Cannabis Commerce in the USA

Part 3: A Poteconomist Plays The Game

Lecturing about marijuana, Jon Gettman is a veritable monster. He’s camera-shy, which is why we don’t have him on video, and can only offer this stock head shot.

Some of us wonder how many beers are left in the fridge. When you’re Dr. Jon Gettman, PhD, chronicler of the bulk folk, you wonder how many metric tons of marijuana people consume in a year.

Hopefully, that amount balances with how much ganja growers are producing. It’s helpful knowing what an average joint weighs, how much an average “user” consumes, and how much “demanders” are willing to compensate “suppliers” for preferred rations.

When new government data becomes available for any of the above, your blood races a little faster. Why not — isn’t this the essential data economists live for?

Economist or poteconomist?

“I’m not an economist. My training is in both criminal justice and regional economic analysis. I’m just an adjunct professor of Public Administration at Shepherd University in Shepherdstown, West Virginia,” Gettman says modestly.

Gettman throws around figures pretty good for a civilian, pot figures in particular. Jeff Miron’s bottom line numbers don’t quite do it for you? Evidently, the road to “more” runs through Shepherdstown.

If you believe that there’s more than $6.2 billion in “lost taxes,” you’d better find a whole lot more metric tons have been supplied to the market.

Gettman has.

Here’s a taste from his April, 2010, interview with Cannabis Commerce:

If we’re going to say – as I do – that there’s 14,000 metric tons of marijuana on the market, then we have to reconcile that with survey data to ask how many people are consuming marijuana? How much are they consuming, and can we account for all that marijuana?

It is kind of a funny thought. Like, OK, we’ve got 30,000 pounds of marijuana here, how long will it take to consume it? Well, gosh, to have such problems!

But that’s the nature of the intellectual exercise, if you will. What data do we have about supply? What data do we have about demand, and how do we correlate it?

Since the Public Administration professor somehow manages to correlate supply and demand data, perhaps he won’t object to the designation “poteconomist?”

One thing is certain. Poteconomists face the same handicap as economists:

“The problem is, we don’t have an inventory, an audit, a census. . . of all the marijuana that’s coming into the country or grown here. It’s not like it’s registered in a warehouse and it’s brought to market. At the same time we have better, but very limited data, about how many people consume marijuana.”

It’s certainly true no one’s figured out how to attach a barcode to Lime Kush – yet.

Playing the game

A gleam comes into Gettman’s eye when he expounds upon obscure cultivation statistics.

“One of the things that people do when they play with statistics in this fashion is make what we call an educated guess, and I’m sorry, but it is play.”

This comment reinforces the contention that seeking cannatax (“lost taxes” in Gettman’s parlance) is a game that anyone can play. Gettman is just way more advanced at it than you and me.

Here’s Gettman playing with how much land it would take to grow all the nation’s marijuana:

“Basically you could look at 50,000 acres supplying all the marijuana that Americans consume today. That’s 12% of America’s idle cropland. Now, again, these are really general estimates, and they’re based on certain assumptions about how many plants per acre, how much space between rows, based on the premise that you’re growing outside, while some people might prefer marijuana grown inside.”

Marijuana Production

Sweating the space between rows is one reason Gettman’s star shines brightly as the foremost expert on domestic marijuana production. In 2006, Gettman trained his guns on a growing industry. His Marijuana Production in the United States is a laudably researched paper. It spotlights the bulk folk and the untaxed 15,000 or so metric tons they clandestinely cultivate for commerce in grow rooms, greenhouses, and the great outdoors — including national forest land.

We learn that an average joint weighs .75/gram, an average pound of pot costs $3,570 a pound, and, in case you’re provisioning an epic event, only $7,871,480 stands between you and a metric ton (2204 lbs.).

