07 Aug 2009

The Coming Marijuana Legalization

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The more I think about it, the more certain I become that there will be significant liberalization of the marijuana market within the next three years. I expect that at least half of the states will allow small purchases of marijuana, perhaps under an open ended “medicinal use” clause.

The power elites in D.C. are clever, but they’re not as clever as they think they are. And that’s not a good group of people to get handed the keys to the nukes, the IRS, and the Fed. They are going to hit a brick wall within the next two years and the elites will be genuinely surprised by just how hard the wall is. They think they have several backup plans, but they don’t really understand how society works and so their mental simulations are wrong.

In particular, I think they are underestimating the importance of reputation in financial markets. These people understand thuggery and intimidation. That’s not how you have your way in the bond market. Maybe it is for a while; but you can’t take on the whole world if they start attacking the dollar.

And oh my gosh can you imagine how much Putin is hoping the dollar crashes? This is like the time in high school when the meat-head gang slipped up and went to the wrong barbecue. They didn’t realize it was a get-together of 15 guys who were huge and who hated them with a passion. And they were just waiting, biding their time, until the meat-heads showed a vulnerability… (Yes I’m referring to actual events from my high school years, and yes Uncle Sam would be the big meat-head in the analogy.)

So what does all this mean? It means they will face the dilemma that Jeff Hummel describes: Within three years (my timing, not Hummel’s), they will have to either default on Treasury obligations or simply let the Fed print all our troubles away.

But they will have a third option, as someone will surely point out: They could legalize pot and tax the heck out of it! Not only would it bring in tax revenue, but it would also let the states turn out millions of nonviolent inmates. So they’d bring in more money and have to spend less on prisons.

How much money are we talking? Well, in 2007 the U.S. states in total collected $5.8 billion in revenues from liquor stores. Now note, I’m pretty sure that figure just refers to the actual earnings from state-run stores; that number doesn’t count sales and special sin taxes levied on alcohol sales in general. (The alcohol and beverage tax receipts in 2006 were $5.4 billion.)

Now who knows how much revenue pot legalization would bring in. But I’m guessing that it will be at least $15 billion annually, especially if you include the jump in sales tax and income tax revenues.

Because the elites who run the show will be caught with their pants down, I think they will almost certainly turn to marijuana legalization. They might save it to deploy near the 2012 election, just to make sure Obama gets enough votes that they can plausibly declare him the winner. There are going to be some seriously angry people then, so getting a bunch of them stoned might be an added bonus.

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