(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. –

The president was inaugurated in front of adoring crowds and positive reviews in the media. As the unpopular incumbent sat on the platform with him, the new Democratic chief executive took office as the nation faced a crippling economic crisis. The incoming president was a charismatic figure who had run a brilliant campaign and had handled the press with aplomb. The media were ready to give him a break.

That was 1933, and in Franklin Roosevelt’s case, the media gave him a break.

For Barack Obama, the honeymoon was shorter.

Less than 36 hours after Obama took the oath of office, the White House denied news photographers access to the new president’s do-over swearing in, instead releasing official White House photos of the event. Reuters, The Associated Press and Agence France-Presse protested and refused to distribute the official photos (which nevertheless showed up on the websites of a number of large U.S. newspapers).

This is an important issue for news organisations, the public and for an administration that has promised a new era of transparency in doing the people’s business. How are people to know, for example, that the official photos haven’t been staged?

All U.S. administrations seek to manage the flow of information and the White House and the news media have a complex, interdependent relationship. Each needs the other. But it’s important that media organisations remember who’s most important.

For Howard Goller, Reuters editor for political and general news for the U.S. and Canada, it’s clear who’s most important.

“A news organisation’s first obligation is to its clients," he says. "Our correspondents have a front-row seat at the White House, we ask questions at news conferences and briefings, and we travel with the president wherever he goes. Our photographers work just as hard for our customers. We became concerned when on taking office, the new administration prevented Reuters and other news organisations from taking our own photos. We’ve had several conversations with the new administration since those first days and we expect a more open relationship going forward.”

Most administrations get a bit of a honeymoon. Gallup polls show that every incoming, newly-elected president back to Dwight Eisenhower enjoyed majority approval ratings. Even the lowest-rated incoming presidents, Ronald Reagan and George H.W. Bush, had job approval ratings of 51 percent and disapproval ratings of only 13 percent and 6 percent, respectively.

Obama’s approval rating, 68 percent, was exceeded only by that of John F. Kennedy, who had a 72 percent rating. Even a plurality of Republicans—43 percent—give Obama positive marks.

The media have also generally been positive—or at least, not very negative-- about new presidents during their administrations’ first 100 days, one of those round numbers we seem to like so much.

The Pew Research Center’s Project for Excellence in Journalism compared the coverage of the two most recent first-term elected presidents, Bill Clinton and George W. Bush. In measuring the tone of coverage by network television, newspapers and a major weekly news magazine, the study found that only 28 percent of the coverage of both presidents’ first two months was “negative.”

No president has been more successful at managing the media than Roosevelt. So carefully did the administration control the president’s image that only a few pictures were published in newspapers of the president—disabled by polio-- using his wheelchair. Indeed, in a scene in the movie “Yankee Doodle Dandy (1942),” James Cagney was able with a straight face to portray Roosevelt in a song and dance number, as the “president” wittily told reporters what was on and what was off the record.

Betty Houchin Winfield, a journalism professor at the University of Missouri, argues in “FDR and the News Media” that “FDR’s consummate news management skills served as a major key to his political artistry and leadership legacy” and that “a strong president such as Roosevelt can indeed influence the journalists’ newsgathering, the reporters’ reactions, and the final news stories.”

As Douglas McCollam notes in the current issue of the Columbia Journalism Review, many believe much of the media are already in the tank for Obama.

A Pew Research Center poll during the heat of the campaign in September 2008 found that 36 percent of those questioned believed news organisations were biased in favor of Obama, while only 14 percent said the media were biased in favor of Republican John McCain. Forty percent detected no bias. A Rasmussen poll last summer was even more stark, with 49 percent saying they believed most reporters would “try to help the Democrat with their coverage.” Just 14 percent believed reporters would try to help McCain win and only 24 percent believed that “most reporters will try to offer unbiased coverage.”

Those are depressing numbers for a journalist to read—and the only way to respond is to aggressively cover the issues that matter to your audience.

For Reuters News, that’s a global audience and a financial audience.

Goller says that in response to the change in administrations, “We have made some big changes, especially in the way we work together to cover the big economic stories in the face of the financial crisis as well as the politics of climate change and health care….We’ve put more people on both the White House and the Congressional beats in part because the president…has promised change and both he and the Democratic-led Congress have made a priority of addressing the crisis, no small matter for our core financial clients.”

So how do we balance the need to be close to the newsmakers at the White House with the danger of being in a bubble where news can be managed?

