The economics of legal weed don't work

Ten years ago Colorado became the first state in the U.S. to fully legalize the recreational use of cannabis. Many other states followed, and several others already had sufficiently lax medical marijuana legislation, that now an estimated 40% of American adults can legally buy cannabis. Musicians, actors and sports stars have quickly jumped into the market with their own brands of weed, hoping to lure people who want to get high with a high-end product. Some of these—Willie Nelson, Snoop Dogg, Seth Rogen—are unsurprising. Others are less likely weedpreneurs, including Bella Thorne, Jaleel White—the actor who played Steve Urkel in Family Matters—and former NBA star Al Harrington. The newly legal industry was predicted to be a multibillion dollar business and a big tax revenue win for the states.

But it hasn’t been that simple, according to the authors of the new book Can Legal Weed Win?: The Blunt Realities of Cannabis Economics. The two economists from the University of California, Davis’s Department of Agricultural and Resource Economics found that the future of the legal cannabis business, hampered by regulation, competition and standard agricultural issues, is a bit hazy. TIME spoke to the authors, Daniel Sumner—who is also a former assistant secretary of economics at the U.S. Department of Agriculture—and Robin Goldstein, who is also the author of a controversial bestselling guide to wine, The Wine Trials.

This interview has been edited and condensed for clarity.

Not quite half of American adults can now buy weed legally. How’s business going?

Daniel Sumner: It’s been tough. There’s still a whole lot of illegal weed out there available to that same group of consumers, and most of them choose the illegal product because it’s half the price. Also, they have been consuming the product for the last 20 to 40 years; they’ve been dealing with this guy who knows a guy and they’re reasonably happy with the product.

Why is legal weed more expensive?

Sumner: To get a license to start with in most states you hire a consultant to help you through the regulation maze. And then you wait. In Vermont [which legalized recreational cannabis in 2018], for example, you’ve hired your consultants, you’ve gotten your venue for your retail store, you’ve purchased a greenhouse or rented one as your cannabis growing facility, and you’re still waiting. It’s been four years. Nobody has got an adult-use weed license in Vermont.

Robin Goldstein: In many states, the agencies are understaffed and the process is very lengthy, time-consuming and difficult for people to get through. So it can take years and years and in the meantime, they have investors, they’re burning cash and a lot of people have lost their money just by waiting.

Sumner: And at the farm level, the illegal producers really are, for the most part, off the grid. They’re not paying attention to labor regulations or pesticide regulations or other things that are the same for every farmer, not just for cannabis. That is a cost disadvantage for the legal guy. And that’s one where almost everybody would say, “We really ought to enforce that.” I wish we could figure out a way to enforce it on the illegal guys, but we haven’t figured that out yet.

Have we not seen an influx of customers who wanted to try weed but who were turned off by the criminal aspect?

Goldstein: Yes, but it’s a small percentage. In many of these states that have legalized, the penalties weren’t that harsh already for the buyer. People who wanted to try it could try it. Evidence from around the world, from places like the Netherlands that have had forms of legalization well before the U.S., suggests that you don’t see a big increase in the total amount of weed smoking just because you legalize it.

So what’s happened to the medical marijuana industry as a result of legalization?

Goldstein: In some states there was legal medical weed for many years and it was more or less unregulated. And now with all these new rules, some of those people are breaking the laws. We don’t think it was the intention of the voters generally to make more weed criminals. [In states where weed is legalized] there’s not really that much reason for people to continue getting their medical recommendations. Once anyone can just walk into a dispensary and buy it, then what’s the reason to pay a doctor to get this recommendation? There have been some states where the medical system has survived, including Colorado, and Massachusetts, because they’ve got much bigger tax exemptions for the medical patients.

A lot of people think that weed is a growth industry and states like Colorado are riding this new product to economic prosperity. Is this not true?

Sumner: There are companies that have done well and there are lots of companies that have not done well at all. There are growers that are doing OK and there are lots of farms that are not doing OK at all. Now, that’s true for other farms too. I’ve been looking at farm industries for a very long time, and that’s the nature of agriculture. But cannabis is in this state of flux. It’s been a gold rush and a few people have found some gold and a lot of people haven’t. What I like to say is the company that made a lot of money in the California Gold Rush was Levi’s. It was making jeans for the guys digging for gold. And so there are some companies that have done OK in supplying the cannabis business with things that it needs as it modernizes.

What about the investors? You mention in your book that former Republican congressmen and legalization opponents, Tom Daschle and John Boehner are involved in the industry. Is there any money being made on the VC or investor front?

Sumner: Those two are among the consultants, for example, the lobbyists and the like, who may be doing OK.

Goldstein: The ones that are probably making the safest money are probably the ones who were taking flat fees. You can’t not make money taking big consulting fees. But folks who took their compensation in the form of shares in these big cannabis holding companies, those stocks have not done well on the whole.

One of the hopes of the legalizing movement was that people who had been most injured by its criminalization would have a head start in taking advantage of that market. Has that happened?

