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.

A BILLION HERE, A BILLION THERE

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. –

104 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

I like the disclaimer at the end: “James Saft did not own any direct investments…” it is conceivable that he may at other times invest direclty into said market.

Posted by doctherooster | Report as abusive

This is no joke. I’d be very surprised if our legislators had to wisdom or will to do this, but it is an action that is over due.
Stop treating otherwise law abiding citizens as criminals. What is criminal is the percentage of our population that is in prison. Free up the courts and the prison system so they can function more as they were meant to. Raise revenues, lower expenditures and spend some interdiction money on treatment for those that need it.
Nah, makes too much sense.

Posted by Alan Chernin | Report as abusive

There’s one thing always bothers me about suggestions like this, and maybe James is one person smart enough to spot the hole in my thinking.

Basically, it boils down to the fact that criminals don’t have pension plans. If we legalise commonly trafficked drugs, what will the traffickers do? It seems unlikely that they will simply turn to legal business, start paying taxes and stop having turf wars.

One thing they might do is turn to other, still illegal drugs. There is the potential for a kind of arms race here, as the state legalises more and more drugs, and the traffickers turn to ever more novel drugs. This is an arms race the traffickers, I think, are bound to win (and especially in countries like the UK who might be presumed to treat addicts on the NHS), because unlike the state, they don’t much care whether their customers live or die. So they’ll very likely be able to come up with a product so toxic that no state could countenance legalising it, let alone prescribing it.

Or if not drugs, what else might they turn to? Fake pharmaceuticals? That problem is already close to being out of control; if the traffickers turned their attention to it full time, there might be some very nasty consequences. Human trafficking? Counterfeit parts for aircraft and cars? Almost as bad.

I think we need to devote more thought to understanding why legalising alcohol worked. Perhaps the US was lucky in that in those days, with the exception of a few celebrities, the bootleg trade was a lot less organised (and globalised) than the drug trade is now?

Posted by Ian Kemmish | Report as abusive

“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. –”

Does this statement include the “investments” Mr. Saft may hold in the aforementioned controlled substances!

Posted by chaudfroid | Report as abusive

The cat is out of the bag and our cabal of Prohibitionists are down to less than a leg to stand on… As hard as they’ve tried to keep discussion of the issue from the mainstream, it’s here.

Legalization. Say it… “le-gal-i-za-tion”

That’s good… say it again… “legalization”

See, it isn’t that hard is it? Now, understand it. Understand that to maintain drugs Prohibition is to keep the drug thugs and the drug cartels fat and happy. The drug war is their cash cow, the goose laying their golden eggs. Legalization would cook their goose…

I’ve got a better solution. Why not impose a mandatory 5 year sentence for drug possession (no matter who) unless you give up the name of the person who supplied the drugs.
This way you can go back up the food chain an Hopefully eliminate the source.

Posted by David | Report as abusive

Yes Yes Yes! I am not an advocate of drug use at all BUT the war on drugs is as much a failure as prohibition was in the 20s. We have allowed a criminal distribution network with NO morals to become wealthier than some countries. Addicts will ALWAYS have problems legal or not, legalization removes the revenue stream from immoral elements and allows us to tax/fund help for addicts that actually want help.

Posted by scott_mich | Report as abusive

Prohibition does nothing except empower the wrong people. It hasn’t eliminated demand for or availability of drugs. Plus, you have to be pretty steeped in anti-drug propaganda to think it is just to put people in jail for smoking a plant that is less harmful than alcohol.

Posted by Will Almand | Report as abusive

In many years of work as a nurse I have NEVER seen a person in the hospital because of marijuana use/abuse. Alcohol is the #1 most dangerous drug in America, from a medical standpoint-ask anyone in the medical field.
As for drugs like heroin,from what I have seen, working near a major Physics ‘Laboratory’ in the Southwest for many years, this and other such drugs are already legal for all practical purposes. The ‘users’ get free medical care for any and all needs. Medicare/medicaid-your tax dollars at work, also the ‘indigent fund’, and other such freebies pay for all their needs. These people are experts at getting everything for nothing (I can imagine in California it is even more extreme), the health care system has figured out how to get their piece of this financial pie by treating and billing whoever will pay (you can’t have these people dieing by the side of the road-it looks bad for the country in the international press). The drug use is multi-generational in families, everyone knows who these people are, there are no legal repercussions. To tell the truth after working around these people for years I mostly forget that these drugs are even ‘illegal’ until I read something like this. I don’t consider the users to be any more or less ‘crooked’ than the banking people who have stolen all the money; nothing is going to happen to those crooks either.

Posted by QueZen | Report as abusive

Some years ago, one of our major scientific bodies, possibly the National Science Foundation, studied how much cocaine you could prevent the use of by spending $1 million various ways. The least was mandatory sentencing; a couple of pounds. The most was education and treatment; you would need a forklift. Sorry to be vague; this is from memory.

Posted by Pete Cann | Report as abusive

What is $$ cost to put someone in jail for 5 years … just the prison cost?

