Introduction: The Illicit Market for Cannabis
Drug abuse has wreaked havoc across the nation for more than 150 years. A common response has been that the harms result principally from criminalizing the manufacture, distribution, possession, and use of drugs rather than from legalizing and regulating those activities. That argument was often made in connection with the long-standing but still-ongoing debate over the issue of whether to legalize the distribution and use of cannabis.
Legalizing cannabis, the argument goes, would eliminate the existence of the illicit market for drugs while also allowing the government to earn revenues from reasonable taxes, permits, and the like. The so-called Iron Law of Prohibition—viz., demand will always drive supply—ensures that a sought-after product always will be available if there is a critical mass of people willing to pay for it. The result is the birth of an illicit market for whatever product or service consumers demand. Legalization would eliminate an illicit market because most consumers prefer to do business with legitimate vendors selling products known to be safe because of regulation. Legalization also would have an additional benefit: namely, elimination of the harms that result from use of the criminal law to prohibit disfavored products or activities. Violence is necessary to settle disputes because parties cannot resort to the judicial system to seek relief for disagreements over contraband. Corruption of law enforcement officials becomes commonplace because poorly paid state and local police officers, judges, and other officials find it easier and more profitable to look the other way when they believe that an activity is unstoppable. By contrast, legalization is a win-win for individuals and society.
At least, that’s the argument.
Since 1996, more than 40 states have become their own real-life versions of the “Hamsterdam” made famous in the fictional television series The Wire. They have revised their laws on cannabis, making it legal to grow, sell, possess, and use it for medical or recreational purposes. Cannabis is now available in a host of forms different from the classic joint, such as ointments, beverages, and “edibles.” California was the first state to legalize medical-use cannabis. Voters passed a citizen initiative, Proposition 215, entitled the Compassionate Use Act of 1996. It authorized the cultivation, distribution, possession, and use of marijuana by patients for medical purposes by creating an affirmative defense to the state criminal code for physician-approved personal medical use. In 2016, California took the next logical—and always planned—step of passing Proposition 64, which legalized the cultivation and sale of cannabis for recreational use, thereby eliminating the pretense that cannabis was a legitimate therapeutic product. Since then, numerous states have adopted their own medical or recreational cannabis programs.
Today, 37 states, four territories, and the District of Columbia allow cannabis or its products to be used for medical purposes. As the night follows the day, numerous states have taken the next logical step toward complete legalization. Currently, 18 states, two territories, and the District of Columbia permit cannabis to be used recreationally. There, advocates for legalization have pushed the ball across the goal line.
We have accumulated years of experience with the effect of those laws, and one result is clear: Cannabis legalization has not eliminated an illicit market for the drug. In some states—California is the leading example—the illicit market is larger than the lawful one and is driving pseudo-legitimate businesses to close because they cannot compete with the illicit market. Moreover, violence has not disappeared in states with legalized cannabis programs. In some instances, that problem has worsened.
The upshot is this: The Iron Law of Prohibition has some explaining to do. It seems that, sometimes, supply drives demand. Whatever the theory might be, there is evidence to that effect. Increasing the availability of cannabis, effectively eliminating criminal prosecution for its possession or use, and giving cannabis the same imprimatur that comes with state regulation of any other consumer product—all that has lifted the legal and moral restraints that kept a lid on some of the harms resulting from its production and use by enticing new users to light up. Moreover, given politicians’ and bureaucrats’ natural inclination to kill the goose that lays the golden egg—that is, to overtax and overregulate any newly approved source of revenue, regardless of the second-level effects that such overaction might have—legalized cannabis programs have not erased the illicit markets that legalization’s supporters guaranteed us we would see in the rear-view mirror. Why? Consumers are motivated by cost and availability factors, meaning that they prefer cheaper cannabis from an established seller rather than legal dope from a perhaps distant store. Economic theory, meet common sense. As far as eliminating illicit markets goes, we have taken one step forward and two steps backwards.
This Legal Memorandum will explain what has happened and why it did. It then will offer some advice for elected and appointed officials, along with the public, to consider.
