Harvard professor Jeff Miron is the go-to guy for pot tax quotes. The Miron Report is the mother of all poteconomics papers. Yet the author remains detached from his subject. For Miron, weed is “just another boring agricultural thing.” He defends his conservative estimate like it’s the Alamo. Then why do we like him so much? Find out, as we subject the longstanding activist to a merciless grilling.

Q.Do you have a state of Massachusetts medical marijuana card?
A.No.
Q.Do you have any favorite strains you’d like to share with us?
A.No, really, I don’t use. Ever. It never even occurred to me to get a medical marijuana card, because I simply don’t use.
Q.What problems are unique to projecting about potential marijuana taxation?
A.Well, the crucial figure in figuring out how much tax revenue we’d get is we don’t know the size of the market. It’s hard to determine the precise size of any economic market, especially if it’s underground. Of course you don’t have the standard ways of measuring it from, say, retail sales and things like that. So people have used other methods, which provide some orders of magnitude. But it’s subject to a lot more doubt.
Q.Speaking of the methods, over the course of the last decade, you’ve put out at least four or five reports. Have you lost track yourself?
A.I’ve sort of lost track! They’re also sort of variations on the initial theme. So they’re not so different from each other. Some have been just updates, some of them just expanded state vs. federal, and so on, but yes, something like four or five.
Q.Your conclusions have been remarkably consistent over that last decade, as I know that you’re aware. The overarching question I have is, as marijuana issues keep getting more press, as TV and movies keep portraying more marijuana, there’s an incredible amount of advertising, and there’s an incredible amount of publicity. Yet your report seems to not consider this at all. What am I missing?

A.Well if we take data on use rates, from any of the existing main surveys, there’s basically two main sources. One is conducted by the federal government, the National Household Survey of Drug Use (NSDUH), and then there’s something called Monitoring the Future (MTF), which is a survey of high school seniors, conducted by the University of Michigan.

So those give use rates for marijuana – reported use rates. Of course, those may be inaccurate in some ways. But those don’t show any dramatic changes up or down. They show some changes up or down, but it’s not as if they say we went from a 10% use rate to a 50% use rate or anything like that. So I think a lot of the fluctuations, whether the movies portray it one way or the other, is changing trends fast and not a reflection of changes in the underlying use. Or at least it’s plausible that it doesn’t bear much resemblance to the changes in underlying use.

I’ve stayed with the main estimate of the size of the market that I took from a report commissioned by the White House’s drug czar’s office, back in the late 1990s, published in 2001, and I’ve just taken that number, and I’ve updated it for inflation, and I’ve looked at whether maybe I should update it for use rates. I wanted to use their number for 3 reasons: first, I read the study, and it seemed like it made reasonable assumptions; second it’s an order of magnitude that seems plausible to me in the sense of how big a market they’re talking about compared to alcohol and tobacco. There are estimates around of the marijuana market that imply that it’s way bigger than the legalized alcohol and tobacco markets, and that doesn’t strike me as plausible.

I also wanted to use a number that is basically beyond criticism, OK, in particular beyond criticism from the White House drug czar office and the DEA, or other advocates of marijuana prohibition – that’s why I used their number, because I don’t want them to be able to say ‘you deliberately inflated the size of it to make a tax revenue estimates look bigger than they’re actually going to be.’ So, I think given that if anything I erred on the low side, I’m immune to that criticism.

Q.But Jeff, how long is the shelf life of that one ONDCP (Office of National Drug Control Policy) table you refer from 2000? You’ve given it a decade-long shelf life. Is there any outer limit to its shelf life?
A.Well, if we’ve sort of got data from the surveys suggesting that use rates from the overall population were not 10% but 20 or 25%, then absolutely then that number would have outlived any usefulness. But we don’t see that. We see fluctuations in use rates of a couple of percentage points, or even less over a long period. It seems to be relatively stable, just as alcohol use rates are relatively stable, and tobacco use rates are relatively stable. Until there’s something better, I will probably continue to use that, and I continue to read other people’s estimates, and think about whether or not I should change my view, and they maybe nudge me that I’m 20 or 50% too low, but they certainly don’t convince me that I’m off by a factor of 10, which is how different some of the estimates are out there from the numbers.
Q.Are you talking about the report by Max Chaiken?
A.That’s on the extreme end. That’s like 20 times bigger than my number. Then there are other reports from some researchers that are between 5 and 10 times bigger than my number. And if you want we can go into those details, but I think there are reasons to be very cautious about that order of magnitude.
Q.Getting back to the advertising and publicity. From an economic standpoint, I’m just curious. . . obviously marijuana’s a product that a lot of people want, correct?
A.Yep.
Q.Now Budweiser is a really good beer, people already want it, but they still advertise the heck out of it. Coke is a really good soft drink, people already want it, and they still advertise the heck out of it.
A.Right.
Q.It seems like you’re almost discounting the effects all the free advertising marijuana has received has had on consumption.

A.Well, I think there are a couple of things to say. One is that in some sense there already is a lot of advertising about marijuana. There’s the movies and the TV shows and the books and all that, that create obviously an awareness, and there’s all the anti-drug education that goes on in junior high schools and high schools. So every single student that goes through the schools is made aware of the existence of marijuana. They may be dissuaded; they may in fact be enticed by that anti-drug education. But there’s no scarcity of knowledge about the existence.

