The economic case for legal marijuana

By Bernd Debusmann
October 8, 2010

CALIFORNIA-MARIJUANA/

On June 2, 2005, more than 500 economists, including three Nobel prize winners, issued an open letter that called attention to a report on the economic benefits of treating marijuana like alcohol and tobacco – billions and billions in budgetary savings and gains in new tax revenue.

The report, by Harvard’s Jeffrey Miron, an expert on the budgetary implications of enforcing the prohibition of illicit drugs, provided fodder for a long-running debate on the pros and cons of legalizing marijuana but did little to impress the people to which it was addressed – President George W. Bush, Congress, governors and state legislatures. One reason: the economy was humming along nicely in the first half of 2005.

That’s no longer the case and Miron has just published a follow-up report for the Cato Institute, a libertarian think tank in Washington, that revisits the economic case for ending prohibition at a time when state and federal governments stagger under enormous deficits and America’s national debt is at its highest since World War Two. Legalizing all drugs, Miron says, would yield $41.3 billion a year in savings on government spending on law enforcement and $46.7 billion in tax revenue.

For marijuana alone, say Miron and his co-author Kate Waldock of the Stern School of Business at New York University, savings from law enforcement – less time spent on arrests, fewer people booked and jailed – would total $8.7 billion a year. New taxes would bring in roughly the same. In the overall scheme of America’s fiscal troubles, these are relatively modest sums but in times of stress, every bit counts.

How much money matters was made clear by Arnold Schwarzenegger, the governor of California, on the first day of October when he signed a bill that provides for more lenient treatment of Californians caught with small amounts of marijuana. “In this time of drastic budget cuts,” he said in a statement, “prosecutors, defense attorneys, law enforcement and the courts cannot afford to expend limited resources on a crime that carries the same punishment as a traffic ticket.”

That makes possession of an ounce or less of marijuana almost legal – it will no longer be an “arrestable” offense and will not result in a criminal record. The maximum fine will be $100. For advocates of full legalization that is not enough, though, and marijuana reform policy groups have joined in a spirited effort to get Californians to the polls on November 2 to vote on Proposition 19, the Regulate, Control and Tax Cannabis Act of 2010.

Opinion surveys have been inconsistent. A Reuters/Ipsos poll on October 5 showed 53 percent against the measure, 43 percent for. Just a week earlier, a poll by the Public Policy Institute of California showed almost the exact opposite: 52 percent in favour, 41 percent against, 7 percent undecided. The one thing that seems clear is that nobody really knows what would happen if the measure were adopted.

UNCHARTED WATERS

Passage of Proposition 19 would land California in truly uncharted waters. America’s most populous state (and the one with the biggest budget hole) would be the first jurisdiction in the world to make it legal for citizens over 21 to use and grow a limited amount of marijuana (on 25 square feet per private residence) for personal consumption. Not even the Netherlands, the Mecca of marijuana aficionados, has gone quite that far.

In countries from Latin America to Europe, the trend has been towards “decriminalization” of personal use, a word that essentially means looking the other way, rather than formal legalization. Production and distribution, under the decriminalization model, remain in the criminal underground.

If California voted for Proposition 19, there is a long list of thorny questions of federal and international law that have not been answered and could keep an army of lawyers busy for a long time. In an unusual joint op-ed piece in the Wall Street Journal this week, nine former heads of the Drug Enforcement Administration (DEA) – every chief since the agency’s 1973 inception – said the California initiative would violate the constitutional clause that gives federal law supremacy over state law.

The administration of President Barack Obama, the ex-chiefs said, should prepare to follow the course it took when Arizona introduced a harsh anti-immigration law and Washington filed a suit to declare it null and void, arguing that federal law trumps state law and immigration is a federal matter.

That former DEA heads would be upset by changes in attitudes towards marijuana comes as no surprise. They were involved in running a war on drugs that has cost billions, brought violence and bloodshed to producer countries, achieved little, and was termed “an utter failure” by Obama when he was running for a seat in the U.S. Senate in 2004.

