Nip It in the Bud

Could Donald Trump be our best hope for sensible marijuana legalization?

With the approval of Proposition 64, which legalized the sale of marijuana for recreational use, California voters on November 8 created the world’s largest market for legal pot. Massachusetts also voted to legalize, giving marijuana entrepreneurs the green light to open stores that could serve customers from up and down the I-95 corridor. So did Maine and Nevada. While Colorado, Washington, Oregon, and Alaska had already legalized large-scale commercial production, marketing, and distribution, these latest votes will accelerate the scramble among other states to follow suit.

Part of what’s at stake is the tax revenues being generated by the burgeoning marijuana industry. In California, the state’s Legislative Analyst’s Office expects taxes on the drug to bring in on the order of $1 billion annually. But marijuana’s extreme portability—a year’s supply for a heavy user weighs less than a single bottle of beer—means that one state’s prohibition can easily be undermined by legalization in neighboring states. Unless the federal government intervenes, it won’t be long, perhaps less than a decade, before marijuana is legal in most states.

The problem with the state-by-state legislation process is that we are drifting into the worst possible form of legalization, one that imagines for-profit corporations to be effective guardians of public health. The danger in entrusting supply to for-profit businesses, as every state with legal marijuana (but not the District of Columbia) has done, is that most of their profits will come from exploiting a small number of problem users. Already, 80 percent of sales are to daily and near-daily users; half of all sales are to people with substance use disorder, or SUD, the clinical term for a range of problems arising from heavy drug and alcohol use. Occasional users, who make up a majority of pot customers, account for only a modest share of sales, but may provide political cover for an industry that gets rich supplying people who struggle with self-control. The damage to public health will be substantial.

The federal government can put a stop to this ill-advised trajectory. That’s because all of the industry’s activities, even if legal under state law, are prohibited by the federal Controlled Substances Act (CSA). Federal agents could arrest the owners of these businesses at will if President-elect Trump were to reverse President Obama’s policy of not enforcing the CSA against state-legal marijuana enterprises.

A premise of that policy, which was announced in the Department of Justice’s 2013 “Cole Memo,” was that states should be “laboratories of democracy,” free to innovate and experiment until the best policies emerge. But that theory is a poor fit for marijuana regulation, because America is one interconnected national market, not fifty islands with impermeable borders. (Alaska and Hawaii excepted.) And with their shared reliance on a for-profit
model, the states don’t appear interested in real innovation. As we’ll see, there are other, superior approaches that states are not pursuing.

It’s hard to know what position the new administration will take toward marijuana. Trump’s nominee for attorney general, Alabama Senator Jeff Sessions, has called consistently for enforcing prohibition. But Trump himself said repeatedly during the campaign that legalization should be decided at the state level. The ideal solution may be somewhere in between.

It would be unfair to let investors pour billions of dollars into developing new products, securing celebrity endorsements, building internationally recognized brand names, and paying for product placement in movies and television shows—only to then say, “We changed our mind. We don’t want for-profit businesses promoting consumption after all.” That’s why the Trump administration should act immediately to rein in the most pernicious consequences of for-profit legalization before the growing power of the for-profit industry takes other options off the table.

A commercially driven marijuana market would create public health challenges for the same reason that some users may welcome it: radically lower prices. Companies will be happy to promote ubiquitous, cheap marijuana to all types of consumers, and studies show that when prices fall, both use and abuse rise.

Before policy began to liberalize, high-quality domestically produced cannabis—the proper name for the marijuana plant—sold at wholesale for around $6,000 per pound. By November 2016, the Cannabis Benchmarks Spot Price Index, a commodities index for the American market, had fallen to $1,400 per pound. Aphria, a Canadian producer, reports production costs of $400 to $700 per pound in U.S. dollars at current exchange rates.

Prices could fall much lower as modern industrial agricultural practices fully displace artisanal cultivation. Unlike exotic mushrooms or finicky citrus trees, cannabis is a pretty ordinary crop—harder to grow than dandelions, but not as tricky as orchids. Aphria now produces sixty grams per square foot in its greenhouses. If production costs fell to those of tomatoes grown in greenhouses—roughly $4 per square foot—that would be only $30 per pound. Outdoor production costs could be even lower.