Second, advertising is expensive. Budweiser spends a lot of money selling something that is not much more than water. Same thing for Coke. And they get people to spend quite a bit of money on a product where the raw ingredients are not all that costly. That means they have to charge a high price, because they’re spending all the money on that advertising in addition to the amount they spend on materials. So I think that advertising of legalized marijuana would mean higher prices and that tends to discourage consumption. That also is a factor that limits rather than enhances the market.

But right now, all that advertising and publicity is free. Normally corporations that want that level of advertising and publicity would have to pay a fortune for it. Right now, it’s sort of naturally occurred. So to me, that’s a naturally occurring free boost.

Well if they’re getting a free boost now, indeed, if it became legal and there were a relatively small number of big suppliers of marijuana like Miller vs. Budweiser, or Phillip-Morris vs. RJ Reynolds, they would love for someone to ban advertising because then they could save all that money on advertising. But as long as policy allows advertising, you’re going to end up in kind of an arms race between rival suppliers of marijuana that are going to spend tons of money claiming that their product is better than their rival’s product.

That means the prices will be higher and that will limit the size of the market. That’s one of the reasons I don’t feel the price is going to go down that much, and in fact it might go up if you allow legal advertising of marijuana.

Q.I would imagine it would both go down and up – there will be Collectibility, and there will be commercial strains available.
A.And there will also be a broad range of product variety. So just as there’s more of less generic alcohol, it’s got a brand name on it but it’s basically rotgut, it’s not heavily advertised, and there are generic cigarettes, all those are low price, and there will be generic marijuana and there will also be the Budweiser equivalent of marijuana which will be way expensive relative to its raw ingredients. And most people seem to buy the branded stuff, the advertised stuff. And that’s a factor of limiting the market, not necessarily enhancing it.
The extent to which advertising is successful at getting people to smoke marijuana, some of that might come from reduced consumption of alcohol, but that means the tax revenues for alcohol go down, while the tax revenues for marijuana go up. That’s another reason to be cautious about thinking we’re going to get huge net increases in tax revenues from legalized marijuana.
Q.Speaking of big tax increases, why does your projection not include what Big Tobacco could make, what Big Agra could make, what Big Food could make? Why does it seem to be based on what individuals would pay, and not what corporations would kick in, in a legalized landscape?

A.My estimates do take account of all that. Given the size of the market that I estimate, and the dispute across different researchers who’ve looked at the tax revenue issue, I think it comes down almost entirely to how big the market will be, not to our assumptions about what the price rate would be, not to our assumptions about how the market would adjust. It’s what do you think the size of the market is compared to how it would change?

My estimates include that there would be standard business taxes, employment taxes, income taxes and all that, and we would collect a fraction of that that is equal, or a bit higher, than the fraction we collect from existing legalized industries. So 30% is a nice round number representing what tax revenue is, relative to economic activity, relative to the GDP. And I assume we have a special tax, an excise tax or a sin tax.

But I am taking account of all those factors. And I still think that they don’t add up to huge numbers, because I think that’s because it’s one product. If we look at the tax revenue we get from any product, no matter how popular, it’s maybe, maybe, tens of billions. But it’s not hundreds of billions.

Q.Will marijuana ever appear on the International Commodities Exchange?
A.It should! But I don’t know if it will, I can’t make that kind of a prediction.
Q.If it was legal, do you think pot would zoom to the top of the commodities charts?

A.No! I think we’re being from a tax revenue perspective a bit hopeful that somehow this is sort of a miracle commodity that’s going to overtake everything else. For example, you hear this statement all the time, that marijuana is the largest cash crop in California. I challenge anybody to discover the source of that statement. I’ve been hearing that statement for decades, and I bet whoever made that statement had zero data to back it up.

But even if there is, there are many many crops. And whether it’s a #1 cash crop or not is not the crucial issue, there’s wheat and corn and soybeans and all that stuff, and it just can’t be that big a deal cause it’s only one of zillions of things that any economy produces.

Q.Yeah, but is anybody opening avocado dispensaries?
A.Look, there are in effect Advil dispensaries, aspirin dispensaries, yes, those bring in some tax money. But they’re only one of zillions of pharmaceuticals. Marijuana would be one of many pharmaceutical products if you think of it that way. It would be one of many intoxicating products that would be available, including alcohol, if you want to think of it that way. So it’s very easy to get excited and think that it’s going to be huge, but a lot of that is double counting. For example, forgetting that the purchases of marijuana don’t come from nowhere, they come from shifting purchases from something else, so we’re going to get less tax revenue from other sources.
Q.Speaking of the pharmacy industry, why were they snoozing when the dispensary system was set up? Why didn’t they get that for themselves? Since we’re talking about obtaining something you need a doctor’s prescription for, they would seem to be a natural outlet. How did they miss that opportunity?
A.I don’t know. My guess is that they were betting that it was not going to become as big or as important as it seems it might actually turn out to be. And they don’t like the idea of being associated with a quote, “illegal drug,” and so they decided to stay away. A different explanation, of course, is that they don’t actually think there is all that much revenue available. And so it wasn’t in their interest to go near it, given as how it has some negative PR aspects. And, yes, this would be consistent with my view that this is a source of some revenue, but not unbelievable gobs of revenue.
Q.OK. Toward the goal of trying within reason to find some more revenue, I’m curious why the term ‘metric ton’ is absent from your reports, while it’s so prevalent in Gettman, who I know you’re familiar with, and Chaiken to name a few.

