How Not to Make a Hash Out of Cannabis Legalization

Amajority of Americans, and an overwhelming majority of those under thirty, now support the legalization of marijuana. This change in public opinion, which has been building for years but has accelerated of late, is now generating policy changes.

In 2012, voters in Colorado and Washington State endorsed initiatives legalizing not just the use of cannabis but also its commercial production and sale to anyone over the age of twenty-one. That goes further than the “medical marijuana” provisions that are now the law in twenty states. Nonmedical retail sales started on January 1 in Colorado and will begin in early summer in Washington. Similar propositions are likely to be on the ballot in 2014 and 2016 in as many as a dozen other states, including Alaska, Arizona, California, Nevada, and Oregon, and a legalization bill just narrowly passed in the New Hampshire House of Representatives, the first time either chamber of any state legislature has voted for such a bill. Unless something happens to reverse the trend in public opinion, it seems more likely than not that the federal law will change to make cannabis legally available at some point in the next two decades.

The state-by-state approach has generated some happy talk from both advocates and some neutral observers; Justice Louis Brandeis’s praise for states as the “laboratories of democracy” has been widely quoted. Given how much we don’t know about the consequences of legalization, there’s a reasonable case for starting somewhere, rather than everywhere. Even some who oppose legalization are moderately comforted by the fact that the federal government isn’t driving the process. “It’s best that this be done state by state,” said Pat Buchanan recently on The McLaughlin Group, “so you can have a national backlash if it doesn’t work out.”

But letting legalization unfold state by state, with the federal government a mostly helpless bystander, risks creating a monstrosity; Dr. Frankenstein also had a laboratory. Right now, officials in Washington and Colorado are busy issuing state licenses to cannabis growers and retailers to do things that remain drug-dealing felonies under federal law. The Justice Department could have shut down the process by going after all the license applicants. But doing so would have run the risk of having the two states drop their own enforcement efforts and challenge the feds to do the job alone, something the DEA simply doesn’t have the bodies to handle: Washington and Colorado alone have about four times as many state and local police as there are DEA agents worldwide. Faced with that risk, and with its statutory obligation to cooperate with the states on drug enforcement, Justice chose accommodation.

In August, the deputy U.S. attorney general issued a formal—though nonbinding—assurance that the feds would take a mostly hands-off approach. The memo says that as long as state governments pursue “strong and effective” regulation to prevent activities such as distribution to minors, dealing by gangs and cartels, dealing other drugs, selling across state lines, possession of weapons and use of violence, and drugged driving, and as long as marijuana growing and selling doesn’t take place on public lands or federal property, enforcement against state-licensed cannabis activity will rank low on the federal priority list. Justice has even announced that it is working with the Treasury Department to reinterpret the banking laws to allow state-licensed cannabis businesses to have checking accounts and take credit cards, avoiding the robbery risks incident to all-cash businesses.

That leaves the brand-new cannabis businesses in Colorado and Washington in statutory limbo. They’re quasi-pseudo-hemi-demi-legal: permitted under state law, but forbidden under a federal law that might not be enforced—until, say, the inauguration of President Huckabee, at which point growers and vendors, as well as their lawyers, accountants, and bankers, could go to prison for the things they’re doing openly today.

But even if the federal-state legal issues get resolved, the state-level tax and regulation systems likely to emerge will be far from ideal. While they will probably do a good job of eliminating the illicit cannabis markets in those states, they’ll be mediocre to lousy at preventing an upsurge of drug abuse as cheap, quality-tested, easily available legal pot replaces the more expensive, unreliable, and harder-to-find material the black market offers.

The systems being put into place in Washington and Colorado roughly resemble those imposed on alcohol after Prohibition ended in 1933. A set of competitive commercial enterprises produce the pot, and a set of competitive commercial enterprises sell it, under modest regulations: a limited number of licenses, no direct sales to minors, no marketing obviously directed at minors, purity/potency testing and labeling, security rules. The post-Prohibition restrictions on alcohol worked reasonably well for a while, but have been substantially undermined over the years as the beer and liquor industries consolidated and used their economies of scale to lower production costs and their lobbying muscle to loosen regulations and keep taxes low (see Tim Heffernan, “Last Call”).