The problem with state-by-state legalization is that we are drifting into the worst possible system, one that imagines for-profit corporations to be effective guardians of public health.

That is spectacularly cheap. If a half-gram joint produces a two-and-a-half-hour high, then a pound could fuel 2,250 hours. At $30 per pound, that translates into about a penny per hour of being high. (Of course, lower prices will lead some users to use much more at a time, which doesn’t translate into a proportionally longer high, so this ratio could go up a bit. But it would still be pennies per hour.)

Processing will add only modestly to cultivation costs. Tobacco is in many ways a similar kind of crop, and receiving, grading, stemming, and drying tobacco costs less than $1 per pound. Labor-intensive steps could be offshored to countries with lower wages, letting the domestic industry focus on concentrates (e.g., vaping, edibles, and dabs), whose production is easy to automate. It is unclear how much the extraction of cannabinoids, the psychoactive ingredients in cannabis, would cost when done at scale, but it may be analogous to decaffeinating coffee beans, which only costs a few dollars per pound.

Even if processing pushed costs up from $30 per pound for cultivation alone to $45 per pound all-in, that is still just ten cents a gram before taxes, compared to current retail prices of $10 to $15 per gram.

No doubt stores will always sell high-priced, hand-cultivated, organic marijuana to rich and discerning customers, just as they sell bottled water and fancy chocolates. But if a company can produce marijuana for $45 a pound, it would make a terrific profit letting Amazon deliver $10 ounces to users’ doorsteps. Grocery stores survive on much thinner margins, and convenience stores could sell at a loss to increase foot traffic for junk food. Restaurants buying in bulk might pay no more per joint than they now pay for mints, creamers, and other customer freebies. If joints increased customers’ appetites, they might be comped like salty nuts at a bar.

Industrial agriculture could cut the retail price of pot to just ten cents a gram, compared to current prices of $10 to $15 per gram. Studies show that when prices fall, both use and abuse rise.

Rock-bottom prices are a boon for most consumers, but not for those struggling with self-control. Imagine a friend whose difficulty saying no to dessert leaves him unhappily overweight. Now imagine that the production costs of sugar, butter, and chocolate plummeted, so your friend could order unlimited dessert for fifty cents a day. Would your friend be better off?

From the point of view of doctrinaire market economists, yes. They would note that your friend could eat exactly as before, but save money. Yet many of us have said yes to a free dessert that we wouldn’t have ordered, or to a cookie from a passed plate that we wouldn’t have bought, then stood regretfully on the bathroom scale the next morning. Sometimes high prices protect us from over-indulging.

Most people who use marijuana use very little, and do so happily, but the smaller number of high-frequency users dominate consumption. The National Survey on Drug Use and Health and other data show that fully one-third of past-year users are adults who use fewer than ten times per month, yet they account for just 2 percent of consumption. Twenty-five times as much is used by people who have SUD, a history of treatment, or both (46 percent of the total), categories of use that most people would prefer not to encourage via lower prices. Some daily users just smoke a little each evening. That’s not a problem, but a little more than half of all the marijuana is consumed by people who spend more than half of their waking hours under its influence.

There are other public health risks as well. Marijuana smoke contains carcinogens. Marijuana-infused edibles and beverages are more prone to over-consumption, especially the candies and sodas that appeal to youngsters. Many vaping pens are shoddily made, exposing users to heavy metals, and the unregulated production of hash oils often leaves behind nasty solvents. There’s also an open question about the impact of marijuana use on the use of other substances. The current evidence is split right down the middle for the indirect effects of marijuana on alcohol. For tobacco, it suggests complementarity: past changes that increased marijuana use also triggered greater use of tobacco. There are a few peer-reviewed articles suggesting that increasing the availability of medical marijuana reduces problems with opioids, but this debate is far from settled.