A.Oh, well, they sort of did the estimates in a slightly different way. Because I started with a dollar figure estimated by the ONDCP’s report, which in fact had been built up on data about grams, ounces, tons, etc. I never needed to use the data directly on the physical number of units.

I just had an estimate of the size of the market measured in dollars, then, using sort of standard microeconomics about the standardness of demand for product, as a function of the change in the price, could ask how much the price of the market could change. If the price went down, how much the revenue would be, if a certain tax were imposed then a certain tax rate. So those metric ton numbers are implicit in the approach that I’ve used. But given the source that I started with, I didn’t need to talk about them any further.

Q.Can we talk about sin taxes a little bit?
A.Sure

.

Q.Is there a difference between sin taxes and excise taxes?
A.Kinda depends on whether you think the commodity in question is good or bad. No, for economic purposes sin taxes and excise taxes are the same thing. Some people prefer the term sin tax because they want to send the message that this activity should be discouraged, and other people object to it because they don’t believe that government should be taking a stand on what’s sinful or not.
Q.Let me see if I have my numbers correct. I believe in your earlier report, in 2005, you mentioned a sin tax rate of 59% while in your 2010 report that shrunk to 50%. Is that right?
A.Yes, I think I used 50% in my most recent report.
Q.Are there any surveys that have been done to indicate whether that would be palatable to buyers and sellers?
A.I’m not aware of any surveys, but we have experience of excise taxes of at least that rate on alcohol and tobacco. And what we observe when we get taxes of that level in different jurisdictions, like where there’s a high cigarette tax in one state and a low cigarette tax in an adjacent state, people absolutely do some cross border shopping to avoid the high taxes.
When you’re looking at the level of the country as a whole, it seems to be possible to have 50, 60, 80% sin tax rates, without driving the market underground. That might be a bit surprising. It’s certainly an incentive for the underground market to develop if that rate gets high, but it also appears people want to buy from a legal supplier, and therefore you can impose a reasonably high sin tax without driving the market underground. That’s what experience from alcohol and tobacco seems to suggest.
Q.Because variety is very attractive, it seems people like going into a dispensary and choosing from different varieties, like they can choose from 30 different varieties of single malt scotch at a liquor store?
A.There’s a plus from having variety. There’s a plus from having a reputation of the seller, you’re pretty sure what you’re getting, you’re getting what you think you’re getting, not something that’s been adulterated or watered down. There’s the possibility of suing the manufacturer if it turns out to be something that it’s not professed to be, if it injures you in any way. You don’t have to go into a bad part of town, you’re not buying it from people who engage in criminal activity. People can grow their own tomatoes at much less monetary expenditure than going into the grocery store. But most tomatoes are purchased from groceries stores, not grown in the back yard. People seem to be willing to pay some premium for that.
Q.But you are giving a personal opinion that 50% sin tax would be palatable, there’s no particular data to support that, is that fair?
A.No, there are data. There’s the evidence from the other commodities. Economists consider data like that to be much more reliable than data from surveys. When people say this is something I’d do in a hypothetical situation, that may be a very noisy indicator what they would do in that situation, because they haven’t really thought through exactly how they would feel and what the real trade-offs would be when confronted with that. If we see that governments have imposed 50, 60, 80% tax rates, and not driven the market underground, that’s pretty strong evidence what the effect would be if we did that for some relatively similar commodity. So my view is definitely based on data, but a different kind of data on the surface.
Q.Well, would it be a valid criticism that you’re comparing marijuana, a drug with known therapeutic value with tobacco and alcohol? I guess someone could argue that a glass or two of wine is good for the heart, but there would generally be much less evidence of palliative effects.

A.Well, I could take the point that you just made, maybe people in an informal way view alcohol as having a therapeutic value, not necessarily because it’s preventing heart attacks, but just because it relaxes you, and makes it easier for you to enjoy a pleasant evening after a hard day at work and things like that.

Second, for marijuana users, I think there’s a broad range of the way in which people are using it therapeutically. In some cases, it’s clearly very similar to the way people use prescription pharmaceuticals for a very special condition with extreme sort of negative effects. In other cases, I think it is very much like a martini or a glass of wine at the end of the day. It’s helpful for relaxation, for calming, for putting you in a better mood. And so I think the distinction is not so clear-cut. In any case, I don’t see why that would affect the nature of the calculation.

The way economists think about it, at least, is what matters is your demand for a good. If your demand for a good is there, then you’re going to want to purchase it if it’s more convenient to buy it from a legal supplier. If you get more reliability from a legal supplier, then that’s going to make you willing to pay some sin tax, in order to have that convenience.

Now if it’s right that some sin tax would keep some of the market underground, that’s one more reason for us to think that the tax revenue we’re going to collect is moderate, not huge. If a lot of the market stays underground, then we don’t collect nearly as much in tax revenue, and I think that’s another reason to be cautious.

