Illegal Dealers Owe Thanks to Washington State's Marijuana Regulators

The state's doomed scheme for a centrally planned market in pot creates a breeding ground for a completely unplanned and illegal market in the stuff.


Washington state voters legalized recreational marijuana in 2012 and the first retail store opened in 2014 in a popular move widely hailed as a success for reform. So how come the authorities are moving to close a pot shops across the state in just a few weeks? Are they actually trying to revive the black market in pot?

Probably not. More likely, political hubris and managerial ambition have overwhelmed basic knowledge of how economic incentives work.

Tacoma ranks among the municipalities where new licensing regulations will have a major impact on the marijuana market, potentially inconveniencing consumers and creating a huge opening for those willing to work outside official channels.

"Last August, there were close to 70 unlicensed operators in Tacoma," noted The News Tribune last week. But a 2015 law merged the medical and recreational markets and required all vendors to be licensed—with a strict cap on the number of permitted retailers. "Tacoma is limited by the state to 16 retail licenses, and a recent city ordinance requires every retail operator to also get a medical endorsement to provide for those with medicinal needs," the article added.

So, let me get this straight. A market that sustained 70 businesses will be adequately served by 16 after the rest are closed by government order? That's the official story, and politicians and bureaucrats are sticking to it.

Statewide, "the former retail store cap of 334 was lifted to a new cap of 556. The recommendation followed an analysis of the entire marijuana marketplace by the state's contracted research organization, BOTEC Analysis Corporation," according to the Washington State Liquor and Cannabis Board.

"We illustrate the methods and tools for two particular target numbers of stores statewide: 200 and 330, BOTEC noted in a 2013 report before the recent legal change. Still, the company hedged its bets. "[B]ut we do not necessarily endorse either as the 'correct' number."

Washington's "current grow canopy license limits are sufficient to supply both the recreational and MMJ markets" the University of Washington's Cannabis Law and Policy Projected predicted separately. The group also hedges and notes "we defer to WSLCB to make that determination."

That's right. A quarter-century after the Soviet Union did a face-plant into the ash heap of history, Washington state officials are trying to centrally plan the market for marijuana.

This sort of micromanaged legal-but-only-sort-of market is a characteristic of state officials who were forced to change the law by voters and not as a matter of their own preferences. To carefully control the implementation of the voters' will, they brought in a consultant who perfectly reflected their reluctance: public policy professor Mark Kleiman. Kleiman is a sort of middle-way type on the marijuana issue, favoring legal reform out of conviction that full prohibition has been counter-productive—not as a weed cheerleader or out of a commitment to personal choice.

"The free market is an excellent system for maximizing consumption. That's why I don't want it to apply to this product," he told an interviewer an interviewer at UCLA where he worked before moving to New York University. "I wouldn't want that system for alcohol either, but we lost that battle."

In the same interview, he expressed a preference for state stores, non-profit vendors, and high prices that would make marijuana available, but not cheap or convenient.

Kleiman, by the way, is the head of BOTEC Analysis.

I'll note here that Kleiman is a tad prickly and has tangled with Reason's Jacob Sullum over marijuana issues, even when they are in general agreement.

But black market dealers don't appear just because marijuana—or anything else—is technically outlawed; they arise when restrictions drive prices up, restrict availability, or both, and leave an opening for vendors willing to flout the law to satisfy demand. Eric Garner was killed by New York City cops in a confrontation rooted in his sale of loosies—loose cigarettes—in defiance of state and city tax rules. Cigarettes are legal, but so heavily taxed and restricted as to invite illegal dealers to enter the market and make a buck.

As a former dope dealer myself, I can say with a fair degree of confidence that severely restricting the availability of "legal" marijuana (and otherwise jacking the price with a 37 percent excise tax) creates a wonderful opportunity for black market dealers. Even before the latest change, Washington's underground economy in marijuana was thriving despite its nominally legal status.

BOTEC's reports for the state fully acknowledges the existence of the black market. Kleiman and company's latest submission grants that the scope of illicit sales is not entirely knowable and "the feasible range covers as low as $60 million and as high as $740 million." In fact, "Due to the considerable amount of uncertainty in the estimation process, as well as the rapidly changing nature of cannabis markets in Washington at present, it is valuable to reference feasible ranges rather than a single point estimate." That is, the whole marijuana market is too dynamic and in flux to get a firm handle on its size.

So, with "rapidly changing" markets, how do you predict, as a central planner, "sufficient" production capacity? Or the magic number of retail outlets to satisfy demand?

The answer is that you can't. Central planners can never respond to shifting supply and demand as quickly as buyers and vendors can in their multitude of independent transactions. That's why central planning failed in the old Soviet Union, and why it can't any more effectively serve the trade in marijuana in one state. And unable to satisfy buyers, it will inevitably leave room for sellers who don't care what officials think ought to be.

Washington's impossible scheme for a centrally planned market in marijuana creates a breeding ground for a completely unplanned and illegal market in the stuff.