What has come as a surprise to some is opposition from part of California’s cannabis community to legalization. Like the economists’ case for budgetary savings and fresh tax revenues, opposition revolves around money. Clandestine growers who have turned California’s Humboldt County into the marijuana equivalent of wine’s Napa Valley fear that legalization would drive down prices and thus cut into their income.

Such fears were deepened by a study this summer by the RAND Corporation, a California-based think tank, on the possible effects of legalization. RAND researchers said the price of high-quality marijuana could drop by as much as 80 percent. Before tax, of course.

25 comments

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Perhaps it is reckless thinking to believe legalizing marijuana would resolve many of the financial and criminal violence issues within the state. Then again…

Maybe we should inhale.

The outcome of the 40 year war on drugs has thus far proven the criminals win and lose, but the ‘good guys’ always win. The DEA, FBI, ATF, Sherrifs, and municipal police, the courts, the jails and the prisons are all funded by tax dollars and continue to be well paid enterprises in this losing quest. There are unions tangled in this mess, there are huge corporate interests supporting the jail and prison infrastructure, gun & ammo manufacturers supporting both sides, and the individual lust for greed (high salaries, bribes & graft)and power is upheld because there are too many people on the “right side” of the laws making money as drug war profiteers.

The Mexican drug cartels and American street gangs have historial American precedent: With Al Capone and his contemporaries America endured an equally bloody era. Criminally minded people of that day had equally lucrative incentive to become gangsters and enter into the bootleg enterprise.

When prohibition ended, so did the violence and taxes on alcohol filled state and federal coffers. Many bootleggers became legitimate producers and still exist today.

Alcohol kills far more than marijuana, and yet we don’t think of the makers of Budweiser and Jack Daniels in a criminal light, rather as great American institutions of capitalism and individual liberty.

The big difference between the two comes down to production and control of dollars. Growing weed is simple to do and to distribute. Brewing beer or grain alcohol is less so and a little easier to control.

Everyone who wants to smoke pot today in California already does. The difference in the legalization question is where the dollars would go from the pot smokers and from the tax payers.

Removing 80% of the cash flowing to drug cartels is a good thing. This alone is reason to legalize pot.

Removing the reason for funding all of the aforementioned ‘war’ enterprisers, both public and private, well now you are playing with fire.

Posted by NobleKin | Report as abusive

Cannabis is so easy to grow and use. It doesn’t require any particular expertise to make or sell. Politician who think this is going to generate a lot of money for the state are naive. Why would anyone bother to report the sale and collect the taxes? There would still be a huge underground market.

this is s dumb idea.

Posted by NilsPils | Report as abusive

Marijuana legalization will not generate much tax revenue. People will just grow their own and pay not tax and sell to friends and not pay tax.

Also, even if marijuana was just purchased at retail outlets, it would generate less than what many claim.

Look at this well-thought out analysis:
Myth: Prop. 19 will bring California $1.4 Billion in tax revenue
http://www.marijuanaharmsfamilies.com/my th-prop-19-will-bring-in-billions

Posted by DavidSchmidt | Report as abusive

The case for ‘can’t beat them, join em’ is always a losing case. Better reserve my seat now aboard the hell-bound hand-basket. Last chance of comfort.

Posted by plubber | Report as abusive

Come on, the only people who are against legalization are big tobacco, big alcohol, illegal cartels and the DEA. What does that tell you? Cannabis is virtually harmless, and especially so when compared to cigarettes, alcohol and other drugs.

Are pot smokers really criminals, or are they just pot smokers? You want to talk about how this drug ruins peoples lives, the mandatory minimum sentences are what ruin lives. Criminal records for possession cause more people good jobs than the weed itself. We are hurting the kids more by locking them up than we are doing good. If you can’t see why prohibition is backwards and wrong, then tell me, what are you smoking?

Posted by Cosmic_Computer | Report as abusive

The figures in this article regarding how much money would be saved by the state in not prosecuting marijuana crimes might be much lower than reality. It doesn’t say how those figures were computed.

Generally speaking, inmates serve about 2/3 of their sentence inside the fence and about 1/3 of their sentence on parole or supervised release.

Inmates on supervised release are routinely drug tested at a cost of about $200 each time.