Q.OK. I know that you’re very cautious. You’re a courageous crusader for legalization, but you have a little dichotomy going on because when you talk about taxation, you’re easily the most conservative economist out there. That’s why I wanted to interview you. It fascinates me.

A.I don’t think it’s a dichotomy. But there’s another side of it, which is, whatever the amount is, whether the tax revenue for the country is $10 billion, or $50 billion or $500 billion – whatever number you want to assume for a moment. None of that should be the main reason to legalize marijuana. The crucial reason to legalize marijuana should be: why not? Why should the government be prohibiting something, harassing people, jailing people, for producing, consuming, selling something, unless there’s a compelling case that in doing any of those things people are harming innocent third parties. That’s the attitude toward alcohol that the country accepts.

So we certainly try to prevent people from using alcohol in ways that harm others such as driving a car when you’re under the influence. But we don’t criminalize the whole industry. We don’t make it illegal to produce it, sell it or consume it. We accept that the vast majority of people use alcohol in a way that is mildly beneficial, maybe somewhat beneficial if the heart benefits are substantial, but in any case, for the most part, not harmful to themselves or others.

And that’s why it’s a legal good and we only go after the irresponsible use. That should be the attitude, and that’s the reason to legalize marijuana even if it didn’t give us a single dollar in extra tax revenue or save us a single dollar of extra expenditure. It should still be legal for reasons of freedom and liberty, never mind any of these sort of economic arguments. So I don’t want what I think are the compelling reasons, the liberty arguments, to wind up being undercut by inflated, excessive, and possibly contaminated estimates of the economic benefits.

I think that makes the movement seem somewhat disingenuous. We’re kind of trying to sell people on this being a free lunch. It’s not a free lunch. Some people will misuse marijuana. Of course many of them are already doing that. I think the increase in people misusing marijuana will be very small. But we shouldn’t think that we’re getting some great big goose-that-laid-the-golden-egg benefit out of this. The benefit is letting people consume marijuana in peace.

Q With all that said – and I heard every word you said, you’re preaching to the choir – is there a magic number that could induce politicians to get off the fence? Is there a magic number that if you were a Republican from a red state you could get past the Nancy Reagan programming that you have? Everything has its price. Is there a magic number?

A.I have no idea if there’s a magic number. For some politicians that are relatively liberal, they represent liberal districts, they don’t necessarily need a big number, and their constituencies are with them already. For people who are in hard corps red states or red districts, I think there’s lots of fiscal conservatives who couldn’t care less whether the number is $10 billion, $50 billion, $100 billion. They think it’s evil, and they won’t put a price of anything evil.

There clearly are people in the middle, there are politicians in districts which have more of a mix, and I certainly talk to a lot of politicians who say, ‘Look, I need cover. I agree with you philosophically or morally, but I need an excuse to tell my constituents that I’m going to vote for this.’ And so yes, for some politicians, a big number maybe is helpful. But I don’t think that’s a reason to make the number bigger than my objection analysis of the economics suggests.

Q.That’s pretty much what President Obama says. He says the reason to make marijuana legal is not just to raise money.
A.But he hasn’t said that he’s in favor of making it legal?
Q.No, but he said that if it became legal, it wouldn’t be just to raise revenue.
A.I agree with that.
Q.I understand. Do you think that the President or Democrats in general are vulnerable to attacks from Republicans who take the “higher ground?” Would that be a good political strategy for them to adopt?

A.I think that for the Democrats to take on this issue, especially outside of California, is risky, because they want people in the middle, and if you think of independents broadly, they’re a very mixed group. I mean some Democrats are sort of Libertarians who would be great with this issue. But many independents are pretty socially moderate, maybe socially conservative, even if they’re not sort of hard corps religious right.

So I think that any Democrat in moderate states – the purple, instead of red versus blue – they would feel very nervous about this issue. Now they don’t have to address it yet. For the moment, it’s basically a California issue with the legalization initiative that’s on the ballot in November. But if I were a Democrat, I would just hope that this issue would go away.

Q.It seems to me it would be a great Republican strategy because it contains the element of surprise. What they do now, with their pro-life stance, they get a lot of people to vote for them who the rest of their program doesn’t serve. They vote Republican for that single issue alone.
A.Right.
Q.If I were them, I’d think, that if I came out in favor of legalization, how many people would vote red, based on that single issue alone, that wouldn’t normally vote that way?
A.But what if all those people who voted for you on your anti-abortion stance abandon you? And what if you’re from a district where that’s a significant fraction of your support? And what if the national party has no tolerance for any sort of deviation on this issue? So I think it takes a brave Republican to say. . . I think you kind of have to be either all in or all out. You can say I’m going to be a socially liberal Republican and a fiscal conservative, in other words I’m going to be basically a Libertarian. So I’m going to be pro choice and pro marijuana legalization. We don’t see too many politicians like that.
Q.What about Peggy Bachhiochi from Connecticut?
A.We see a few, but we don’t see very many. Gary Johnson is running on a platform being pro-choice and pro-marijuana legalization in the 2012 presidential election. There are a few others. But it’s a small set.
Q.Getting back to numbers again, I know you’re familiar with Jon Gettman cause you cite his report in your 2010 paper. The biggest difference between you, and I know you have mutual respect for each other. Is that a fair statement?
A.That’s a fair statement.
Q.He comes up with about $110 billion in sales where you’re at $11 billion. You both respect each other, you both worked really hard on your reports. How is there such a huge difference between you?

