Manhattan Institute scholars Steven Malanga and Charles Fain Lehman join Brian Anderson to discuss the persistent black market for marijuana, the possibility of renewed drug enforcement against illegal pot, and the changing nature of the drug.

Audio Transcript

Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal. Joining me on today's show are Steve Malanga, the senior editor of City Journal and the George Yeager fellow at the Manhattan Institute, and Charles Lehman, contributing editor to City Journal as well, and a fellow at MI. Each has been following the public policy issues posed by the legalization of marijuana, and each has been writing about it for the CJ website recently. So Steve and Charles, thanks very much for joining.

Steven Malanga: Thank you.

Charles Fain Lehman: Thanks for having us.

Brian Anderson: Steve, let me start with you. Your recent piece for us looks at what's going on in California and Oregon with regards to the legalization of pot. So, shortly after legalizing the drug for recreational use, both of these states saw their black markets absolutely explode. Now, this was contrary to what the advocates of pot legalization had predicted. We were told in the run-up to legalization that legal weed would kill off the black market and generate enormous sums of money in tax revenue for various governments, local and state. Now those same advocates are saying, Well, now the black market is persisting only because not every state has legalized the drugs so that we need legalization across the board. So I wonder what your take is on the black market in these states, and if there's any merit to that counter-argument by legalization advocates.

Steven Malanga: Yeah. Well, the first thing that occurred actually with legalization, and we're talking about a legalization of recreational use, which 19 states now have, and there are five states that are actually voting on legalization for recreational use this November. Initially when the black market didn't go away, the justification was, I guess you could say, or the explanation was that governments were regulating this marketplace and they're charging taxes, and they're charging registration fees, and there are all these regulations that marijuana growers in particular have to follow, and that it's just simpler to be part of the black market. Some of the investigations in places like California, Oregon, and Colorado, for instance, have found that essentially marijuana growers who were doing a bang-up business before legalization don't want to become part of the system because they don't even want to follow environmental rules, for instance, that all farms have to follow.

In some cases, black-market growers who have been busted, have been found stealing things like water, which is a valuable commodity in a place like California these days. And so if you add the special taxes that we believed we could apply to marijuana, that states believe they could apply, if you added that to the fact that all businesses have to follow, I mean, any business whether you're selling food, whether you're selling personal care products, you know have to follow certain basic rules. The black market eventually decided that, number one, they could make more money simply by not following the rules and staying in the black market at a time when, because of legalization, use of marijuana was becoming normalized across the country, which meant that the market itself was exploding. And so you have two things going on.

One, they don't want to necessarily adhere to the rules and regulations that legitimate businesses adhere to because that's an added cost for every legitimate business. Basically, government regulation is an added cost and taxation. And two on top of that, what's happened is, and this is where the other argument comes in that you just suggested, is that only 19 states, and we could be up to 24 within a couple of weeks, but that's still only half the states have legalized it, and therefore there's this market out there across the country in places that haven't legalized it, where people are looking for pot. And you might as well grow it in a place like California under the cover of legalization and then export it somewhere else. Although the fact of the matter is that even in a place like Massachusetts, which does have full-on legalization, it's estimated two-thirds of all sales of pot are actually black market pot. So even in places where it's legal to buy it, the black market continues to thrive.

Brian Anderson: Charles, you've written on this persistence of the black market as well recently in a review of a book that's recently been published called Can Legal Weed Win? The culprit as you explain there is in part the lack of law enforcement. So these illegal pot businesses, on every level—cultivation, distribution, drug dealing, they're not shutting down, as Steve was just saying, but partly for the reason nobody is shutting them down. Why is that the case?

Charles Fain Lehman: Yeah, I think that ultimately the answer is squeamishness, right? The argument, and I think Steve said this well, the argument that illegal weed is out-competing legal weed due to regulation is sort of prima facing crazy, right? It's arguing that the only difference between the two markets is that one is regulated and the other one is not. And the answer is, the difference between an illegal market and a legal market is that one is sanctioned by law and the other one is not. And if you're not operating sanctioned by law, then there should be costs associated with this. And they’re actually very good academic estimates that say prohibition is associated with a 50 to 90 percent increase in the price of marijuana. So I think that there's a difference between formal prohibition of the law, saying that something is permitted, and actually enforcing the law. And when you care about real effects, you care about whether or not the law is actually being enforced.

I think what we're seeing in a place like New York City is that there are dozens of illegal dispensaries and licensed dispensaries popping up, but there's squeamishness on the part of law enforcement, the city and the state of going after the people who are operating these illegal businesses. And there's a simple reason for that, which is that there has been a cultural drumbeat for over a decade saying that marijuana enforcement and drug enforcement more generally is immoral, racist, and otherwise destructive. The theory has been that people in the black market are legitimate business people who are just being stopped from carrying out legitimate business by criminalization. And so we need to bring them into legitimate market. Why would you go after those same people? Why would you think it was listed to go after those same people?

