Who gets marijuana licenses?

There are various ways of dealing with excess applicants for marijuana licenses, like holding a lottery, as Washington state did; selling licenses to the high bidder, as colonial India did in the 1800s; or, as the Roosevelt Administration did in 1933, considering each application on its merits and deciding yes or no for each application.  Voucher privatization, where each voter gets a transferrable fraction of the overall quota, may seem far-fetched, but it may be worth a look in Theoryland.

Marijuana licensing “on the merits” leads to disappointed applicants.  At best, merit selection (in the USA) has led to an enormous amount of energy going into appeals and litigation.  At worst, it’s corrupt crony capitalism.

Even lotteries require threshold qualification, whose denial can engender appeals and litigation.  Social equity licensing adds more complexity if not uncertainty.

The Merits in the 1930s

When Alcohol Prohibition was repealed, the federal government was deluged with applications to import liquor.  Granting quotas to all applicants seemed likely to create a situation where “nobody would have got enough to do business with.” 

Here are details, with highlights bolded, stated by the head of the Federal Alcohol Control Administration.

“When the Federal Alcohol Control Administration was first designed, it was intended that the work of allocation of these [liquor importing] quotas should, until the new organization was well started, that is until February 1, be carried on by a committee of two, one designated by the Secretary of Agriculture and one designated by the Secretary of the Treasury.

“They started the work, and it was then realized that it had so close a connection with the Federal Alcohol Control Administration work [quoted material above from page 29; below from page 30] that it was not safe to have it done by a separate body, and accordingly it was dumped on the administration–on the Federal Alcohol Control Administration, the F.A.C.A.

“That has been a considerable task.  I suppose people have allotted quotas before among an industry, but they have never been called upon before to allot quotas among an industry which did not exist.  We had nine hundred or a thousand applicants, many of them purely speculators, in fact with no connection with the importing business, with no resources, no means of distribution, and no responsibility, all clamoring to get into the importing business. 

“If we had simply distributed the quotas among them all on anything like an even basis, nobody would have got enough to do business with, and the whole thing would have been disorganized.

“Accordingly, a system had to be worked out and each application considered separately on its merits and I had to deal with each of these.”

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Statement of Joseph H. Choate, Jr., of the Federal Alcohol Control Administration, December 12, 1933, Tax on Intoxicating Liquor, Hearings Before the Committee on Ways and Means, House of Representatives and the Committee on Finance, United States Senate, 73d Congress, Interim, 1st and 2d Sessions 124 (Dec. 11-14, 1933), pages 29-30:

Background on Joseph H. Choate, Jr.:  He “chaired the Voluntary Committee of Lawyers, a group established in 1927 that promoted the repeal of prohibition. Upon repeal in 1933, President Franklin Roosevelt named Choate the first head of the Federal Alcohol Control Administration (FACA).” http://en.wikipedia.org/wiki/Joseph_H._Choate,_Jr.  So having him say who got licenses would be like having Alison Holcomb decide who got licenses in Washington. 

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Voucher privatization

Now here is a trip to Theoryland, designed to exhaust the options for allocation of the privilege to sell marijuana commercially.

 Voucher privatization is a democratic model for sharing the wealth. OK, it may not be practical, especially in the short term.  But it sets up a model for comparison.

A legalizing state creates a valuable new asset – the privilege of growing marijuana commercially – that is worth money.  That asset can theoretically be divided up among residents. Here’s how that might work:  The state passes out transferable vouchers to all residents, or voters. This is like Alaska’s Permanent Dividend Fund, which sent $1,884 in oil dividends to each qualifying resident of the state for 2014. Drilling down on a possible option for marijuana: Every voter gets one transferable Quota Share. Each Quota Share is entitled to an equal fraction of the year’s total production target, set by the state. (The target marijuana production total would need to reflect the likelihood that Quota Shares would find buyers; some would not – they would lapse unsold.  The target involves layers and layersof guesswork.)

Marijuana businesses bid and compete for Quota Shares issued to individual voters. Each year, new Quota Shares are issued.  Growing without Quota Shares might be banned, or extravagantly taxed.  The state could limit growers to a certain number of Quota Shares (and thus grow areas), and require a threshold amount, a minimum, to produce at all.

Annual distributions and other safeguards might be able to prevent some of the haphazard results of the one-time, permanent distributions of vouchers for privatized shares of post-communist enterprises late in the 20thcentury. Making the public have a non-tax stake in marijuana commerce would make ordinary citizens tend to oppose marijuana taxes – but the public would benefit directly from Quota Shares rather than indirectly from taxes as citizens. Meanwhile, the Quota Share process should push up the after-tax price of marijuana.

Voucher privatization is like a lottery where everyone enters and everyone wins a little something. Voucher privatization shares the wealth, but Quota Shares could sell for pennies until the black market is marginalized.

Guessing at numbers consists only of wild speculation. While actual allocations would be done at the state level, national numbers are available to work with. The RAND Report for Vermont suggests that 1,900 acres could satisfy national demand. That’s 827,640,000 square feet to split among 320 million people. So each Quota Share would allocate a little over two square feet. Say the total crop is now worth $40 billion, as the RAND Report suggests.  (Watch out:  The speculation gets even wilder.)  Say that a huge portion of the prohibition premium could operate for the benefit of owners of Quota Shares.  For instance, say half of the total consumer price eventually went to pay for legality. Then 320 million people would divide up $20 billion, so a Quota Share would be worth some $62.50. (Good luck getting that price.)  If the 78 million voters in 2014 divided it up, the raw number would be a little over $250 each.

But Quota Shares would sell for far less until the black market is marginalized. At first, the black market may remain so strong that the legal market can hardly compete. In that case, Quota Shares could be worth so little that a mechanism to handle them will seem too bulky.  For now, Quota Shares fail the practicality test.

There might be glimmer of possibility for this apparently far-fetched notion if incumbent medical growers got temporary growing privileges as a transition rule, for two or three years.  Then any new method of allocation might be on the table.  Quota Shares might be worth the trouble.  But any new experiment faces an uphill climb.

Voucher privatization might work better at a county or sub-jurisdiction level rather than a state or national level.  But maybe it won’t be tried.

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