Regulation of the Market for Cannabis
Cannabis—popularly known by its slang term, marijuana—is contraband under federal law. The principal federal statute outlawing cannabis is the Controlled Substances Act of 1970 (CSA). It classifies cannabis as a Schedule I controlled substance and forbids its use for any purpose, even if a state-licensed physician would recommend that a patient might find it therapeutic.
There has been considerable debate since the CSA became law over such issues as whether Congress should reclassify cannabis below Schedule I or leave the subject entirely to the states to regulate. Members of Congress have introduced bills that would declassify cannabis altogether, shift it downward from Schedule I to a less restrictive schedule, or revise the federal regulatory scheme in other ways, but none of those proposals has become law. Congress has nibbled around the edges of the issue by limiting the government’s ability to enforce the controlled substances laws against state medical-use—but not recreational-use—cannabis programs. Nonetheless, Congress has not fundamentally reconsidered how the nation should treat cannabis. It remains a Schedule I controlled substance whose distribution is a felony.
The Continued Existence of an Illicit Cannabis Market
Despite its status as contraband under federal law, cannabis is widely available across the nation and is the most commonly used illicit drug today. How has that incongruity—a “potential train wreck” is a more colorful and apt term—come about? The explanation is threefold.
One explanation is that the CSA does not preempt the state medical or recreational cannabis schemes. The state legalization programs might exempt distributors and users from state criminal laws, but they cannot shield anyone against a federal prosecution. The Article VI Supremacy Clause makes federal law supreme, preempting state law whenever it conflicts with federal law, so no state could exempt anyone from the reach of the CSA. But the state programs do not purport to bar the federal government from enforcing the CSA, nor do they order anyone to violate federal law, so there is no conflict to be preempted. Atop that, the Constitution does not require the states to criminalize drug distribution, possession, or use, and the CSA does not expressly bar the states from exempting cannabis from their controlled substances laws. Of course, the state medical and recreational cannabis programs can be described as granting individuals permits to commit federal crimes that turn out to be useless, but the Supremacy Clause does not prevent the states from confusing the public about its responsibilities under the federal criminal code.
The second explanation is that the federal government cannot fully enforce the CSA provisions outlawing cannabis. That is true for two reasons. One is legal. Since 2014, Congress has regularly passed appropriations bill riders limiting the U.S. Department of Justice (DOJ) from enforcing the CSA against state medical cannabis programs. The riders do not altogether bar enforcement of the CSA. They only forbid the use of appropriated funds to “prevent” states from “implementing” state medical marijuana programs, and the federal government could take numerous actions short of violating that proscription. Nonetheless, the DOJ has decided not to take an aggressive enforcement posture across presidential Administrations. The second reason for the federal government’s nonenforcement is practical. Even without the riders, the Department lacks the resources to investigate and prosecute every cannabis sale. The federal government has only a small fraction—about 10 percent—of the number of law enforcement officers available to the states and localities.
The third explanation for the widespread prevalence of cannabis is that, despite the assurance of legalization’s advocates that lawfully available cannabis would vanquish the black market and its accompanying harms, the state legalization schemes have not eliminated an illicit market for the drug. The Drug Enforcement Administration has found that cannabis continues to be smuggled across the southwest border from Mexico and is widely grown illegally throughout the United States. Researchers, journalists, and trade groups have noted that, despite the assurance that legalization would eliminate an illicit market, one has survived legalization and in some places is thriving.
No one knows the size of the illicit cannabis market, although some have tried to estimate it. But however large it might be, the illicit market generates a considerable amount of product. New Frontier Data, which studies the cannabis industry, estimates that the illicit market is seven times as large as the state-sanctioned market. According to one report, “The marijuana black market has continued to thrive to the point where legitimate growers and sellers are struggling to stay afloat in areas of the country awash in illegal weed.”
