The Pandemic Depression
The Global Economy Will Never Be the Same
In the blink of an eye, global debates about cannabis regulation have shifted from “whether” to “how.” In 2014, Uruguay became the first nation to explicitly regulate cannabis from seed to sale. Its preferred strategy? State-regulated production, cannabis clubs, and personal growing. Meanwhile, four U.S. states and the District of Columbia have moved ahead with legal regulation, Colorado and Washington being the first, and the federal government seems unlikely to intervene. More states, possibly even California, look set to follow. Likewise, in the rest of the world, there are a number of gray-area regulatory systems, including in Belgium, the Netherlands, and Spain. All offer insights into how the United States—and other countries—might tackle the “how.”
THE AMERICAN MODEL
In 2015, researchers at RAND produced an exhaustive study on cannabis legalization. The core insight was that “legalization is not simply a binary choice between making the production, sale, and possession of the drug legal on the one hand and continuing existing prohibitions on the other.” The report’s authors suggest that, if states do pursue legalization, a state monopoly, in which the government controls price, production methods, and quantities produced, is likely the most attractive supply model. Drug policy experts Professor Mark Kleiman and Jeremy Ziskind offer a similar analysis in their contribution to the London School of Economics Expert Group on the Economics of Drug Policy Report, writing, “The debate over how to legalise cannabis tends to assume that for-profit commercial enterprise is the default option. Legalising cannabis on the alcohol model may, however, be the second-worst option (behind only continued prohibition).”
Legalization regimes have two facets: rules for medical marijuana and rules for recreational marijuana. In the United States, states have opted for a spectrum of models to deal with medical marijuana. Some states’ medical laws are considered so lenient as to constitute de facto legalization, for example in parts of California. New Jersey and New York, due to regulatory design or a lack of support from their governors, have witnessed a bumpier rollout and greater restrictions on supply and qualifying ailments. New Jersey Governor Chris Christie has made clear his lack of support for medical marijuana, and he initially stalled implementation. Meanwhile, New York State, viewed as having the strictest regulations in the country, has a long implementation process that will stretch into 2016. New York Governor Andrew Cuomo has overseen continued protests, most notably from parents of sick children suffering from a range of illnesses, from brain tumors to seizure disorders, over the slow progress.
The patchwork applies to recreational cannabis as well. Colorado has taken a soft regulatory touch and transformed many of its well-run medical cannabis businesses into recreational providers. These are balanced by a strong state tax regime aiming to fund new public works, such as schools and anti-drug educational programs. Its regulatory model has shown itself responsive to market outcomes and public safety concerns. For example, public concerns around edible cannabis goods such as brownies resulted in the governor tightening regulations by instituting limits on product size, THC content (marijuana’s main psychoactive ingredient), and ensuring childproof packaging. In the meantime, more mundane questions of banking regulation are slowly being resolved.
Washington State opted for a more centralized regulatory model and has overseen a bumpier transition. Its experience highlights a core issue in planning for a licit market—taking back control from the illicit one. Its medical marijuana industry was widely viewed as poorly regulated, and much effort has gone into clamping down on it while scaling up the recreational market by creating a number of hard targets, such as the square feet of cannabis plants to be grown (two million) and the number of retail licenses to be allocated (334). Rather than allowing medical businesses to transition into recreational ones, as Colorado has done, the Washington Liquor Control Board aims to build a new system of licensed premises through open bidding. Supply shortfalls, high prices, and a deluge of new applications has delayed the rollout of the system, and the state has struggled to take much business from the black market. Some also attribute the uncompetitive prices to high taxes.
Oregon’s legalization initiative, which will likely resemble Washington State’s model, has not yet gone into effect. In Washington, D.C., the local government has moved to a legalized "grow and give" model, in which citizens can legally grow, share, and consume cannabis. This model is meant to avoid commercialization. Meanwhile, in Alaska in February 2015, an initiative became law that allows residents to grow up to six plants and share up to an ounce. The state has given itself one year to develop a regulatory model for commercial retail sales. As The Economist reported, the Alaskan case in particular will provide enormous insights to how consumers respond to price drops. Alaska is the furthest U.S. state from Mexico, the source of much of the illegal cannabis in the United States. The extra distance results in extremely high prices—around $2,500–$4,000 wholesale per pound versus border regions where it can be bought for several hundred dollars. If consumption does not increase substantially with the lower prices that will come with legalization, the arguments for continued prohibition elsewhere will become ever more tenuous.
