The Great Debate

Postscript to California’s marijuana vote

Bernd Debusmann

Nov 5, 2010 09:39 EDT

From America’s mid-term elections, two noteworthy comparative results. A modestly funded ballot initiative to legalize marijuana in California drew 300,000 more votes than a billionaire businesswoman who spent well over $140 million of her own money to try to become the state’s governor. Both lost.

The hotly debated marijuana ballot measure attracted 3.4 million yes votes. Meg Whitman drew 3.1 million voters. It’s not clear whether she will run again but proponents of the marijuana measure, Proposition 19, are already planning to make another attempt in 2012. They think the California vote shows legalization is a matter of when, not if, never mind that this time they fell more than half a million votes short of success.

Proposition 19 would have allowed Californians over 21 to grow up to 25 square feet (2.3 sq metres) of marijuana and possess up to an ounce for personal consumption. It would have turned California, America’s most populous state, into the world’s first jurisdiction to formally legalize marijuana. (Not even the Netherlands, which has a system best described as schizophrenic pragmatism, has gone that far).

Legalization would have brought California state law in conflict both with federal law and the international treaty that underpins the global war on drugs, the 1961 United Nations Single Convention on Narcotics Drugs. It placed marijuana alongside powerfully addictive drugs such as heroin, a wrong-headed classification which became U.S. federal law in 1970.

Backers of Proposition 19 gave little thought to the international ramifications of the measure, which was closely followed in Latin America and particularly closely in Mexico, where more than 30,000 people have been killed since President Felipe Calderon declared war on the country’s drug cartels in 2006.

Calderon, a vocal critic of the proposition, sent out a Twitter message on election night saying that any changes in policies on “the production, transport and consumption of drugs should be made in an integrated and global framework.” In other words: no country (or state) should go it alone.

Calderon’s tweet echoed the ideas discussed a few days before the mid-term elections at a summit of five Latin American presidents hosted by Colombia’s Juan Manuel Santos who wondered “how can I tell a farmer in my country who grows marijuana that I’ll put him in jail when in the richest state of the United States it’s legal to produce, traffic and consume the same product?”

California voters back weakened climate law

John Kemp

Nov 3, 2010 08:12 EDT

-The opinions are the author’s own-

California voters on Tuesday rejected a measure to suspend the state’s innovative climate change law. But the state’s emission trading scheme has been substantially diluted to buy off opposition from energy-intensive industries and allay fears about job losses.

If it is true that “as California goes, so goes the nation”, the past 10 days have confirmed the lack of political support for tough emissions curbs.

The survival of California’s cap-and-trade scheme has kept alive hopes for enacting a patchwork of state and regional schemes in the absence of a federal program. Supporters hope establishing even a diluted system will lay the groundwork for a program that can be toughened as the economy improves.

But the state government’s last-minute decision to give away most emissions allowances rather than auction them suggests voters and politicians are not ready to embrace the steep increase in energy prices needed to decarbonize the economy.

“NO” ON 23 Proposition 23 would have suspended the 2006 Global Warming Solutions Act (AB 32) until the state unemployment rate fell below 5.5 percent for four consecutive quarters. Proposition 23 would have effectively killed the law because unemployment is currently over 12 percent and has only rarely dipped below 5.5 percent in the last three decades.

Voters rejected it by a wide margin following a heavily funded campaign pitting clean technology companies, environmentalists and moderate lawmakers against parts of the oil refining sector. With 92 percent of precincts reporting, “No” votes led “Yes” votes by 4.2 million to 2.6 million (61 percent to 39 percent), according to the Los Angeles Times.

California vote and Mexican drug cartels

Bernd Debusmann

Oct 15, 2010 09:48 EDT

What would legalizing marijuana in California, America’s most populous state, mean to the drug cartels whose fight for access to American markets have turned parts of Mexico into war zones? Shrinking profits? Certainly. Less violence? Maybe.

These topics are being raised as the U.S. heads towards Nov. 2 mid-term elections which in California include a ballot initiative, Proposition 19, providing for marijuana to be treated like alcohol and tobacco for Californians over 21. A vote in favour would end 73 years of prohibition and have enormous political impact not only on the rest of America but also on the long-running global war on drugs.