Ditchweed to richweed

Gettman wasn’t exactly cramming for Marijuana Production. The prolific pot advocate has been writing articles championing marijuana reform for at least twenty-two years. Gettman recounted marijuana’s long, strange trip from ditchweed to richweed for Cannabis Commerce:

Originally pot was grown in just a few states, primarily California and Hawaii. What happened was, first people were growing large fields in a few states, then government started eradication programs. As people started growing in more states, the eradication program spread to more states. Then people started growing smaller plots and getting a greater yield. They started cultivating sinsemilla — seedless marijuana. They started paying attention more to individual plants. They started growing on fence lines, in little groves here and there.

And as production spread through more states, the eradication program spread through more states. As production got more intensive, the eradication program got more intensive. At one point the government started seizing private lands, so people moved on to public lands, growing in national forests and national parks for example. As part of this action/reaction cycle between growers and law enforcement authorities, two big developments evolved. One, a higher quality, more valuable crop was produced, and second, cultivation moved indoors.

Meanwhile, the government was keeping statistics about all that eradication. It was also tracking what informers pay for marijuana in a little-known program called STRIDE (System To Retrieve Information From Drug Enforcement).

Anyone that’s been arrested — there were a staggering 847,864 marijuana arrests in 2008, according to NORML — is surveyed about their usage and buying habits by agencies like NSDUH (National Survey on Drugs and Health).

Data harvested from those sources and several more previously untapped founts found its way into Gettman’s next white paper. It became his signature work.

Going the extra mile

Gettman’s 2007 Lost Taxes and Other Costs of Marijuana Laws went above and beyond acceptable due diligence. It took into account all sorts of comparison scenarios, referenced every survey issued by credible pot traffic-tracking entities [more government agencies with longish acronyms], and produced a slew of vital statistics about the acquisition habits of cannabis connoisseurs.

Gettman left no stone unturned in his exhaustive investigation of known statistics. He averaged four different methodologies to reach his conclusion, exhibiting plenty of industriousness in the process, even weighing street prices published by High Times magazine, the Playboy of herbology.

Shepherd 31, Harvard 7

In Lost Taxes, Gettman estimated there were 41.8 million American users spending a total of $112.9 billion, which deprived the nation of $31 billion in “lost taxes” for the year 2006. He emphasizes that $31 billion represents what he terms “lost taxes” for the year 2006, not the amount of taxes that could be collected in a fully legal, regulated economy [cannatax].

How did Gettman land on $31 billion?

Economists know that the amount of “government receipts” (i.e. income taxes; local, county, and state sales taxes) individuals and businesses wind up paying on any given product averages 28.70%. Gettman calculated the government receipts by “source as percentages of GDP.” The “source” is the $113 billion in marijuana sales. If we divide the source of $113 billion by the GDP percentage of 28.70%, after a few minor tweaks, the total of lost taxes comes in right around $31 billion.

There’s no doubt Gettman went the extra mile to arrive at his figures. There’s no disputing he’s deeper into marijuana production than Miron — or anyone else, for that matter. But does that make his $31 billion figure any truer than Miron’s $7 billion? Perhaps. It’s certainly more robust. But why is it so much higher than Miron’s?

Supply and demand: working both sides of the street

As noted, Miron mines demand-side statistics on consumption, based on NSDUH data. Gettman uses these figures, too, and blends in supply-side data, taken from DEA seizure and plant eradication records — that’s where he found all those metric tons.

Because Gettman works both sides of the street, he’s confident total marijuana expenditures in the US add up to $113 billion annually. Compare this figure with Miron’s $10.5 billion. Hmm. How do we account for a 1,000% difference?

As it turns out, the economist and the poteconomist are friends. They don’t agree on everything, but they respect each other’s opinions and know each other’s position inside and out.

Miron offers his take:

There are a couple of reasons for the difference. First, I’m using a demand side estimate. There’s data from surveys on the amount that people use. And he’s using that data, and other data from the supply side estimates of the amount seized, combined with some assumptions about what fraction of the market gets seized — and those numbers turn out to be higher.

