Thus Ford became the only U.S. President who was elected neither President nor Vice President, while Nixon, who was (and remains) the only person to be elected twice to both offices, became (and remains) the only President to resign!

But at least one of Nixon’s greatest achievements has born wonderful fruit.  When Sino-Soviet relations began to deteriorate, Nixon saw the opportunity to get China on our side, and in 1972 he visited Mao Zedong in Beijing.  Thirty-eight years later, China is a key trading partner of the U.S. as well as the second-largest economy on earth!

Thirty-eight years ago, no one imagined this state of affairs was possible.
Similarly, none of us can know what’s coming 38 years down the road.  But I think it will be good!

Editor’s Note: One effect of Nixon’s visit and the booming Chinese economy is that Cabot China & Emerging Markets Report remains the top-performing investment advisory of the past five years, with a compound annual return of 17.9%

For more details, click here.

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When I was in eighth grade, I took third place in the school science fair with an exhibit on Bernoulli’s principle.  Named for Daniel Bernoulli (1700-1782) the principle states that as the speed of a fluid increases, pressure decreases … and thus explains how airplanes fly.  My exhibit included a model airplane wing that lifted when a fan was turned on.  (My father was trained as an aeronautical engineer, so he was a valuable “resource.”)  And my prize was a hardcover copy of the book, The Way Things Work, which was chock full of two-color illustrations and explanations about how things worked.  These things included refrigerators, magnets, sewing machines, forklifts, televisions, X-rays, deadbolts, AM radios, machine guns, submarines, etc.

I loved that book … and I still have it.

But that book is useless at explaining how all the new stuff in my house works, from the Comcast router I have to restart at least once a week, to the Moxi DVR that enables me to avoid watching commercials, to the iPhone that’s much more than a phone.  Happily, the answers to all my questions about them are on the Internet.

And these days I’m less interested in how machines work, and more interested in how people work (or don’t), and in how the institutions made up of people work (or don’t).

So today I present my personal list of five programs that aren’t working, followed by five good things.

Five Programs That Aren’t Working

1. Our national balance sheet is a mess, and destined to get worse unless politicians make some hard choices.  My suggestions include progressively raising the retirement age, as well as the age at which people qualify for Social Security and Medicare; simplifying the tax code; putting the responsibility for health care back on the individual; and reducing spending on foreign military entanglements.  And why can’t our politicians do these things?  Because they care too much about being re-elected, and about pandering to the constituents of their home state.  Thus the country suffers.

2. We continue to consume excessive amounts of oil, both domestic and imported, clinging to the habits of an idealized past while reluctantly being dragged to a future that promises limitless non-polluting energy from the sun and wind.  The impediments to progress include lobbyists from our massive oil and gas complex as well as all who benefit in the short term from their money.

3. Obesity rates are still rising in this country, costing us untold billions in healthcare dollars, yet we’ve been unable to halt the trend.  Why?  Because the power of the corn industry, the soft drink industry, the processed food industry, the fast-food industry and all their lobbyists in Washington are too influential in Congress.  There’s much more wrong with our health care/insurance system but curing the obesity problem would provide the greatest benefit.

4. I’ve been delayed by a lot of stimulus-funded road projects over the past year, but the stimulus isn’t working as promised.  Why?  It’s not simply because those projects themselves have caused untold millions of hours of delays.  It’s because baby boomers have passed their point of peak consumption—not coincidentally at the same time housing prices peaked—and now they’re preparing for retirement.  It’s because the lingering recession and stubbornly high unemployment have increased the sense of uncertainty among consumers, and thus increased their reluctance to spend.  And it’s because businesses recognize this slowing demand—as well as increasingly costly and restrictive regulations—and conserve cash to get through the hard times.  Implementing the suggestions I made in #1 would help.

5. For far too long we’ve allowed our public education system to be controlled by the interests of the employees (the teachers), not the customers, and the results has been substandard achievement compared to other developed countries.  Happily, the Democratic establishment, heretofore the biggest beneficiary of the unions’ money, has begun to recognize the problem, and to see the gains that can be achieved through implementing systems of accountability, but we have along way to go.