Experts on the issue have been working overtime and the latest of a string of academic studies, out this week, came from the RAND Corporation, a California-based think tank. The voluminous paper is entitled: Reducing Drug Trafficking and Violence in Mexico – Would Legalizing Marijuana in California Help? The study’s four authors, all prominent authorities on the illegal drug business, hedged their answer.

“Our best guess,” they concluded, “is that legalizing marijuana production in California would wipe out essentially all DTO (Drug Trafficking Organization) marijuana revenues from selling Mexican marijuana to California users; however, the share of Mexican marijuana in the United States that comes from Mexico to California is no more than one-seventh of all Mexican imports.”

Note the word “guess.” It stems from the fact that most figures in the long debate on the war on drugs are estimates and many have been manipulated for ideological purposes. According to the researchers, the drug cartels’ marijuana business in the entire United States could virtually evaporate if high-quality marijuana from California were diverted from legal production and smuggled to the rest of the country.

And what effect would that have on the Mexican drug wars, in which the death toll is nearing 30,000? Again, a scholarly hedge, given the difficulties in measuring the drug market and its suppliers. Thus: “It is unclear whether reductions in Mexican DTOs’ revenues would lead to corresponding decrease in violence…The effect of reducing DTO marijuana revenues on violence is a matter of conjecture…(and) could well change over time.”

The reason for the academic caution is simple: there’s no historic precedent for what might happen in California – one state making legal a substance that remains illegal elsewhere in the country and the rest of the world. It is not as straightforward as the 1933 repeal of alcohol prohibition which applied to the entire country.

Get ready for the IOU market

Agnes Crane

Jul 2, 2009 17:03 EDT

– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Let the trading begin.

California will be mailing out its first batch of IOUs today after the state’s stalemate over how to close the more than $24 billion hole in the budget leaves it with insufficient funds.

The IOU market could swell to $3.36 billion by the end of the month if lawmakers and the governor still can’t find a middle ground.

Big banks, which stepped into the breach 17 years ago when the state last issued IOUs, appear to be reluctant to do the same this time around. Wells Fargo & Co, Chase and Bank of America have so far said they will accept the IOUs from their customers as they would any other check, but only for a very limited period of time. All three banks say they’ll stop accepting them after a week.

For the more entrepreneurial investor, California’s newly introduced debt could be the opportunity of a lifetime, or at least of the summer.

The IOUs are registered warrants with an interest rate of 3.75 percent and a maturity date of October 2. But for the purposes of marketing, let’s just call them Terminators.

from Commentaries:

California faces its moment of truth

Agnes Crane

Jun 29, 2009 14:53 EDT

The California budget impasse comes to a head one way or the other this week, with state lawmakers needing to make nice by June 30 to close a $24 billion budget gap. If they don't, rating agencies have threatened to downgrade the state's credit ratings.

California's Comptroller said he would begin handing out IOUs on July 2 and the Treasurer said the state will draw on reserves to service the debt of all economic recovery bonds on July 1. (These bonds were created in 2004, when voters gave the state government the authority to raise $15 billion through bond issuance to plug another budget deficit.)

While a slump in real estate and tax revenue are very real factors behind California's disastrous finances, the San Francisco Chronicle also bullet-points more entrenched problems that have made it difficult if not impossible for the state to surmount extreme dysfunction.

-- Partisanship: California's gerrymandered legislative districts tend to protect incumbents and encourage more political extremes - Republicans on the right and Democrats on the left with less incentive to reach out to the political middle, much less compromise at the Capitol.

-- Term limits: Proposition 140, passed in 1990, limits legislators terms to six years in the Assembly and eight in the state Senate.

-- Ballot-box budgeting: Initiative-loving Californians mandated set-aside funding for all kinds of single-interest issues, from education to stem cell research.

-- Prop. 13: The 1978 landmark law slashed commercial and residential property tax rates, shifting state reliance to other more volatile sources.

-- The two-thirds majority rule: The Golden State is one of just three states that require a two-thirds majority vote from each legislative house to pass budgets.

Fitch Ratings cut California's ratings to A-minus last week from A, and warned that further action could be forthcoming if there's not a budget agreement beyond June 30.

