Tracing consequences both seen and unseen.
Justin M. StoddardRent-Seeking Potheads
Posted at 12:59 am on March 28, 2010, by Justin M. Stoddard

I honestly could not initially decide whether or not to post this, as I could not determine if it was a hoax or parody (a la The Onion). But the more I thought of it, the more plausible it seemed.

Outlaw pot farmers in Calif. fear legalization could actually hurt their business:

“The legalization of marijuana will be the single most devastating economic event in the long boom-and-bust history of Northern California,” said Anna Hamilton, 62, a Humboldt County radio host and musician who said her involvement with marijuana has mostly been limited to smoking it for the past 40 years.

Local residents are so worried that pot farmers came together with officials in Humboldt County for a standing-room-only meeting Tuesday night where civic leaders, activists and growers brainstormed ideas for dealing with the threat. Among the ideas: turning the vast pot gardens of Humboldt County into a destination for marijuana aficionados, with tours and tastings — a sort of Napa Valley of pot.

The irony is deliciously delicious…in so many ways. But, foregoing all that, this is basically an issue of rent seeking. People who deal in black-market goods are protected from the ‘legal’ market. Not only do the goods they are producing/trading have an unnaturally high price point, they are shielded from competition from the free market. If anyone can get into the pot growing business, prices will dramatically fall. Some of the former illegal growers will then be priced completely out of the market.

We see this type of rent seeking behavior every day. Groups from manicurists and hair stylists to HVAC repairmen to interior decorators insist on licensure laws as requirements to enter their professions.

Those doing the rent seeking will nearly almost always claim that these types of licensure laws are needed so that only qualified people get the job. It’s a safety issue. Or a quality issue. Or, well, pick your reason.

In truth, it’s none of those. Rent seeking protects jobs using the force of government by way of restrictive fees and time-costing measures. It protects the few at the cost of hurting everyone else by way of decreased competition, higher prices and fewer employed people. You have a limited amount of money and you want to become a florist? Do you have the right license? Have you paid enough fees and attended enough classes? Sorry, you’re now priced out of the market. Some select florists benefit; the aggregate suffers.

But back to the rent seeking pot farmers of Humboldt County, California. Not only are their actions unbelievably immoral, they’re frightfully hilarious. The whole thing reminds me of the Simpsons episode where Homer Simpson is bullied out of the chiropractic market:

Steve: [walks in] Simpson! You’re not a licensed chiropractor, and you’re stealing patients from me and from Dr. Steffi.

Homer: Boy, talk about irony. The AMA tries to drive you guys out of business, now you’re doing the same to me. Think about the irony.

Steve: [grabs Homer by the collar] You’ve been warned. Stop chiropracting.

Homer: Not unless you think about the irony.

As pot legalization becomes more likely, I would expect to see more of this type of behavior. Just remember, the behavior is equally ridiculous when applied to interior decorators or florists, or the nearly other 30% of the workforce that requires licensure.

[Cross-posted at Shrubbloggers.]

Filed under: Drug Policy, Economic Theory, Regulation
Comments: 7 Comments

Wirkman VirkkalaThe Giffen Weed
Posted at 12:27 pm on March 24, 2010, by Wirkman Virkkala

John W. Payne’s contribution, yesterday, on this very blog, “More Bans Won’t Deter Use, but Will Increase Costs,” raises a serious issue directly tied to the theme of this blog. The issue is Supply and Demand — that is, the working out of incentives and disincentives throughout the vast network of individuals that makes up society.

People sort of understand that if you raise the price — or, by legal interdiction, radically increase costs — of a good, use of that good should go down.

This is, after all, a standard economic notion. Very basic.

So, what is working against this? I mean, in the case of marijuana we have an economic good that could be nearly free (it grows easily almost anywhere; it requires little complicated processing — even stoners can learn how to nurture and harvest the psychoactive agents in the plant) but has been raised in price because of legal actions by the federal government and all of the states. Still, despite the vast network of state agents directed against the plant and those who use it for pleasure, usage has remained fairly steady, and, by long trend, has grown. Why?

The cost rises and the usage rises? This defies economic law, you might say.

Mr. Payne writes as if it were obvious that this should be the case. And he has reason to: Experience. This has been the modern experience, and not just with marijuana.

