Underground economies

In the article "Marijunana Law" we are informed that nine states: Alaska, California, Colorado, Hawaii, Maine, Nevada, Oregon, Vermont, and Washington have all passed laws that allow patients to use marijuana for medical reasons.
What does this have to do with economics? Let me tell you. It has to do with the underground economy. There are two aspects to this: 1. the production and distribution of illegal goods and services; and 2. the nonreporting of legal economic activity. Drug sales generate huge amounts of money and this is the one I’d like to focus on. Since drug dealers could never explain where their money came from, to the IRS, they launder it. Laundering the money makes it appear legal. By legalizing marijuana it helps decrease some of the underground economy that is going on in the US.
As a whole, would legalizing all drugs (not just marijuana) help increase GPD? One way it could do this is by making drug dealing a legitimate business. The business would now have to pay taxes on the merchandise. The taxes then are spent by the Government which strengthens the economy.   
By legitimizing drug dealing it would decrease the amount of money spent on housing drug dealers in jails and prisons. Not to mention the several other costs the Government incurs because of illegal drug sales. The money gained from the now legalized business of drug dealing, and the money that use to be spent on stopping drug sales could be put back into the economy. This act alone would increase GDP by a minimum of 10%.
The really question is would legalizing drugs such as marijuana be worth the increase in GDP? That question is the topic of a whole other blog!


micahnay said...

I think that we would be doing a lot of good by legalizing marijuana. The government would have a lot more money for everything that they need it for, we would have less people in jail for drug charges, and it would reduce crime rates by a lot. The only thing I see wrong with legalizing marijuana is that we would have to have some restrictions. These restrictions would have to include: 1. People with certain jobs can not be under the influence while working. 2. Implement laws similar to those of alcohol so that people can’t drive under the influence and it can’t be sold to minors. 3. There should be certain places that can sell it so that there aren’t people growing and selling it out of their homes. I am sure that there are many other restrictions and laws put into place for this to work, but overall, I strongly believe that marijuana is far safer than alcohol. Alcohol is legal, and because it is legal, it takes many…many lives every year. I can’t remember the last time I heard about someone dieing from the effects of marijuana.

Boris said...

Would legalizing drug trafficing help the economy? I highly doubt it. I can't even begin to imagine all of the loss of output the economy would experience. How many people would suck back their reefer all night and "forget" to come to work in the morning. How many people would fry themsleves and become completely worthless to the labor force? How many kids would become adicts and never persue higher education?

I could go on and on, but I won't. I don't think that legalized drugs would be used responsibly, and we'd get ourselves into a huge mess.

Dr. Tufte said...

This is more of a microeconomic issue, but I think Kid did a good job of sticking with the macro aspects.

Macroeconomically, I doubt that legalization of marijuana would do anything important. The reason is that this business already exists. Legalizing it will just make it change from going uncounted to counted. I think most of Kid's ideas revolve around better counting of GDP, rather than any change in the size of the economy.

Economists, particularly conservative ones, are well known for supporting some sort of marijuana legalization. The basic idea is that prohibition doesn't work very well on goods that have inelastic demands (which is the point that Micah made). Skip's arguments are not likely to follow for the same reason. He is actually relying on an assumption that demand is elastic, which is counter to the available evidence.

Rolf Tiblin said...

I believe that Kid has a valid point. Kid’s argument is for legalizing all drugs not just marijuana. There is however a side of this economic model that is going unnoticed. The cost and money that is coming from drugs is high due to the risks involved. If all illegal drugs were legalized the costs would fall to a pretty cheap level. The revenues that would possibly be put into GDP might not change the numbers much. Secondly there is the question of the possibility of continued money laundering. Even though drugs would be legal I hardly believe that the individuals selling them would run an ethically better business. Lastly cigarette smoking is on the verge of being outlawed (not that it will happen anytime soon), doesn’t it seem a little odd to be legalizing illegal products for revenue purposes and making legal vices illegal? Cigarettes will become the new underground economy and nothing would have changed.

kavindavis said...

Im at a loss of words on this subject. I think it could go both ways, and both sides have a good point. If you legalize it, it would be interesting to see how it would be sold. For instance would you go into the gas station and say "umm I had $20 on pump 3, and could you get me 3 ounces of pot."

But to comment on Skips blogg, I dont think that our Nation would all turn into a big looser walking the streets in shredded cloths asking each other for a buck, becouse I still would'nt do drugs. But I dont want them legalized.

Senator Miller said...

I couldn't imagine how legalizing marijuana wouldn't increase the actual users of the substance. Haven't countries that have legalized marijuana and possibly other drugs run into a number of problems associated with it? I would imagine there would definitely be an increase in those that would experiment with the substance, particularly with the American culture (ex: all those thousands of college students that try beer at least once.) Of course any increase at all in drug use would decrease our nations human capital particularly in the education area. I personally had a friend who was ruined by marijuana. I don't think it should be legal to let people throw away their lives so easily.

C-Dizzle said...

Just for the fun of it I’m going to play somewhat of a devil’s advocate on this blog.

I’m going to say that I disagree with the second paragraph that says that making marijuana legal will bring in more tax dollars because of legalized drug dealing.

I’m willing to make a guess that the marijuana given to patients isn’t just any run of the mill shrubbery. I’m willing to bet that it comes from some sort of government greenhouse where the plants are “pharmaceutical” grade. So sure, someone gets to benefit economically from the weed but I don’t think that it’ll help out the common drug dealer.

Now if the marijuana was legalized for the use of the common man without a prescription, the economy could totally benefit. This would allow the street dealers to distribute their goods legally to everyone without the need for such large drug enforcement police units. Making the dealers pay taxes on their now “legalized” sales is another story.

metromut said...

I don't see any good coming from the legalization of marijuana. I think if it were, our nation would start going down the drain real fast. I don't say this just because I don't like the stuff. I've never tried it but Im sure it is good for medicinal purposes or else why would there be a big issue? If the law was to be implemented I would have to go with micanay and say there has to be limitations and restrictions for this to work.

james said...

The legalization of marijunana could increase GDP in a nunmber of ways. About fourteen years ago there was a Ted Cople special report on legalization. In this report it was estimated that the national debt could be paid of in ten years with just the taxes from marijunana sales. The government is paying some farmers not to grow certain crops. These farmers could grow marijunana and instead of recieving a handout earn their money. It would also have to be regulated and taxed in a similar fashion as alcohol and tobacco.

kamm said...

I think legalizing marijuana is a crazy idea. It's hard enough to keep drugs away from curious kids as it is, and I think that legalizing would send the message that "it is ok to smoke dope."

I know that's just considering the moral side of the issue, but thinking about it economically, I do not believe that our economy would be any better off. Think about how many jobs there are such as policemen and NARC officers who are trying to protect us from those drugs. Since the drug business already exists, I think we would be hurting our economy and possibly decrease our GDP by legalizing drugs because of the loss in law-enforcement jobs.

Dr. Tufte said...

Spelling mistakes in James' and Kavindavis' comments.

Personally and professionally I think it is incorrect to think about drug legalization in terms of macroeconomic issues like taxes, debt, and GDP. Microeconomically, the questions need to be what are the marginal costs and benefits of it being legal or illegal?

BTW - I read something recently (didn't save the URL in my favorites though) that the "medicinal" marijuana provided by the government in Canada is both expensive and low quality. Leave it to a government to screw up selling a weed (pun intended).