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

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Now James is putting some thought into solutions rather than the “let them fail arguments”. Kudos.

Legalization is something that is supported by large groups of law enforcement and many governors of border states. No aspect of the War on Drugs is working. Not to mention, it is easier as a teenager to buy illegal drugs- than alcohol. How about the pills in the cabinet at home? Legalization won’t be easy, but it will help solve related problems.

It’s a shame making intelligent moves such as this are being held up for only political reasons. This makes me question Dems/Repubs value-add even further. Third party anyone? But that is a discussion for another day.

Posted by Matt | Report as abusive

Mexico and Columbia have been playing along the last decade but the cartels are coming back strong in both places. The economic crisis will deplete US funding and deprive the governments of the vast resources required to fight these wars. So not only is the Drug War costing us domestically, both states have broken and in danger of failing again. This will lead to more immigrants, more supply, lower prices, more demand… the cycle never ends.

The Drug War creates taxing side-effects in almost every corner of our society, from health care, to education, to real estate value, to general quality of life. Lifting the prohibition would send all the rats into hiding, and would be the best thing we can do to get out of this economic sinkhole.

Posted by sam | Report as abusive

i totally agree the amount of revenue in tax dollars would be incredible !

Posted by b | Report as abusive

This is a suggestion that’s been around for years, and I’m all for it. Read the Nurses’ comment above and that’s the whole story. But the US isn’t mature or intelligent enough to do any of it. On the same subject, the person who contributed the idea about sex workers has also the right idea. If we can grow up enough to accept the fact that these issues will be around forever, make them pay.

Posted by Andrew Franks | Report as abusive

The giants of the global economy have been hobbled and wobbled so perhaps a puff may alleviate some of their pain but taxing marijuana will not help a thing.

Obama’s fluffy speech did not help either as real problems require real solutions.

Sometimes it is difficult for people to make tough decisions but past Presidents have made them. Kennedy ordered the naval blockade of Cuba to end the missile crisis and it was a tough decision as war was the other possible outcome.

Right now there is a global financial crisis that requires clear mind tough decision making. Making tough decisions is not what is happening, instead all manner of fluffy thinking is taking place with the single objective of saving shareholders by propping up the banking industry and others (AIG and motor companies).

I trust you will get your mind back to the serious issues James as the Dow is down 50% from its high and heading towards 6600 or less. Marijuana tax wont save this.

Posted by Greg | Report as abusive

The answer should be obvious, Legalize. The war on drugs was a fail. It’s ridiculous to imply “fear of the unknown” into this debate as a counter argument. That’s just another reminder of the reefer madness. Cause fear and people will follow, right? “what if’s” you can not measure should not be a debatable objective. We can measure the failure of the drug war in $, we can measure the amount of $ that will benefit us by legalization.

Posted by Bliss | Report as abusive

The drug problem will never be eradicated just contained, we should also legalize prostitution and clean it up and tax it. Religion will step in the way of course. Plus all the vested interests in the private prison business and black ops that are feeding off the system will have their input.

Posted by matt | Report as abusive

Legalize it, tax it, regulate it, and subsidize it……..
The new jobs created, corporate farms, retail outlets (cannabis-r-us…sorry, couldn’t resist), FDA inspectors( I want that job, “yup, thats some bad ass weed”) and bureaucrats to write the laws.
End the forty-year war and put the money to a better use.

Posted by mark | Report as abusive

A parallel suggestion. At present a very high percentage of ‘speeding’ and other traffic tickets are intended as ‘revenue-enhancers’ but masquerade as safety measures and the revenue is split with the insurance companies who pocket a large part of the revenue as rate increases. Why not change the point system so that only serious safety issues result in a threat to license and/or insurance rate increases and at the same time increase the fines. Everyone issued a ticket for 10 mph over the limit knows the present system is a cynical exercise anyway, and wouldn’t be thrilled but probably be satisfied if they could pay more for a nuisance ticket which was treated like a parking ticket and didn’t raise their rates. The only obstacle I can see to such an approach is the insurance industry lobbyists–and that, I grant, is a non-trivial obstacle–but perhaps greed and the need for increased revenue by states and municipalities might trump it.

