High Hopes: Does Legalised Marijuana Have A Future?

David Smith

Last Updated: 5, December 2012

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The American states of Colorado and Washington have gone beyond the decriminalising policies in place in European countries like the Netherlands and Portugal by becoming the first modern jurisdictions to legalise marijuana – with far-reaching legal, social and economic repercussions.

In November this year, the U.S. states of Colorado and Washington embarked upon an unprecedented social experiment by legalising the consumption of marijuana for recreational use. Citizens, by a 55 to 45 percent margin, voted to make it legal for adults to possess an ounce of processed pot; and most significantly, the new laws will allow businesses to sell marijuana.

Colorado and Washington have gone much further than the European countries, such as Portugal, Spain and the Netherlands, whose liberal drug policies still fall short of legalisation.

“What Colorado and Washington have done is unprecedented. Up until now, no modern jurisdiction had removed prohibition on commercial production and distribution,” said Dr Beau Kilmer, co-director of the RAND Corporation’s Drug Policy Research Center and co-author of Marijuana Legalisation: What Everyone Needs to Know.

Portugal’s drug policies are the most radical in Europe, but they are quite different from the legislation in Colorado and Washington. Decriminalisation, which was introduced in 2001, applies to all drugs in Portugal, not just marijuana. And nothing has been legalised. Users caught with banned substances will not be prosecuted, but they must still attend addiction panels composed of psychologists, judges and social workers.

“Decriminalisation is nothing like legalisation. Equating the two is the biggest misconception when it comes to understanding drug legislation,” said Jonathan P. Caulkins, co-author of Marijuana Legalisation and a professor of Operations Research and Public Policy at Carnegie Mellon University.

[quote]“In Portugal, drug gangs still do the same things. You don’t buy a kilogramme of cocaine at the grocery store, but from criminals. True legalisation, such as in Colorado and Washington, allows large-scale commercial companies to aggressively market their products. We should see spectacular reductions in the costs of production.”[/quote]

What the Portugal liberalisation has done, however, is reduce the number of addicts of hard drugs from 100,000 in the 1990s to around 50,000 today, according to the nation’s Institute of Drugs and Drugs Addiction. Portugal’s approach has also seen a large reduction in the number of infections among intravenous users and a significant drop in drug-related crimes.

Although there are similarities between the policies of Colorado and Washington and the longstanding tolerance of cannabis in the Netherlands, here again there are key differences. The world-famous Netherlands cannabis “coffee shops” operate in a legal grey area where their activities are technically illegal, but are tolerated and licensed.

The trend in the Netherlands, however, is towards a less relaxed approach. The previous government was frustrated at the size of the Dutch black market, which supplies cannabis to the whole of Europe. They claimed Dutch cannabis exports were greater than the country’s annual flower exports, which are worth US$6.6 billion. The Government was also worried about the growing potency of marijuana.

In 2010, the Netherlands coalition Government decided to stamp down on drug tourism by phasing in restrictions on the “coffee shops”. Starting in May this year, Dutch citizens in southern provinces were required to present a government-issued “weed pass” for admission. Non-Dutch citizens could not get a weed pass, halting the flow of French, German and Belgium drug tourists across the border. This will cut marijuana use dramatically as only 5.4 percent of Dutch locals smoke the drug annually, according to the UN.

The ban will become active in the rest of the Netherlands on January 1, 2013, although not in Amsterdam where the hash coffee shops get 1.5 million visitors a year. The Dutch Government feared that frustrated drug tourists would start roaming the city looking for drugs from illicit sources.

Meanwhile, in Uruguay, a political experiment is planned which rivals the audacity of the new laws in Colorado and Washington. President José Mujica intends to introduce a legal, state-controlled market for cannabis. The law is not yet on the statutes, but his proposal forms part of a general global trend towards liberalisation.

Changing Times?

Not long ago, greater tolerance of marijuana would been inconceivable in the US, but a recent Rasmussen poll showed that 56 percent of Americans now believe marijuana should be legalised and regulated like alcohol and tobacco. To date, 14 US states have decriminalised cannabis possession, and 17 states now allow medical cannabis. In some areas, the distinction between medical and non-medical use is blurred.