Goller puts it well: “For Reuters, the key is to keep our eye on the issues, and that means to be aware of the impact a president’s words and actions or non-actions have on business, the economy, other countries and Americans as a people. We ask the tough questions in the briefings—and in the stories we write. If we don’t get the answers, our stories say so. This is our job.”

As in coverage of the Middle East, there are partisans who will never, ever be convinced that journalists can report objectively. As in the coverage of the recent Gaza fighting, all we can ask our audience to do is judge us on the journalism we produce—and tell us when we’re wrong.

It’s especially important now, as coverage of the new administration moves out of the warm, feel-good glow of the inauguration. As we saw Wednesday, the stimulus bill passed the House without a single Republican vote, a reminder of the deep divisions that remain and a sign that the story of the Obama administration is just beginning. It will be up to the hard-nosed, experienced journalists in Washington to push beyond the soft, easy, feel-good stories and tell the hard and complete truth.

The papers have been full of comparisons between the elections of Barack Obama and Franklin Roosevelt. Like FDR, Obama is assuming the presidency in the middle of a financial crisis. Also like FDR, he has been carried to the White House on the back of the public’s repudiation of the policies of the previous administration and a wave of enthusiasm for his promise of change. There is even talk of a new New Deal.

With all these references to Roosevelt in the air and so much speculation about the transition, it seems natural to ask if there are any lessons to be drawn from how FDR handled his transition into office.

Roosevelt was elected to office in November 1932, with the country in the third year of the Depression and unemployment rates at 25 percent. In the four months between his election on November 8 and the inauguration on March 5, 1933, the economy took yet another lurch downwards and a wave of bank runs swept through the country.

Herbert Hoover, the outgoing president, tried to elicit support from Roosevelt for bipartisan action during the transition. Believing that the bank panic was caused by fears over the incoming Democrats’ future economic policies, he tried to pressure Roosevelt to back away from some his campaign promises. Roosevelt simply ignored him and refused to engage in any policy discussions until he himself took office.

Roosevelt maintained his hard line against cooperating with the out-going administration to the very end, even on issues over which he and Hoover might have agreed. For example, on the day before the inauguration, as the run on banking system threatened the New York Fed, Fed officials tried to get Hoover to announce a national bank holiday. Hoover, who was in his very last day in office, thought this made no sense unless Roosevelt also signed up. But in a stormy meeting at the White House, Roosevelt refused to endorse any moves, declaring that he would do nothing until after he was inaugurated the next day.

Two days later, Roosevelt went ahead and closed every bank in the country. Hoover would forever blame Roosevelt for playing politics with the economy.

Although Roosevelt was undoubtedly somewhat motivated by political considerations, this was not the whole story.  With the mandate that he had received, Roosevelt saw little reason to have to compromise. He was willing to take the risk of prolonging the economic turmoil for a few more months for the sake of getting his own economic program in place.

This current presidential transition is just as tricky. A bank bailout package of $700 billion dollars is half done, working its way through the system, although it keeps changing shape every few days. A fiscal stimulus package of unknown magnitude by a lame duck session of Congress is being mooted. With all these balls in the air, can Obama afford to emulate Roosevelt and sit the game out?

While the Bush administration has made many of the same mistakes that Hoover’s did—constantly underestimating the scale of the problem, relying excessively on private sector solutions, doing too little too late—in the last few months it has changed its approach.

While there may be a bipartisan consensus on the broad steps that need to be taken to rehabilitate the U.S. financial system, there remain some big differences on a range of issues. How much of the bail out money should be directed to homeowners in trouble rather than channeled into banks?  What conditions should be demanded of the banks that receive money? Who else apart from banks should be getting bailed out?

If they threw themselves into the ring at this stage, the Obama team would be forced to spend some of its political capital on needless wrangling with a lame duck administration.

There are also some political advantages for the Obama team to let the current administration do some of the experimenting. In designing the financial rescue plan, everyone has been operating somewhat in the dark. Why not let the outgoing administration take the political heat for some of the false starts and blind alleys that will be an inevitable part of the process?

There is little risk that the Obama team will be limiting their future options significantly by this tactic.  The broader danger of a hands-off strategy during the transition is that it leaves the management of the economy in limbo until January 20.

Two months can be a long time when a financial crisis is raging. But it’s far better to do it right than get it done right now.

(Pictured above: Portrait photo of Franklin D. Roosevelt. REUTERS/White House)