Note: “The Wunderkind” is also Part 4 of Cannabis Commerce in the USA, found in its entirety here.

“Where has all the pot tax gone, long time passing.”

In 2008, economics major Max Chaiken was chugging along the graduation track at Brown University, arguably Earth’s hardest-to-get-into college. He was campus coordinator for Obama. A natural song leader, he loved raising his voice in song, often to folk tunes he composed himself – in Hebrew, no less. He was active in a fraternity.

What he didn’t have was a subject for his undergraduate thesis.

Coincidentally, one of Chaiken’s frat brothers was involved with the Rhode Island Patient Advocacy Coalition, a medical marijuana lobbying group.

“I was talking with him, and thinking about writing a thesis,” Chaiken told CC, “and the question popped into my head, how much revenue could there possibly be? So I started doing some reading, and eventually, that became the topic.”

When that revenue number emerged, it was so staggering, Providence couldn’t contain it.

Stephen J. Dubner, Freakonomics blogger for the The New York Times, dropped it his May 22, 2009 entry, “What Would Happen If Marijuana Were Decriminalized?”

Although President Obama doesn’t seem interested, arguments in favor of decriminalization are popping up everywhere, from the Law Enforcement Against Prohibition platform to the senior thesis of a graduating economics major at Brown named Max Chaiken, which finds that “a legally taxed and regulated marijuana market could generate upwards of $200 billion annually in excise tax revenues for the federal government … [which] would be enough to fund Medicaid.”

They don’t card you if you want to play the game. You’re never too young or too old. And maybe a little youthful open-mindedness is exactly what prior MPMTR (maximum pot-ential marijuana taxation revenue) prophecy has lacked. Whether he was 19 or 91 when he wrote it, Chaiken’s The Other Green Economy deserves a “standing O” from anyone with the slightest interest in how they, their family, and their community will benefit from a legal, regulated society.

Naturally, we have to ask the question: what if he’s right? Is there actually a distinct possibility there’s way over $200 billion MPMTR to be had? Could this number skyrocket past the $300 billion barrier, if certain taxes Chaiken admittedly didn’t address were accounted for?

Hmm. Seems a bit . . . optimistic . . . but let’s poke around and see what we find.

$212 billion: did that get your attention?

Cutting to the chase, in The Other Green Economy, Max Chaiken boldly concluded that there’s a bare minimum of $71 that could be collected in excise taxes alone, with a “high probability” the number could be $212 billion. “Enough to fund twenty months in Iraq,” he wrote, though I don’t think he was referring to a vacation for two. A $300 billion bonanza “wouldn’t be surprising” at all.

Where did this wunderkind find the chutzpah to eclipse Gettman’s forecast by the same order of magnitude Gettman’s eclipsed Miron’s?

He found it on the supply side.

Uh-oh. As we’ve found, economists who only work one side of the street tend to get slammed. Sometimes it comes from economists working both sides of the street. Sometimes it comes from economists working the other side of the street.

Maybe you’ve heard the term “poetry slam?” Well, welcome to “economy slam.”

 

Economy slam: what grade would Professor Miron give The Other Green Economy?

Any top economist you can think of who works the demand-side exclusively?

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

I would challenge him to go back and find the original sources of these amounts seized, and where these estimates come from. It was just some DEA official saying ‘I think the market will be this big,’ based on nothing. Therefore, I would tell him you should have put more weight on this. I don’t want to say what grade I would have given him, because it would have been a different experience.

I don’t think he got instilled in him a healthy enough skepticism of data. How did somebody actually figure out that number? How could anybody know that number?

Translation: “Kid, you shouldn’t be using supply-side data exclusively.”

A walk on the supply side

Let’s review:

  • Miron uses demand-side data exclusively.
  • Gettman uses demand-side and supply-side data.
  • Chaiken uses supply-side data exclusively.

Scolded for exclusive use of supply-side data, did Chaiken capitulate, or did the criticism steel his resolve? That was the burning question when Chaiken spoke with Cannabis Commerce in April 2010.

The answer is, some of each:

Professor Miron basically looks at the data out there, and takes only the demand-side data, while Professor Gettman takes demand-side data and supply-side data. I take only the supply-side data. And I lay out in detail why I chose that, and why it seems to me we should be looking at one data set and not another.

I think I expanded a little bit, and tried to use other sources that are not as traditional as well. But there’s certainly some valid criticism that they have for my figures, and it does make me ultimately think maybe my more minimum estimates are in the better range, rather than my more astonishing $200 to $300 billion estimates.

But a lot of this comes because most of the data we have to answer questions like, how much revenue can there be, how much quantity is currently on the market . . . the data that we have to answer these questions is largely nonexistent. There’s so much guesswork that goes on in any of these papers, that basically, at some point, you have to make assumptions that people could criticize.

You have to decide which data you’re going to use, which data you’re not going to use, and try to justify it. Professors Gettman and Miron don’t necessarily agree, and I respect that opinion.

But I still have a feeling that we’re talking about significantly more than their most recent efforts.