I think that the supply side numbers are very suspect, because they come from law enforcement, and law enforcement has a strong incentive to want to make it look as though they’re being very effective. Frequently, when they estimate the weight, they’re looking at the entire plant, not just at the smokeable part, so the plant is way big in terms of weight, and they‘re looking at the wet weight, which is less relevant than the dry weight, for estimating the size of the market.

So I don’t use the supply side stuff at all, and I think one should be very cautious when using supply side guesstimates.

Gettman begs to differ — to a certain extent:

There is a considerable problem reconciling supply and demand-side data. All the surveys suggest a much smaller market than data on the supply-side. I try to bridge that gap with my own analysis, but the gap remains. This is why some credible analysts are skeptical of my estimates. They think a marijuana market of over $100 billion is just way too big, much too large to believe in.

But police are frequently indicating that marijuana has an extremely high retail value. And that price is inevitably between $2,500 and $4,000 a pound. When you look at all the marijuana they say that is on the market, it’s clear that based on that data, how accurate that data is is of course the open question.

But based on what police reports provide, and I mean DEA reports, state police reports, price estimates from all sorts of sources, there is some consensus of what the price of marijuana is these days. Again, we’re looking at a $100 billion a year retail market based on these reports.

That’s where the issue of marijuana consumption comes in. Like right now we’re talking about estimates of supply. Generally, these are assumptions based on very limited data. We have to balance whatever we come up with in this supply-side estimate context in relation to whatever estimates we have of consumption.

But there’s no way to do it without observors poking holes in your methodolgy. Developing a thick hide is an occupational imperative. Findings by economists and poteconomists have to withstand attacks by their peers, keep the press from asking too many questions, and survive merciless grilling from the likes of Cannabis Commerce. So they have to look hard at their claims.

And Gettman has looked really hard at his claim that all of us put together purchase $113 billion worth of weed annually.

“The data is the data, and if the feds want to publish such numbers, then they should confront the economic ramifications of their supply estimates. But that’s a lot of money. The truth is probably somewhere in between Miron’s numbers and my own.”

The apparent “downgrade” has to do with Gettman anticipating the market “collapsing” in a legal, regulated, market. He expects prices to fall hard under legalization. That $113 billion could turn into $50 billion. This is an example of the “elasticity” poteconomists refer to. How much will prices change due to a paradigm-shifting event, like legalization?

[Update 8/16/2012: When I interviewed Dr. Gettman in 2010, it was hard to believe that, even after an hour of constant talk, there was next to nothing I could dispute that he said. The only thing I was sure he was wrong about was his prediction that $450 ounces would become $150 ounces in a legalized setting. The situation here in Denver is the closest thing we have to a legalized setting anywhere in the US. And guess what: ounces are now selling for $150 and less!]

That was then, this is now

Miraculous events have occurred in the three years since Gettman penned Lost Taxes. Strange but true, we actually transact in a partially legal poteconomy. Total legalization hovers on the horizon, at least in some states. That begs the question: what kind of numbers could we rake in — I mean collect — in a fully legalized economy?

I shy away from a revenue number because I just don’t know what the consumption versus price issue is going to be. My report is based on ‘now.’ It’s based on a status quo. It’s based on the taxes lost by marijuana being illegal. It’s ‘what does this policy cost taxpayers today?’ It’s not really meant to be the taxes available from legal marijuana tomorrow.

Right now I’m comfortable with saying it’s costing us $40 billion a year. And I’ll tell you something. We can speculate all we want about the potential money that will come in when marijuana’s legalized, but that’s imaginary money.

What, then, makes his $40 billion real?

One reason I focus on the fiscal costs is that this is money that the government’s losing out on today. It’s not imaginary. This is lost money. This is directly hitting everybody’s wallet. It’s hitting every government’s balance sheet. This is real and it’s now. The potential tax revenue is important to evaluate as a policy, it’s important to evaluate its economic impact, it’s important to evaluate costs vs. benefits.

It’s not a trivial exercise to try to evaluate this stuff, it’s extremely important. But the losses . . . these are tangible . . . these can be estimated with a greater degree of reliability, and they show an immediate impact on people. People are paying higher taxes these days, or getting less services, because marijuana’s illegal. That’s the situation as we speak.