Criticizing is easy, and I don’t want to be labeled a crank.  So I’m going to finish today with five good things.

1. Apple (AAPL) makes great products that make our lives both more productive and more enjoyable.  And that’s great progress.  The stock has been building a base around 260 for nearly four months, which is a positive technical pattern.  Furthermore, editor Roy Ward of Cabot Benjamin Graham Value Letter wrote this last week:  “CEO Steve Jobs and company have a unique ability to identify what customers want, produce easy-to-use products and launch huge marketing campaigns to create demand.  The iPad helped sales soar 88% and EPS more than double in the latest quarter. In addition to gaining market share in the computer, smart phone and tablet sectors, we believe Apple will launch a new subscription-based TV service and a new multi-task mini-computer. We expect Apple’s earnings to grow at a rapid 24% pace during the next five years. At 14.7 times our one-year forward EPS estimate, AAPL shares are clearly undervalued.”

For more, click here.

2. Momentum to undo our national prohibition of marijuana is growing, fueled in part by the hunt by cash-strapped governments for new sources of revenue.  Taxes on the sales of marijuana fit the bill, and as production chains are institutionalized, I look forward to a growing standardization of quality as well as diminished funding of criminal gangs, which will bring marvelous unanticipated benefits in both the U.S. and Mexico.

3. Momentum behind the solar power movement is picking up again, driven not so much by government action as by the actions of forward-looking individuals and institutions who don’t mind paying extra right now to get a clean source of power that will be insulated from higher oil prices in the future.  While there are many attractive companies in the solar cell business, I think one of the smartest plays is a company that makes the electric inverters that efficiently process that power so it’s suitable for the home, business and/or the electric grid.  The company is Power-One (PWER), and here’s what editor Michael Cintolo wrote in a recent issue of Cabot Top Ten Weekly.  “Not long ago, the bulk of its business involved manufacturing AC/DC and DC/AC converters for companies in the telecom, computer and office equipment markets.  But between competition and the great slowdown of 2008, 2009, the company was getting killed.  Then the booming market for alternative energy presented a market opportunity, and management took aim at that market and hit a bull’s-eye!  A year ago, 18% of the company’s business involved making inverters for solar power farms and wind power farms, so that their energy could be distributed to the grid.  Now that percentage is 66%, and rising!  Revenue growth is accelerating, analysts’ earnings estimates are being raised and investors are climbing on board.”

When Power-One was first recommended in Cabot Top Ten Weekly in mid-July, the stock was trading at 9.  Now it’s at 13, but still attractive on normal pullbacks.

For details on Power-One and other top stocks, click here.

4. It took a near-death experience, but the auto industry in this country is finally taking the search for the successor to the internal combustion engine seriously.  And one interesting aspect of this movement is that the Europeans couldn’t do it, even when motivated by years of high gas prices.  Now, good old American Ingenuity is bringing us Tesla, the Chevy Volt, and numerous companies involved in designing and manufacturing batteries and control systems.

One of these young, fast-growing companies is Polypore International (PPO), which is an expert at designing and manufacturing membranes that allow very small particles like ions, gas molecules and fluid components to pass through in a controlled way. These membranes are used to electrically insulate the two sides of batteries (both lead-acid and lithium), and battery-makers are lining up for Polypore’s material.

The stock (PPO) was recommended by editor Brendan Coffey of Cabot Green Investor back on June 18, when it was trading at 22.  Now it’s at 28.

Details here.

5. Finally, eBay is well known as one of the greatest online retailers, a great resource for both institutional and individual buyers and sellers of everything from old baseballs to new cars.  Far less well known, and with far greater investment potential, is the eBay of Latin America, MercadoLibre (MELI) (the name means free market).