The same will likely happen with cannabis. As more and more states begin to legalize marijuana over the next few years, the cannabis industry will begin to get richer—and that means it will start to wield considerably more political power, not only over the states but over national policy, too.
That’s how we could get locked into a bad system in which the primary downside of legalizing pot—increased drug abuse, especially by minors—will be greater than it needs to be, and the benefits, including tax revenues, smaller than they could be. It’s easy to imagine the cannabis equivalent of an Anheuser-Busch InBev peddling low-cost, high-octane cannabis in Super Bowl commercials. We can do better than that, but only if Congress takes action—and soon.

The standard framing of the cannabis legalization debate is simple: either you’re for it or you’re against it. Setting up the debate that way tempts proponents of legalization to deny all risks, while supporters of the status quo deny how bad the current situation is. Both sides deny the unknown. In truth, there’s no way to gauge all the consequences of adopting unprecedented policies, so it’s foolish to pretend to be 100 percent certain of anything. But it’s possible to guess in advance some of the categories of gain and loss from policy change, even if the magnitudes are unknown, and to identify the complete wild cards: things that might get either better or worse.

The undeniable gains from legalization consist mostly of getting rid of the damage done by prohibition. (Indeed, as E. J. Dionne and William Galston have pointed out, polling suggests that support for legalization is driven more by discontent with prohibition than by enthusiasm for pot.) Right now, Americans spend about $35 billion a year on illegal cannabis. That money goes untaxed; the people working in the industry aren’t gaining legitimate job experience or getting Social Security credit, and some of them spend time behind bars and wind up with felony criminal records. About 650,000 users a year get arrested for possession, something much more likely to happen to a black user than a white one.

We also spend about $1 billion annually in public money keeping roughly 40,000 growers and dealers behind bars at any one time. That’s a small chunk of the incarceration problem, but it represents a lot of money and a lot of suffering. The enforcement effort, including the use of “dynamic entry” raids, imposes additional costs in money, liberty, police-community conflict, and, occasionally, lives. Cannabis dealing and enforcement don’t contribute much to drug-related violence in the United States, but they make up a noticeable part of Mexico’s problems.

Another gain from legalization would be to move the millions of Americans whose crimes begin and end with using illegal cannabis from the wrong side of the law to the right one, bringing an array of benefits to them and their communities in the form of a healthier relationship with the legal and political systems. Current cannabis users, and the millions of others who might choose to start using cannabis if the drug became legal, would also enjoy an increase in personal liberty and be able to pursue, without the fear of legal consequences, what is for most of them a harmless source of pleasure, comfort, relaxation, sociability, healing, creativity, or inspiration. For those people, legalization would also bring with it all the ordinary gains consumers derive from open competition: lower prices, easier access, and a wider range of available products and means of administration, held to quality standards the illicit market can’t enforce.

To those real gains must be added the political lure of public revenue that comes without raising taxes on currently legal products or incomes. The revenue take could be substantial: legal production and distribution of the amount of cannabis now sold in the U.S. wouldn’t cost more than 20 percent of the $35 billion now being paid for it. If prices were kept high and virtually all of the surplus were captured by taxation, it’s possible that cannabis taxation could yield as much as $20 billion per year—around 1 percent of the revenues of all the state governments. Those are, of course, two big ifs. The current pricing and tax systems in Colorado and Washington, which between them account for about 5 percent of national cannabis use, won’t give taxpayers there anything resembling the $1 billion a year that would be their prorated share of that hypothetical $20 billion.

So much for the upside. What about the downside?

The losses from legalization would mainly accrue to the minority of consumers who lose control of their cannabis use. About a quarter of the sixteen million Americans who report having used cannabis in the past month say they used it every day or almost every day. Those frequent users also use more cannabis per day of use than do less frequent users. About half of the daily- and near-daily-use population meets diagnostic criteria for substance abuse or dependence—that is, they find that their cannabis habit is interfering with other activities and bringing negative consequences, and that their attempts to cut back on the frequency or quantity of their cannabis use have failed. (Those estimates are based on users’ own responses to surveys, so they probably underestimate the actual risks.)