A.There’s a couple of reasons for the difference. First, I’m using a demand side estimate. There’s data from surveys on the amount that people use. He’s using that data and data from the supply side estimates of the amount seized, combined with some assumptions about what fraction of the market gets seized in a typical year – and those numbers turn out to be higher.

I think that the supply side numbers are very, very suspect, because they come from law enforcement, and law enforcement has a strong incentive to want to make it look as though they’re being very effective. They like to show up on the nightly news saying we seized 100 million pounds of marijuana. Frequently, when they estimate the weight, they’re looking at the entire plant, not just at the smokable part, so the plant is way big in terms of weight and they‘re looking at the wet weight, which is less relevant than the dry weight for estimating the size of the market.

So I don’t use the supply side stuff, and I think one should be very cautious on the supply side. When you get the demand side stuff, you get to a point where you have data on a number of users who say to the surveys “I am a daily user of marijuana.” And then you have to come up with an idea of how much daily use means. Does it mean smoking a puff a day, a joint a day, five joints a day?

I mean you have to make an assumption because you don’t have that data from those users. And, again, if I look at those assumptions that they’ve made, my guess is that many of the people who say they’re daily users are consuming way less than the amount they’re assuming is being consumed on average. So the demand-side estimates are higher than what seems plausible to me.

Q.Is there no way to factor in the incredible proliferation of dispensaries in areas where they’ve been allowed to go legal, like my own area in South Denver, which is mind blowing to me? I just moved here, there are 20 dispensaries I can walk to in 12 minutes, I mean my mind is blown. And then when I go visit my brother in LA, it’s the same thing. It seems to me you’re completely ignoring this reality. What am I missing?
A.Well, it’s certainly reasonable to try and get data from the dispensaries. I’m not aware that any of them are willing to supply data on their sales and the amount of pounds that they dispense.
Q.Let me give you an example. I went into a dispensary yesterday. I said, according to your business plan, if things go fairly well, how much tax will you paying during this year? And that one dispensary said $150,000. Just them. And you know how many dispensaries there are. I also didn’t see you account for license fees. There seems to be a lot of different rocks to turn over since you started writing your reports. If there wasn’t that one ONDCP table, would you have ever written a report?
A.If there was not that ONDCP, I would have probably tried to do something similar myself. The report for ONDCP was done by a consulting firm called Abt Associates. I could have tried to do the Abt analysis on my own. Secondly, I would have been somewhat tempted to take the supply-side estimates, but I would have discounted the magnitudes far more, by making adjustments for how much I feel they’re likely overstated in terms of wet vs. dry and considerations like that. In terms of the dispensaries, you need to know how much they’re selling is actually going out of state. So you could get a highly exaggerated result if in fact people are coming from other states adjacent to state who don’t.
Q.You have to have a medical marijuana card in the state you’re buying from dispensaries. You can’t use your license in other states.
A.Why can’t you? Why can’t someone from another state get a physician to write a script?
Q.Well, you can. But if you don’t already have that, you can’t just go to another state and buy from a dispensary.
A.But it seems pretty easy to go to a doctor and walk across the border, go to a doctor and get a prescription. They’re not going to check if the address you gave them is a correct address. I’m perfectly willing to look at dispensary data. But it would be useful to have a few years worth of data. And second, I don’t think the dispensaries have made it available yet, and partly, you have this issue that you don’t have taxes being imposed.
Q.Here dispensaries most certainly do pay taxes. I’m not sure about all the other states. Locally, they have to pay tax.
A.Is it a city tax or state tax?
Q.They pay a city tax and a state tax. And then they pay a lot of licensing fees. $5,000 just to get going. And how about all the tax revenue from people applying for medical marijuana cards? That’s not in your report.
A.No, that’s not in the report. I agree. But if we look at all the tax revenue you could collect. . .
Q.Please do!

A.. . . from any commodity, there still are limits. If we add more and more kinds of taxes, that directly goes to the concern that we’re going to drive the market back underground. I get criticized from both ends. When I say we’re going to have this legalized industry and collect taxes, bunches of people look at that and say, “oh, everyone’s that producing illegally is just going to stay underground,” in which case there’s no tax revenue. So I think the right answer is in between, as long as the taxation is moderate, it will come mostly above ground.

Of course there are still some individuals who will grow in their basements or their back yards or wherever. But just saying that we could impose all these kinds of taxes does start to beg the question of how much can you tax it before you drive it underground again?