But Colorado and Washington are the first to take the great leap towards legalisation. In Washington, Initiative 502 comes into effect on December 6, whereas Colorado’s Amendment 64 will be enacted by December 23. Both states will allow for individual cities, districts or counties to ban recreational marijuana usage altogether. One interesting divergence is that home growing – up to six plants – is permitted in Colorado, but not in Washington.

There are still issues to resolve, however. State officials have yet to write the rules, tax codes and other regulations creating state-licensed retail marijuana shops. But an even bigger potential stumbling block is a potential clash with the federal government, which still views marijuana as a Schedule I prohibited substance and has cracked down on states, like California and Montana, which have allowed medical marijuana.

Jeffrey Miron, a Harvard University economist, and the author of Drug War Crimes: The Consequences of Prohibition expects the federal Government to frustrate Colorado-Washington’s programmes.

[quote]“My guess is they will make sure that when a business growing marijuana in Colorado puts money in a bank account, that bank will have to report to the bank examiners that they are doing something illegal under federal law and they will be guilty of felonies. That’s going to have a chilling effect so it’s not obvious how the State v Federal dynamic will play out.” [/quote]

However, Miron believes that, in time, the Federal Government will relax its stance because the of the US trend towards legalisation.

“More states will legalise and gradually the trend of public opinion might become broader, so the federal government may cave in eventually,” he said.

Pot Profits

Miron has been an ardent campaigner for the legalisation of all drugs. He has argued that legalising marijuana, cocaine, heroin, and methamphetamine would save US$85 billion a year in the US. He accepts, however, that the only drug which could be legalised in practice is marijuana.

“A lot of commentators keep the arguments for the legalisation of marijuana and other drugs separate, but some of the same reasoning applies. Criminalising anything for which there is a substantial demand leads to black markets and associated violence, corruption and quality control problems. So if you prohibited ice cream, we’d have black markets and drive-by shootings over ice cream. We’ve seen that for alcohol and many other goods.”

[quote]”So, to me, the only dimension where other drugs are substantially different to marijuana is the potentially greater harm to the user, although that is typically exaggerated.” [/quote]

In a well-respected paper on the economics of marijuana distribution, Miron said the US government would save US$7.7 billion annually if it legalised marijuana by not having to enforce prohibition. The scale of arrests is certainly mindboggling. In 2010, US Police made 853,838 arrests in for marijuana-related offences, according to the FBI. Marijuana arrests now comprise more than a half (52 percent) of all drug arrests in the US and an estimated 46 percent of all drug arrests are for offences related to marijuana possession.

Miron’s calculations of savings from legalisation also include a further US$6 billion per year if the Government taxes marijuana at rates similar to alcohol and tobacco. More than 300 fellow economists, including three Nobel laureates, recently signed a petition in support of his research. One economist who did not sign the petition was Stephen Easton who believes Miron has underestimated the savings. In an article in Businessweek, Easton wrote that the financial benefits of pot legalisation could be closer to US$45 to US$100 billion per year.

Clearly, legalising marijuana use in two US states would not have the same economic impact as national legalisation. But there are still huge potential repercussions, such as a major price falls in Colorado-Washington. A report by Dale Gieringer, director of California NORML, a non-profit lobbying group working to legalize marijuana, shows that legal marijuana in an open market could cost as little as US$3 an ounce, which is 100 times less than its current price of about US$300.

But the real cost of marijuana will be influenced by how the two states decide to tax it on the open market. In Washington, marijuana will be taxed at the high rate of 25 percent three times over – when the grower sells it to the processor, when the processor sells it to the retailer and when the retailer sells it to the user. Estimates indicate that Washington stands to earn US$500 million in tax revenue.

In Colorado, taxes will be lower at 15 percent of the wholesale price of marijuana through 2017. The Colorado Center on Law and Policy estimates that marijuana sales would generate US$60 million a year in tax revenue for the state.

But the basic taxes are only part of a complex and unpredictable economic equation, according to Caulkins. Amsterdam-style drug tourism could bring in a lot more revenue.