Paul Goodwin, editor of Cabot China & Emerging Markets Report, recently wrote, “MercadoLibre is an Argentinean company that provides the same kind of e-commerce transactions as eBay, including fixed-price and auction sales, dedicated marketplaces for cars, boats, planes, real estate and services, and an online payment platform. The company was founded in 1999 and it’s the largest online trading platform in Latin America. It has operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Portugal, Uruguay and Venezuela, with recent expansions bringing Costa Rica, the Dominican Republic and Panama into the mix.  The Marketplace has nearly 43 million registered users and sales are expedited by a very efficient search engine, leading to gross merchandise sales of $2.7 billion in 2009.  MercadoPago, the company’s online payment system, processed over three million payments in 2009 and the division contributed 26% of revenues for the year.  The drivers for future growth are expected to be 1) increasing penetration of Internet access in Latin America as the area’s telecom infrastructure builds out, 2) strong GDP growth in the region, which will increase disposable income for its large population, and 3) the introduction of MercadoShops that offer sellers their own online sales channels, and MercadoClics, a search platform that uses sales of display ads and a program like Google’s AdWords to generate income.”

When Paul recommended the stock, MELI was selling at 64.  Now it’s 68.

Click here for details.

But this post isn’t about the politics of cutting tax rates–the speech really gave insight into the relationships of tax rates, the economy and Federal revenues. As a disclaimer, this is NOT a political talking point on my end; it’s a reasoned economic argument that rarely gets mentioned these days. I hope you enjoy it!

“In taxation, like all else, it is necessary to test a theory by practical results. The first object of taxation is to secure revenue. When the taxation of large incomes is approached with that in view, the problem is to find a rate that will produce the largest returns. Experience does not show that the higher rate produces larger revenue. Experience is all in the other way.

“When the surtax on incomes of $300,000 and over was but 10%, the revenue was about the same as when it was at 65%. [Note: $300,000 back in 1924 is the equivalent of $3.8 million today.] There is no escaping the fact that when taxation of large incomes is excessive, they tend to disappear. In 1916 there were 206 incomes of $1 million or more; then the high rate went into effect. The next year there were only 141, and in 1918, but 67. In 1919, the number declined to 65. In 1920 it fell to 33 and the next year it was reduced further to 21.

“I am not making the argument with the man who believes that 55% ought to be taken away from the man with $1 million income, or 68% from a $5 million income; but when it is considered that in the effort to get these amounts we are rapidly approaching the point of getting nothing at all, it is necessary to look for a more practical method.

“I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden. If, on the other hand, the tax rates are placed where they will get the most revenue from large incomes, then the small taxpayer will be relieved.”

I like this speech because it’s based on facts and figures and experience, not on political talking points. Incidentally, Congress did pass Coolidge’s tax bill, reducing the top tax rate to 25%, and the economy and people’s incomes indeed boomed during the roaring 1920s, before the Great Depression took hold. Just something to chew on!

“If Casey Johnson was single at the time of her death–and I think she was–and with no current federal estate tax in 2010, she may well be the first famous “name” to entirely escape federal death taxes. (Her estate would still be exposed to state of California inheritance or California estate taxes).

“And while Congress will supposedly resurrect the federal estate tax retroactive back to 1/1/10, there are any number of constitutional challenges to making a tax retroactive to a deceased person who passed away under then-current tax law.

“Moreover, for very affluent couples with assets exceeding the old 2009 exemption amounts of $3.5MM per spouse if the assets were individually titled, when the first spouse dies, any excess over and above the exemption amount ($3.5MM in 2009) automatically flows into trust bypassing the surviving spouse.

“This has a potentially disastrous effect on the countless wills written across the country that mandate estate asset transfers in this manner.

“Even if the old $3.5MM estate exemption amounts are revived shortly in 2010 by Congress and made retroactive, it will still be too late for millions of assets which passed under will to trusts under the current (no exemption amount due to no estate taxation) tax law for people who died (the already dead) in January 2010.

“Talk about the law of unintended consequences … stunning consequences, simply because Congress couldn’t get their act together on this expiring estate tax law–all of course due to their almost complete and utter fixation on healthcare.”

Upon further reflection, I realized the common theme uniting these elements is the theme of personal responsibility.  So here we go.

Last week, I received a notice informing me that Cabot’s medical insurance premiums would go up next year.  No surprise there.  It happens every year.  What shocked me, however, was the amount of the increase … 26%!