And then, of course, there are the extreme cases. A substantial number of these daily users spend virtually every waking hour under the influence. Legal availability is likely to add both to their numbers and to the intensity of their problems. Jonathan Caulkins has done a calculation suggesting that legalization at low prices might increase the amount of time spent stoned by about fifteen billion person-hours per year, concentrated among frequent heavy users rather than among the more numerous Saturday-night partiers. Every year, hundreds of thousands of cannabis users visit emergency departments having unintentionally overdosed, experiencing anxiety, dysphoria, and sometimes panic. Presumably many others suffer very unpleasant experiences without seeking professional attention.

While a bad cannabis habit usually isn’t nearly as destructive as a bad alcohol habit, it’s plenty bad enough if it happens to you, or to your child or your sibling or your spouse or your parent.

Maybe you think the gains of legalizing marijuana will outweigh the costs; maybe you don’t. But that’s quickly becoming a moot point. Like it or not, legalization is on its way, unless something occurs to reverse the current trend in public opinion. In any case, it shouldn’t be controversial to say that, if we are to legalize cannabis, the policy aim going forward should be to maximize the gains and minimize the disadvantages. But the systems being put in place in Colorado and Washington aren’t well designed for that purpose, because they create a cannabis industry whose commercial interest is precisely opposite to the public interest.

Cannabis consumption, like alcohol consumption, follows the so-called 80/20 rule (sometimes called “Pareto’s Law”): 20 percent of the users account for 80 percent of the volume. So from the perspective of cannabis vendors, drug abuse isn’t the problem; it’s the target demographic. Since we can expect the legal cannabis industry to be financially dependent on dependent consumers, we can also expect that the industry’s marketing practices and lobbying agenda will be dedicated to creating and sustaining problem drug use patterns.

The trick to legalizing marijuana, then, is to keep at bay the logic of the market—its tendency to create and exploit people with substance abuse disorders. So far, the state-by-state, initiative-driven process doesn’t seem up to that challenge. Neither the taxes nor the regulations will prevent substantial decreases in retail prices, which matter much more to very heavy users and to cash-constrained teenagers than they do to casual users. The industry’s marketing efforts will be constrained only by rules against appealing explicitly to minors (rules that haven’t kept the beer companies from sponsoring Extreme Fighting on television). And there’s no guarantee that other states won’t create even looser systems. In Oregon, a proposition on the 2012 ballot that was narrowly defeated (53 percent to 47 percent) would have mandated that five of the seven members of the commission to regulate the cannabis industry be chosen by the growers—industry capture, in other words, was written into the proposed law. It remains to be seen whether even the modest taxes and restrictions passed by the voters survive the inevitable industry pressure to weaken them legislatively.

Reefer madness: On January 1, 2014, customers crowded into marijuana outlets in Colorado hoping to legally purchase the drug for recreational use for the first time. Credit: AP

There are three main policy levers that could check cannabis abuse while making the drug legally available. The first and most obvious is price. Roughly speaking, high-potency pot on the illegal market today costs about $10 to $15 per gram. (It’s cheaper in the medical outlets in Colorado and Washington.) A joint, enough to get an occasional user stoned more than once, contains about four-tenths of a gram; that much cannabis costs about $5 at current prices. The price in Amsterdam, where retailing is tolerated but growing is still seriously illegal, is about the same, which helps explain why Dutch use hasn’t exploded under quasi-legalization. If we too want to avoid a vast increase in heavy cannabis use under legalization, we should create policies to keep the price of the drug about where it is now.

The difficulty is that marijuana is both relatively cheap compared to other drugs and also easy to grow (thus the nickname “weed”), and will just get cheaper and easier to grow under legalization. According to RAND, legal production costs would be a small fraction of the current level, making the pre-tax value of the cannabis in a legally produced joint pennies rather than dollars.

