Prohibition Déjà Vu: Cannabis And COVID-19

Article co-written by Jeff Schultz of Feuerstein Kulick LLP.

A typical news day seemed like any other, until it didn’t. When televisions across the nation provided news of a stock drawdown, initially it was not enough to strike fear in the minds Americans. Within the blink of an eye our definition of ‘normal’ had changed, and what began as a moderate, short term market hiccup, became a deluge of daily declines. On the heels of a record-breaking decade of growth, a nation reeled from massive unemployment leaving no demographic untouched. Economic malaise reached unprecedented levels with basic goods like water and toilet paper more valuable than oil. Fear and uncertainty became the two new primary emotions with the ever-present wonder:  when and if, we would return to a life once known.

The crisis has added emotion and divisiveness to an upcoming Presidential race. The challenger has put forth a broad platform of social policy reform, relief and recovery. A quiet rumbling becomes a national discourse about legalizing one of the nation’s most popular adult consumer products with a tacit acknowledgement that its prohibition has failed to provide the desired outcomes, and instead introduced unintended adverse consequences.

The year was 1932.

FDR began his presidential campaign in the midst of the Great Depression on a promise to end the “Noble Experiment” of alcohol Prohibition and repeal the 18^th Amendment. While recognizing its failures, he was acutely aware of the urgent need to find an end to a growing health crisis stemming from illicit market activity, ending the scourge of criminal markets, finding a new substantial source of tax revenue, and employing Americans again. The collapse of Prohibition had four primary causes:

1. Bathtub Gin. On January 17, 1920 the U.S. became “dry” resulting in the end of regulatory oversight. The new unfulfilled demand created a void that was seamlessly filled by the illicit market. Bootleggers created profitable concoctions, diluted with less costly but unsafe additives. Without mandated purity and safety standards, cheap ingredients like methanol and wood alcohol (used for anti-freeze, mouthwash, fuel and shaving cream) were used. Nearly one hundred people died Christmas week 1926 from alcohol poisoning, followed by another seven hundred and sixty-one a year later, ultimately resulting in an estimated 50,000 deaths. Mark Twain recognized the obvious when he said that, “Prohibition only drives drunkenness behind doors and into dark places, and does not cure it or even diminish it”.

2.The Illicit Market. Street gangs soon evolved into sophisticated criminal bootlegging syndicates. “Lucky” Luciano and Joe Kennedy began to build their fortune while in Chicago, Al Capone built an annual $100 million alcohol empire. Profits begat violence with thousands of gangsters, cops and bystanders brutally murdered.

3.Revenue. $443 million in tax revenue was collected in the year prior to Prohibition, $11 billion estimated to have been foregone, representing 60% of tax revenues, with expenditures of $300 million on enforcement. Pierre DuPont stated, “half the revenue required for the budget…would be furnished by the tax on liquor alone.”

4.Employment. An estimated 250,000 liquor industry jobs were lost in the country’s fifth largest industry. Prohibition’s end created the largest privately funded jobs program to date. Today, the alcohol industry employs nearly one million people.

See also: 4/20/20: Will COVID-19 Bring Pain Or Prosperity?

History doesn’t repeat, but it certainly rhymes. An eerily similar fact pattern confronts us: a consumer health crisis, a devasted economy, the evisceration of government budgets, a stock market crash and massive job losses.  Could legalization of another high-demand consumer good provide the solutions that the end of alcohol prohibition provided? Is now the time to finally re-legalize cannabis?

1. Health Crisis. The CDC recently issued a report on THC vaping products and associated lung injury and found the majority of cases arising from products sourced from ‘informal sources”[1].  NCIA studies demonstrated that only illicit products had unacceptable levels of contaminants, In Massachusetts, shelving legal vape products increased black market demand. We should have learned our lesson: like alcohol, only regulation can protect cannabis consumer safety.
2. Illicit Market. The illicit cannabis market resembles Prohibition’s. Milton Friedman recognized that, “One role of prohibition is in making the drug market more lucrative”. California’s illicit market was estimated to be $8.7b in 2019 vs. a $3.1billion legal market[2]. Aggregate U.S. illicit market demand is estimated at $64 billion[3]. Many believe that Federal re-legalization will at worst, eliminate a large portion of illicit sales. The DEA has acknowledged that legality diminishes the illicit market noting in their 2021 fiscal budget that, “[u]ntil high potency marijuana becomes legalized …the potential for abusing current law remains a possibility…”[4]. The Supreme Court ‘s 2019 report stated that drug crime defendants grew by 5% but cannabis-related crimes fell by 28%, believed to be attributable to state legalization.
3. Revenue. COVID-19’s existential strain on the healthcare system and mandated shutdowns have crushed the economy and employment, increasing problems with state, local and federal budgets.  Stimulus packages must be paid back eventually. A new and growing source of revenue should be welcomed. New Frontier Data estimates that federal legalization could lead to $130 billion in annual tax revenue.[5]
4. Employment. Recent jobless claims have hit 24 million. The cannabis industry is one of the fastest-growing labor markets employing 243,000 Americans, adding 33,700 new jobs in 2019 .[6] New Frontier Data estimates federal legalization would create 1.5 million additional  jobs, representing $50 billion in wages by 2021. America deserves these jobs.

The consequences of Federal re-legalization will provide numerous benefits:  jobs, tax revenue, public safety, and diminishment of the illicit market. America has made the prohibition mistake twice. Nearly one hundred years ago, the first mistake was fixed. It’s now time to fix the second.  No one better than Abraham Lincoln recognized that, “[p]rohibition... goes beyond the bounds of reason in that it attempts to control a man's appetite by legislation and makes a crime out of things that are not crimes...A prohibition law strikes a blow at the very principles upon which our government was founded.”

Lead image: cannabis and sports, by Ilona Szentivanyi. Copyright: Benzinga.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.=

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