Unless my doctors are being paid in gold, there’s no good reason for this.

The reason, such as it is, is that someone has to pay for the universal medical coverage we now have in Massachusetts, and the insurance companies have decided it will be me, and the thousands of other small businesses who lack the clout to cut a deal with their insurers.

So I’m going to look around, try to find a better deal, but I’m not very optimistic about it.  In the end, this is going to hurt my employees, who will find themselves with less insurance coverage or smaller paychecks or both.

If you’re living outside Massachusetts, watching our politicians debate healthcare on the national stage, don’t say I didn’t warn you.

As for that national health care bill (which should really be called the national medical money bill), it looks like we’ll end up with a system that benefits everyone who’s already part of the establishment.  The insurance companies will keep on skimming their piece, keeping for themselves between 13% and 34% of every dollar they collect.  The doctors will keep on trying to maximize their income by seeing more patients and billing for treatments that are well reimbursed.  And the hospitals will keep on doing whatever the insurance companies will pay for.

The main difference, as I see it … and I’ll admit I’m a little steamed about this now … is that I’ll have to pay more for it.  I may have more red tape to deal with.  I may have even less choice, and less opportunity to take personal responsibility.  But I don’t see a single thing Washington is doing that’s going to make the medical experience better for my employees or me.

What we really need, as I’ve said before, is a focus on health … on staying healthy through diet, exercise and education.  And quite possibly a big tax on junk food.  But no one with big money is lobbying for those changes.

Here in Massachusetts, in fact (switching gears slightly), big money is being spent to capture Ted Kennedy’s Senate seat.  Leading the pack is the sole woman in the race, Martha Coakley, the current Attorney General.  Coakley is a lawyer, she’s been working for the state in the Attorney General’s office for 23 years, and if elected, there’s no doubt she would honor Ted’s legacy by continuing to grow government in the name of protecting the little people, all while taxing the working people and small businesses who actually provide the majority of jobs in the state.

I think there’s a better way, and it was well articulated in last week’s Boston Globe by the newspaper’s token conservative columnist, Jeff Jacoby, who wrote the following.

“Congress is filled with permanent members of the political class, government lifers addicted to the influence and prestige that come with high office. In a setting that glorifies politics and fawns on public “servants,” the air is thick with the arrogance of power, a narcotic that deludes politicians into thinking not only that they are capable of exercising authority over others, but also that they are uniquely qualified to do so.

“Two of the four Democrats in the Massachusetts Senate race, Coakley and Capuano, are career politicians. For all I know, either might turn out to be a splendid senator. But surely the last thing this state needs is to elevate yet another government lifer, yet another professional officeholder, steeped in the culture of politics.

“Whatever else might be said about the other two Democrats–Khazei and Pagliuca–they have spent their lives in the real world. They know what it means to build something from the ground up, to risk their own assets on a goal they believe in, to bring a dream to reality without being able to pass a law ordering others to do it.

“As a conservative, I don’t share Khazei or Pagliuca’s politics. But I would much rather vote for either of them than for yet another lifelong member of the political class.”
Then on Sunday, the Boston Globe surprised me by endorsing Alan Khazei (co-founder of the City Year service program), primarily on the grounds that Coakley is an uncreative drone while Khazei is a visionary leader.

Nevertheless, unless Coakley murders someone between now and election day, I think she’s a shoo-in (partly because of the female vote) and that you can count on Massachusetts’ senators to vote the classic liberal ticket for years to come: tax, spend and control.

But (switching gears again) there is a bright spot … with an ironic twist.  Over in the education sector, which has long been controlled by Democrats, there’s a growing realization that merit pay for the best teachers can result in improved performance.  The NEA (the largest union in the U.S.) is against it, of course; they want to keep all their teachers employed.  But the evidence is growing that the best teachers produce better-educated children, and that compensating teachers on the basis of seniority alone helps no one but the teachers themselves.  In fact, President Barack Obama recently launched “Race to the Top,” a competition that will parcel out $4.5 billion to states that commit to true education reform that respects the power of academic standards and competition.