That is particularly true in California, where “Weedmania” began. Consider these figures:
The size of the persisting illegal market can also dwarf legal production. In Colorado, many illegal grows cultivate hundreds or thousands of plants. California’s Stanislaus County, for example, imposes a cap of 61 commercial cannabis permits. Yet more than four years after Proposition 64 legalized marijuana, the county is estimated to feature between 1,100 and 1,500 illegal pot grows, even while enforcement has been intense. In the 2019 to first half of 2020 period, the county’s sheriff’s department destroyed almost 100,000 illegal outdoor and indoor cannabis plants and seized tens of thousands of pounds of processed marijuana. In the state’s Siskiyou County, 130,000 illegal cannabis plants, some 26,000 pounds of processed marijuana, and 13 illegal firearms were seized in raids and 123 arrests were made in 2020. In California overall, over 1.1 million cannabis plants and 20.5 tons of processed pot were seized from 455 grow sites last year.
The illicit market has almost killed off its hoped-for replacement. One commentator has estimated that in 2019, 80 percent of the cannabis sold in California came from an illicit market. According to a detailed account in the Los Angeles Times, “The immense scale of illegal cultivation fed a glut that crashed wholesale prices last year, jeopardizing even those in the licensed market. Small-scale legal farmers unable to sell their crop have been pushed toward financial ruin.” The problem also exists at the distribution level: “Prosecutions are rare, according to court records, and shop employees say some dispensaries don’t even wait a day to reopen after being shut down by the police.”
California does not stand alone; other states have experienced the same result: illicit markets have survived legalization. The phenomenon also is not limited to the United States. Canada legalized cannabis use in 2018, and it too has a sizeable illicit cannabis market. As one commentator has noted, “the extinction of the black market is the chief fallacy of arguments for legalizing marijuana. If anything, legalization has forced hordes of stoners, namely the poor, to continue to rely on the streets.” Other commentators have reached the same conclusion. The illicit cannabis market gives truth to the aphorism, to paraphrase Ray Kinsella, “If you grow it, they will come.”
Those explanations for illicit cannabis’s widespread availability are not surprising. The goal of the medical cannabis movement was to ease the transition to recreational use by demonstrating that society would not collapse, the sky would not fall, if cannabis were available under medical supervision as a treatment for the worst of life’s maladies, such as end-stage cancer. With that foothold, the step to outright legalization was a short one. Indeed, there often is little difference between most medical and recreational cannabis use programs other than that the latter are more honest in their goal. For example, before the U.S. Department of Justice announced in 2009 that it would not enforce the CSA against individual patients and caregivers, there were only approximately 2,000 registered medical cannabis users in Colorado. After the announcement, the number jumped to 127,000 by March 2011, leading comedian Jon Stewart to remark that Colorado changed almost overnight from “the healthiest state in the country” to “one of the sickest.” Just a coincidence, of course. Legalization of recreational use in numerous states should have come as no surprise to anyone. That was the goal all along.
Why Did the Illicit Cannabis Market Survive?
Legalization did not oust an illicit market. That is true for several reasons.
The first one is a combination of economics and politics. As noted earlier, both price and availability influence consumer decisions. With more businesses entering the cannabis cultivation and distribution markets, supply increased, which forced prices downward, encouraging businesses to export their surplus to other states. Moreover, politicians see the legal cannabis market as a new revenue source for their pet projects or new giveaway programs for constituents, a modern-day version of bread and circuses for the Roman mob. Delaying the onset of high taxes might lead to a gradual reduction in the size of the illicit market, but few politicians think about the long-term effects of their decisions. Most have three short-term time-horizons: television news shows that evening, talking-head shows the upcoming Sunday morning, and their re-election. Besides, each legislator fears that colleagues will move first and capture tax revenues for their own pet projects. The result is tax laws that drive up the price beyond what many consumers are willing to pay, a result that encourages the growth of illicit markets, which leads to the harms that accompany them.
The real problem, of course, is not finding a tax rate that satisfactorily achieves targeted deterrence and reasonable income generation. Well-intentioned, rational legislators could haggle over the appropriate tax range and come up with a number that might be passably useful. But that is not what leads to trouble. Politicians become just as addicted to promising new revenue streams as any other addict is to his or her drug of preference. Moreover, politics being what it is, a small number of powerful, well-placed elected officials—say, the chairs of appropriations or rules committees—can have a greatly outsized influence over the progress of legislation. The result is the passage of legislation supported by a small minority of legislators, or perhaps just one, because a large majority of legislators are fearful of making enemies who can torpedo their own favored bills. That political phenomenon is one that neither economics nor law can remedy.