[quote]“We’ve seen the large revenues generated in Amsterdam. If people from other US states and abroad come in, it will generate bigger tax revenues than excess tax on marijuana. Lots of drug tourism means regular sales tax on restaurant meals and hotels, and so on,” he said. [/quote]

Caulkins said that a regulated industry would also bring in more income tax. “If they only supplied Colorado and Washington it would not be a big deal, but there’s a chance that in five years time these states could host the industry for the whole country because of falling prices,” he said.

In addition, if Colorado and Washington host the bundled cannabis goods industries revenue will be much higher. “For straight-up cannabis prices may drop so much that profits will be low, but if the bakeries mixing it with wheat in Minnesota relocate to Colorado where the laws are friendlier, it becomes a much bigger industry,” Caulkins believed.

In a regulated market, aggressive marketing would distinguish brands.

[quote]“It would take only eight to 10 farms in the mid-West to produce enough cannabis for the whole country. That’s where marketing comes in. We could see cannabis growers cultivating healthy images – like niche wine producers – based on it being cultivated a wonderful piece of earth so people spend five times more,” he said.[/quote]

Ironically, after the decisions in Colorado and Washington, shares in Medbox, an American company that makes cannabis vending machines, soared 3,000 percent in a week. They later dropped back, but remained well above the usual price. The run on prices was based on the assumption that a more relaxed attitude to marijuana will boost nationwide consumption, which may be true. But the punters did not take into account the potential lowering of costs in a regulated market.

One misconception about the legalisation of marijuana, Caulkins says, is that it will cripple the drug gangs. This false assumption is based on the size of the marijuana market. In 2011, there were 18.1 million users, compared with 1.4 million users of cocaine users, 620,000 of heroin users and 972,000 of hallucinogens, according to the Substance Abuse and Mental Health Services Administration. But marijuana is cheaper and it does not dominate the black market in terms of revenue.

Related: Drug Capitals of the World

[quote]“It would only modestly reduce the financial power of drug gangs. A lot of marijuana distribution takes place in friendship networks rather than professional dealers with buyers being reimbursed at cost. A lot of the time there’s no violence at all,” Caulkins said. [/quote]

Around 60 percent of US cannabis comes from Mexico, however, and that market could be hit severely if Colorado and Washington become the suppliers for the whole of the US, or in the unlikely event that their social experiment triggers legalisation at federal level.

Dr Kilmer, of the RAND Corporation, says it’s difficult to predict how the situation will pan out until Colorado and Washington determine their regulatory regimes.

“There’s a lot of uncertainty about the number and types of producers they will allow. Will it be four or 400? Until we know, it’s hard to predict total tax revenues,” he said.

One possibility, he says, is to tax cannabis at a higher rate if it contains more THC, the cannabinoid linked with anxiety and psychosis. Some forms contain more CBD, which has anxiety-reducing properties and lowers the risk of psychosis.

Kilmer says that even though the potency of some forms of cannabis has tripled in recent years, excess cannabis use is rarely as damaging as excess alcohol intake. “People do go to the emergency room for panic attacks. But the social costs pale by comparison with heavy alcohol consumption in terms of violence and chronic disease. And drunk people are far more likely to have car accidents.”

There is a general consensus, Kilmer says, that cannabis use will increase when legal. There will be greater faith in the product, prices will fall, and there will be less social stigma. But it is not clear whether that increase will be 25 percent or 100 percent. It’s also unknown how the legalisation will impact on alcohol consumption. More cannabis could reduce alcohol consumption, but the two could simply co-exist.

Kilmer is unwilling to predict the long-term prospects for federal legalisation, but he would not be surprised to see legalisation on the ballot in other US states between 2014-16.

Meanwhile, Jeffrey Miron says that if the Colorado and Washington experiment is successful and is copied by other US states, it could have a dramatic effect on drug policies worldwide.

[quote]“The US is the single biggest force behind the international Single Convention On Narcotic Drugs. If it backs away from prohibition, there would be an incentive for other countries to follow suit. But right now that’s speculation and we’ll have to see how it all pans out in the next year.”[/quote]

By David Smith, EconomyWatch.com

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About David Smith PRO INVESTOR

An English journalist who, when he's not exploring the social consequences of political actions, likes to write about cricket for some light relief.

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