Some hope that legalization would attract enough new controlled users to reverse that pattern, but the math doesn’t add up. Suppose every one of the 200 million American adults who do not currently use marijuana joined the “fewer than ten times per month” category. That market segment would swell to 90 percent of all users, but it would still account for less than one-third of consumption even if there were no increase in problem use. And low prices would almost certainly increase use by those already suffering from SUD and would tip others into that group. Indeed, the evidence suggests that younger and more frequent users are more price sensitive than occasional users, not less.

Since no nation has ever legalized a commercial marijuana industry, there is enormous uncertainty about how it will play out. But the best guess is that a competitive industry could deliver marijuana at shockingly low prices, and approximately half of the resulting increased use would be by people already struggling with SUD.

In theory, taxes might be used to prop up prices. A tax of $5 per gram, for example, could keep prices from falling by much more than another 50 percent.

No individual state, however, could collect such a tax. Five dollars per gram adds up to more than $2,000 a pound. Imposing that on producers would just send them—and the jobs they provide—scurrying to more industry-friendly states in a classic race to the bottom. At sixty grams per square foot, the roughly 6,000 metric tons of marijuana consumed annually in the United States could be grown on about 2,300 acres of plants. Compare that to the eighty-three million acres of soybeans planted by American farmers this year. You could fit the entire marijuana industry in Rhode Island with plenty of room to spare.

A retail sales tax is no more practical because smugglers would arbitrage price differentials with lower-tax states. Interstate variation in cigarette taxes already generates considerable smuggling even though the highest tax (in New York State) is only $4.35 per pack. A pack of cigarettes weighs twenty grams, so taxing marijuana at $5 per gram would be like trying to collect a tax of $100 per pack of cigarettes.

The federal government could impose uniform taxes, but its track record with using “sin taxes” to protect public health is abysmal. The federal cigarette tax is only $1.01 per pack, well below the state average, and most federal alcohol excise taxes remained unchanged from 1951 to 1991, a period during which inflation eroded their real value by 80 percent. (They were finally increased, but are still only about a nickel on a can of beer.)

To keep marijuana prices reasonably stable, taxes would have to increase sharply over time as production costs fall. The federal government typically does not have the backbone to tax popular industries. Nor is it nimble at adjusting rates in response to changing circumstances. Ideally, Congress would delegate the setting of tax rates to an independent commission staffed by public health experts. However, the Constitution’s Origination Clause could be a complication, since it requires all tax bills to start in the House of Representatives. At any rate, Congress may be loath to give up such powers. (The power to not impose high taxes is the power to receive generous campaign donations.)

Thinking carefully about how to best tax marijuana merits its own full analysis, but the bottom line is clear. Getting taxes right is hard, and it is probably wrong to expect the government to successfully tax its way out of a flood of cheap marijuana.

The solution to this dilemma is straightforward: keep for-profit industry out of the market. There are better ways to legalize; the key is choosing wisely who gets to produce and sell. No amount of regulatory Band-Aids can make up for picking the wrong market structure.

The most cautious approach would be to legalize only possession, use, home-growing, and gifting of limited quantities—but not sales. Extending this to small groups has been called a co-op or “cannabis club” model, variations of which exist in Spain, Belgium, and Uruguay. The idea is that a limited number of people (say, thirty) can pool their home-growing privileges so that those with green thumbs can grow for others, but with no distribution outside of the group. This would allow people to enjoy pot legally without enabling industrial-scale production. The disadvantage is that it would only displace most, not all, of the black market, and it would generate little or no government revenue.

Another option would allow the sale of marijuana only by small nonprofit organizations. This would allow artisanal, but not industrial-scale, production and marketing. The best version would require the organizations’ charters to define their mission as meeting existing demand, to undercut the black market, without promoting new demand. Boards should be required to include people from the public health and child welfare communities to reduce the risk that they morph into quasi-corporations the way some nonprofit hospital chains have.

