[Adam Ozimek]





recent op-ed in the New York Times by Sylvia Longmire tries to lower expectations for what legalization of marijuana could accomplish. It's all fine and good and be realistic, but I think the author oversells her pessimism. Here is her summary of the argument she is attempting to counter:

"FOR a growing number of American policy makers, politicians and activists, the best answer to the spiraling violence in Mexico is to legalize the marijuana that, they argue, fuels the country's vicious cartels and smugglers. After all, according to official estimates, marijuana constitutes 60 percent of cartels' drug profits. Legalization would move that trade into the open market, driving down the price and undermining the cartels' power and influence."





There are several debatable issues here, but she is mostly disagreeing with the notion that the "power and influence" of cartels would be "undermined" by legalization of marijuana.





Her main counterpoints can be summarized as:





1) They will still have 40% of their profits from other activities.





2) They could enter the legal marijuana market.





3) A growing share of profits come from other activities.





4) Given these other activities, "it's unlikely that Mexican cartels would close up shop in the event of legalization."





The first thing to note is that all of the above can be true, and we are still very short of showing that the power and influence of drug cartels would not be weakened, and that killings would decline by a significant amount.





Longmire doesn't debate whether the cartels get 60% of their revenue from Marijuana, but there is a lot of uncertainty regarding this number. A recent Rand study highlights the difficulty here. They find estimates of U.S. annual marijuana consumption ranging from 1,000 to 5,000 metric tons (MT), with one estimate as high as 9,830 MT. Then, they put the range for the Mexican share of the U.S. market somewhere between 40% to 67%. Using these and a couple of other estimates, they peg the final Mexican exports to the U.S. as somewhere between $1.1 billion to $2 billion. The Rand report also cites a range from the NDIC of $3.9 billion to $14.3 billion, so clearly the is much uncertainty here.





In the end Rand concludes the revenues from marijuana in the U.S. are around 15% to 26% of cartel revenues. Of course one could image the U.S. legalization leading to Mexican cartels losing both their domestic market as well as the Canadian market, which would have a larger impact. The Rand report helps Longmire's case, and I don't point it out as an argument against her. But since Longmire doesn't stop to question this number, I'm sort of--but not completely--going to sidestep the issue and grant that she is correct and the revenues are 60%. In any case marijuana revenues mean a lot of money to cartels, but we don't have a very good idea how much.





Moving on to her argument, Longmire's second point strikes me as her weakest. Sure, cartels could enter the legal U.S. marijuana market, just as they could enter the U.S. market for alcoholic beverages and tobacco. Likewise they could enter the market for diapers, ballet shoes, or any product or services. Yet the major profit center for the cartels she lists are all illegal: kidnaping, oil theft, pirated goods, extortion. If cartels are capable of competing in legal markets against legitimate firms, she hasn't provided any examples. It's hard to see why this would be the case for marijuana.





So if I'm right and they won't be getting into the legal market, how would a revenue reduction of as much as 60% impact cartels operations? Longmire is skeptical it would do much, arguing:

"Cartels are economic entities, and like any legitimate company the best are able to adapt in the face of a changing market."





But it's hard to imagine being sanguine about the long-term viability of any "legitimate company" in the face of losses approaching 60% of revenues. Apple, for instance, get's around 50% of it's revenues from the iPhone. If this market were to evaporate, would it be fair to say that it would probably "hinder" their "long-term economics"?





Like cartels, it's probably true that Apple has a lot of other activities that represent profit centers, and they would be unlikely to "close up shop" in the event of losing the iPhone market. But it is a far walk from here to concluding that their "power and influence" (or whatever the comparable measures are for a legal company, maybe market cap?) would not be severely weakened. I guess my question for Longmire is this: if a 60% decline in revenues wouldn't represent a significant blow to the power and influence of cartels, what percentage would? 70%? 90%?





Another important way cartels are similar to Apple is that there likely economies of scope and scale for cartels. A decrease in marijuana revenues will take away resources they were using to build their distribution networks and buy political and legal influence, both of which probably exhibit economies of scale and are inputs for cartels in the production of their other elicit goods. This means a decrease in marijuana revenue should decrease raise costs and thus decrease profits in their other markets. This is in the same way that if the iPhone went away it would hurt Apple's sales of it's computers and software, and generally diminish its brand.





Longmire ends her piece by listing reasons why marijuana should be legalized:

"We need to stop viewing casual users as criminals, and we need to treat addicts as people with health and emotional problems. Doing so would free up a significant amount of jail space, court time and law enforcement resources. What it won't do, though, is stop the violence in Mexico."





Say the higher end estimate of marijuana revenues from the Rand corporation is correct, and legalizing would reduce cartel revenue by 26%, or that the 60% number is correct and they will make back an implausibly high 50% of their lost revenue in other activities. This means something like a 30% decrease in lost revenues. If this leads to a proportional decrease in long-run drug related murders in Mexico, then based on the 15,273 drug related deaths in 2010 , there would be 4,580 fewer deaths each year. That's a huge gain in welfare even if it falls short of the quixotic goal of "killing the cartels". The end of alcohol prohibition in the U.S. did not mean an end to the mafia, but it did lead to a significant decline in murders and in their power. Longmire has not presented a convincing case that the same would not be true in Mexico.