Q.Have you seen any sort of natural job creation with all the dispensaries and all the different aspects of the dispensary craze? I don’t know how big it is in Massachusetts.
A.It’s not job creation, what it is, is job shifting. It’s people who were doing other jobs, then they go to work in a legalized job, and their job gets counted. Somebody who’d been growing a lot of pot in his back yard and spending a lot of time doing that, or has a plot in a national park or whatever, now knows it’s legal. And so he’s going to officially sell it to some marijuana dispensary or some legalized outlet. Then he will now legally report himself on his tax forms, on his surveys of the Bureau of Labor statistics that he’s employed as a marijuana farmer, whereas he didn’t before. But that’s not changing whether he’s employed. That’s just changing whether he’s officially employed.
Q.Do you think legalized marijuana would make farming sexy again?
A.Not for very long. I think it will become just a boring agricultural thing just like everything else. If it’s really legalized and treated like everything else, it shouldn’t be any sexier than anything else. I mean, after all, it’s basically a weed. So it not that sexy to grow a weed.
Q.Is predicting marijuana taxation the sole domain of economists, or could futurists make a contribution?
A.I guess I would put most of my weight on economists. I’m not sure what a futurist is, or what a futurist would add to the discussion. Other than I guess envisioning that we’d have a totally different society with much, much more marijuana use if marijuana were legal. I can’t prove that’s not going to happen, but I’m dubious.
Q.OK. Getting back to your reports, is there sort of an unwritten code that you have to depend on literature that came before you, and you’re really not allowed to futurize about anything? Is there some kind of guide, like a Hippocratic oath that you adhere to when you undertake a report, like your first report for the state of Massachusetts? How are you confined or restrained, or aren’t you?

A.You’re not confined or restrained to not do new things. What you’re constrained by, if you want to still be an economist, is to use the methodology that economists accept. Meaning, in terms of how big the marijuana would be, we look at basically the degree in which changes in price affect the amount consumed. We try to look at how much the price is likely to go down based on evidence from comparing different places with different marijuana rations, and so our forecast of what the marijuana market would be is based on that, not on some hypothesis that if it were legal, there might be five times as many users.

Our hypothesis, our view is, our framework is the change in the amount consumed, the change in the number of users would be governed by the change in the price, OK, and that seems to imply, based on the kinds of data that we’ve looked at for other products, relatively moderate changes, not drastic changes.

Q.Isn’t the data that you look at mostly slanted toward, as you said, weeds as opposed to edibles, cannaboloids, and all the other potential products that could be made, and all the hemp that could be grown? I don’t see any consideration for anything but straight weed.
A.I don’t see that. The estimates of the size of the market and what the elasticities are, take into account there are multiple uses of marijuana, therapeutic versus recreational, for example. I think the hemp thing is probably a very small issue, because in every country that has allowed legalized hemp, used for rope, clothing and things like that, the hemp industry has been highly subsidized. It hasn’t been the case that in places that allow it, anyone found it profitable to compete with rope, to compete with nylon, or cotton, or whatever. So it may be there will turn out to be legal uses of hemp, but, again, the existing evidence doesn’t suggest that that’s going to be a big deal that’s going to generate fundamental change to the economy.
Q.If you worked for a state Board of Equalization, how would you go about calculating what your state could collect from legalized marijuana?
A.First of all I wouldn’t work for the state Board of Equalization, and, second of all, if were forced to work for the State Board of Equalization, I would use the data that I’ve used. I would make the people aware that there are other estimates out there. I would provide the critiques and the cautions that I’ve suggested in our discussion, and tell them that there may be the possibility that my numbers maybe could be 50% too low or 100% too low, but I would say that my best judgment was that my estimates were the right magnitude, even if they turn out to be somewhat too low. I don’t think that I would do it any differently if I were working for a Board of Equalization.
Q.Or a city?
A.I’m not sure why it should be different. The economic model methodology is the economic model methodology. It may be wrong, but that’s what economists do, that’s what we’ve utilized consistently, and I think the evidence is for things like this is we’re pretty good at getting orders of magnitude right. I’m certainly not going to swear that it’s going to be $11 billion vs. 10 vs. 13, but in terms of whether it’s going to be somewhere between 10 and 20 as opposed to 80 to 100, I think the methodology has a reasonably good track record.
Q.What about Big Pharma and cannaboloids? You’re probably aware that they’ve conducted over 18,000 studies. Do you think that’s a ripe area for taxation if it were nationally legalized, and the pharmaceutical companies could train their guns on coming up with therapeutic products?
A.They may well develop therapeutic products, and they may well have significant sales of those, but those are going to be a few products out of an enormous pharmacopoeia, and any activity that goes into that is coming from some other activity, so we have to be careful about double counting for that aspect as with the other aspects that we’ve discussed.
Q.Could you foresee an Uncle Sam brand?
A.I don’t know, wouldn’t they get sued if they used Uncle Sam’s image?
Q.Don’t know, but wouldn’t it be nice to see Uncle Sam’s face on a coffee can sized container?
A.I’m sure there will be all sorts of entertaining labels out there if they’re legally allowed.
Q.The government does compete with private sectors with treasury bills, savings bonds. There’s quite a few examples of the government competing with the private sector that it taxes.
A.But why should the government be in the business? They’ll just tax it if they want the revenue. It doesn’t gain anything by being the actual business itself.
Q.Then they get more than the taxes. They get the whole profits too.
A.No. They just tax away the profits. You don’t need to be in the business to get the profits. You just tax the profits. It’s a mechanical thing, just like gambling. States don’t’ need to be in the lottery business. They can just tax private lotteries and collect the same amount of revenue.
Q.Is it ok to talk about some of the other reports that have come out? Do you mind?
A.Sure.
Q.If Max Chaiken, the Brown undergraduate who wrote The Other Green Economy, was in your class, what grade would you have given him on his undergraduate thesis? Oh, and I should tell everyone reading, viewing or listening, that his thesis predicted at least $70 billion in marijuana taxation revenue, probably $212 billion, and wouldn’t be surprised if the figure was $300 billion. That’s the background.