Overregulation is also common. Legalization’s advocates propose regulation as a consumer protection mechanism. The problem is that regulators often go overboard. As George Will once put it, “Fish gotta swim, birds gotta fly, and regulators, too, have a metabolic urge to do what they were created to do.” Regulators regulate whether their subject is hazardous waste or cannabis. Overregulation drives up costs and encourages the opening of firms that are willing to skirt the rules. Just look at what has happened in California.
Finding the tax and regulatory “sweet spot” would be a challenge for the best-intentioned officials. There is, however, no reason to believe that every public official is so inclined. Some states have decided that cannabis distribution licenses should be awarded on the basis of race and, believe it or not, a criminal record. New York legalized recreational cannabis use in 2021, and the New York State Office of Cannabis Management has been quite upfront in that regard. The office has published that one of its goals is to “promote social and economic equity applicants who have been harmed by the prohibition of cannabis, such as having been convicted of a cannabis-related offense,” and that it will award “50% of licenses to social and economic equity applicants” to achieve that goal. Atop that, the office will favor people who have been convicted for cannabis trafficking or even just possession, a lesser included offense that often is the result of a plea bargain. Under the New York program, “[p]eople with marijuana-related convictions get first dibs on the new permits, and hundreds of millions of taxpayer dollars will be directed toward helping them purchase and renovate storefronts to peddle cannabis products.” The result, as Jason Riley put it, is that “[t]he same lawmakers who refuse to expand education options for low-income minorities trapped in failing schools are eager to help former drug dealers get back in the game.” If the goal is to hand out cannabis distribution licenses to favored constituents—including ones with convictions for cannabis trafficking pled down to cannabis possession—there is no reason whatsoever to believe that any such program would eliminate an illicit market by making owners out of past illicit-market traffickers.
The second explanation for the existence of illicit markets is psychological and personal. Some individuals will want to use, or perhaps just experiment with, cannabis but do not want to “out” themselves as doing so. Perhaps they work for the government or companies that would frown on their cannabis use. Members of the medical profession, primary or high-school teachers, the clergy, various businesses with an anti-drug policy—those people and others might suffer being fired because of the reaction of their patients, parents, parishioners, superiors, or the public to their drug use. If so, they cannot afford to let it be known publicly that they light up. That could happen, however, were they to run into someone they know at a state-licensed cannabis store. (“Joe, I never expected to see you here!”) The only recourse those people have is to a black market. They would perhaps pay a premium to cover the costs of secrecy, but the additional price would be worth the privacy that a black market provides. No amount of legalization could ever eliminate that phenomenon. The result is that a black market will always exist to service people who want to keep their cannabis use to themselves and their dealers.
The result is the growth of two different types of illicit markets. One is the traditional black market. An example is the market fed by drugs that are illicitly grown or manufactured and smuggled from another country, like Mexico, into the United States across the southwest border. Similarly, cannabis grown in a state where its sale is legal is shipped to states where it is not, where it is sold on the black market. But there is also a so-called gray market in the cannabis industry. Businesses will openly sell cannabis from brick-and-mortar storefronts identified on Weedmaps, an online dispensary locator. Those companies give the appearance of legality, but they do not take the time and expense to obtain a license, nor do they pay taxes or comply with the regulations governing state-licensed cannabis businesses. Ignoring requirements such as product testing rules enables gray market businesses to shave off a large amount of the compliance costs borne by businesses that play by the state’s rules.
Where Do We Go From Here?
What lessons can we draw about continued legalization of cannabis, as well as ongoing efforts to legalize other now-forbidden drugs? There are a few.
Lesson 1. One lesson is that legalized supply might create new demand. There is likely to be a nontrivial number of people who refuse to use cannabis when it is contraband but who are willing to try it once its sale has been legalized. Some of those people will try it because they no longer fear criminal prosecution for possession, some will use it for its euphoric effect, and some will do so just to learn what all the fuss was about.