California general obligation bonds have been getting hit as a result of all the uncertainty. In May, the bonds were trading roughly 37 basis points above AAA-rated munis, according to Municipal Market Advisors. Now they stand at 105 basis points. It's also helping to drag down the overall market, though returns for the year are still in the black at 5.2%.

The big fear of course is default, but there are many gradations about what they could mean for bondholders.  The worst case scenario would be repudiation, or simply walking away from its debt obligations, though this seems extremely unlikely given the size of the California economy (eighth in the world if it stood alone) and its dependence on future credit market financing. Then there's defaulting on the debt servicing or paying only part of it.

Develop domestic oil reserves for energy independence

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —

President Obama is in favor of moving towards “energy independence,” but his new 2010 Budget specifically seeks to raise taxes on domestic oil exploration by $31 billion over 10 years, a larger tax increase than on any other industry. In addition, oil and gas producers would bear a disproportionately heavy share of other tax increases on business, more than $320 billion.

Surely a president who desires energy independence would leave oil companies alone so that America could develop greater domestic reserves.  But this is not the case.

The ostensible rationale for the tax increases is that the current tax system “distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent expensing encourages overproduction of oil and gas, it is detrimental to long-term energy security…” This wording, with reference to credits, lower tax rates, special treatment, and accelerated depreciation, is repeated eight times in the Treasury Department’s Green Book, a description of proposed spending and revenue changes in the budget.

President Obama believes that subsidies for renewable energy are acceptable, even though renewable energy is only responsible for 4 percent of America’s supply.  He does not consider expenditures of $60 billion on “clean energy investments” to be distortions.  But oil, which accounts for almost 40 percent of America’s energy usage, is a different matter, apparently deserving of higher taxes to limit overproduction. With fuel prices close to $5 a gallon last summer, we could have used a little overproduction.

If America is to reduce use of imported fuels, it needs to raise domestic production to increase long-term energy security. Every additional barrel of oil produced in America is one barrel fewer that needs to be imported.  The oil and gas industry already employs more than 1.5 million workers, and has the potential to employ many more.

Estimates of American oil and natural gas reserves keep growing, potentially generating more job opportunities.  In 2007, 200 trillion cubic feet of natural gas, equivalent to 33 billion barrels of oil, or about 18 years of U.S. oil production, were found in the Haynesville Shale, a rock formation in northern Louisiana. Discoveries have also been made in Texas, Arkansas, and Pennsylvania. New optimism about U.S. gas reserves and production capacity has been pushing natural gas prices down.  Since the fuel is there, why propose new taxes to discourage production?

Fishing for the housing bottom in San Diego

J Saft

Mar 30, 2009 10:31 EDT

– James Saft is a Reuters columnist. The opinions expressed are his own – When prophetic long time bears turn a bit cuddly, it is usually best to take notice.  A real estate maven who rejoices in the “nom-de-blog” of Professor Piggington has now, after five years of correctly shouting bubble, labelled San Diego housing prices “reasonable” based on the latest available housing data.

Remember, San Diego has been, along with Phoenix, Las Vegas and parts of Florida, among the most bubbleicious markets in the U.S., and the massive busts there still represent a huge problem for bank balance sheets, for employment and for the U.S. economy generally.

So a bottoming, if that is what we are seeing, would be very significant. Housing is usually among the first sectors to recover in the aftermath of a recession and many economists argue that it actually drives the economic cycle.

Piggington, whose mother knows him as Rich Toscano, is making more modest claims; that prices are reasonable historically, but his arguments have some merit and fair value is a necessary but not sufficient precondition for a bottom and a turn.

He argues that, based on the historical relationship between San Diego county house prices and both incomes and rents, prices are now not so bad. The ratio of home prices to per capita income in December was below eight (remember San Diego housing has always been expensive!) as opposed to a bubble peak above 14. And buying the average single family home now costs the equivalent of just about 200 months of the average rent, as against well over 350 at the peak.

I think it’s fair to say that we are getting ever closer to a bottom in some of the bombed out markets, not just San Diego, but I don’t think we are there yet. On the plus side, in many of these markets transactions are now well above last year’s extremely low levels, driven by banks selling foreclosed properties at aggressive prices. And many of the buyers in places like Florida appear to be investors who are happy to take the quite positive cash flow from renting, a real sign of health, as opposed to 2006′s flippers.