A.First of all if he’d been in my class, I would have been discussing his progress with him all along the way, and I would have cautioned him that I thought his higher numbers were incredibly implausible, and asked him to do more sort of robustness checks and more investigation into the supply side numbers that underlie his big estimates.

And I would challenge him to go back and find the original sources of these amounts seized, and these estimates that come from various sources that he uses, and I’m pretty sure what he’d find out was that there was never any data underlying some assertions about the size of the market, it was just some DEA or other official saying ‘I think the market will be this big,’ based on nothing. Therefore I would tell him you should put relatively little weight on that. I guess I don’t want to say what grade I would have given him, because it would have been a different experience.

Q.So you don’t find any merit in Chaiken’s thesis whatsoever? Is there anything in there that was interesting to you? Any kind of theory worth exploring?

A.I don’t think there’s a lot of different theory. What’s in there is a lot of data and a lot of work. I mean there’s a lot of merit in his thesis, but I don’t think there’s a lot of merit in the numbers. He didn’t get instilled in him a healthy enough skepticism of data. I mean any sort of data that one hears about even less controversial things should make one ask, “How did somebody actually figure out that number? How could anybody actually know that number?”

And there’s an example related to the book Freakeconomics, which makes a claim that the wage of architects are lower than the wages of prostitutes or something like that. So an economist went out to try to check that, an economist name John DiNardo from the University of Michigan. And he basically found that he couldn’t get any data anywhere on the wages of architects or the wages of prostitutes. So how can anyone know which wages were higher or lower, if there were no decent on either of the two pieces? So the skepticism about data, that’s what was missing from Max’s thesis.

Q.He found quite a few metric tons. I only came across his report a couple of days ago. I tried to re-read it and find where he got the metric tons from, that was a little obscure, but I haven’t given up yet.
A.I’ve looked at some of those things. And what you find is one report cites an earlier report, and an earlier report cites a still earlier report, and sooner or later you sort of lose it, and can’t even find the initial report that had these numbers. So you don’t really have any idea where the original estimates came from. So I don’t know whether to put any weight on those whatsoever.
Q.Now Jon Gettman, he really seemed to turn over a lot of rocks to try and find different ways to calculate MPMTR (maximus potential marijuana taxatiion potential). We talked about this a little earlier, but do you not find any of them meritorious? He gives quite a lot of criticism to your dependence on the lone ONDCP table, as does Max Chaiken. Is there anything about Gettman’s methodology you agree with, or do you discount it? Because you have not reacted to his figures, which were $31 billion in lost taxes for the year 2006.

A.I think his figures are too high. He uses both demand side and supply side. The demand side pretty consistently comes out lower than the supply side. He takes an average. That’s why he gets a number that’s sort of in between my estimates and Chaiken’s estimates. So Chaiken is kind of extreme supply side, almost all the way on the supply side, Gettman is putting weight on an average of the two approaches, recalling that I’m using only the demand side, which always tends to be the lowest.

So that’s how those three wind up being in the way that they’re ordered. Again, I won’t use the supply side at all, that’s part of why I end up with a lower number. On the demand side, I think that the amount assumed per use, for each person who shows up in the demand side estimates, is probably too big. So that’s the difference between mine and Gettman’s, focusing only on the demand side. And there’s some more sort of details, some sort of wonky things that I don’t remember all the details of, but, basically, that’s the crucial number.

If you look at the California Board of Equalization estimates, it comes down to the same thing. They’re basically using a demand side approach. They have data on frequency of use broken down by daily users and annual users. They focus on people who are regular users, and they have an assumption about how much is being consumed by a daily user. But we don’t know what a daily user is. Is a daily user someone who has a puff or two before going to sleep each night, is it someone who consumes all day, every day, and that’s what daily use means?

And so, at a minimum, without knowing whether daily users are in one category or mainly in another category, you can clearly get a really big range. But they in particular assume an amount, which is sort of unlikely to be the case.

Q.Would it be fair to say that you are loath to ever assume anything, so you just go with whatever facts there are?
A.No. I still have to assume a lot in my analysis. I have to make an assumption about what the demand elasticity is like, so I looked at what the elasticity seemed to be like for legal goods that have somewhat similar properties, tobacco and alcohol.
Q.Define elasticity for us please.

A.Sorry. Elasticity is how much the quantity demanded responds to changes in the price. What we find for most commodities is that when the price goes up, the quantity consumed for purchase goes down, and in this case we’re talking about a decline in the price from legalization. Exactly how big a decline we don’t know for sure, but we have some information.

In some ways, I’ve actually assumed things that would make my tax estimates even smaller, because depending on what that elasticity is, we may get different numbers than I came up with. So I have to make assumptions too. Lots of assumptions, but I try to minimize them, and I certainly tried to err, if I was erring, on the cautious side, but I didn’t make that kind of choice where I thought I was erring by a factor of ten to one. I made the choice that maybe I was erring by a factor of 10 to 20%.