Taxes are one way to keep prices up. But those taxes would have to be ferociously high, and they’d have to be determined by the ounce of pot or (better) by the gram of THC, as alcohol taxes now are, not as a percentage of retail price like a sales tax. Both Colorado and Washington have percentage-of-price taxes, which will fall along with market prices. In states where it was legal, cannabis taxes would have to be more than $200 an ounce to keep prices at current levels; no ballot measure now under consideration has taxes nearly that high.

Collecting such taxes wouldn’t be easy in the face of interstate smuggling, as the tobacco markets illustrate. The total taxes on a pack of cigarettes in New York City run about $8 more than the taxes on the same pack in Virginia. Lo and behold, there’s a massive illicit industry smuggling cigarettes north, with more than a third of the cigarettes sold in New York escaping New York taxes. Without federal intervention, interstate smuggling of cannabis would be even worse. Whichever state had the lowest cannabis taxes would effectively set prices for the whole country, and the supposed state option to keep the drug illegal would fall victim to inflows from neighboring states.

The other way to keep legal pot prices up is to limit supply. Colorado and Washington both plan to impose production limits on growers. If those limits were kept tight enough, scarcity would lead to a run-up in price. (That’s happening right now in Colorado; prices in the limited number of commercial outlets open on January 1 were about 50 percent higher than prices in the medical outlets.) But those states are handing out production rights for modest fixed licensing fees, so any gain from scarcity pricing will go to the industry and encourage even more vigorous marketing. If, instead, production quotas were put up for auction, the gain could go to the taxpayers. Just as a cap-and-trade system for carbon emissions can be made to mimic the effects of a carbon tax, production quotas with an auction would be the equivalent of taxes.

The second policy lever government has is information: it can require or provide product labeling, point-of-sale communication, and outreach to prevent both drug abuse and impaired driving. In principle, posting information about, say, the known chemical composition of one type of cannabis versus another could help consumers use the drug more safely. How that plays out in practice depends on the details of policy design. Colorado and Washington require testing and labeling for chemical content, but techniques for helping consumers translate those numbers into safer consumption practices remain to be developed. The fact that more than 60 percent of cannabis user-days involve people with no more than a high school education creates an additional challenge, one often ignored by the advanced-degree holders who dominate the debate.

The government could also make sure consumers are able to get high-quality information and advice from cannabis vendors. In Uruguay, for example, which is now legalizing on the national level, the current proposal requires cannabis vendors to be registered pharmacists. Cannabis is, after all, a somewhat dangerous drug, and both much more complex chemically and less familiar culturally than beer or wine. In Washington and Colorado, by contrast, the person behind the counter will simply be a sales agent, with no required training about the pharmacology of cannabis and no professional obligation to promote safe use.

A more radical approach would be to enhance consumers’ capacity to manage their own drug use with a program of user-determined periodic purchase limits. (See “A Nudge Toward Temperance.”)

All of these attempts by government to use information to limit abuse, however, could be overwhelmed by the determined marketing efforts of a deep-pocketed marijuana industry. And the courts’ creation of a legal category called “commercial free speech” radically limits attempts to rein in those marketing efforts (see Haley Sweetland Edwards, “The Corporate ‘Free Speech’ Racket”). The “commercial free speech” doctrine creates an absurd situation: both state governments and the federal government can constitutionally put people in prison for growing and selling cannabis, but they’re constitutionally barred from legalizing cannabis with any sort of marketing restriction designed to prevent problem use.

Availability represents a third policy lever. Where can marijuana be sold? During what hours? In what form? There’s a reason why stores put candy in the front by the checkout counters; impulse buying is a powerful phenomenon. The more restrictive the rules on marijuana, the fewer new people will start smoking and the fewer new cases of abuse we’ll have. Colorado and Washington limit marijuana sales to government-licensed pot stores that have to abide by certain restrictions, such as not selling alcohol and not being located near schools. But they’re free to advertise. And there’s nothing to keep other states, or Colorado and Washington a few years from now, from allowing pot in any form to be sold in grocery stores or at the 7-Eleven. (Two years before legalizing cannabis, Washington’s voters approved a Costco-sponsored initiative to break the state monopoly on sales of distilled spirits.)