And the reality is, people operated in the illegal marijuana market are criminals. They aren't just by definition criminals. They're also of a criminal tendency, which is to say they think it's a good idea to make their living operating outside the law. And so it is little surprise that people look at the situation and say, Well, I'm not going to get in any trouble if I don't follow the law. I'm not going to get in trouble if I don't follow the regulations. And following regulations is costly, so I'm just going to not follow the regulations. But that's is proof that the regulations are not being enforced.

Brian Anderson: Yeah. Steve, you note in your piece that at least in a couple of places, law enforcement has started to crack down on illegal pot. There's a multi-year operation going on in Colorado to shut down this vast growing operation that's sprung up. I wonder if other states might follow suit. Charles just mentioned these gray-market, I guess you could call them brick-or-mortar stores that are popping up in New York City. The weed trucks that are circulating around now, they've been operating basically unmolested for months in New York City. But once the limited number of licenses is issued to the various commercial legal marijuana dispensers, will that create a lobby for real enforcement? Or is this kind of gray market or tolerated black market going to continue, do you think?

Steven Malanga: Yes. Well, the irony of the situation is that, as Charles suggested, and when I wrote about the rise of the black market in legal states a couple years ago, this was the case that I quoted a California official saying, "Do we really want another war on drugs?" We were supposed to end the war. And so they were, in the word Charles used, squeamish at that particular time. And they were squeamish because originally the whole idea was a war on drugs was really a war on people who were just kind of pursuing this increasingly benign occupation of selling marijuana, which, since 38 states have medical marijuana, people now view marijuana as being benign as a safe product. Now, there's a whole other discussion about that because increasingly the marijuana that's being sold out there doesn't seem to be safe at all. And we're seeing many more studies on that, but that's a whole other discussion.

So there was this squeamishness, but as you say, what happened is the legal marker created a lobby of legitimate businesses who are now, they are the ones complaining. They are the ones driving this notion that we’re never going to have an adequate legal market unless we have basically a new war on drugs, a new war on pot. And so Oregon, a couple of months ago, they essentially devoted out of their budget $25 million to a new enforcement policy to essentially suppress the black market in that state. And it involves using all kinds of different government agencies. California, they used to have, when pot was illegal for all the years that pot was illegal in the state, they had a seasonal campaign against illicit growers during the prime growing season. Ironically, they've now taken that seasonal campaign and made it a 12-months-out-of-the-year campaign, putting together all different agencies within the state and federal agencies, including assigning the National Guard in California to the idea of suppressing the black market.

In Colorado, they've busted Chinese nationals, Argentinian gangs that have come to Colorado to grow illegal pot, and Bulgarian gangs. And part of what's driving this is there actually are newspaper stories about the violence that accompanies this. Itinerant workers essentially being imported into California, being mistreated, dying on these farms. So it's like there's a new scandal that's arising, and the squeamishness that Charles talked about is disappearing in part because there's a lobby saying, you want us to pay taxes, but we can't succeed in this environment. And then there's also a lot of bad outcomes like violence arising from this, homicides in places like Denver have never disbanded. It's kind of like marijuana enforcement mechanisms in the police department, even though it's been legal there. Recreational pot’s been legal there for quite a number of years now. So this is a new, I guess, war on crime that we're seeing arise, particularly as, on the one hand, you have a new lobby, the legal growers, but on the other hand, there is violence associated with this, and that is starting to get headlines.

Brian Anderson: Charles, the idea behind this legalization drive is in part based on social-justice considerations, I guess, but it's also being touted now as an economic development tool. So in New York, Eric Adams has really gotten behind the idea of legalized pot as a way to generate revenue for the city. You're seeing these pot dispensaries spring up, legalized pot dispensaries are about to spring up in very many communities throughout New York. I wonder, though, if there's really any credit to that argument that this is going to drive any kind of economic development?

Charles Fain Lehman: The short answer is no. So the book that you alluded to that I reviewed for City Journal, Can Legal Weed Win? by a pair of economists, Robin Goldstein and Daniel Sumner, UC Davis agriculture economists, and they basically, in the book, they make the point that when marijuana legalization is being rolled out, there were all of these wild estimates being suggested by advocates that this would close states' fiscal gaps, that it would be the godsend to end all godsends. The reality is, it's not playing out like that. The ballpark is maybe in the last year, something like a few billion dollars across all legalization states. There was a Barclay estimate that's something like $12 billion by 2030. And is that nothing? No. Is that a lot of money? No, not really. A big part of the reason for this is because of the illegitimate market that people continue to stay in the illegal market, the unregulated market, rather than shifting into the taxed market, the regulated market.

