7/20/2004

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!

3 comments:

derek 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.

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).