Cannabis legalization as economic stimulus: a pipe dream

Robert Gibbs was right to blow the question off: as a policy idea, it’s a complete non-starter.

Andrew Sullivan, following HuffPo blogger Paul Armentano thinks that Robert Gibbs, the White House press spokesman, was “inarticulate, vapid, and embarrassed” in answering a question about legalizing cannabis as an economic stimulus.

Actually, I thought Gibbs did pretty well. Perhaps he was simply trying to avoid saying, “What sort of dumbass question is that, and what have you been smoking?”

The argument “We should legalize cannabis to stimulate the economy” is one of those arguments that could only be believed by someone with a strong motive for believing it regardless of the facts.

Since this is a topic in which I have a professional interest, here’s the quick analysis:

1. The illicit cannabis industry in the U.S. generates revenues of about $10 billion per year. If you’re keeping score at home, that’s less than 1/10th of 1% of GDP. We’re talking rounding error here.

2. To legalize cannabis we would have to withdraw from a treaty, the Single Convention on Narcotic Drugs. (No, of course cannabis isn’t, properly speaking, a “narcotic.” But that’s the name of the treaty.) Doing so requires six months’ advance notice. And of course there’s the little matter of getting that change in the law through the Congress, and through the 50 state legislatures, since cannabis is currently illegal under state as well as federal laws. And it would take some serious work up front to develop whatever tax and regulatory structure would replace the current prohibition. If the President declared his support for cannabis legalization today, and had the political muscle to push it through, the current recession would still be a memory before a legal cannabis industry came into being, or we’re in much worse trouble than I think we are.

3. Legal cannabis, even taxed, would presumably be way cheaper than the current illicit product. Other things equal, that would mean that the legal cannabis industry would have lower revenues than the current illicit industry. That wouldn’t stimulate the economy: just the reverse. Of course it would move those revenues from criminals to (at least nominally) honest businessmen (or rather, make hones businessmen out of today’s criminals). But the convention that excludes criminal earnings from GDP is just that: a convention, of no descriptive significance when it comes to determining the actual level of economic activity. That’s not to deny that there would be economic gains: consumers would gain by getting better product at lower price and with less hassle, producers would gain by not going to jail, taxpayers would gain from the tax revenues and the reduction in enforcement spending. But all that is gain in welfare, not stimulation of economic activity.* The effect on economic activity would be negative.

4. For that not to be true, the volume of cannabis sold would have to explode; if licit cannabis sold for $50 an ounce as opposed to the current average of about $300 per ounce, volume would have to sextuple in order to keep the total value-added in the trade constant. (Super-fancy tea, the only licit-market product I can think of that resembles cannabis, goes for $300 a pound.)

5. Since casual cannabis users consume very little of the drug, almost all of that new volume would have to go to chronic wake-and-bake stoners. So the only way that cannabis legalization would avoid being the opposite of a stimulus is if legalization is precisely the disaster the drug warriors have been warning about.

* Update

A reader challenges me: isn’t it a contradiction to say that something improves economic welfare but does not increase economic activity?

No, it isn’t.

“Economic activity” means the value of goods and services bought and sold. GDP is a measure of economic activity. When economic activity slips below capacity, resources &#8212 including people &#8212 are unemployed. That’s called a recession. It’s bad because the lost production means lost welfare (someone could have benefited from the goods and services not being prodcued) and because unemployment is, as our society is currently organized, a personal disaster.

A stimulus is supposed to get us back to the level of output the economy can produce and thus get unemployed people back to work.

Economic welfare, by contrast, has to do with how much good all that activity does the people involved. Cleaning up after 9/11 generated economic activity: people had jobs cleaning up. But that doesn’t mean 9/11 contributed to economic welfare.

Second update Afriend who knows much more economics than I do points out that this is too partial-equilibrium an analysis: yes, some pot dealers would lose jobs if pot prices fell, but the money not spent on pot would (mostly) get spent on other stuff. I stand corrected, and simply fall back on the fact that at 1/10th of 1% of GDP, the pot market isn’t big enough to matter, one way or the other.

First, let’s define GDP appropriately as the inflation-adjusted value of domestically-produced goods and services, including illicitly produced goods.>br>

Case 1: Assume there is no change in demand when marijuana is legalized, and no change in price as a marijuana tax brings the legal price back up to its prior illicit level. Quantity is thus unchanged as well. Absent prohibition and enforcement, it takes fewer resources to produce marijuana, so we end up with unemployed former growers, distributors, and dealers. To keep things simple, assume that none of these ex-marijuana workers finds a new job.

Does GDP decline? Not if the govt spends the marijuana tax revenues. Marijuana production is unchanged, and production of other goods and services shouldn’t materially change either as govt spending of the marijuana tax revenues offsets reduced spending among former marijuana workers.

Case 2: Same as Case 1 except no tax. And to simplify, assume marijuana demand is completely inelastic, so the price decline doesn’t increase quantity.

GDP falls? Perhaps. Marijuana users, who spend less on dope, now spend more on other goods, partly or fully offsetting reduced spending among former marijuana workers. Key is the hard-to-know income effects on spending among the two groups. Note that that the marijuana price decline would lower inflation, raising real GDP relative to nominal GDP.
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Case 3: Same as Case 2 except some of the unemployed former marijuana workers find something productive to do.

GDP? Probably up now.

Case 4: No tax. The demand curve shifts sharply up as many middle class Americans, previously deterred by illegality, now want dope. In the new equilibrium, marijuana spending and employment is unchanged from prohibition levels, but quantity is up significantly.

GDP? Up, unless increased intoxication among users causes a drop in productivity or a rise in saving, neither of which seems likely.

Case 5: Like Case 4, but the demand shift is smaller and there’s a tax that brings price up to $150/lb, half the prior illicit price. Quantity doubles (partly from the lower price, partly from the demand curve shift), leaving marijuana spending unchanged. Marijuana employment drops.

GDP? Up, assuming govt spends the dope tax revenues. If govt spends the tax revenues, then production of non-marijuana goods and services is roughly unchanged and marijuana production doubles, increasing GDP by the amount of that increase. To be more specific: nominal GDP doesn’t change in Case 5, but the decline in inflation from reduced marijuana prices creates an increase in real GDP.

Obviously all of these examples are highly simplified. I am not considering, for example, short-run frictional losses in spending pattern changes, or the impact of taxing formerly illicit wage income. But all in all, I think Case 5 is closest to reality. Therefore, I would guess that marijuana legalization would increase economic activity.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com