How he got stratospheric

Basically, Chaiken found a whole lot more metric tons than Gettman, along with higher pricing per metric ton than Gettman, while aligning with Miron by calculating sin taxes, which Gettman didn’t calculate at all, at the fixed rate of $4 per gram (28 grams to the ounce), or around $112 per ounce at current average medical marijuana rates of, give or take, $400 per ounce.

In this model, $4 per gram can also be viewed as a sin tax percentage of around 25%, quite possibly a “sweet spot” that might actually work out for all concerned.

“Cannabis Commerce, that’s the site for me, I said Cannabis Commerce, that’s the site for me, when it comes to pot economists, I’m the highest of the three.”

Once he warmed up, Chaiken got downright professorial as he laid out his methodology.

What follows is a virtual handbook on how to estimate MPMTR, with the caveat, using supply-side data only:

Basically, I try to estimate a simple equation using a “variable of interest.” We want to know how much the federal government could conceivably earn if the marijuana market that we have today were legal, and regulated, and taxed. So there’s a few different ways to go about this.

You have to know something about price, what the price of marijuana currently is in the market. We know that it varies regionally; we know that it varies by quality. It’s not too easy to know much about price, but we have some limited data on price to give us a general range of what’s out there.

Then you need to know something about the quantity, of how much is being consumed. So there’s two ways to know how much quantity is being consumed. Producers supply marijuana to the market. There’s a whole illicit chain of suppliers that we know very little about except what the DEA and the ONDCP (Office of National Drug Control Policy) kind of tell us about it.

And on the supply side, we have information about what the government has claimed to have seized in terms of pure pounds and metric tons of marijuana. We have information about how many plants have been eradicated in outdoor and indoor locations. We have some information about where most of this marijuana that we’ve seized is coming from, mostly at southwest borders, also some on the northern border as well. That’s all on the supply side.

So to get an estimate of how much is out there you have to say, well, OK, how good are they at catching it? Are they getting 10% of all that’s coming in or are they getting 2%? Or should we be generous and say they’re getting a third of all that’s out there?

Those sources that try to estimate how much is cultivated domestically, for example, will say that eradication efforts are getting 30 to 50% of the domestically grown market. I just think that’s pretty unrealistic. I don’t think that one of two plants grown in this country either indoors or outdoors is being seized or eradicated by the government.

So, for the sake of understanding what the very maximum could be, it was helpful to say, well, what if they’re only getting 2%? What if the metric tonnage that gets seized is only 2% of the market that’s out there? Then it’s ridiculous, it’s probably unlikely, some of the data on the demand side that I did exclude, indicates that it should be, perhaps some of their data listed at 10% could be more realistic based on what we think we might know about how many people are using marijuana.

 

Quit being so demanding

Why, exactly, didn’t Chaiken analyze any demand-side data?

On the demand side, one of the criticisms of my paper was that I excluded demand-side data. What that means is that I didn’t use the National Survey of Drug Use and Health (NSDUH), that Professor Gettman used, which basically says ‘we think there are so and so many Americans who use marijuana, and they use approximately so and so much.’

Basically, we know that those surveys underestimate significantly how many users there are, and the most recent data that we have about frequency of use, about how many times those users are using, is fifteen years old. So, a lot of that data to me, was more suspect than the amount of marijuana seized, the government saying we seized this much marijuana, a hard quantity of marijuana that came into the country, we took it off the market. I think another one of the criticisms is that I did exclude some estimates of data that would have resulted in estimates closer to Professor Gettman’s.

What about those metric tons?

Chaiken’s “high” number of 175 metric tons is one of the more extraordinary figures in The Other Green Economy. While Jon Gettman makes assumptions, like all poteconomists, his latest figure of “around 15,000 metric tons,” sold annually in the US, had appeared relatively bulletproof.

Aha! Now we know who sniffed out all those metric tons!

Chaiken parachuted his high metric tonnage figures back down to earth:

When you change the parameters of the equation that you’re looking at, it can change fairly significantly. Those parameters include a few different things. First and foremost, those include the number of how much marijuana that was seized. In this case, we know that over the past few years, it’s been increasing. And we know that the amount of plants that’s been eradicated, both indoors and outdoors, is also increasing. Those numbers imply that more is being imported, and more is being grown domestically.

All these things would lead us to believe that more marijuana is being consumed in the country as time goes on, and, if I recall, that 15,000 metric tons or so is Gettman’s average of several computations. If you relax those factors to see what the maximum potential could be, you start getting up into a much higher number of metric tons that could be on the market. But it is somewhat speculative.

My feeling today is that there could be 15,000 or 20,000 metric tons on the market. I wouldn’t be surprised if there was a little bit more. You know, the 2010 National Drug Threat Assessment is out . . .

He shared this revelation with breathless anticipation, as if the Sports Illustrated swimsuit issue awaited him in his mailbox:

. . . that puts the number of how much is produced in Mexico at 21,500 metric tons. So even if only half of that is coming into the United States, that’s 10,750 metric tons right there. And we know that a lot of it’s being grown in this country as well. So it’s not inconceivable to me that we have 20,000, maybe 25,000 metric tons on the domestic market that’s being consumed by Americans.