If an ex-con gets a job, shows up on time, works hard, stays out of trouble and does not commit any new felonies, but smokes a little marijuana even once; he will end up back in prison.

But it’s not even as simple as that. These felons have families. When a parole is revoked, the government must absorb the cost of food, housing, legal costs, medical care for the inmate… and for his/her family. The inmate is no longer bringing home the bacon and remaining parent is again faced with increased problems and costs of day care.

Federal, state and county programs usually provide less than what the intact family was able to provide for itself which insures that his/her children will grow up impoverished and accustomed to the idea of relying on the government for sustenance.

Posted by breezinthru | Report as abusive

The drug traffickers are already in the economy. Any model of what happens after legalisation needs to specify exactly what assumptions have been made about their future behaviour – “simply disappearing” or “taking up knitting” are simply not credible answers to this question, but even then they’re better than simply ignoring it, which is what most advocates of legalisation seem to do.

The most logical answer, it seems to me, is that they will increase the amount and penetration of fake pharmaceuticals they traffic. For example, starting to sell them directly into the state and national health services, as already happens in some countries. The cost of dealing with that is obviously not zero, and in all likelihood far exceeds the money that would be saved by not prosecuting the fight against any (or even all) currently banned drugs.

Posted by Ian_Kemmish | Report as abusive

It was a mistake when it made illegal in the first place … how much money has we waisted … all of those years .?

Posted by misterliu | Report as abusive

As somebody who has observed this question since before the hysteria I say legalize !
All the draconian measures of the early 70′s achieved were to broaden the range of drugs offered [ cocaine , heroin, speed ] and increase the criminal activity [ in the true sense not the literal] .
Regulate and tax , you know it makes sense !
even though I am not a California resident and have nothing to gain from this I urge you to vote for 19

Posted by battersea2 | Report as abusive

LOL Yeah and food is so easy to make at home and doesn’t require any expertise. I guess it’s dumb to have a restaurant business?

Get real people.
More people are afraid of the IRS then the DEA. Massive amounts of people break the law by either growing and selling or smoking pot but do the same people make their own beer and wine and sell that thus averting tax? Paying tax is a small cost to be legal that people already pay for hundreds of thousands of products think about it and give your head a shake.

[quote]

Cannabis is so easy to grow and use. It doesn’t require any particular expertise to make or sell. Politician who think this is going to generate a lot of money for the state are naive. Why would anyone bother to report the sale and collect the taxes? There would still be a huge underground market.

this is s dumb idea.
Posted by NilsPils
[/quote]

Posted by Seapaddler | Report as abusive

I think the case for taxation is an interesting one. It will create a new revenue stream for taxes, but just how much is debatable. One thing that is not debatable is the savings from law enforcement. The non stop revolving door of arrests, trials, and incarcerations has become become a monster burden on society. There are violent crimes which require the attention of law enforcement. Marijuana is a be nine crime at best, and should not be the focus of of our thin spread law enforcement.

Posted by macimini | Report as abusive

I think the case for taxation is an interesting one. It will create a new revenue stream for taxes, but just how much is debatable. One thing that is not debatable is the savings from law enforcement. The non stop revolving door of arrests, trials, and incarcerations has become become a monster burden on society. There are violent crimes which require the attention of law enforcement. Marijuana is a be nine crime at best, and should not be the focus of of our thin spread law enforcement.

Posted by macimini | Report as abusive

The writer does not consider costs that might be imposed by impaired users let alone costs of regulating and taxing marijuana. For alcohol use, there are 40,000 annual motor vehicle deaths and at least $100 billion in annual damage costs. While direct damage estimate comparisons is impossible between the two substances, it is certain that the benefit of legalization will be something substantially less than the $100 billion benefit described.

Posted by SanPa | Report as abusive

The writer does not consider costs that might be imposed by impaired users let alone costs of regulating and taxing marijuana. For alcohol use, there are 40,000 annual motor vehicle deaths and at least $100 billion in annual damage costs. While direct damage estimate comparisons are impossible between the two substances, it is certain that the benefit of legalization will be something substantially less than the $100 billion benefit described.

