A new Federal Reserve study conducted by Jason P. Brown, Elior D. Cohen, and Alison Felix looks at the consequences of legalizing marijuana. Here is the abstract:
We analyze the effects of legalizing recreational marijuana use on a country’s economic and social outcomes using the difference-in-difference measure between the robust mean over time and the treatment variable. We find moderate economic benefits associated with certain social costs. After enactment, the average income grew by 3 percent per capita, home prices by 6 percent, and the population by 2 percent. However, substance use disorders, chronic homelessness, and incarceration increased by 17, 35, and 13 percent, respectively. The first states that were legal had great economic benefits but similar social costs, showing the potential advantage of the first.
Tyler Cowen discusses this research at Bloomberg:
The researchers used appropriate statistical controls, but there is some question about causation versus correlation. At the very least, it seems likely that the country’s GDP will increase: A state with legal marijuana can sell it, including users in other states. Selling marijuana is a new business, and like any new business, it boosts the local economy.
Because of the problem of scientific replication, it makes sense to remain cautious with this type of research. But in this post, however, I will assume that their findings are accurate.
Let’s start with the fact that the relative gain in income is huge. To a non-economist, 3% may not sound like a lot, but it is. The US defense budget is about 3% of GDP, and you rarely see people describe defense spending as small. In contrast, the legal marijuana industry is small, accounting for less than 0.2% of GDP in California. Therefore, this huge increase in income cannot be created direct effect of adding legal pot to the state’s GDP. Instead, the legalization of marijuana appears to have produced strong externalities—some combination of making workers more productive and adding to the labor force. If true, that is a finding that we should “shout from the rooftops”.
Tyler has mixed opinions about pot legalization, and in his Bloomberg piece he emphasizes the negatives:
It would be difficult to use this latest research paper to convince people that more drugs should be legalized again. And I wouldn’t be surprised if other governments decide to end their legalization of marijuana. Unless you are a responsible user, how does it make you better? If you only look at the real issues, what is the case for approval?
Well, research says it leads to higher income. Well, that seems unlikely. But why are you citing the study?
A strong argument for legalizing pot is that it is cruel to jail people for selling or consuming pot. After legalization in California, the number of people arrested for marijuana offenses dropped significantly. On the other hand, the black market did not go away, and thus the benefits of criminal justice were much less than they should have been. That’s because pot remains illegal at the state level, and this greatly increases the cost of doing business. Additionally, states have adopted legalization as a way to encourage the continuation of the black market. There’s nothing special about marijuana that makes it easier on the black market than toasters or tee shirts. The black market is probably due to heavy regulation. (Contrary to popular wisdom, taxes are not the main problem.) The government may wish to restrict sales to people under a certain age and ban drunk driving. Otherwise, it is unclear why there should be regulation of the production and distribution of pot.
So what did we expect complete pot legalization? Here are my guesses:
1. Some increase in the population of the state, but probably less than 2%.
2. No significant change in per capita productivity or income.
3. Some increase in both total consumption and problem consumption.
4. A huge drop in crime and punishment, far greater than we have seen so far. The black market will be virtually extinct, except for resale to underage youth. (We would have an even smaller black market than cigarettes, with higher taxes than pot.)
(Note that points #1 and #2 are actually me more pessimism than the Fed course. I believe they outweigh the economic benefits.)
It is interesting to compare this list with the results of alcohol licensing. I suspect that alcohol has a much worse effect on productivity than pot. It appears that there is a problem with alcohol use rather than pot, and that the health costs are greater.
If society was determined to stop “bad things”, it would make sense to start by banning alcohol. Of course that test was tried, and the results were pretty much in line with the pros and cons mentioned above. Prohibiting alcohol reduced both consumption and problem use, and led to a dramatic increase in crime and punishment. The latter is clearly contrary to prohibition, while the former is ambiguous. Many people enjoy drinking alcohol, while heavy users suffer from serious side effects. I suspect that both the gains and losses from pot use are less than alcohol.
When I look at the proposals to ban products like alcohol, tobacco and pot, I see one major negative effect (more crime and punishment), and then there are other effects that are difficult to judge. In 1933, the US public rejected the prohibition of alcohol, and now it is starting to develop the same idea of banning pot—a policy with uncertain benefits and great losses.
PS. When I say “comprehensive” pot legalization, I mean federal legalization combined with state laws that are no more burdensome than beer sales laws.
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