From an Economic Standpoint
12/2/2012

The Legalization of Marijuana in America

ID: 1175376

Introduction
After the recent 2012 United States Presidential Election, whereupon Colorado and Washington passed the policy to legalize marijuana for “adult purposes,” government officials faced conflict as to whether to legalize the drug on a federal level or not (Smith 1). There is a battle between the Supreme Court and federal government regarding enforcement as state law allows production and consumption of the drug while the federal law prohibits such activities. When a state officer finds marijuana on the persons of a Colorado resident, there is no charge; however, when a federal officer finds marijuana on the persons of a Colorado resident the extent of the penalty could be arrest and incarceration. Due to conflicting enforcement policies, America is forced to examine the issue and come to a consensus between the policies to ensure homogeneity between the two lawmaking bodies. One means of analyzing the issue is through an economic perspective. As economics is the study of “how society manages its scarce resources” and the manner in which a society makes decisions, the economics behind a controversial policy can help determine acceptance or rejection of the proposed law (Mankiw 1-1). Based on fundamental economic concepts, historical evidence, global data, and future forecasts, the effects of legalizing marijuana will be analyzed. After analyzing the economics of the legalization, a decision can be made.

Brief History of Cannabis
From the beginning of time, the Cannabis plant has been cultivated and exported around the world for its material, medicinal, and spiritual uses. The first recorded instance of the cannabis plant being valued in society was in 2900 BC when Emperor Fu His claimed it held the powers

1

of yin and yang (Historical 1). Egypt, Persia, and Greece, also cultivated the Cannabis plant for both physical and mental healing antidotes and used the resin to create an anesthetic in surgery. Cannabis was also a fundamental export during the formation of America. Cannabis was so highly valued in American society in 1611 that Virginia law fined those that didn’t grow the plant. In other words, the settlers’ initial success in forming America’s economy is partly due to the hemp plant as an export for both its traditional medicinal uses but also for many other purposes. The tensile strength of the hemp plant makes for a good material for sails, the seeds of the hemp plant could be ground to make a substantial meal, and the bud used as a recreational drug. In fact, grocery stores and newsstands sold cannabis in bulk until 1937 when the Federal government implemented the Federal Marijuana Tax Act (History 30). The movement for the prohibition of cannabis began with commissioner, Henry Anslinger in 1930, who later became head of the Narcotics Bureau in 1936. Anslinger was a strong proponent of prohibition and made it his mission to make Cannabis illegal. He influenced the opinions of the American government and citizens by drawing a negative racist association between illegal Mexican immigrants who produced the herb and coined the term “marijuana.” Anslinger claimed the drug caused "dire mental and moral changes" and provoked criminal activity within the user. The negative preaching of Anslinger, tied with the publicity of William Randolph Hearst’s 28 newspapers in 1933, created enough negative sentiment that in 1936, 48 states imposed regulation laws for marijuana (Historical 9). By 1937, the federal government implemented the Marijuana Tax Act which taxed all producers and consumers of marijuana, attaining the core goal of reducing consumption. However, in creating a regulation tax, deadweight loss is created and both producers and consumers are hurt financially (Mankiw 8-2). The small victory in 1969 achieved by Timothy Leary, which proved the Marijuana Tax Act to be unconstitutional as a
2

violation of the 5th amendment was quickly thwarted by the Controlled Substance Act in 1970 under Richard Nixon’s reign. Nixon commenced the War on Drugs in 1972 and has created a financial burden on the United States. In the 2012 elections, both Colorado and Washington passed the policy for marijuana as a recreational drug and Massachusetts became the 18th state to legalize medical marijuana (Smith 1). The passing of these policies creates ongoing conflict between the individual state and federal government regarding enforcement and until there is resolution, the states that passed the policies will enjoy economic benefits and the nation on the whole will suffer financial drawbacks resulting from the war on drugs.

Cost of War on Drugs
Examining fundamental economic concepts and historical instances, prohibition has proven to impact America’s economy in a negative manner. Prohibition is a method used to reduce consumption but has proven to result in negative externalities such as producer surplus, “criminal activity, health problems, distorted education and moral stigmas” (Boermans 45). America experienced the negative effects of prohibition in the 1920’s during the alcohol prohibition as organized crime came into fruition, spawning violence all over the world (Supply 3). The externality of violence occurs because any good that has been made illegal goes “underground” and holds an inelastic demand, whereupon a change in the price of the good has little to no effect on the demand (Mankiw 5-1a). The application of this concept with regards to marijuana is as follows: regardless of the decrease of farms producing the herbal cannabis in the United States, the amount of cannabis demanded by American consumers remains unchanged. While American consumers will refrain from purchasing the drug in the United States anymore because it is prohibited, they will continue to purchase the drug from other countries where the
3