Posted by SanPa | Report as abusive

I agree with all of you on this, except Mr. Schmidt. Marijuana does not harm families, it’s illegality and the stigma that goes with it being a schedule 1 drug that does. It’s the harder stuff like heroin and meth that really ruins families. Those are the drugs that deserve that sort of classification, but don’t have it, and it’s those drugs that are actually the addictive ones, not marijuana. I am a student and I work, and I pay my taxes, contribute to society, and have goal and dreams….but I like to smoke pot. I don’t break the law in any other way besides maybe jaywalking. It’s the people like me who are harmed by these laws, not the people who don’t care about what happens to them. Yeah, the legalization may not bring in billions in tax revenue in the first day, week, or even the first month, but given some time, its benefits will drastically outweigh its drawbacks, and a portion of control will be taken back fron the criminal underground. Let’s put it this way, people like me would rather go to a clean, legtimate place to get high-grade government stuff than go to some shady guy on the street corner that may end up robbing and murdering me anyway.

Posted by alphaleonis | Report as abusive

Way back in the middle 1930s, America was still suffering with/from the great depression. All of the “G-Men” who had fought the war against the evil alcohol were soon to be out of work.

Harry Anslinger who was Assistant Prohibition Commissioner in the Bureau of Prohibition, became the first Commissioner of the Treasury Department’s Federal Bureau of Narcotics (FBN) and basically refused to give up his power (and his G-Men army). So with help (for example William Randolph Hearst, owner of several prominent newspapers ) he began a conspiracy to make hemp illegal … only they called it the evil marijuana (sometimes spelled “marihuana”) and lied to our then lawmakwers in Congress and got it classified as a Schedule 1 drug (zero meditional value) …
hence the WAR ON DRUGS started .
These are known facts … and by this alone … the classification should be repealed …
Based on the fact that marihuana is basically harmless, every lawmaker in our Congress today should repeal the federal ban …

Posted by rotnkid | Report as abusive

I am a libertarian. How can conservatives want less government interferance in their lives but still support this prohibition? This is an infringement on personal rights. At the least make it legal federally and then allow states to decide how they want to handle it, if they want medical, or full legalization. The DEA has more important things to fight now, and if they had the help of border security the harder drugs would not be make it to the US enmasse like it is now.

The US only needs to look to the south to see where all of the Chicago Gang style violence over our drug prohibition is causing havoc in other nations as they race to become the suppliers for our country’s habit. Prohibition is wrong. Fiscal Conservatives should be behind this 100%. Social conservatives need to stop oppressing other people with their own beliefs. This is America not a shia islamic country.

Posted by Trooth | Report as abusive

What is the cost to society of creating millions of people with criminal records because they were caught using marijuana? Were any of these people worth saving? Are we so harsh in our judgment that we destroy these possibly productive lives at a cost of billions out of pocket? While we let Wall Street felons skip?

Let’s stop being an arm of some evangelical religious organization that focuses primarily on sin and hellfire. We waste money on silly crimes of pleasure in this country and allow massive frauds to run rampant.

Posted by txgadfly | Report as abusive

Entrenched profiteers will not easily cede their extremely profitably franchises.

In other words, neither the cops or the drug dealers want to give up their helicopters and other cool toys.

Any conservative who believes in perpetuating this taxpayer funded fraud needs to reconsider what it means to actually be a conservative.

Ineffective, tax-payer funded social programs like the War on Drugs are not what conservatism is about.

Posted by zaius | Report as abusive

Yes, I personally agree with every reason to legalize MJ, maybe even opiates. However the ones who matter – the Congress – would not, in a rare manifestation of bipartisanship, though each side for own reasons.
Conservatives would oppose it because it is against their so called “moral values”; everyone knows what they would elect between these “values” and common sense.
Liberals would not support it because drug use mostly affects their constituency – the poor and minorities, and they wouldn’t want to be seen by their electorate as promoters of the scourge.
And the centrists… Wait, have you seen any of them in Congress? Lately? The Primaries are organized in such a way that the only ones who can pass the muster are either extreme left, or extreme Conservatives. So – no chance for any meaningful legalization or even decriminalization to pass on federal level any time soon. The only hope is that the states would get it into their own hands, because on state and local level the local issues weigh more than ideology, so the common sense people have much better chances to get elected regardless of affiliation.