So I find it ironic (humor is good medicine) that just as Democrats are recognizing the shortcomings of an education system that serves the need of the teachers more than the students (the customers), they’re working to take power from the individual American health care consumer (the customer) and vest the establishment (in this case Washington) with even more authority.

The trouble with that, should it come to pass, is that Washington is absolutely terrible at discriminating.  The more central control there is, the more we’ll all be treated the same, and the more you and I will continue to pay for the health care of people who don’t take care of themselves.

Consider this: According to Ralph Keeney, a decision analyst at Duke University’s Fuqua School of Business, a remarkable 55% of deaths for people aged 15 to 64 can be attributed to making bad choices.  Chief among those are smoking, overeating and unsafe sex.  Back in 1900, he estimates, the number of deaths attributable to bad behavior was just 5%.

The problem, of course, is that people value the present more highly than the future, and thus make bad calculations about the real cost of their actions.  Some of these people are both poor and poorly educated and thus have a decent excuse.  But some people, who are otherwise well educated, have no excuse at all.  They smoke, they don’t buckle their seat belts, and they overeat to the point of obesity.

One institution of higher education has actually tried to address this problem.  Four years ago, Lincoln University, an historically black school in Pennsylvania, mandated that obese students (those with a body mass index of 30 or more at matriculation) take a class called Fitness for Life (which teaches them about nutrition, exercise and healthy life habits) sometime before graduating.  There was no requirement to lose weight, only to take the class, something Lincoln, a private school, has a right to do.  But now, four years later, some two dozen students who have ignored that requirement may see their diplomas withheld.

The school hasn’t revealed how successful the program has been.  We don’t know how many students have completed the course and how many have adopted healthier habits.  But we do know that at least two dozen students in that first class have refused to take their responsibility seriously.

Many years ago (switching gears again), it was common for colleges in the U.S. to have a swimming requirement; you couldn’t graduate until you’d proved you could prevent yourself from drowning, typically by swimming a few laps of a pool.

The movement started after World War I, when the national Red Cross was working to reduce the number of accidental drownings in the country, but since the 1970, increasing numbers of colleges have dropped the requirement.  Today, the following schools still have a swimming requirement: Bryn Mawr College, Columbia University, Cornell College, Dartmouth University, Hamilton College, Massachusetts Institute of Technology, the University of Notre Dame, Swarthmore College, Washington and Lee University, the U.S. Air Force Academy, the U.S. Military Academy and U.S. Naval Academy.

Yet there are still roughly 4,000 accidental drownings in the United States every year.  Children under one year of age tend to drown in bathtubs, buckets and toilets; children one to four tend to die in residential swimming pools, and most drownings over age 15 occur in natural water settings, often as a result of boating accidents.

Males are four times as likely to die from drowning as females.  Black children are more than three times as likely to die from drowning as white children, while American Indian and Alaskan Native children are more then two times as likely.

Swimming is not difficult, particularly if you learn when young.  Ideally, your parents ensure that you learn when you’re a child, but if they don’t, it’s smart to take responsibility for that learning yourself.

On Saturday, the New York Times ran a story on the drug wars in Mexico, describing how the power of the criminal gangs often outweighs the power of the law enforcers.

It’s a big problem, and the violence has increased since President Felipe Calderon launched an army-led assault on the cartels soon after taking office in late 2006.  More than 14,000 people have died in drug-related violence in Mexico since.

The Mexican gangs, of course, are just trying to make a living by serving the demands of a market … in this case the market for marijuana and other illegal drugs in the U.S.

Recognizing this, the U.S. attempts to help.  It’s currently giving $1.4 billion to Mexico to provide training and equipment to security forces.  And last week it conducted a massive sting operation that netted more than 300 arrests in 19 states.  But none of the arrested were upper-echelon figures, and U.S. Attorney General Eric Holder admits the gangs are too entrenched within the political and economic fabric of Mexico for the arrests to deal a deathblow to the gangs.

On Sunday, the Boston Globe noted that it was the 78th anniversary of Al Capone’s conviction on tax evasion charges, for which he received an 11-year federal prison sentence.