To avoid getting locked into bad policies, lawmakers in Washington need to act, and quickly. I know it’s hard to imagine anything good coming out of the current Congress, but there’s no real alternative.

What’s needed is federal legislation requiring states that legalize cannabis to structure their pot markets such that they won’t get captured by commercial interests. There are any number of ways to do that, so the legislation wouldn’t have to be overly prescriptive. States could, for instance, allow marijuana to be sold only through nonprofit outlets, or distributed via small consumer-owned co-ops (see Jonathan P. Caulkins, “Nonprofit Motive”). The most effective way, however, would be through a system of state-run retail stores.

There’s plenty of precedent for this: states from Utah to Pennsylvania to Alabama restrict hard liquor sales to stateoperated or state-controlled outlets. Such “ABC” (“alcoholic beverage control”) stores date back to the end of Prohibition, and operationally they work fine. Similar “pot control” stores could work fine for marijuana, too. A “state store” system would also allow the states to control the pot supply chain. By contracting with many small growers, rather than a few giant ones, states could check the industry’s political power (concentrated industries are almost always more effective at lobbying than those comprised of many small companies) and maintain consumer choice by avoiding a beer-like oligopoly offering virtually interchangeable products.

States could also insist that the private growers sign contracts forbidding them from marketing to the public. Imposing that rule as part of a vendor agreement rather than as a regulation might avoid the “commercial free speech” issue, thus eliminating the specter of manipulative marijuana advertising filling the airwaves and covering highway billboards. To prevent interstate smuggling, the federal government should do what it has failed to do with cigarettes: mandate a minimum retail price.

Of course, there’s a danger that states themselves, hungry for tax dollars, could abuse their monopoly power over pot, just as they have with state lotteries. To avert that outcome, states should avoid the mistake they made with lotteries: housing them in state revenue departments, which focus on maximizing state income. Instead, the new marijuana control programs should reside in state health departments and be overseen by boards with a majority of health care and substance-abuse professionals. Politicians eager for revenue might still press for higher pot sales than would be good for public health, but they’d at least have to fight a resistant bureaucracy.

How could the federal government get the states to structure their pot markets in ways like these? By giving a new twist to a tried-and-true tool that the Obama administration has wielded particularly effectively: the policy waiver. The federal government would recognize the legal status of cannabis under a state system—making the activities permitted under that system actually legal, not merely tolerated, under federal law—only if the state system contained adequate controls to protect public health and safety, as determined by the attorney general and the secretary of the department of health and human services. That would change the politics of legalization at the state level, with legalization advocates and the cannabis industry supporting tight controls in order to get, and keep, the all-important waiver. Then we would see the laboratories of democracy doing some serious experimentation.

Could such a plan garner enough support in Washington to become law? Certainly not now, given a dysfunctional Congress, an administration with no taste for engaging one more culture war issue, and in the absence of a powerful national organization with a nuanced view of cannabis policy and the muscle to make that view politically salient. But there is a mutually beneficial deal waiting to be made. Though legalization has made headway in states with strong initiative provisions in their constitutions, it’s been slow going in other states in which legalization has to go through the legislature, where anti-pot law enforcement groups can easily block it. So it could be many years before legalization reaches the rest of the country or gets formal federal approval that removes the stigma of (even unpunished) lawbreaking from cannabis users. Rather than wait, legalization advocates might be willing to accept something short of full commercialization; some of them actually prefer a noncommercial system. Meanwhile, those who have been opponents of legalization heretofore might—with the writing now on the wall—decide that a tightly regulated and potentially reversible system of legal availability is the least-bad out-come available.

The current political situation seems anomalous. Public opinion continues to move against cannabis prohibition, but no national-level figure of any standing is willing to speak out for change. That’s unlikely to last. Soon enough, candidates for president are going to be asked their positions on marijuana legalization. They’re going to need a good answer. I suggest something like this: “I’m not against all legalization; I’m against dumblegalization.”