AROUND THE WORLD
The range of approaches to marijuana legalization outside the United States is just as varied. Jamaica is in the midst of a policy reevaluation, beginning with a recent legislative shift toward the decriminalization of consumption and the legalization of personal cultivation of up to five plants. The new law contains provisions for regulating medical and religious uses of the plant, and it remains to be seen whether these provisions will form a mechanism for broader commercialization or state monopolization and, thus, a new source of revenue for the government.
The Netherlands, through non-enforcement of national laws, has a world famous “coffee shop” system to provide de facto legal sales, but supply remains prohibited. According to a 2013 report by the Open Society Foundations Global Drug Policy Program, the result has been the creation of separated illicit drug markets. In other words, there is significant evidence that the Dutch have successfully prevented the interaction between those seeking to consume cannabis and those supplying harder drugs. Where one buys cannabis in the Netherlands is not the same as where one goes to buy cocaine or heroin. One of the stated goals of marijuana prohibition is to forestall the so-called gateway effect, and it seems that the Dutch have actually achieved this outcome by de facto legalization. The Open Society report cites data that “in Sweden, 52 percent of marijuana users report that other drugs are available from their usual cannabis source. In the Netherlands, only 14 percent of marijuana users can get other drugs from their cannabis source.” Meanwhile, youth usage rates of cannabis and cocaine are lower in Amsterdam than in the United States and the Dutch cannabis market is estimated to generate $440 million in sales annually.
Spain remains the best case study of gray-market systems for recreational cannabis. Its system relies on so-called Cannabis Social Clubs. As a briefing by Transform Drug Policy Foundation explains, “Cannabis social clubs (CSCs) are private, non-profit organizations in which cannabis is collectively grown and distributed to registered members. With no profit motive to increase cannabis consumption or initiate new users, the clubs offer a more cautious, public health-centered alternative to large-scale retail cannabis markets dominated by commercial enterprises.” Although production remains technically illegal, personal cultivation and sharing has been accepted under an expanded definition of decriminalization of consumption. Up to 400 CSCs exist throughout Spain. The government has periodically interfered in their operation and recently started cracking down on them again, likely as a means to prevent their evolution into a coffee shop system akin to that in the Netherlands. Nevertheless, it seems likely these CSCs will persist and represent an alternative model for states in Europe and elsewhere to examine and pursue.
Finally, politicians in countries as diverse as Morocco and Zambia have been warming to the idea of legalized production. As The Guardian reported last year, a Green Party candidate in the Zambian presidential election promised to exploit the global undersupply of medical cannabis. Israel, long a pioneer in medical cannabis provision and research, seems unwilling for the moment to step into the void because it would bring unwanted international attention. The Czech Republic, meanwhile, received press attention in 2013 for domestic efforts to secure new sources of supply to bring down the domestic price of its medical cannabis.
The international trend is clear: countries are openly countenancing policies that would have been unthinkable just five or ten years ago. For his part, Kleiman writes that “the places that legalize cannabis first will provide—at some risk to their own populations—an external benefit to the rest of the world in the form of knowledge, however the experiments turn out.” So what have the early adopters taught us?
On balance, it would seem that the gray-area models represent the best alternative to prohibition in areas where they can be made to operate. The Dutch system, despite the continued problems around the prohibition of supply, has been a clear success on many of the metrics upon which policies are judged. The ability of the state to roll back excessive commercialization and shrink the scale of the coffee shop model when it desires is something that would diminish under a fully legalized market, though it would also be harmful to those working in the retail market. Similarly, the Spanish market, despite a general lack of research, appears to offer a strong example for other countries to consider emulating. In the case of the Uruguay model, it remains too early to tell. Nevertheless, the level of state control is encouraging and something that countries that desire to institute fully regulated markets would certainly wish to emulate, depending on how the Uruguay experience plays out.