Take the underreporting of use by people responding to surveys. One can easily imagine that if you pick up the phone and someone says, “I’m from the federal government and I want to ask you how often you use marijuana,” some people might say never, when, in fact, the truth is that they do. A few people may actually lie in the other direction and claim they use it when they don’t, who knows, but it’s perfectly plausible that use is underreported in these surveys.

But we have a lot of studies that have compared survey measures of use to objective measures of use, and have found that the surveys are low by 10 or 20%, not by 50% or 80 or 90%. Sometimes you can ask people if they’ve used drugs, but you’ve also given them a urinalysis test. So you can check if they’ve used drugs and compare it against what they said. So the degree of honesty is actually sort of surprising. It’s not 100%, but it’s not dramatically less than 100% either.

So I don’t make an adjustment for that. If you said that the ONDCP numbers are underreported by 10%, that would imply a bigger number. But that’s $11 billion instead of $12 billion, it’s not a radical change. It’s not getting me to $100 billion or $300 billion.

Q.Are you allowed to put any kind of creativity into your report? It almost seems as though you try to not go into potential taxation revenue streams that don’t already exist. For example, for example Scott Bates, who wrote about the economic implications for Alaska, talks about the state coming up with Alaska energy bars, which are marijuana edibles, and cannabis tourism. So you don’t feel any obligation to your audience to look for creative ways to collect revenue?

A.It’s nothing to do with creativity. It has to do with accuracy. So let’s take an example. Tons of cities decide to subsidize baseball stadiums, football stadiums, convention centers, and so on and so forth. They also commission some local consulting firm to do an economic impact statement. Lo and behold, because those studies were actually commissioned by the group that wanted to get the stadium built, they always wind up implying that there’s some sort of unbelievable benefit from building a new baseball stadium in Boston.

Now in the case of a state, there is an argument that there might be some significant benefit, which is maybe the city of Boston has a much better Fenway park which has 50,000 seats instead of 35,000 seats, we’ll get more fans from Rhode Island, from Maine, or some Yankees fans from New York. So there will be money coming into Massachusetts from out of state. On the tickets, on the hotels, on the meals, etc. And it turns out that zillions of economists have evaluated the benefits of adding stadiums, adding convention centers, and things like that. They universally find that there’s almost no net gain and often a big loss. Why?

Because first of all, almost anyone who goes to Fenway Park is already a Massachusetts resident. Second of all, there’s tons of double counting in these studies. When Massachusetts, if it gets more people to come and go to baseball games, most of all, it’s because those people weren’t going to a football game or weren’t going to a movie or weren’t going to NASCAR or something else. So it’s just a shift in their dollars. For the country as a whole, if Alaska has cannabis tourism, that’s just money that’s not being spent on some other form of tourism, which almost for the most part was going to be spent within the United States, so there’s no net benefit. It’s just shifting dollars.

Q.You mentioned convention centers. There’s a huge convention in our Denver Convention Center this weekend. That’s going to generate some bucks. Is that the same theory? Is that money that would have gone somewhere else, or is that really taxable? Are you saying those 15,000 people would have gone to a model railroad convention, instead? Is that money really going to government or not? How can you say no?
A.For Denver it may be a net plus. But if we legalize for the whole country, the number of cannabis conventions is going to go down. There’d be no reason any more to have cannabis conventions. And, secondly. . .
Q.Computers are legal and people go to computer conventions.
A. . . . OK, it’s fine. There’s conventions for legal goods. I think the attractiveness of the cannabis conventions is going to go down if it becomes a legalized product, but even if it doesn’t, that’s just money on computer conventions, on Star Trek conventions. It’s not a net gain. We can’t double count. So it’s nothing to do with creativity. It has to do with accuracy.
Q.You’ve been a great sport, Jeff. We super appreciate you taking the time to address all those questions. I know that you’re an activist for Complete Legalization, so, if there’s anything else you’d like to say to our audience, any message you’d like to give, please feel free. Once again, we appreciate you handling our grilling here at cannabis-commerce.com.

A.I would say what I sort of hinted at earlier. I think we have a better chance of convincing the country to change policy, and staying that way over the long haul, if we focus on the arguments other than the budgetary, taxation arguments. I think they’re item number 6, 7, or 8 on the list of reasons. The crucial reasons are enhanced welfare of current marijuana users. The second reason is the enhanced welfare of people who would like to use marijuana but who are abstaining because they’re worried about the legal penalty. The third crucial benefit is reduced crime, reduced corruption. Also increased civil liberties, because people don’t have to be worried about punishment because of the color of their skin, not being afraid of having their door knocked down in the middle of the night and things like that.

And so, the fact that we will spend less money on police and prosecutors is certainly a plus, the fact that we collect some tax revenues is certainly a plus. But to me, these other arguments that I just mentioned are even more important. And those are the ones that we should focus on when arguing for legalized marijuana. So that’s my message.

Q.If those arguments continue to fall on deaf ears in Washington, could you ever envision a marijuana march on Washington?
A.Sure. I’m absolutely in favor of that. In which I hope every single participant would abstain to make a point that this is about changing a law and freedom, it’s not just about being a marijuana user. Cause everybody would benefit from a change in policy, not just people who have an interest in consuming marijuana.
Q.Thank you so much for your time.
A.My pleasure.

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