Half-Baked Economics

June 22, 2005

Idan Ivri, LA City Beat

This spring, a few months before the Supreme Court ruled in Raich v. Gonzalez that the Federal government has authority over state marijuana laws, a high school economics lecture broke out in the courtroom. Justice John Paul Stevens wanted to know whether the medical marijuana marketplace would affect the price of pot on the black market. 

Attorney Randy Barnett for Angel Raich equivocated, “Well, it would reduce demand and reduce prices, I think. But –” Justice Stevens interrupted: “If you reduce demand, you reduce prices? Are you sure?” Barnett answered “Yes.” Laughter swept the courtroom. Stevens added: “Oh, you’re right. You’re right. Okay. Yeah. Yeah.”

As it happened, the question loomed large in the court’s final opinion this month. At first, it seems like a simple matter of common sense: Sick people stop buying marijuana illegally because they can get it from their dispensaries. Substitute widgets or hamburgers or bicycles for weed, and your 11th grade econ textbook dictates what happens next: Less demand in the market (in this case the black market) means more unsold supply, meaning lower prices (for marijuana) across the nation, which undermines the federal government’s power to regulate interstate commerce/ban drugs.

The Court found that Congress had a “rational basis” for believing the scenario above was real, and that’s all it took to overpower state laws.

But dig just a bit deeper and some bizarre paradoxes of applying regular economics to black markets emerge. For example, the Supreme Court assumed (and common sense tells us) that the aim of government laws on marijuana is to keep the price of illegal pot as high as possible. But the corollary to the “low demand drives low prices” drug model is that everyone who smokes pot illegally is actually contributing to the government’s anti-drug effort by pushing its price higher. Huh?

UCLA Professor Mark Kleiman, an expert in drug control policy, has a different theory – albeit one that’s not particularly well known in policy, judicial, or academic circles. According to Kleiman, the dominant driver of illegal drug prices is actually the supplier’s costs of evading the police.

In other words, the government spends billions of dollars hunting down drug growers and dealers, and the user pays handsomely to make it worth their while. And, crucially, the fewer dealers risking getting busted out on the streets, the greater the chances of any one of them getting caught, and the more they’ll charge you for drugs.

In the Raich case under Kleiman’s model, it’s entirely rational to believe the opposite of what the court found – that a partial legalization scheme (licit medical marijuana) would actually increase the price of the drug on the street. With no sick people buying from the dealers, there would be fewer dealers in business and cops would find it easier to bust the remainder.

“Other things equal, if the enforcement pressure on the market [stays] the same and now the market [is] smaller, there is a little more enforcement pressure per gram, and therefore you would expect the price to go up, not down,” Kleiman told CityBeat. In other words, it’s possible that legal medical marijuana would actually strengthen the Federal ban on recreational marijuana.

In a more simplistic form (e.g. “Cops should spend time catching the real criminals!”), pro-marijuana advocates have been making the case for years.

“I think [medical marijuana prosecutions are] a shameful waste of valuable resources and really a violation of what the people of the state of California wanted when they passed Proposition 215,” said Bruce Margolin, an attorney and director of Los Angeles NORML, referring to the initiative that legalized medical marijuana in 1996.

Unsurprisingly, police officers point to the added efficiency of the old all-or-nothing approach to pot smokers. “Because there is now a fine line between a legal operation and an illegal one, it takes more police resources, a lot of paperwork, things we wouldn’t normally be involved in having to prove,” said LAPD spokesman Lt. Paul Vernon. “That takes more work, not less.”

The implication is that by increasing the confusion among cops enforcement in general would be weakened. And that’s just the official line, reserved for inquiring reporters. In reality, the current system of partial legalization may be even less popular among police. “[Marijuana laws are] enforced at the local level by local cops and local sheriffs,” said Teresa Schilling of the California Attorney General’s office.

“They are sworn to uphold the law and many of them do feel duty-bound to enforce federal law [as well],” Schilling admitted. Of course, marijuana has no medical uses whatsoever according to the Feds.

Kleiman predicted Vernon’s counterargument about the extra paperwork to the letter, and he’s also quick to concede that the number of users of medical marijuana may not be enough to free up significant police resources. “I’m not 100 percent clear that the effect I described would happen,” said Kleiman, “But at least it’s clear that the knee-jerk [supply and demand] argument doesn’t hold up.”

More research is in order. New identification cards could obviate the extra headache that law enforcement agents feel trying to sort out who’s sick and who’s not. “In San Francisco County they are open about how they want to set up their system. A lot of [dispensaries] have their own identity card systems, and there’s an effort to create a state program,” said Schilling.

The LAPD and other law enforcement agencies worry that extra pot will turn up in the black market. Lt. Vernon said the LAPD will take action if “they can be linked to specific crime in the City of Los Angeles, [including] street sales of marijuana, and association with gang crime or street crime or violent crime.”

Two recent busts suggest the LAPD is serious. The Compassionate Caregivers dispensary on La Brea was the scene of 14 arrests in May, and the LAPD confiscated $186,000 from the United Medical Caregivers Clinic (UMCC) on Wilshire. Bruce Margolin of NORML is representing Compassionate Caregivers and disputes any wrongdoing on the employees’ part.

But both Margolin and Kleiman pointed out that medical marijuana is expensive compared to the going rate of the drug on the street, limiting the danger of leakage. “Certainly it is the case that some producers might decide to conceal their sales of purely illicit cannabis under production for the [medical] market,” Kleiman said, “but it’s hard to see that that would matter much.”

“The places most receptive to the presence of [medical cannabis] clubs tend to be the places where strictly illicit cannabis is easiest to obtain,” Kleiman wrote on his web log prior to talking to CityBeat for this piece. “The ubiquity of the illicit cannabis supply … greatly reduces the impact of making it medically available.”

Still, even if the Supreme Court had had data showing that medical pot is unlikely to leak much, and even if California had a true medical marijuana ID system reducing the headache for patients and police, Kleiman still assumes the justices would have ruled the same way this month. The “rational basis” test is just too weak.

“The absence of particularized findings does not call into question Congress’ authority to legislate,” wrote Justice Stevens in the opinion. In other words, Congress doesn’t need to produce any actual proof that medical marijuana weakens the regulatory scheme, just a hunch. “We have never required Congress to legislate with scientific exactitude,” Stevens added.

“The congressional judgment that an exemption for such a significant segment of the total market would undermine the orderly enforcement of the entire regulatory scheme is … not only rational, but ‘visible to the naked eye,’” wrote Stevens confidently, raising the question of whether Supreme Court justices could use some free time at a UCLA public policy course or two.

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