good is produced, and perhaps not as strongly enforced, such as Mexico. The additional risk of smuggling the drug across US borders allows drug dealers to name their price and, in turn, benefit from abundant profits. The prohibition of marijuana in America has only increased the economic power of drug dealers in Mexico. In fact, the Mexican cartel was presumed to have earned “three times as many profits as Mexico’s 500 largest companies combined” and was theorized to replace oil as Mexico’s largest export in 2009 (Grey 3). The war on drugs has cost America an exorbitant amount due to enforcement, incarceration, and violence. $51 billion is spent every year for the war on drugs, resulting in a cumulative $1 trillion dollars spent overall (Supply 1). Moreover, as America spends $51 billion dollars to battle the Mexican cartel in the war on drugs, the drug trade in Mexico is estimated to earn just as much in revenue from the money American consumers pump to the cartel underground (Gray 2). Furthermore, the taxes to fund the war on drugs have only achieved negative outcomes due to misaligned financial incentives. Officers are persuaded to make arrests of low level drug offenders because “funding is often based on the number of arrests made and the amount of property seized in drug busts” (Supply 2). Thus, the cost of decreasing crime has proven to be wasteful as America’s law enforcement is piloted to combat low level crime rather than dangerous high level crime. In 2010, North America accounted for 69% of herbal cannabis seizures in the world (EMCDDA 40) and the United States alone is known to have one of the highest enforcement rates in the world (Supply 1). In 2007, America performed 1 million arrests for the possession of marijuana (Boermans 30). In 2000, over 734,000 people were incarcerated for marijuana related-offenses (Legalization…1). All of those arrests and imprisonments results in tax money wasted paying the salaries of the police officers to incarcerate low-level crime offenders rather than high level
4

crime offenders, and to cover the costs of jail space for those individuals. Not to mention, the overcrowding of prisons is largely due to the war on drugs and the US Government Accountability Office found that a whopping 42% of those with drug charges were marijuana offenses (Woodard 2). When California voted for the Regulate, Control, and Tax Cannabis Act in 2010, the drug enforcement costs were estimated to decrease by $300 million a year and increase prison space (Boermans 40). After Mexican President Felipe Calderon took office in 2006, enforcement was increased in Mexico to 45,000 troops which made the drug smuggling across the US/Mexico border even more risky, thereby creating greater stakes and more violence. In 2008 the drug-related murder rate doubled to 6200 and in Nuevo Laredo alone there had been over 60 Americans kidnapped following the increased enforcement (Gray 1).

Comparing US Economy to Amsterdam, Netherlands
To note the effects of lifting the current prohibition on marijuana, a society with a regulated marijuana policy such as the Netherlands can be analyzed. The Netherlands adopted a tolerance policy in 1976 and has profited from the economic benefits ever since (Historical 11). In a city that sits between Holland and Belgium comprised of 120,000 citizens, Maastricht boasts an economic gain of $120 million per year earned by the coffee shops alone (Bender 1). Nationwide, annual taxes paid by the coffee shops have amounted to a healthy $569 million dollars that feeds the national government. If America also allowed legalization, both the local and national economy would follow suit and benefit from the additional revenue earned. Furthermore, studies have shown that 1 million, out of a total population of 16 million in the Netherlands, use cannabis on a regular basis (Bender 1). Combined with the fact that the
5

Netherlands holds the lowest number of drug related farming, it is shown that nations can receive economic benefit without realizing high levels of consumption (Regan). The European Monitoring Center for Drugs and Drug Addiction (EMCDDA) found that the proportion of cannabis users in European countries population was lower than that of the United States (EMCDDA 43). If marijuana prohibition was lifted, America would find a lower user population as well, given the fundamental nature of prohibition (see Cost of War on Drugs) The studies also found that regular users are representative of the Dutch population on the whole, which implies that if the US were to adopt legalization, the law would benefit citizens without distinction. The policy would not be biased to gender, wealth, or education level (Boermans 29). The tolerance that has been in play for years is known as “geodoogbelied,” which allows both coffee shop producers and consumers to be free from prosecution if the amount possessed is under the legal limit. The policy holds that coffee shops may grow up to five plants and herbal cannabis consumers can possess up to five grams of cannabis (Boermanns 29). However, any amount exceeding the aforementioned limits results in a misdemeanor. In this manner, the government effectively splits the market into hard and soft drugs. The government combats the hard drugs and illegitimate soft drug street dealers rather than the innocent citizens who are simply looking to take the drug for recreational or medicinal purposes. Unfortunately, a new nationwide law regulating cannabis consumption will be enacted beginning January 2013 that will pivot the coffee shop market in the other direction. The three southern provinces that have already employed the law have realized economic downturn. Under the new law, foreigners and any citizen without a “weed pass,” or legal permit acquired through the local government are prohibited from even entering a coffee shop. This causes an economic loss as