But what of economic theory?

The standard answer is that marijuana is an inelastically demanded good. That is, it is so high on some people’s value scales (demand schedules, if you must) that increases in cost to obtain the good do not deter consumption. Indeed, marijuana may be that much-discussed rarity, a Giffen Good, an economic good that, with increases in price come increases in purchases.

Giffen goods, an anomaly in simple price theory, occur because of income effects. Limitations of income (or , more broadly, resources) mean that, if a highly valued good increases in price, lower valued goods must be forgone to maintain satisfaction from that higher-valued good.

The trouble with understanding such goods is psychological. Most of us do not attribute as much importance to the good in question as some few do. I, for instance, drink less alcohol as the price goes up. I like my whisky, anisette, port, and the occasional glass of wine. Sure. But not enough to continue to buy them in the same amounts when their prices rise. I prefer a cold Diet Coke™ or a cool glass of water. And when my income goes down, I swap the Coke for more water. A standard behavioral scenario.

And most people are like me. They cannot imagine buying more of a luxury like a psychoactive pick-me-up (or put-me-down) like alcohol or marijuana, and so they continue to give credence to the idea that prohibition of such goods makes sense.

But prohibition does not make sense if they are, in fact, Giffen goods. Not to everybody, but some.

And then we hit some interesting social factors not often discussed in economics: The divergence of markets by social stratification. Making a good illegal puts merchants and purchasers of the good outside the law, outside of “polite company,” so to speak. In the black market, trades are more dangerous, risk is everywhere, and representatives of law tend to be nowhere in sight.

This divorces illegal drug users from normal society, and puts them in a complete different social world. Expectations about behavior begin to change. Violence is just one aspect of this world. It is often not pretty.

And it traps some of those who enter it. They sometimes find it increasingly difficult to navigate normal society, find it harder to maintain an honest job, for instance.

But just the Giffen Good aspect has notorious side-effects. If you buy more drugs because the drugs have increased in price (because of the War on Drugs), then your income does not allow many other things. Like, perhaps, good food. Or toothpaste. Or a car. With fewer resources, you can be increasingly trapped from any possibility of upward mobility.

This scenario helps explain some of the horror we see regarding meth addiction. But, of course, to it we must add the sheer power of meth: It is the ultimate “Giffen Pleasure,” robbing other pleasures of their purchase in the human soul . . . and since life proceeds on little pleasures and little pains guiding our prudential action, those who partake of this drug can quickly ruin their lives. They don’t maintain the pleasure mechanisms that allow the rest of us to brush our teeth, comb our hair, bathe, and go to work. All the little pleasures have been burnt out.

Marijuana, on the other hand, is a much more mild psychoactive substance, though heavy users tend to reach a point after many years that mildly mimics the downward spiral often seen in meth addicts. Still, most users are moderate users.

And yet moderate users still use it, despite the possibility of getting caught. Indeed, people in all walks of life use it. What gives?

Here we have a market maintained, I think, by a core set of people who treat it as a Giffen Good. This market allows those who treat it more casually to continue to use it. (This works rather like Early Adopters who “subsidize” tech development: Their enthusiasm for new devices funds efforts to improve technology so that, as each tech device develops over time, and prices drop, others can afford it. Similarly, core marijuana users have maintained a market, against the official suppression, allowing casual users to access it for occasional purchase.)

Apparently, the only way to eradicate the market is to eradicate availability of the plant, as meth has been mostly eradicated in Oregon, according to the drug warriors most enthusiastic about Oregon’s full-scale war on the production of same (by stringent regulation of Sudafed, a key ingredient).

Not likely, for marijuana. It hasn’t happened yet, except for short, dry periods in some cities.

To summarize: The widespread use of marijuana by enthusiastic users and casual users alike challenges the most simplistic formulations of economic theory. But economics can still, I think, explain what is actually happening, and why simplistic formulations of supply and demand are inadequate to predict the outcomes of legal suppression of drug usage.

Further, it’s worth bringing up a point outside of economics: Widespread marijuana usage by both enthusiasts and casual users, in the face of both legal and illegal violence and risk, suggests that the right to self-medicate is a “right retained by the people.” The Ninth Amendment should surely apply here.