But be cautious: we are in the midst of an awful recession and the employment effects will last long into 2010. Prices also are liable to overshoot on the way down, as they have in the past, including in California.

First the stock market, now water

– Jonas Minton is Water Policy Advisor for the Planning and Conservation League, an environmental advocacy organization.  Previously he was deputy director of the California Department of Water Resources. The views expressed are his own. –

In many ways, water policy in the Western United States mirrors the economic policies which created our financial catastrophe. Here in the West we’ve seen a massive development boom fueled by unrealistic expectations of ever-increasing supply.

Water contracts have been issued for many times the amount of water that nature can reliably provide. Wildly optimistic appraisals of water availability are being used to justify long-term, otherwise infeasible projects. Long held cautionary principles are being overlooked or eliminated in the rush to fulfill promises and support dreams that are unsustainable. And the public is being actively encouraged to invest billions more in bonds to subsidize the very system that is driving us to the crisis point.

The result has been escalating conflict, unwieldy demands, environmental collapse and economic disaster. Fortunately, as with the economy, adjustments in expectations, greater efficiency, and implementation of new, smarter ways of doing business can reverse some of the damage we have done, allow the West to come to grips with water limits, and provide reliable water to meet our needs.

The West supported lush post World War II growth in California, Nevada and Arizona by depleting local rivers and creeks and overdrafting groundwater. As these resources dried up, cities reached out with ever deeper wells and with hundreds of miles of aqueducts to grab “surplus” water from areas with less political clout.

But just like Wall Street’s derivatives, underlying water assets were counted many times over.  In startling testimony late last year the California State Water Resources Control Board revealed that they had issued water rights permits for over 8 times the amount of natural water available in an average year. On the Colorado River, seven states cling to unreasonable expectations that they will receive the full allocation promised to them in decades old agreements. (For background information, click here for PDF.)

Over allocation is not limited to surface water. Over pumping of groundwater water is also common in the regions overlying the huge Ogallala aquifer, a major source of water supply for South Dakota, Nebraska, Wyoming, Colorado, Kansas, Oklahoma, New Mexico, and Texas.

First 100 Days: Obama’s first climate change target

– Mary D. Nichols is Chairman of the California Air Resources Board, the lead agency for implementing California’s landmark climate change law, the Global Warming Solutions Act of 2006. The views expressed are her own. –

After eight years of inaction on climate change by the federal government, we can now look forward to the Obama administration tackling global warming head on. With not a minute to lose, Lisa Jackson, the soon-to-be new head of the EPA, should move quickly to capitalize on the momentum of states that have so far been the leaders in fighting global warming. There is no better place to start than by establishing a national greenhouse gas emission standard for automobiles based on California’s landmark clean car law.

California has always been a pioneer in setting tough automobile emission standards. Our regulations paved the way for lead-free gas, the catalytic converter, and many other innovations that were later adopted as the national standard. As a result, we have eliminated 99 percent of harmful pollution pouring out of autos today compared to a 1960s era car, leading to clearer skies and cleaner air in our cities.

In 2002, California continued its track record of pioneering environmental legislation when it passed a law that directly addressed greenhouse gas emissions from cars. Personal vehicles produce 20 percent of the nation’s greenhouse gases, and so are increasingly being addressed by governments that are serious about averting catastrophic climate change. Thirteen other states have formally adopted and three states are considering adoption of California’s cost-effective and technologically doable program.

Indeed, the motivation is not only environmental – owners of these cars will save thousands of dollars over the vehicle’s life because cars that meet the standard are also likely to be more fuel efficient.

Together with California, these 16 states constitute almost half the country’s new vehicle sales, creating a huge market for the best that Detroit has to offer.

Despite these benefits, the EPA blocked California from enforcing its greenhouse gas emission standards for cars. It also delayed responding to the Supreme Court, which required that the EPA consider using the federal Clean Air Act to create a program similar to California’s program to reduce emissions from all the nation’s vehicles. Just last month, the outgoing administration failed to carry through on its promise to publish new CAFE rules – national fuel economy standards – as required by Congress.