Posted by anonym0us | Report as abusive

What irks me is the utter lack of attention to the opportunity cost of money spent on drugs. When Joe Hashpipe isn’t spending $160 a month on weed, what do economists suppose they might be spending it on instead? Albums, cheetos and hot wings at the very least, leaving humor aside the same things you and I would buy. Gee, I wonder who thinks that during the depression it might be a good idea to get 10% of people to spend another $160 a month. Think that might help claw us up out of the depression?

Posted by nardozi | Report as abusive

In fact,I don’t approve this action.Because it’s not only about revenue ,but also about healthy .If it is leagalized ,more and more people will smoke marijuana ,that will affect a lot of families.

Posted by whale | Report as abusive

Cannabis is less physically addictive than caffeine, while the so-called “gateway drug” theory is a complete fantasy, and it was just recently called “half-baked” as a result of a scientific study. CNN reported that Cocaine use has dropped sharply, by 30% since 2002, which is really good news. I worked in addiction medicine for years, and this is what I can advice on the matter: Any suppression of Cannabis use will be immediately followed by an increase in alcohol/hard drug/prescription drug abuse! You don’t believe me? Then maybe you will believe the Big Alcohol lobby that is financing the Cannabis Legalization opponents for exactly this reason. Right now Cannabis is just simply perceived as a much safer alternative to alcohol/hard drugs, which is precisely how it should be perceived. To have a society in which there is NO psychoactive substance use is an illusion, and it will be good for our government to realize this. So then, it becomes a matter of “safer choices”, just like with the sex education. And Cannabis is, without a shadow of a doubt, a much safer choice than alcohol or hard drugs! Just very recently a research study in addiction medicine has determined that Cannabis may actually serve as an “exit” substance for recovering alcoholics/hard drug addicts! And there is another extremely important property of Cannabis that the prohibitionists would love to keep secret: Cannabis use suppresses violent urges and behaviors and, as one prestigious textbook says, “Only the unsophisticated think otherwise” Then, of course, there is a potential of Cannabis in chronic pain, where other drugs may be ineffective (or physically addictive), with very important potential consequences for our wounded veterans, many of whom have chronic pain. It is also worth noting that Cannabis may have certain preventative value for such devastating conditions as cancer and Alzheimer’s disease. And all this comes with no danger of overdoses or induction of a physical dependence! Let’s be very happy that the cocaine abuse rate is dropping. Let’s not interfere with these dynamics, and then we can possibly achieve what has already been achieved in the Netherlands where the drug overdose rate is 85%(!!) lower than in the US, and that is with much more liberal Cannabis possession laws than in this country! Maybe it is time to give up “dogma” about Cannabis, and to start listening to the experts, if we really want to lower the alcohol/hard drug use in this country, and the accompanying dependencies and overdoses!

Posted by doctorK | Report as abusive

There are a number of points to consider. First anyone who has never smoked, has very little understanding and should be ignored.If you have driven a car stoned it is not smart but you are unlikly to go over 30 mph.As for health it is not good for you if you smoke regularly.The effect on the budget will be possotive even if they collect no tax revenue, because the cost of lawyers, cops, prisons etc will be drasticly reduced.Finaly the moral issue,if you dont want me to tell you how to run your life, dont tell me how I should run mine.

Posted by wiffles | Report as abusive

To those using the arguments against legalization of: “Marijuana legalization will not generate much tax revenue. People will grow their own and pay not tax” or “there will be a huge underground market”..
Please ask yourself and consider:
How many cigarette smokers or alcohol drinkers do you know? How many of those are also tobacco growers or alcohol distillers? Additionally, of those tobacco/alcohol users, how many are truly reaping large personal gain from buying underground tobacco and alcohol?
Yet, it is a fact that tax revenue from Tobacco & Alcohol sales in the US is well into the billions not to mention the related GDP implications.

Posted by snoee | Report as abusive