And one solution to that problem is to change the cost by reducing the tax rates. I think there are arguments for and against, but the reality is, if you want to shift people, if you want to increase consumption in the tax market, you have to cut taxes. So your revenue still stays low. And I think this is reliably true across most sin taxes. There are sort, I think, incentive reasons to want to tax sin goods, but they aren't necessarily the budget aids that they often present it as.

Brian Anderson: Steve, you alluded to the fact that that we're learning more about some of the effects of pot consumption. So there are social costs to this legalization that some critics are saying haven't been taken into consideration enough. I would agree with that 100 percent. I wonder if you could survey what we know about the safety of pot consumption, what some of the links are that we're seeing. And maybe Charles, you can speak to this too as a final question. Both of you. Are there going to be significant social consequences to legalization? So, Steve first, and then Charles.

Steven Malanga: Yeah. Well, the first thing is that modern pot is not your parents' pot. It's not your grandparents' pot. The pot that people smoked on college campuses in the ‘60s and ‘70s was much less potent, had a much lower percentage of THC, which is really the ingredient that generates the response. Back in those days, the potency was about 20 percent. Now, the proportion of THC is about 70 to 80 percent. And it has tremendous psychological effects. A Danish study basically estimated that smoking pot regularly has the highest, what they call conversion rate to schizophrenia, meaning the tendency to create schizophrenia results in ordinary users, the highest conversion rate of any drug that's out on the market now, including meth or opioids. There are a couple of the Danish studies, which put the chances for a regular user of marijuana with a 70 to 80 percent proportion of THC of developing schizophrenic tendencies at anywhere between 20 percent and 50 percent of users, which are just kind of enormous numbers.

So there have been quite a few articles in scientific journals about this issue. Now, and there are countries that have pushed pause on this, including the UK, that are not heading towards legalization at anywhere near the rate that we are. So we'll have to see. I mean the studies, some of these, there have been long-term studies, but some of these newest studies looking at the drug as it is constituted now as opposed to some of us who are older remember as being, some of those studies are just appearing. And there's a fair amount of alarm.

Charles Fain Lehman: I think Steve makes all the right points. I just want to add to that. There's this idea in drug legalization circles called the iron law of prohibition, which is that essentially the effect of prohibition on the potency of a drug is positive. If you criminalize the drug, it'll become more potent because you want to concentrate so it's easier to smuggle. And as my friend Jonathan Caulkins, the Carnegie Mellon professor, said a number of times, marijuana utilization smashes the iron law of prohibition. All of the increase in potency that Steve is talking about was a function of the greater diversity made available, the greater innovation, the greater effectiveness made available by the post legalization i.e, the deregulated market. And that's what you expect. Right. In the old days, there was one product in the marijuana market. It was an eighth of an ounce; it cost $40. And now there are dozens and dozens of products, and that's exactly what you expect when you end prohibition.

So I think Steve hits all the right points. I'll just add a couple of notes. One is that really, I think the major concern about marijuana consumption is among teenagers, is the effect on the developing brain, whether it be, as you alluded to, conversion to psychosis, whether it be anxiety, depression, there's even some suggestive evidence that it can cost IQ points. So I mean, in my mind, the major population of concern is adolescence, is those under the age of 25 in particular.

I like to say is, look, do I care if the 60-, 70-something baby boomer smokes pot? Not really. Do I care if my kids smokes pot? Yeah, absolutely. And when you're making decisions about the impact of the market, legal weed is not necessarily causing mass violence. Well, it's not causing no violence, as Steve's alluded to in his piece, but it's still introducing a socially harmful substance into broader society, making it more accessible. We recently saw a market increase in the share of 19- to 30-year-olds who reported smoking marijuana. That's probably bad at the margins. So I think it's important to remember where those costs, among whom costs are concentrated, and to think about whether those costs are outweighed by whatever the alleged benefits of legalization are.

Brian Anderson: Gentlemen, thanks very much. Don't forget to check out Steve Malanga and Charles Lehman's work on the City Journal website. That's Their recent pieces on marijuana legalization can be found there. We'll link to their author pages in the description. You can also find City Journal on Twitter @CityJournal and on Instagram @cityjournal_mi. And as always, if you like what you've heard on the podcast, please give us ratings on iTunes. Charles, Steve, thanks very much.

Steven Malanga: Thank you.

Charles Fain Lehman: Thank you.

Photo by THOMAS SAMSON/AFP via Getty Images

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