 

Ladies and gentlemen, now playing the game . . . you!

Here’s an excellent opportunity for you to jump in the game. Yes, you!

Take Chaiken’s last metric tonnage figure, 25,000. Now, what do you think the average price of a pound of marijuana is in the USA? The range is anywhere from a high of around $6,000 a pound for high grade “medical marijuana,” to around $1,300 a pound for commercial-grade Mexican. Wholesale pricing and retail pricing will differ. For the sake of brevity, let’s guesstimate a value of $3,000 a lb.

Remember, a metric ton is approximately 2200 pounds.

2200 pounds x 25,000 (metric tons) = 55,000,000 lbs. (all the supply available for purchase annually in the USA).

55,000,000 lbs x $3,000 = $165,000,000,000.

In this scenario, you just calculated that Americans spend $165 billion annually on the magic herb.

Do you think the average value of a pound is more than $3,000? Less? What about the metric tons? Too many? Not enough? OK, just plug those figures into the equation, and see what you come up with.

From there, to compute how much of that supply will wind up as tax dollars, you would play around with varying percentages of sin taxes, local taxes, income taxes, and so on.

We’ll try some more exercises later in this report.

An actual cannabis fan, OMG!

When discussing the brouhaha the cannabis plant is currently causing, and all it could mean to the country in a legal, regulated landscape, Chaiken actually expressed excitement and admiration. “Refreshing” is a word that springs to mind.

Here are a few highlights:

. . . there definitely is a whole chain of supply between whoever is planting the seeds and watering them, and doing whatever they’re doing with technology which is really quite amazing, some of the things that you can do to enhance strains and get a better quality product, which should fetch a higher price .  . .

. . . there’s a possibility that we could be exporting choice strains and importing choice strains. It’s a wide world of the unknown. Where could it go? How much could we get at the border for imported product, and how much could we get when it’s sold at retail level? Really, there’s some potential there . . .

. . . there’s also people who may not even quit their day job, but they’ll make glassware (for pipes) on the side, adding more productivity to the economy, and, basically, I don’t think it’s trivial that it would be countable, even if it’s not true job creation as much as reassignment of jobs. I don’t think it’s trivial. I think there will be people put to work who might not otherwise be working right now, who would be willing to work legally as a grower, as a light technician . . . who knows what it would be. But I think there is at least some potential for true job creation . . .

. . . over the last eighteen months, as you said, recent boosts in publicity have the potential to bring more people into the market, whether that will be as legal medicinal marijuana users in their respective states, or more black market consumption. That has the potential to bring people into the market and slowly push demand out before we get to a complete legal and regulated market. So, as you know, if a larger number of people are consuming marijuana, there will be a larger amount of money going into government’s purse strings . . .

Hold the presses

Hard to say how I managed to research pot-ential marijuana taxation for months before stumbling upon The Other Green Economy. Unearthing it came at the worst possible time, right before Cannabis Commerce was due to launch – with this report intended to be the “pillar” article. Once I got my hands on it, the rest of this report had to be adjusted accordingly. It’s that provocative.

 

Conclusion

There’s nothing wrong with throwing in best-case scenarios, for the benefit of fencesitting politicians, as Chaiken has done. Other poteconomists are entitled to their opinions. Is Chaiken a fledgling, too “green” to be taken seriously? Decide for yourself.

But consider this. With over a year to reassess his position, aided and abetted by constructive criticism by the sharpest poteconomists on earth, the Brown graduate listened to what critics had to say, observed the cannabis commerce conducted all over the country, and honed his estimate accordingly. He sees that other lucrative taxation revenue streams exist, streams currently unexplored by poteconomists steeped in more traditional thinking. These represent significant opportunities.

At the very least, The Other Green Economy deserves a gold marijuana leaf for Best Title Of A Poteconomics White Paper.

CC’s interview with Max Chaiken.

 

Next section preview

You’d think a $71 billion MPMTR projection might include every conceivable revenue-generating stream. Believe it or not, Chaiken’s thesis omits several golden opportunities.

He admits as much:

“Spin-off industries would flourish . . . All of these areas require further research, as many of them represent significant opportunities to catalyze growth and stimulate the economy. Unfortunately, for now they are outside the scope of my estimates.”

$71 billion – or more – without accounting for spin-off industries? Spin-off industries include some of the heaviest hitters in the GNP lineup! They’re coming up in Part 6.

Keep in mind Chaiken’s $71 billion minimal estimate represents solely what consumers would pay in excise (sin) taxes. It doesn’t even factor in local and state sales taxes, much less state and federal income taxes. Or the ingenious fees local, county and state regulators impose on dispensaries and collectives.

Accounting for all these additional taxes – none of which are contrived to accommodate marijuana, they’re normal taxes for all goods produced in the US, is within the scope of Cannabis Commerce’s estimates, as we’re about to see.