Posted by Carolyn | Report as abusive

Its great this discussion is beginning to get serious play. Some may recall, the late, great William F. Buckley (founder, editor, publisher of the National Review) was a very strong proponent of general narcotics legalization back in the 1980′s.

Ian’s comments are apparently shared by many. In today’s Dallas Morning News, editorial writer Tod Robberson stated basically the same concern: if we legal various narcotics what will the cartels do, just disband and go home or find something else to smuggle? While it may be interesting to ponder such things it really amounts to “fear of the unknown”. It is really not a serious argument for not doing what obviously the right thing. With the gun battles, beheadings, bodies strung from highway overpasses with dire warning banners attached, I’m not sure what worse problem could “fill the vacuum” after legalization.

Posted by Tony | Report as abusive

It is time to legalize marijuana- a so-called “drug” that is so widely used and readily available it is almost as if it is legal right now. Instead of simply stuffing my dealers’ wallets full of cash, why not help out my country in the process? Also, legalizing would do wonders for police-community relations, particularly among young people. It is time to let our law enforcement and courts get back to their real jobs instead of harassing and imprisoning the peaceful public.

Posted by Dre | Report as abusive

They should legalize Marijuana, already been proven by dozen of studies to be less lethal and addictive than tobacco, however there are no huge companies lobbying for marijuana as there are for tobacco. Alcohol is also more lethal than Marijuana and it has been around forever. I think congress should stand up and let their heads take a breather, and consider this along with prostitution.
Prostitution may give the night workers some hope of Social Security and retirement plans that they can not hope for now, and push some health plan to require them regular checks, to make sure they are safe. They already have this in other countries and people are not killing each other over this everyday, or spending billions to control social deficiencies that begin in everyone’s home. If you want to reduce this human necessity to incur in illegal activities start by injecting ethics and morals, with a high dose of family values, that every hard working parent can not do while on the streets 12 to 14 hours a day, just to raise a socially immoral being. Lets’ fight the wars worth winning right in our backyard, and stop trying to police the whole world while our own is crumbling apart.

Posted by Vincent | Report as abusive

@ David
That type of suggestion illustrates your total lack of understanding of the issue and its complexities. Hey here’s an idea- how about we lock up ALL of the roughly 1/3 of young Americans (and I’d consider that a conservative estimate) who’ve tried pot, instead of wasting the human potential of mere thousands of your fellow Americans annually in our time of need. From what you’ve said I assume you’d consider it justified based on the extreme danger posed to you personally by other people’s consumption of an intoxicant with a history of human use stretching back at least 6,000 years. Because I’m sure with just another few billion dollars a year and a few hundred more prisons we can finally stop this insidious plague- since there are so many studies providing evidence of the effectiveness of this war on drugs so far. I’m also sure that you’d be excited to cover this massive undertaking from your taxes. Try learning a little something about a subject before you comment on it, it makes for healthier debate.

Posted by Art | Report as abusive

I say lock ‘em all up!- the idiots who still believe in the Drug War, that is. “Drug-Free America” lol! Don’t be a Patsy.
Read this morn that the Mexican Atty Gen says they’ve got the cartels on the ropes. I’m not kidding. Dallas-Morning News.

Posted by Dave | Report as abusive

To David and Ian,

David, you are abosolutly right!! we should just lock up these people and remove them from society.

But certainly dont legalize drugs: here are the reasons why. It is in our interest (of the U.S) to see Mexico become a failed state, as our consumption of these drugs and our “legalized weapons program” feeds instabiltiy and chaos in Mexico. It is in the U.S.’s interest to watch itself fall into localised chaos, as gangs and violent criminal elements are empowered with unlimited cashflow. – As you say – All users of these substances are certainly criminals! Not perhaps recreational users, or individuals with a deeper underlying health issue. God says or – at least whispered in my ear “They are bad” – and bad is bad, so throw away the key – Americana morality is such pleasure to watch – it oozes that slimy warmth – “Studid is as stupid is”

Posted by marc | Report as abusive

what cannot be prevented, may as well be made legal and regulated to maintain order and safety, Giving control of the cannabis market to criminals sounds like a great idea. Way to go..

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economist and conservative icon Milton Friedman, who before his death told Forbes, “There is no logical basis for the prohibition of marijuana.” And: “It’s absolutely disgraceful to think of picking up a 22-year-old for smoking pot. More disgraceful is the denial of marijuana for medical purposes.”

If you support prohibition you support drug dealers.

Posted by clare | Report as abusive

The sad thing is that this notion only gets credibility when the government needs money, not when somebody realizes it is actually the right thing to do. If we did this, it would only be so that the government could have more of its drug of choice… your money. It won’t be long before it needs to increase the dose again.

Real integrity would be to legalize because it should be legal. If your politicians do it any other way, you can be assured that they didn’t do it for you. All the potheads would probably think so, though, and happily puff on down the street to the polls, waiting to cast an adoring vote.

Posted by Russ Ward | Report as abusive

So what if legalizing pot increases use? I’d rather deal with pot-smokers than drunks any day. I dare Congress to use Progress so boldly.

Posted by Adrien | Report as abusive