6

goods, such as coffee, and the corresponding service that were once available to the entire population are now restricted to the limited number of citizens that hold the permit. The tourism rate will also drop as coffee shops, one of the main attractions, are prohibited for the tourist (Bender 1). The unemployment rate has and will continue to increase as 82% of the coffee shop workers in Maastricht were canned in May 2012 after the law was implemented. 1500 jobs are expected to be lost in Maastricht alone. In 2013 when the law takes effect in Amsterdam, the results will prove to be disastrous, as there are 138 coffee shops, and six times the population as Maastricht (Bender 2). The rate of frictional unemployment will realize substantial increase across the board in the Netherlands (Mankiw 20-2a). Not to mention the unemployment rate will bring about an increased government spending through unemployment insurance (Mankiw 20-2c). Thus, the national government will face decrease in revenue from the loss of coffee shop business and an increase in costs due to a large spike in the unemployment rate. While Math Wynands, spokesperson for the mayor of Maastricht, insists the new law battles the illegal drug market driven by foreigners, coffee shop owners question the logic behind further restricting the previously regulated and successful coffee shops. Amsterdam fears the new law will achieve the opposite of its purpose by pushing individuals to purchase marijuana illegally. A survey released by the city showed this to be true as only 30% intended to buy the weed pass and 25% planned to purchase the drug illegally. This means once the law is in place that is intended to decrease consumption, there will be a 25% increase- and will achieve results that are adverse to the core objective (Bender 2).

7

The outcomes of the new law in the Netherlands will be a good indicator of the impact of increased regulation on a commodity. Coming from a more regulated nation with higher consumption rates, America can expect to experience the opposite of the Netherlands if marijuana is legalized. Consumption, unemployment, and government spending rates will decrease as revenue and government funds from taxes increases.

Future: Prohibition versus Regulation
Instead of continuing the prohibition of herbal cannabis and giving power to Mexican drug lords, the US government needs to legalize the drug. The federal and state governments could then impose taxes to both generate revenue and internalize the externality (Mankiw 10-1b). In legalizing the drug and accounting for social costs, the taxes imposed on the drug would bring revenue to the states. The money generated from taxes could be used to fund treatment programs rather than preventative programs, which have failed to achieve positive results over the 40 years they have been in existence. In ending prohibition, all associated criminal acts would disappear. All kidnappings and murders would be eliminated because the good would no longer be “underground.” Consumers would experience relief from the sky-high underground prices and keep the cash flow within the United States rather than feeding the flow outward. The Mexican cartel would lose revenue and power because one of its largest consumer bases just pulled out of the underground market. Alejandro Hope, a high ranking official in Mexico’s internal intelligence service, mentioned that the production from Colorado- one of the states that recently passed the marijuana legalization law in 2012- would decrease the Mexican drug Cartel’s income from $6 billion to $4.6 billion (Legalization 2).
8

America will produce revenue from the additional good sold within the US and will increase the nation’s GDP as the number of goods produced increases and the number of adult individuals employed increases (Mankiw 17-1).

Conclusion
It is interesting to note how the opinion can set the precedent to influence the entire nation to see evil in a commodity that was valued positively since the beginning of time. Cannabis is even mentioned in the bible from which Jesus anointed his disciples (see Genesis) and as a consolatory remedy after his passing. Moreover, religious leaders across cultures used the drug to speak to gods and Buddhists, in particular, have been alleged to use the drug to achieve enlightenment (Historical 3). It is important to consider the spiritual, health, and social uses of marijuana and the resulting economic benefits America has experienced and will experience from legalization, and not allow skewed beliefs to contaminate the results. A good needs not be judged based upon its prior legal status and opinion-based perceptions, but on the facts and true value a good adds to society. Prohibition has proven to be a policy with unintended negative consequences. Legalization with taxation is the optimal solution to settle the conflict between the state and federal courts. America needs to unite and legalize marijuana.

9

Works Referenced Bender, Andrew. Dutch Government to Foreigners: No More Weed For You.” May 2012. Forbes. 2 November 2012. . Boermans, Martijn, Adriaan. “An Economic Perspective on the Legislation Debate: The Dutch Case.” Amsterdam Law Forum. EMCDDA (2012), Annual Report 2012: the state of the drugs problem in Europe, Monograph series 8, Volume 1, European Monitoring Centre for Drugs and Drug Addiction, Lisbon. Grey, Colin. “The Hidden Cost of the War on Drugs.” May 2010. Stanford Progressive. 2 Nov. 2012. . “Historical Timeline.” 7 Nov. 2012. ProCon.org. 15 Nov. 2012. . “History of Cannabis Prohibition.”2005. Legalize.org. 15 Nov 2012. . “Legalization of Marijuana in Two US States Forces Review of Mexican Drug War.” 8 Nov.

10

2012. Fox News Latino. 15 Nov 2012. . Mankiw, Gregory. Essentials of Economics, 6th Edition. Mason: McGraw Hill, 2012. Regan, Nigel. “Amsterdam: Legal drugs, fewer drug deaths.” 2012. Bermuda Sun. 2 Nov. 2012. . Smith, Aaron. “Marijuana Legalization passes in Colorado, Washington.” 8 Nov. 2012. CNN Money. 15 Nov. 2012. < http://money.cnn.com/2012/11/07/news/economy/marijuanalegalization-washington-colorado/index.html>. “Supply and Demand.” 2012. Drug Policy Alliance. 15 Nov. 2012. . Woodard, Jared. “Up in Smoke? The Effects of Marijuana Legalization.” 26 Nov. 2012. The Street. 30 Nov. 2012. .

11