A third option would allow private-sector growing and retailing but interpose a government monopoly on distribution. If growers could only sell to that government monopoly, and retailers could only buy from it, then the government could set prices, control quality, and even establish packaging requirements. For example, if the government refused to buy products that were not in plain-paper packaging, there would be no incentive for producers to create or market brands that would promote consumption or appeal to children.

There are further options, each with its own pros and cons, but all of them would be better than creating a commercial, for-profit industry.

Congress will eventually need to codify a national policy into law. But absent some federal intervention by the time it gets around to doing so, for-profit industry will already be the facts on the ground. That means the only chance to avoid opening the door to the eventual rise of Big Marijuana is for the Trump administration to use its existing legal authority to freeze development of the commercial model in its tracks. Luckily, that would be easy: while the Obama administration chose not to exercise this authority, President Trump could unilaterally decide that co-ops are okay but for-profits are not, and direct federal law enforcement to shut down any new licensees that operate as for-profit businesses, and any current licensees that expand their sales.

The only chance to avoid opening the door to the eventual rise of Big Marijuana is for the Trump administration to use its existing legal authority to freeze development of the commercial model in its tracks.

Corralling businesses that are openly violating federal law is simple, even though eradicating the black market is not. For the price of a stamp, a U.S. attorney could simply notify any licensed marijuana business that the Controlled Substances Act empowers the government to seize its property and assets unless they cease operation. The George W. Bush administration used this tactic against medical dispensaries that were suspected of diverting to the black market. More recently, Washington State used its analogous in-state authority to shut down 100 of its dispensaries to complete the transition to its new, regulated, state-legal regime.

It’s always troubling when the president, whether Democrat or Republican, essentially legislates by refusing to enforce a constitutional law. But in the case of pot, the train is out of the station—strictly enforcing the federal marijuana ban in states that have legalized could trigger a backlash. Given the realities of growing state-level legalization and congressional inertia, President Trump should do what’s necessary to create the best chance of getting sensible nationwide policy when Congress finally gets around to passing federal legislation.

The goal is not to punish but merely to deter for-profit expansion. A state-legal enterprise that sold no more in 2017 than it sold in 2016 would be left alone; one that sold more would be shut down. When and if Congress reached a firm decision against allowing commercial enterprises, then existing for-profits could be given some reasonable amount of time to liquidate or convert into nonprofits.

Trump could also use the CSA to close loopholes in state laws and set national standards for minimally acceptable behavior. I would recommend shutting down stores that sell marijuana-infused candies whose names and packaging mimic conventional candies (“Pot Tarts,” “Kif Kats,” “Hasheys” chocolate, and so on); these products create an intolerable risk of overdose for children who are too young to read. I would also ban products that mix marijuana with tobacco, nicotine, or alcohol. While users outside North America often roll tobacco into their marijuana joints, letting Big Tobacco spice up tobacco cigarettes with marijuana or letting marijuana companies make their products more addictive by adding nicotine seem like very bad ideas.

National marijuana legalization is coming. If we leave it to the states, it’s going to happen in the worst way possible. With spin from advocates and industry lobbyists, this complex policy topic has been oversimplified into a simple yes-or-no question. Hiding the nuances helps industry, because the default alternative to prohibition is to “regulate like alcohol,” which means allowing for-profit corporations, national brands, marketing, and all the ensuing problems. That approach will mint millionaires, but it will also harm millions of Americans who suffer from substance use disorder.

Marijuana may not be as dangerous as alcohol, but it’s not an ordinary commodity, either; its consumption is dominated by daily and near-daily users, many of whom are suffering from SUD. They need to be protected from corporations seeking to get rich by exploiting their compromised self-control.

It might be difficult to imagine that the Trump administration would make marijuana regulation a priority, but the “law and order” inclination of some of his inner circle—including his nominee for attorney general—could persuade him to take action to limit the widespread availability of marijuana. If he does choose to act, Trump’s window of opportunity to make legalization happen in a better way will be brief. He needs to seize it.

Jon Caulkins

Jon Caulkins is the coauthor of Marijuana Legalization: What Everyone Needs to Know.