Posted by Not Silent Not Bob | Report as abusive

Legalization of marijuana(or any narcotic)= menticide. Menticide is just another oppression mechanism. We messed up big time when we legalized alcohol. Clearly quick gains and greed wins out. ALL drug trade stops if we’d be willing to assault the money transaction side of things first. Reminds me of the Chinese opium war days. Will we ever learn? And if we wanna fix the US economy…..how about bankruptcy reorganization for a start…then rebuild our infrastructure and industrial production base.This monetary system is DEAD. Try repaying a 1.5 quadrillion derivatives debt…and you’ll see what I mean.

Posted by JC | Report as abusive

This is to Ian Kemmish –
The hole in the logic that you seek is demand. In order for the traffickers to profit they must be able to sell the drugs. Heroin addicts are generally partial to their drug just like cocaine addicts (and so forth). Many will not replace one with the other, especially if there is less risk involved with staying with your preferred drug. This is unlike many material objects in the fact that you will not sway someone to a completely different product just by incorporating some features of an already popular product (ie mixing the 2 for a speedball). You may move some of the market share but the majority will stay partial to the experience they already enjoy. And that is going way beyond what California is debating. They are debating marijuana which has much different affects than the so labeled “hard” drugs. Many marijuana users do not and will not do anything harder. I myself smoke marijuana but do not drink alcohol because I do not enjoy its affects on my body. I understand the risks, dangers and damages from both and have made my decision to smoke marijuana instead of drink or use harder drugs and no piece of legislature will change that for me. I hope I have helped you.

Posted by Jason | Report as abusive

I believe passing this bill will definitely put the economy back on track.
Attn: David… you’re just crazy.
I don’t believe an earth grown plant could do so much harm to one that we’d have to throw him in jail for 5 years. that’s just nonsense.
I agree with QueZen…I don’t know not even 1 person out there in the world who has been hospitalized, died (overdose), or even came close with the use of MJ.
This is my 2 cents, put that in your grinder and roll it! (then of course smoke a nice fatty)!
Go Cali!!! Legalization Now!!

Posted by Jill | Report as abusive

There are many good points here.
Here are some stats: in 2005 there were 2.2M in prison at an annual cost of 30B
http://www.iop.pitt.edu/documents/fact%2 0sheets/Prison%20Fact%20Sheet%20LO%20RES .pdf
Each state will be different but this will give you a national average. With the majority of these prisoners being convicted of drug crimes of one nature or another one could save huge amounts while ensuring that truly violent criminals remain in prison.

First, I think the 64B MJ market is very low. I have see estimates for MJ as high as 70% of the entire drug black market. Right now MJ is the largest cash crop in California, Kentucky and Tennessee and is grown in each and every state of the union as a cash crop and not one dime is taxed. In addition we are dumping billions out of this country every single year when this money could be kept here if MJ was a legal crop.

As for savings in interdiction, I see reutilization of personal for investigation of real crime like murder, theft and rape. I see the states saving by not having to build more prisons. I see badly needed new jobs in brand new industry and a new tax base.

Even though other societies have legalized cocaine and opium without a social collapse I advocate we first start with MJ. Work out the issues then move on to opium and cocaine. This will cut deeply into the funding of criminals and terrorists. MJ can fall under the same constraints as tobacco and alcohol but cocaine and opium will most likely be dispensed from clinics given the OD possibility. Well, that never stopped alcohol so who knows.

If you want to make sure the White House hears this message you need to go to http://www.whitehouse.gov/contact/
And let them know!

