OLIVIA GINGOLD – APRIL 8TH, 2019
A new industry has been blazing a trail in our economy for the last five years or so. This industry? None other than the marijuana industry. Although cannabis has not yet been federally legalized, many states have already made the decision to legalize the plant in varying degrees within their borders. In 2012, Colorado and Washington were the first two states to legalize the use of cannabis. Thirty-three states have legalized cannabis for medical use alone, while ten have now legalized it for recreational use as well. Although cannabis is exclusively recreational for many, it also has a lot of potent benefits: medicine, cosmetic, and economic. Although use of cannabis sparks many talking points, the most pressing one is of its economic benefits.
Legalization on both national and local levels is expected to have a multitude of economic benefits. Taking cannabis off of the black market creates a plethora of public benefits. When weed is legalized, marijuana businesses that used to be run underground can be quickly formalized. This both creates revenue that was previously not captured by the taxes and expands the marijuana industry as more dispensaries are opened, increasing tax revenue even more. After Colorado legalized marijuana in 2012, sales shot up to $996 million, while tax revenue collected off of those sales was estimated to be about $135 million, accounting for more than 1% of Colorado’s total tax revenue of $10.5 billion. This was in Colorado alone. Considering the size and population density of other states like California or Texas, the revenues from this tax could be monumental.
Beyond the revenue that is accrued after legalization, the money saved is also significant—law enforcement costs go down because prosecuting marijuana users is no longer necessary. According to a report by the American Civil Liberties Union, states spend a combined $3.6 million a year on marijuana prosecution and law enforcement. According to a separate report by a Harvard professor, legalizing marijuana would save the government $7.7 billion a year in enforcement and prohibition costs; $5.3 billion of which would go to state and local governments, while the remaining $2.4 billion would be collected by the federal government.
On the private side, as part of the industry expansion that follows legalization, jobs are created to cultivate this cannabis. In a sixteen-month period, Denver saw more than a dozen new dispensaries open within their city limits, and in the two years since marijuana was legalized in Massachusetts, sixteen dispensaries have opened their doors. These dispensaries need people operating them, and thus in 2017, marijuana industry job postings increased by 445%, outpacing both the tech and healthcare industries. A report by New Frontier estimates that by 2020, the cannabis industry will have created more than a quarter million jobs for Americans as a result of recent legislative changes. From cultivation to working at dispensaries to being the CFO or marketing manager, the supply chain of marijuana is large and requires a significant number of people to make the industry run smoothly.
Legalization also offers significant opportunities for investment. Although cannabis remains illegal on the national market, investing in the industry has already become more and more accessible with opportunities available on both the well-known New York Stock Exchange and the Nasdaq. Even Vanguard Mutual Fund, the world’s largest mutual fund, owns $47 million in cannabis mutual funds. This goes to show that marijuana is promising enough that big name investors are not only willing, but eager to invest in cannabis. There has been a spike in marijuana-focused companies despite marijuana’s federal legal status, and the growth rate of the industry makes marijuana investment an attractive prospect. If it were to become federally legalized, investment opportunities would abound, and profits may not be far behind.
Legalizing weed is projected to have positive effects on economic growth, as well as save money on government expenditures and reduce inequality in America… but sometimes it’s easy to romanticize the outcomes. In reality, a lot of the benefits that legalizing marijuana was expected to create have not necessarily played out as such. Revenue hasn’t been nearly as high as expected, black markets are still operating in full force, dispensaries and other pot shops have not opened at anywhere near the rate estimated prior to legalization in states, and many critics worry about the increase in marijuana use (and abuse) that “Big Marijuana” has the risk of promoting.
A textbook example of this exact situation is in Boston, where marijuana was legalized two years ago. Today, over 75% of marijuana sales in Boston are still through the black market despite legalization. Marijuana users cite slow-opening, crowdedness, and inaccessibility of dispensaries as some reasons to buy on the black market instead. High prices are also a concern of marijuana users. On the other side of the business, pot dealers are not eager to formalize their sales either, because it requires complying to state and local laws and regulations. They would need thousands of dollars in lawyers, consultants, architects, and contracting to open a marijuana business. Negotiating contracts with local governments has been a burden, hurting Massachusetts’ ability to roll out pot shops at a more desirable rate.
California experiences another situation of falling short of what was expected after legalization. Post-legalization, revenue was expected to reach $1 billion, but fell short of this projection by more than 50%, only raising $471 million in a single fiscal year. Of the 6,000 shops that were expected to open in California, only 547 opened. Despite being legal throughout California, less than 20% of Californian cities actually allow recreational pot sales within their borders. Taxes also put pressures on the rare retailers who did have success opening recreational marijuana storefronts, forcing them to lay off workers, contract their businesses, or close their doors and return to the black market entirely. It can be seen how legalizing marijuana is easier said than done.
Beyond the limitations exhibited in California and Boston, there are also social fears that accompany legalizing marijuana. States that legalized marijuana—recreationally or medicinally—consistently saw increases in marijuana usage. They also saw an increase in binge drinking, which may or may not be linked to the increase in marijuana usage that followed. Others worry about the risks that rise, because of America’s historical inability to moderate consumer usage of substances and limit the power of big business to capitalize on consumers. The pull of for-profit marijuana has the potential to market too strongly to users, extorting heavy marijuana users who already have a drug problem, or even potentially pulling in underage consumers the way the Juul industry has. To limit these risks, it has been proposed that, instead of being legalizing for the commercial market, marijuana should be put it in the hands of state governments, limiting the for-profit nature of the industry without perpetuating the criminalization or affecting the potential returns.
While it is interesting to project and promote the potential boon that legalizing marijuana could be for the economy, real life case studies like California and Boston make it clear that these estimates do not capture the full picture. With that being said, this does not mean that marijuana legalization should not be considered—California still raised half a billion dollars that would not have otherwise been raised; states like Washington and Colorado have done what Boston could not, reducing black market sales significantly. Marijuana industries have the potential to create significant public and private benefits if explored and executed in the right way.
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Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
One of the problems with legalization is the “green rush” and the eyes on massive margins and huge profits. This mindset will have to subside if there is any way to stamp out the black market. Otherwise, it will continue to thrive.