And as we speak … $40 billion’s not bad … or it wouldn’t be if people encountered this figure nearly as often as the ubiquitous $6.2 billion.

Gettman on “sin taxes”

Since he was seeking lost taxes in 2007, not cannatax, Gettman did not consider sin taxes in his estimate. One of the reasons $31 billion turned into $40 billion, despite the possibility of prices “collapsing,” is that sin taxes are now in the discussion. He spoke about these with Cannabis Commerce:

“Let me give you a proposed tax. $10 per 1% THC (tetrahydrocannabinol, the primary intoxicant in cannabis) of marijuana per ounce. So an ounce of marijuana at 5% THC would have a $50 tax on it. I think that would produce a retail price, for an ounce of pot, of maybe $100. Whatever the tax structure is, it has to come up with a price at which producers and consumers would prefer a legal market, rather than an illegal market.”

There are several problems with that statement:

• A non-smoker since the 80’s, Gettman’s a little out of the loop; it’s now 2010, the age of super-potent 25% THC domestic exotics, not 1982, the age of perfectly good 5% THC Columbian imports. That means ounces would be taxed at astronomical rates. $10 x 25% thc = $250 oz. sin tax alone. Yikes!
• Calculating increments of THC content from 1% to 25% and beyond (some tinctures and extracts boast 75% THC content) would be a bookkeeping nightmare.
• Ounce prices free-falling from today’s $400 oz. to “maybe $100” are, to use Gettman’s own term, “imaginary numbers.”

An exercise in modeling: a Miron/Gettman mashup

Once they’ve accumulated data from reasonably trustworthy surveys, poteconomists look for ways to “model” that data. Why? Because, placed in a mathematical context, assumptions start looking a lot more authoritative.

A model is a mathematical formula, based on a relationship between certain variables, between certain concepts. You know how long it takes to drive to the grocery store based on the speed limits, based on the speed of the car, based on the amount of traffic at the time of day you’re traveling. You can estimate that by some kind of equation that uses the relationships between those concepts.

One of the things that we do when we do model is we say, OK, we’ve tried to come up with an estimate that’s consistent with all the available data. We don’t know what we don’t know — sounds like an obvious thing, but it’s an important principle of modeling.

An example pertaining to marijuana would be quite simple. For example, the government has seized about 100 pounds of marijuana and the government concedes that they seize about 10% of all that comes into the country. Therefore if 100 pounds are 10%, then 1000 pounds came into the country. When you look at how much the government seizes, you can multiply that by 10 to come up with a fair estimate of what the total supply is. Another model is the government seized 100 pounds of domestic marijuana and that might be one fourth of all that was grown, so again, the same process applies.

These are very simple models. And I’ll tell you something, the more complex a topic is, the more useful simple models become . . .

OK, let’s try a simple modeling experiment.

What if we apply Miron’s 50% sin tax rate to Gettman’s stated $112.9 billion total annual expenditures? Then, borrowing the purportedly impeccable rationale of a Harvard PhD, we’d arrive at a considerably more alluring annual sin tax projection of around $56 billion. That’s before we even add in Gettman’s percentage of GDP, which, you’ll recall, came to $31 billion in 2007.

If we’re bold enough to add $56 billion in sin taxes to the $31 billion from percentage of GDP, that catapults our result to an impressive $87 billion. This figure does not result from applying an esoteric formula contrived by Cannabis Commerce. It’s a variation on the simple model Miron used: adding sin taxes and GDP together to calculate cannatax, the same formula he used for his $6.2 billion estimate.

$87 billion is a relatively giddy number. If it’s not there already, it could be awfully close to “magic number” territory. But wait — if we use Gettman’s $40 billion 2010 figure rather than Lost Taxes’ $31 billion, we ride the thermals to the even more rarefied air of $96 billion! Take a moment and let that sink in.