There is an old rule of Jeremy Bentham’s that would help de-inkblot America’s Constitutional interpretation on such matters. If you cannot, without enforcement, get at least 80 percent (Bentham may have said 90 percent) compliance on a rule, then the rule is wrong, not the people. Both utilitarianism and the American Constitutional tradition suggest that marijuana prohibition is a horrendous injustice put upon American society.

Filed under: Drug Policy, Economic Theory
Comments: Comments Off on The Giffen Weed

John W. PayneMore Bans Won’t Deter Use, but Will Increase Costs
Posted at 10:51 pm on March 23, 2010, by John W. Payne

Early last month, Missouri Supreme Court Chief Justice William Ray Price Jr. called for reforms of our criminal justice system, including incarcerating fewer nonviolent offenders. Price argued that such changes would both decrease recidivism and save the state money by decreasing prison budgets, and he was widely applauded by editorialists across the state for his stance. However, when a bill to ban K2, a chemical used as a synthetic substitute for marijuana, received its first public hearing little more than a week later, newspapers were equally eager to support the restriction. It should not be necessary to point out that increasing the number of nonviolent offenses is not obviously compatible with decreasing the number of nonviolent offenders behind bars. Furthermore, although enforcing a ban on K2 would require spending additional tax dollars, it is unlikely to lower the rate of drug use significantly.

According to Harvard economist Jeffrey Miron, federal, state, and local governments spend more than $44 billion per year in their attempts to stop people from using certain drugs. It is difficult to determine exactly how much money is spent on specific drugs, but given that there were 847,863 arrests for marijuana during 2008 — half of all drug arrests — it is safe to say that spending on marijuana enforcement is higher than for any other drug, and far out of proportion to the dangers of a drug that is relatively innocuous in comparison to most others. Still, despite the billions of dollars spent and millions of people arrested over the years, legal restrictions on marijuana appear to have had little to no impact on decreasing its use.

Although exact statistics for the period during marijuana’s initial prohibition are impossible to come by, when it was first outlawed in 1937, its use was confined almost exclusively to Mexican immigrants in the West and only a tiny proportion of the population had ever smoked it. Marijuana use skyrocketed during the 1960s, when simple possession still typically triggered jail time across the country. As use of the drug continued to increase throughout the 1970s, some states began decriminalizing marijuana possession, indicating that marijuana use tends to influence the law — not the other way around. The 2008 Monitoring the Future Survey, published annually by the National Institute on Drug Abuse, concedes that “A study of the effects of decriminalization by several states during the late 1970s found no evidence of any impact on the use of marijuana among young people, nor on attitudes and beliefs concerning its use.” The report does go on to note that some more recent studies find that teens living in states where marijuana possession is decriminalized are more likely to smoke marijuana, but this correlation does not indicate causation. As noted earlier, the idea that higher use rates drive decriminalization is a better fit for the timeframe, and it could also be that a third variable — such as wider adoption of more socially liberal views — help to cause both decriminalization and higher rates of marijuana use.

As of 2009, 102 million Americans — a third of the population — have used marijuana, according to estimates from the Substance Abuse and Mental Health Services Administration. Almost all of them did so after marijuana was made illegal 73 years ago. Clearly, the law does not stop people from obtaining and using marijuana. Usage rates have changed dramatically over the years, but those changes are driven far more by wider social changes and shifting attitudes than by any law. Only politicians could be so vain as to believe their dictates are the guiding force in the lives of millions of people.

A ban of K2, or of any similar drug, will not stop people from becoming intoxicated in some politically incorrect way. In fact, given that K2 is being sold primarily as a legal substitute for marijuana, banning it may simply send K2 users back to marijuana use, an outcome that I do not believe the bill’s supporters intend. However, if people truly enjoy K2, no law passed by a legislature will ever repeal the law of supply and demand. Market forces will provide consumers with the goods they want — even illicit ones. Banning K2 would increase the already stratospheric costs of enforcing our drug laws, without making an appreciable dent in drug use. Reasonable people would laugh such proposals out of the legislature, but when it comes to the war on drugs, we abandoned reason a long time ago.

Filed under: Drug Policy, Regulation
Comments: 2 Comments

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Henry Hazlitt"[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Henry Hazlitt, Economics in One Lesson






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