The economics of marijuana legalization (plus, a buncha other stuff) - Macleans.ca

The economics of marijuana legalization (plus, a buncha other stuff)

Reflections on the best econ stories from the Twitterverse

by

Andrew Hetherington/Redux

Thoughts on a few of the more popular economics pieces making the rounds on Twitter.

Trudeau and marijuana: A Toronto Star editorial wants answers from Justin Trudeau on “how legalizing marijuana would work.” In an ideal world, these details would come from a think tank, but Canada suffers from a chronic shortage of think tanks (no pun intended). Although I am a long-time supporter of marijuana legalization (see here, here, here, here and here) I admit there are legitimate concerns about how legalization would affect Canada’s trading relationship with the U.S. Of course, if the U.S. is that dead set against Canadian legalization, it would seem to me we could use the spectre of legalization as a bargaining chip to obtain trade concessions from the U.S. (Keystone XL?). Some of the other questions posed by the Star do not seem particularly relevant. The issue of where marijuana would be sold is a fairly straightforward one for Mr. Trudeau to answer (like alcohol and tobacco, it would be up to the provinces to decide). The health questions are also a little absurd—if we are going to make illegal anything as harmful as marijuana, we should be banning everything from African rock pythons to hot dogs.

I did get a chuckle out of the phrase “[a]cademics (and even newspaper editorial boards) might get by with just being right on the facts.” I was reminded of Thomas Carlyle’s description of economics:

I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.

Value Added: My colleague, and fellow Econowatch contributor, Andrew Leach got himself into a little bit of trouble when Twitter discovered he had no idea how the economic concept of “value added” is measured. In Andrew’s defense, I had no idea either. In my mind, the value added by a firm’s operation is: the firm’s economic profit (accounting profit minus any opportunity costs that do not show up on the firm’s income statement) plus the economic profit of the workers (their wage minus any financial expenses they occur from working minus their opportunity costs from a job) plus the consumer surplus customers receive from purchasing the product. There are also probably some externalities we should consider, but who cares about externalities?

Turns out that national accounts measure it quite differently. Consumer welfare isn’t considered at all (typical). Firm profit is measured only net of some accounting costs, and, most disturbingly “value added” assumes workers have no opportunity costs or financial expenses from working! Clearly this statistic was defined by a man that doesn’t have to pay daycare expenses. In applied economics accuracy often needs to be thrown out the window and replaced by what can be measured. This is clearly the case here, where important items that are tough to measure (opportunity costs, consumer surplus) are ignored completely and the resulting statistic only bares a passing resemblance to what we are attempting to measure.

The Great Stagnation:  In “Why the global economy may be doomed to lower growth — maybe forever,” Quartz reporter Simone Foxman gives four reasons why economic growth may be much slower in the future: scarce resources, an aging labour force, stagnant technology growth and externalities from climate change. There are those pesky externalities again! If you enjoy this piece (I did), I highly recommend purchasing economist Tyler Cowen’s 15,000 word eBook “The Great Stagnation.”  At only $3.99, your consumer surplus will be quite high (though I’m not sure anymore what this will mean about the resultant value-added). I find Cowen’s (and Foxman’s) arguments fairly convincing, though as Dan Gardner likes to point out, 50-year predictions are almost always hilariously inaccurate. The point I find least convincing is that technological growth will necessarily be stagnant. Any number of technologies in their infancy could spark the next wave of growth. Maybe it will be test-tube meat. Grow your own bacon at home!

Milton Friedman and quantitative easing: Or, as economist Christopher Ragan phrases it, “Ben Bernanke’s homage to Milton Friedman.” Ragan gives a convincing argument that Milton Friedman would be a fan of the Federal Reserve’s bond-buying program, also known as quantitative easing. In my view, this is unarguably true. Ragan has a tendency to write pieces I wish I had thought of; here he has done it again. Had I written it, I probably would have added this well known Milton Friedman story:

A friend of mine was taking a class by Milton Friedman at the U of Chicago, and after a late night studying fell asleep in class. This sent Friedman into a little tizzy and he came over and pounded on the table, demanding an answer to a question he had just posed to the class. My friend, shaken but now awake said, “I’m sorry Professor, I missed the question but the answer is increase the money supply.”

That’s what I have been reading. Have an interesting article on economics? Please share in the comments.