However, the pragmatic Dutch and Spanish attitudes and the strict supply regulation models may not work or be sustained in the United States, where restrictions on advertising and commercialization would run afoul of the First Amendment guarantees to free speech and an entrepreneurial culture. Further, the inability of the U.S. system to foster pragmatic gray-area accommodations between federal goals and state desires is already apparent in the constant harassment of the medical marijuana sector by federal agents and prosecutors. Although the medical marijuana question has been defused by federal legislation, the recreational question remains particularly poignant given uncertainty over the federal governments’ continued acceptance of state-led legalization. Under this situation, a fully legalized market may well be the only long-term solution, and so officials would do well to preempt the downsides of that model with strong national regulations, which can prevent a regulatory race to the bottom among states. This point is well highlighted by Kleiman and his colleagues, who point to the case of interstate tobacco smuggling within the United States as a means to avoid individual state taxes.
Meanwhile, Jonathan Caulkins, a professor of public policy at Carnegie Mellon, warns that legalization of production and market forces could lead to a dangerous price drop and rising consumption. He points to data from the western United States in 2008, where wholesale prices under prohibition were around $3,500 per pound. At the same time, in the highly regulated small-scale medical cannabis production system in the Netherlands, cannabis sold for roughly $490 per pound. He suggests that under a highly commercialized large-scale production model, prices in the United States could decline by 90 percent. Assuming a straightforward interaction between price and demand (a significant assumption), one might expect potentially large increases in consumption under legal regulation.
Others place more faith in the ability of governments to tax and regulate the substance, thereby mitigating the price differential between the licit and illicit markets, and diverting the returns toward government rather than criminal coffers. The evidence from Colorado is clearly encouraging from this perspective. On February 27, the state’s Department of Revenue's Marijuana Enforcement Division released its first ever Annual Report. As Christopher Ingraham for The Washington Post noted, total state-wide cannabis sales hit $700 million in 2014, medical accounting for $386 million and recreational accounting for $313 million. Total tax revenue from the recreational and medical markets was $63 million, plus $13 million in licenses and fees. By 2016, it’s expected to be a $1 billion retail market, contributing $94 million in tax revenue annually—likely an understatement of the full economic contribution, as tourism and other retail sales related to cannabis are not counted.
Within Colorado, implementation has varied; twice as many Colorado jurisdictions opted out of allowing either retail or medicinal pot businesses as have permitted them. Yet around 58 percent of Colorado residents remain supportive of legalization, with 38 percent against. Meanwhile, the expected downsides have not emerged. Car accidents are stable and crime has fallen. The long-term consequences, such as the evolution of usage rates, remain to be seen, but it seems reasonable to subscribe to U.S. Attorney General Eric Holder’s assessment of being “cautiously optimistic” of the outcomes.
Legalization will also have some impact on producer and transit countries, especially if home-grown marijuana in the United States heavily displaces illicit imports from Mexico. A conservative estimate by RAND in 2010 suggested that 15–26 percent of Mexican drug trafficking organizations’ revenue is derived from cannabis. Although losing that business would not deal the groups a death blow, it would severely hurt their operations, including their ability to purchase weapons and bribe police and politicians. Further, farmers will lose the incentive to partake in this illicit market (although potentially seeking other illicit revenue sources). Anecdotal evidence suggests that the bottom may be falling out of the Mexican cannabis cultivation market. As one Mexican pot grower told NPR reporter John Burnett, “Two or three years ago, a kilogram [2.2 pounds] of marijuana was worth $60 to $90 … But now they're paying us $30 to $40 a kilo. It's a big difference. If the U.S. continues to legalize pot, they'll run us into the ground.”’
The challenges ahead are numerous. States will have to effectively regulate cannabis markets to maintain high prices, minimize rises in consumption, and successfully undercut the black market. It is too soon to tell whether legalization will be a boon or a bane, nevertheless, the more regulatory experiments out there, the more researchers will be in a position to build empirically sound arguments for and against types of legalization policies.