Why they try cannabis, however, is far less important than what they do after lighting up. People who experiment with cannabis and go no further are not a serious public policy problem, but people who go on to use more dangerous drugs put themselves—and others—at risk of health problems that are no laughing matter. That is particularly true if adults become dependent on or addicted to cannabis, which a goodly number will. The problems caused by heavy, long-term use are even worse for adolescents, because early and continued use can damage a minor’s labile brain. To be sure, just as one drink does not make someone an alcoholic, one joint does not an addict make. Multiplying them, however, can become problematic.
Lesson 2. A second lesson is always to distrust elected officials who paint rosy pictures about the consequences of a “progressive” change in the controlled substances laws (or, said in reverse, who never discount the likelihood of unintended consequences coming to pass). Consider the promise that crime associated with illicit markets would wither away as those markets rode off into the sunset, and the government would no longer need to devote considerable resources to policing the cannabis laws. It hasn’t happened so far. “From Colorado to California, illegal grows have been associated with automatic-weapon shootings and homicides (as well as other problems such as water theft and depletion).” There is no reason to believe that those problems will dissipate over time.
This does not mean that illegal cultivation and distribution themselves have disappeared; they go with the existence of an illicit cannabis market. It also does not refer to the increase in the incidence of people who drive under the influence of cannabis and cause motor vehicle crashes, grievous bodily injury, and deaths. That is a crime—and a tragedy—whenever it occurs, and it seems to be occurring with an altogether far greater frequency than legalization’s advocates are willing to admit.
No, the issue here is serious violent crime. Colorado and California’s “Emerald Triangle”— Humboldt, Mendocino, and Trinity Counties—have been infiltrated by the Mexican drug cartels (and perhaps by Chinese nationals as well). Their associates grow cannabis in the United States to meet the new in-state demand, as well as to capture the high profits available from sales in states that have not legalized it. We also are not talking about your friendly neighborhood Bernie Sanders-look-alike dealer who sells to neighbors what he grows in his closet. Drug cartel growers play for keeps. In California, “[o]utlaw grows have exacerbated cannabis-related violence, bringing shootouts, robberies, kidnappings and, occasionally, killings. Some surrounded residents say they are afraid to venture onto their own properties.” That is not exactly the Promised Land that legalization’s advocates foretold. As two University of California at Davis economists have noted:
[S]ome activists thought they could have the best of all worlds: regulate legal weed so thoroughly that you make it perfectly safe, bring lots of tax dollars to the state, make enterprises rich, eliminate the illegal weed market, and make the new system inclusive of the formerly illegal operators who suffered under criminal laws that are viewed by today’s lawmakers and citizens as unjustly harsh. [¶] Recreational legalization has brought none of that anywhere in North America.
Remember that lesson when legalization’s advocates ask us to double down on a past bet.
Lesson 3. Another lesson is that form might follow function, but policy must follow biology. We must make policy decisions based on the imperfect nature of the people who will implement those policies and who will be affected by them. As Stanford Law School Professor John Kaplan explained in connection with heroin maintenance proposals, “we must be careful to do more than merely consider how heroin maintenance would work in a perfect world. After all, in a perfect world we would probably not have heroin maintenance to begin with.” As a result, “we must consider how heroin maintenance would work with the imperfect human beings and institutions that would, in fact, run it.”
The same is true with regard to cannabis. As long as people remain people—which means forever—we will never eliminate an illicit drug market simply by asking people not to use it. Drug trafficking might not be one of the world’s oldest professions, but (at least at the upper levels) it might be one of the world’s most profitable—and harmful—today. The nation needs a serious commitment to reduce the number of people who abuse drugs, including today’s new hyperpotent cannabis. We have not yet got our arms around that new drug, and we should not move forward with further legalization efforts until we do.