Sumner: A lot of people who have been in the business for a long time and knew how to grow the crop thought that that would be enough to allow them to really boom when it was made legal. What they didn’t know is how to run a legal business and that was a real eye-opener for them. Take somebody who’s been a small time criminal. You say, “Go to your banker and get a loan for a half a million dollars so that you can build a modern greenhouse. Come and fill out all the forms and keep very clear records because there’s a computerized track-and-trace system that you have to implement…”

Goldstein: Yeah, and “Go to your city council, or your county board of supervisors and get the local approval.” This is just a skill set that these people didn’t have. Access to capital is part of it and access to political capital is another part of it. In many cases they didn’t have either. No matter how many well-meaning, good faith equity programs there are, having the resources to get into this business is way more than just no longer being officially considered a criminal.

Is there not a weed billionaire somewhere?

Sumner: Probably not, but there certainly are weed millionaires. The people that are trying to build it as an ongoing profit-making business—the honest ones—say we’ve got years to go here. Is one of them going to become Amazon? Probably not, but is one of them generating a regular few hundred million dollars a year from a dozen stores scattered around? Probably, yes.

Can we tell yet if the problems are those of scaling and efficiency that are common to startups and small businesses, or problems where the regulation and the way the market is set up are never going to be solved?

Goldstein: One of the problems with scaling is that it’s all state-by-state at the moment. So, you have to basically craft a strategy within a state based on that state’s regulation and taxation system, and so forth. Expanding to multiple states is less like scaling up a business nationally and more like starting a whole new business in every state. If I were advising a cannabis company, I’d say try to try to compete on price. Everyone wants to create their own fancy weed brand backed by a celebrity. That’s a really tough market to compete in.

Sumner: People say this is a $100 billion industry. Robin and I are skeptical of that, but there could be a $10 billion industry, which is a lot of money if shared among a few players. But we don’t have any companies that are dominant in the market. There’s nothing like a Reynolds Tobacco that has the brands and does the manufacturing. We’ve seen nothing like the consolidation yet where the really big money could be coming. We haven’t even seen an indication that it’s going that direction.

You mentioned Vermont, which in principle legalized, but in practice has no legal weed-dealers. Are there some states that are doing it better?

Goldstein: Legal weed producers and sellers in Washington and Colorado have a better chance at capturing market share than they do in other states. That’s not just because of lower taxes and regulations. It’s also because those two states have been open for recreational and adult use the longest. Over time, companies get more efficient at regulations, and regulators and legislatures adjust things over time, learning from early mistakes.

What industry is weed most like? Alcohol?

Sumner: There are parallels but there are really big differences as well, partly because weed has been illegal longer than it was legal, and alcohol was legal almost forever and then became illegal for a little while. There are other big differences: you can put a million dollars worth of weed in your station wagon and still have room for the kids. Moving illegal weed around is so easy compared to manufacturing and moving illegal alcohol.

Goldstein: I don’t think there’s any other industry that it’s really that much like and that’s one reason we thought it was worth writing a book about it, because it’s so unique and weird. You can draw parallels from alcohol, you can draw parallels from food and agriculture, you can draw parallels from tobacco, but there are so many huge differences. The value per ounce of this stuff is just through the roof, unlike any other product that’s legal. It’s more expensive than white truffle or saffron or beluga caviar.

Are you proposing less regulation? There are a lot of people who would argue for more regulation around something that alters brain function.

Sumner: We understand that. But you can [have so many rules that you] make sure that you have this very heavily regulated pure product that no one buys, and all those people buy the illegal product. We’ll let all these kids go out and buy illegal weed and let that industry prosper. For example there’s a rule that says in California, you can’t buy it after 10 p.m., which is when lots of people are just starting to party. Why would you close the legal store at 10 o’clock?

Goldstein: The point certainly isn’t that it should be unregulated completely; no product is unregulated. The point is it’s a cost benefit analysis, every additional rule you put on, you have to ask how much is this going to take away from the legal market and shift to the illegal market, where you don’t have any safety standards at all. Every rule you pass, you need to think about that balancing test.

How do you balance lowering the barriers to entry with the concern that an increase in the uptake of weed is not necessarily a public good?

Sumner: The evidence that legalization has caused increased overall consumption in society is not at all conclusive. But when we see the price of cannabis coming down for the average consumer, it’s a legitimate question to ask: Is that a good thing for society? There are questions when it comes to something that’s having psychological effects. What can you do about it through regulation and government action? It’s not clear what you can do to be effective, given you’ve got this parallel industry that’s illegal. That’s a real challenge and we acknowledge it.

Wouldn’t one way to resolve this be not to make legal weed less regulated but make illegal weed more so?

Goldstein: Then you have an enforcement problem. The intent of the voters was, Let’s keep people out of jail for marijuana offenses. And let’s stop punishing people for doing something that we don’t believe should be illegal anymore and if the result is, you end up with much more criminal crackdowns and more drawing more people in jail than you did before, you risk frustrating the purpose that voters had, or that legislatures had in legalizing it. With weed, you have this 80-year history of the stuff being produced in incredibly large quantities and distributed all over the world illegally and at low prices with high quality already. This pre-existing illegal market is so robust that to come in and try to just bust that up, it’s a logistical nightmare for law enforcement.

Sumner: Society has signaled over and over again that we feel uncomfortable throwing millions of young black men and young brown men in jail for what seemed to be relatively minor offenses in terms of violence. However, I will tell you that there are individual growers or retailers who say “What the hell? I’m complying with all these regulations. And then there’s a kid standing on the corner in front of my store selling weed at half the price. Why don’t you arrest him?” So there are retailers and farmers who are very frustrated. But even most of them don’t say, “Hey, bust my brother-in-law.”