The scorecard for pot legalization

A new study from the Federal Reserve by Jason P. Brown, Elior D. Cohen, and Alison Felix looks at the effects of marijuana legalization. Here’s the summary:

We analyze the effects of legalizing marijuana for recreational use on state economic and social outcomes, using difference-in-differences estimates that are robust to staggered timing and treatment heterogeneity. We find that moderate economic gains come with some social costs. After legalization, average state income per capita grew by 3 percent, housing prices by 6 percent, and population by 2 percent. However, substance use disorders, chronic homelessness and arrests increased by 17, 35 and 13 percent, respectively. Early legalizing states experienced greater economic benefits yet comparable social costs, implying a potential first-mover advantage.

Tyler Cowen discusses this study in Bloomberg:

The researchers used appropriate statistical controls, but there is some doubt about causality versus correlation. At the very least, it seems very likely that the state’s GDP has increased: a state with legal marijuana can sell it, including to users in other states. Selling marijuana is a new business, and like any new business, it stimulates the local economy.

Due to the replication crisis in the sciences, it is wise to remain cautious with this type of research. But in this post I will assume that their findings are correct.

Let’s start with the fact that the estimated income gain is huge. To a non-economist, 3% may not sound very big, but it is. The US defense budget is roughly 3% of GDP, and rarely do you see people labeling defense spending as small. In contrast, the legal marijuana industry is small, well under 0.2% of GDP in California. Therefore, this large increase in income cannot plausibly be attributed to the direct effect of adding legal weed to a state’s GDP. Instead, marijuana legalization appears to have produced some strong positive externalities – a combination of making workers more productive and increasing the workforce. If true, that is a finding that we should “shout from the rooftops.”

Tyler has mixed views on the legalization of marijuana, and in his Bloomberg piece he mainly emphasizes the negative:

It would be difficult to use this latest research paper to convince people that other drugs should be legalized as well. And I wouldn’t be surprised if some governments decided to end their experiments with marijuana legalization. How exactly are you better off unless you are a responsible user? If we look only at the practical issues, what is the case for legalization?

Well, according to the study, this leads to higher incomes. Yes, that seems unlikely. But why do you cite the research?

The strongest argument for legalizing marijuana is that it is cruel to send people to jail for selling or consuming marijuana. After legalization in California, the number of people imprisoned for marijuana crimes dropped dramatically. On the other hand, the black market has not disappeared, and so the benefits for criminal justice have been much less than they should have been. That’s partly because marijuana remains illegal at the federal level, and this significantly increases the cost of doing business. Furthermore, states have implemented legalization in a way that encourages the continued existence of a black market. There’s nothing special about marijuana that would make it more susceptible to a black market than toasters or T-shirts. The black market is almost entirely caused by burdensome regulations. (Contrary to popular belief, taxes are not the biggest problem.) The government may want to limit sales to people under a certain age and ban drunk driving. Otherwise, it’s not clear why there should be any regulation of marijuana production and distribution.

So what would we expect from it completely legalization of cannabis? Here are my guesses:

1. Some increase in a state’s population, but probably less than 2%.

2. No significant change in productivity or per capita income.

3. Some increase in both total and problem use.

4. A substantial decrease in crime and punishment, far greater than anything we have observed to date. The black market would be almost completely ended, except for resale to underage teenagers. (We’d have an even smaller black market than cigarettes, which are subject to higher taxes than pot.)

(Note that for points #1 and #2 I am too more pessimistic than the Fed’s investigation. I believe they exaggerate the economic benefits.)

It is interesting to compare this list with the effects of alcohol legalization. I suspect that alcohol has a much more negative impact on productivity than marijuana. It also seems likely that problematic alcohol use is more prevalent than marijuana use, and health care costs are higher.

If society were serious about banning ‘bad things’, it might make more sense to start banning alcohol. Of course, that experiment was tried, and the effects roughly matched the pros and cons discussed above. Banning alcohol reduced both consumption and problematic consumption, and led to a large increase in crime and punishment. The latter is a clear negative in relation to the ban, while the former is ambiguous. Many people enjoy consuming alcohol, while heavier users suffer quite serious consequences. I suspect that both the gains and losses from marijuana consumption are slightly lower than from alcohol.

When I look at proposals to ban products like alcohol, tobacco and cannabis, I see one huge negative impact (increased crime and punishment), as well as several other impacts that are difficult to assess. In 1933, the American public rejected alcohol prohibition and is now beginning to adopt the same view of marijuana prohibition: the policy leads to uncertain profits and enormous losses.

P.S. When I say “full” marijuana legalization, I mean legalization at the federal level combined with state laws that are no more onerous than the laws governing the sale of beer.