That means ensuring that medical-use or recreational-use drugs like cannabis are not harmful, which in turn means waiting for the U.S. Food and Drug Administration (FDA) to decide that they are safe, effective, and uniformly made. We didn’t wait for the FDA to make those findings in the case of cannabis. In fact, the agency often told us that smoking a joint was not a safe and effective treatment for any disease. The states jumped ahead of the agency in a rush to deliver an ersatz medical treatment by lying to the public about what the true goal was: legalization of recreational use. The upshot was to abandon the judgment Congress has invariably made for 85 years that the FDA—not the states, and certainly not the public—should make the medical judgments necessary before any drug could be deemed a legitimate medicine. Under the Federal Food, Drug, and Cosmetic Act of 1938, the responsibility to approve the distribution of a “drug” in interstate commerce rests with the Commissioner of Food and Drugs. Along with his or her principal lieutenants and staff, the Commissioner must review all “new drugs” to determine whether they are “safe,” “effective,” and uniformly made for their intended treatment purposes. There is no good reason to exempt cannabis from the FDA’s jurisdiction.
Also, to reduce drug use and abuse, both supply-side and demand-side actions are necessary. Sometimes supply creates demand, especially if the government is unwilling or unable to enforce the law on the books. That is happening today at our southwest border with Mexico. Cannabis is not the principal drug of concern being smuggled into the United States—illicit fentanyl holds that place of dishonor—but the federal government’s refusal to take any serious step to interdict the drugs smuggled across the border by the Mexican drug cartels has generated among the public the belief that the government does not believe that drugs should be illegal but is unwilling to be honest about its policy. Moreover, the federal government’s matador defense at the border also suggests that the Administration does not care about what happens to drug users. That neglect encourages drug use of all types. Those problems do not require us to give up and legalize all drugs as some have argued. What they should do is compel us to enforce the laws we have.
Lesson 4. A final lesson is this: As long as politicians remain politicians—which, again, means forever—we will see overtaxation and overregulation of any newly legalized commodity. Those tendencies are like gravity: You can try to ignore them, but they won’t go away. We therefore need to treat the assurances we will receive that legalization of other now-banned drugs will eliminate the black market in hallucinogens, stimulants, or depressants as the codswallop that it is: It didn’t happen in the case of cannabis, and it won’t happen if we legalize cocaine, LSD, peyote, speed, and the like. Elected officials will find irresistible the impulse to overtax any newly legalized drug, and regulatory officials will find unavoidable the desire to promulgate what they see as the perfect regulatory régime. Those actions themselves guarantee the existence of an illicit market for cannabis based just on price considerations alone. Add in the limited exposure that is provided by purchasing a drug from a known, nonpublic source and you have another reason why that market would survive. That is true even if some new, hitherto unknown batch of legislators and regulators somehow becomes a majority in the federal and state governments and throttles back on the to-date overwhelming urge for new taxes and regulations.
The advocates of cannabis legalization argued that the illicit market would disappear once it was legal to sell and buy the drug because the public would choose a lawful, safe, clearly identified product with known ingredients over one of unknown and potentially hazardous content. That did not happen. Clearly. Only a fool would believe that something different would occur if we continued to legalize cannabis, let alone legalize other controlled substances whose distribution is now a crime. Of course, as H.L. Mencken once observed, no one ever went broke by underestimating the intelligence of the public, so we could see further drug legalization efforts succeed.
But I hope not. As the Reverend Dr. Martin Luther King once said, “Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity.” That danger can be avoided if we wise up to the consequence of our past mistakes. We don’t need to decide how many of the cannabis legalization advocates anticipated that illicit markets and their ills would remain with us once lighting up became legal (although some doubtless did). What we need to do is to realize that, regardless of whether they were charlatans and sold us beachfront property in Kansas or just made an honest mistake about the future, we are not in the land of milk and honey. We need to learn from our past mistakes, and surrender is not the lesson they teach. As Manhattan Institute Fellow Thomas Hogan has written:
Supreme Court Justice Louis Brandeis once noted that “a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Oregon has chosen to run a novel social experiment in decriminalizing hard drugs. Let’s hope the other 49 states are paying attention to the results.
Amen, brother. Fool me once….
Paul J. Larkin is the John, Barbara and Victoria Rumpel Senior Legal Research Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation. The author wishes to thank John Malcolm, Derrick Morgan, Luke Niforatos, and Bill Poole for valuable comments on an earlier draft of this paper.