Time’s up! We never would have attained this altitude without applying Miron’s 50% sin tax rate. What would Gettman’s bulk folk have to say about that? Maybe not, “Sir, yes, sir!”

You’re sharp enough to realize that halving the sin tax rate in the given model, from 50% to, say, 25%, sends those alluring cannatax figures plummeting back down to earth, $28 billion lighter. Does that mean cannatax is capped in the $68 billion range?

Not so fast! Although Gettman did a great job of predicting potential tax revenue based on known data, as he admits, the truth is there’s only so much known data can tell us about the taxation potential of an underground commodity that’s recently become quasi-legal after 65 years of prohibition.

Playing the game beyond 2010

What tools will the poteconomists of tomorrow have at their disposal to make better projections than we can make today?

The real area that we’re missing good information on is what production actually is, how much marijuana is really on the market.

That’s the area we just don’t have exact data on, and sometimes it’s like the old story about a dozen blind men trying to figure out what an elephant is. One of them touches the trunk, one of them touches the leg, and one touches the tail. They all have a different idea what kind of animal they’re groping around, trying to size up.

It’s really a question of getting better data about two revenue streams. One of them is the amount of money being spent on pot being spent on other stuff and the taxes that regular sales produce. Sales tax, payroll taxes, corporate profits, etc. The other revenue stream is what we call sin taxes or excise taxes, the additional taxes that we have on alcohol or tobacco, and in this case marijuana.

To address the issue of getting better data, there may be a way to collect data from dispensaries after they’ve operated for a while. There’s potentially a way to see what they’re collecting in sales tax as a way of modeling what would happen if similar policies were in force in other states. There’s a possibility of using data from the dispensaries in California and Colorado, for example, and using that to provide a much more specific and detailed estimate of current tax revenue and projections of tax revenue.

Nowadays we have something called the National Drug Intelligence Center. So, for example, there’s this website where they have drug threat assessments, and every year or two they put out a threat assessment about cannabis production.

The California Department of Health has a website where they note how many identification cards they have issued verifying how many people are marijuana users.

All this “data of the future” will come in handy for tomorrow’s poteconomists.

However, there may be areas presently overlooked that could be accounted for today.

“Quite legitimate speculation”

While hesitant to futurize in numbers, after reading a preliminary version of this report, Gettman commented “the other sections provide quite legitimate speculation.” In particular, he was referring to Part 6, “Obvious Taxation Streams,” revenue-generating possibilities Lost Taxes and The Miron Report do not address.

Big Pharma’s cannaboloid products were given by way of example:

“I don’t have the data or the models to estimate that, that’s a bit beyond my capability at the moment. But there’s a lot of money to be made by developing highly refined pharmaceuticals based on the chemical ingredients in marijuana. Yeah, there’s billions of dollars there.”

Billions of dollars to add to our aforementioned total of $68 billion? Er, that was a modeling exercise. Can’t take that to the bank quite yet. Read on.

Conclusion

With three years to reflect on his Lost Taxes claims — that’s about 36 episodes in Weeds time — it would have been invigorating to hear Gettman shoot for the moon. It wasn’t meant to be. So much for expectations.

However, unlike $40 billion in taxes, all is not lost for those of us optimistic about cannatax.

Gettman leaves us with this thought:

“Consider this. Crops like corn, wheat, and soybeans gross farmers several hundred dollars per acre. Marijuana, in the current market, grosses a grower several thousand dollars per plant. We can argue about the numbers. But if you put aside the quantitative perspective and look at this in a qualitative manner, there are two inescapable conclusions:

The current market diverts an unacceptable amount of money away from the licit, taxable economy, and the marijuana market, even if deflated by legalization, represents a lucrative source of tax revenue.

Maybe marijuana’s sexy after all?

CC’s interview with Jon Gettman.

Next section preview

Another bold and determined researcher with an even higher tolerance for painstaking research examined the same statistics Miron and Gettman pored over — and more. He liberally referenced both in a vibrant, 100-page document. Astonishingly, this Ivy League phenom concluded that Gettman’s prediction was $172 billion too low!