain will always be exploitive of ecology and society and therefore, unjust. there is only one issue at the top of the to do list nationally and internationally: GREEN SUSTAINABILITY. do we have the ‘time window’ to go in this direction? well, if we don’t, we will self destruct along with the world’s ecosystems which are the source of all life, wealth, and well being. think about it: what is the bedrock of all our advanced societal accomplishments,ideologies, material wellbeing, etc.: truly, it is the EARTH. rape the earth and soon you wiil only possess a handful of ashes, the resting place of all false nonsustainable ways of life. thaks for reading this and hopefull reflecting on how this might apply to your life.

Posted by lois | Report as abusive

Mr. Choi,

I think we both are missing each other’s point. You wish such things never existed. Interesting wish, and I can sympathize with your situation but, I cannot agree with you. Tobacco though abused does have uses. Granted few are medicinal (e.g. elimination of respiratory and intestinal parasites) but, it is a great organic pesticide for your garden and used in moderation enjoyable. I also agree that Nicotine is very, very addictive. Nicotine is more addictive than most illegal drugs. However for addiction to occur you need more than an addictive substance. You need a person who is both physically and psychologically prone to addiction. My comments below, though grated vague, referenced alcohol because there is a lot of research on the illness of alcoholism. An alcoholic produces a certain body chemistry that is conducive to alcohol consumption and a personality that has been termed an addictive personality. Given the reality that there are numerous substances that a person can abuse, taking marijuana, tobacco, cocaine and opium out of the market will not stop addiction. The Addict will find something else. Please note that research has shown that during the highest point in the War on some Drugs the addicts of this nation turned to substances like paint and glue even aerosols that were pressurized with nitrous oxide. My point is this nation needs to stop this stupidity called the War on Drugs and look at the situation rationally. The substance does not make the addict. The addict has an illness that is both genetic and psychological and needs treatment. Like with alcohol consumption, the addict (alcoholic) makes up an insignificant portion of the population consuming the substance. It would be more rational and less expensive to use the resources now applied to drug interdiction on treatment of addicts. I do not think addicts should be jailed simply because they are using a substance. If they violate someone’s rights or endanger someone then treat them as if they were not an addict and prosecute them for the crimes they commit.

If these substances were legal the prices would crash, the production would be brought into this country, draining the funding to the criminals south of the boarder and in the Middle East. New jobs would be created here. New taxes would be realized and there would be additional cost savings in prison and law enforcement. The idea that the number of addicts per capital would increase has never been shown in those societies that have legalized. In fact by substance category (like heroin) addicts actually decreased due to the exposure to the medical community who were administering the substance.

Currently there is no control stopping kids from gaining easy access to these substances. At least in the White markets you have stores who will not sell to minors. Minors are resourceful and you will see theft and fraud gain the bold access but at least it will be more difficult that today where any kid with money can get any illegal substance they desire.

Given the experience with Alaska the local city governments will be upset since a large part of their revenues come from fining people for possession and that source will no longer be available. There will be a shift from interdiction to law enforcement actually expending their resources on real crime. Our laws over the last 60 years have been used to ensure these black markets are profitable to not only the criminals but also government entities. This needs to change. I think this shift is necessary not just in this country but globally. If the US moves in this direction the rest of the world will follow.

I disagree with a government that attempts to dictate under penalty of law what someone can or cannot put into their body. Personal freedom is a right in this country and our lawmakers have grossly abused their power in this area. It needs to stop.

Now if you like we can have a whole other conversation in a different forum on how the big tobacco companies took advantage of no government purity controls to produce a cheap and dangerous product that was proven to cause carcinoma at lower carcinogen concentration levels than the rest of the world’s processed tobacco cigarettes and caused more cardiovascular damage through their inane attempt to create more addicts by increasing the nicotine levels.

Posted by B.Free | Report as abusive

In my original post, the point I was trying to make was that all these proposals are trying to patch up a broken economic system by consuming new markets instead of trying to fix the system… whether it be marijuana or gambling, we’re continuing in search for endless consumption.

Everyone thinks this will be a solution. It is not. And that’s what I was trying to say. I actually am not against legalizing marijuana if it was for medical reasons or for war against drugs. But I don’t speak for everyone and while the morality of this issue is up for debate and I certainly don’t think it’ll be resolved on this board but the reasons for proposing to legalize it… this economy… I believe is not the fix.

Posted by Brian Choi | Report as abusive

I do believe all the ideas you have introduced on your post. They are very convincing and will certainly work. Still, the posts are very quick for beginners. Could you please lengthen them a bit from next time? Thank you for the post.