Posted by B.Free | Report as abusive

I agree with some of the comments above. It’s time to legalize Marijuana and prostitution. Marijuana because it’s far less dangerous than alcohol. Prostitution, because it should be allowed and taxed, when between two consenting adults. The tax revenue and cost savings would be in the billions. Hopefully, now that Obama is in office based on a younger, more open-minded voter base, these changes can happen. Counter that to the Republican, typically older, more inflexible voter base that has constrained realistic change that makes sense for the country.

Posted by Jason | Report as abusive

About time!
Go to the liquor store and pick up a doubie.
Of course usage will go up.
I do not buy off the streets.
Consequently, I do not buy – period.
If – it were legal – yes – I would buy!
Would I “abuse” it?
Heck no!
I drink – maybe consumming two bottles of wine per/yr.
Patterns of getting “stoned” would not differ.
I have been a proponent of legalization for years in terms of financial benefits for our country. Taking the demand from the grip of the drug lord – wow – how that could change things.
And here is the second pitch -
F L A T T A X
EVERYONE pays a base amount of tax – no deducts/incentive.
Legalization and flat tax could solve all our budget problems.

Posted by Eloise | Report as abusive

I think you really messed up on this one James, though usually your columns are very good.

The big problem with legalizing drugs is that drugs are the cause of many other crimes. The druggy that can’t afford his fix, burglarizes, home invades, armed robs, and kills to supply his need. You might say that pot is harmless. I have heard inklings that it might be much more toxic than cigarettes in causing cancer and other diseases and respiratory problems. There are also studies where lesser drugs lead to use of greater drugs.

Drugs are not alcohol. Alcohol is bad enough with all of the accompanying social problems, but legalization of drugs will be much worse. Our country is already almost too dangerous to live in, yeah why not step it up a notch. Good thinking James! God help save us from these kind of ignorant short-sighted solutions. Ask a cop what he thinks about this!

Posted by Stephen R. Bock | Report as abusive

If legalization causes cannabis use to go up at the expense of the competition, there should be significant savings on alcohol related catastrophic losses, including economic ones.
Like so many people are saying, and no one is really denying, alcohol is way more dangerous and deadly than cannabis. What kind of joke is this, to ban the safer substance and not only allow but heavily promote the clearly, clearly more dangerous substance? As they say, the emperor is, umm, not wearing any clothes. Talking about emperor alcohol lording it over cannabis, wearing bogus robes of justice that melt away in the sunlight. No more third class citizens!

Posted by newageblues | Report as abusive

Great article! The war on drugs was lost long before it even began… But it does provide a lot of people with jobs and assures organized crime a huge source of revenue. While we are at it leave Afghanistan and stop spending huge amounts of money protecting the opium trade! The Taliban were our buddies until they banned opium farming… then all the sudden they were enemies harboring terrorists! Now opium production in the country is at an all time high. Coincidence? I think not…

But, since the CIA has historically controlled the drug trade globally, and was set up initially to finance Wall Street with drug money, the chance of any of this legalization happening is very remote indeed…

Even so, just hearing mainstream media talk about the idea of legalization is a good start!

Posted by Donovan | Report as abusive

@greg
Here is where you and I will just have to disagree, I believe that the legalization of marijuana will help the money problem in this country significantly. Our prison systems are terribly over crowded, with the highest percentage of people on this earth locked away in the prison system, and the majority of those locked away for nothing more than victimless crimes such as marijuana use, the billions of dollars that we could be saving in tax payer money just on releasing those people would save us a a significant amount.
Also our police force is fighting a losing battle against the free market, because demand determines supply not the other way around. Our war on drugs is just another way for the government to tax us. unfourtunatly some people wont pull their heads out of there behinds for long enough for any of these “real” problems to be addressed and instead continue to focus on “fluff”

Posted by Jesse meredith | Report as abusive

“The waste and misery involved [in drug prohibition] must make it rival the sub-prime bubble as a misallocation of resources”. That’a nice way of putting it and looking at it.

Posted by newageblues | Report as abusive