Alphonse Gabriel Capone, of course, became rich by satisfying the public’s thirst for alcohol during Prohibition, the 14-year period in which the sale of alcohol was illegal in the U.S.

While meeting the demands of this market, Capone, like the Mexican drug cartels, became very powerful, stymied law enforcement, and killed people.  Today, we generally recognize the folly of prohibiting the sale of alcohol during that period.  Even though one-third of Americans choose not to drink today, we know that instead of trying to outlaw it, it’s better to regulate it and tax it.  Today, the U.S. government collects more than $9 billion per year from alcohol taxes; individual states collect even more.

Then on Monday, President Barack Obama instructed federal attorneys that they should no longer prosecute marijuana users in the 14 states that allow it for medical reasons, but should defer to state laws instead.

Can you connect the dots?

The plain truth is that the War on Drugs (a term first used by President Richard Nixon in 1969) has been a failure.  In fact, the term is no longer used by the Obama administration, which prefers treatment to incarceration.

Yet the U.S. (federal and states) will spend about $47 billion this year on drug enforcement, clogging our court systems and overcrowding our prisons, in many cases dooming young men to a life in the underclass.

In fact, the United States has a higher proportion of its population incarcerated than any other country in the world … and roughly 25% of our inmates are in there for drug offenses, usually possession.

So who benefits from this War on Drugs?

Organized crime, certainly.  According to the United Nations, drug trafficking is a $400 billion per year industry, equaling 8% of the world’s trade.

Also benefiting are arms manufacturers, the law enforcement industry, the prison industry and the legal industry.

And I don’t think we’re getting a good value for our $47 billion.  In fact, I think our efforts may be counterproductive, and that we should explore a more sensible route, the same one we use for alcohol and tobacco.

In short, legalize it, regulate it and tax it.

Legalization would quickly shrink that $47 billion annual cost of law enforcement to a small fraction of its present level.  In its place, we’d have federal quality control inspectors to keep tabs on the legal producers (thus reducing poisonings and overdoses).  Entrepreneurs would spring up out of the woodwork to become producers, and with the increased supply prices would fall to more reasonable levels.  Profits would drop.  And organized crime would soon be out of the business.

We’d have a more efficient legal system, and a more efficient prison system.  And we’d have a ready supply of legal marijuana for medicinal purposes (two-thirds of Americans are in favor of medical marijuana now).

And then we’d be able to tax it!  Every state in the country now taxes alcohol and cigarettes, and I think marijuana should be no different.  And how much would we collect from those taxes?

A 2008 study by Harvard economist Jeffrey A. Miron estimated that legalizing drugs would inject $76.8 billion a year into the U.S. economy–$44.1 billion from law enforcement savings, and at least $32.7 billion in tax revenue ($6.7 billion from marijuana, $22.5 billion from cocaine and heroin, the remainder from other drugs).  I’m not ready to argue for legalizing those harder drugs, but I do think a country as deep in debt as ours should stop giving money away on unproductive projects and start looking for positive cash flows.

Leading the way already is our country’s lifestyle pioneer, California.  This past July, 80% of Oakland, California voters chose to impose a tax of 1.8% on medical marijuana sales, which could bring the cash-strapped city nearly $300,000 next year.

And California Assemblyman Tom Ammiano, a Democrat from San Francisco, introduced legislation that if approved by the California Legislature, would put pot on the same legal footing as alcohol–legalizing its sale and having the state tax it.  Ammiano called it “simply nonsensical” to keep marijuana, the state’s top cash crop, unregulated and untaxed in light of the state’s massive financial problems.

The value of California’s marijuana crop is estimated at $14 billion annually. That’s almost twice the combined value of vegetables and grapes, the state’s second and third most-valuable crops.  Ammiano estimated passage of his pot legalization proposal could generate more than $1.3 billion for state coffers.

Finally, turning to our neighbor Canada, I found this:

“In a recent study for the Fraser Institute, Economist Stephen T. Easton attempted to calculate how much tax revenue the Canadian government could gain by legalizing marijuana.

The study estimates that the average price of 0.5 grams (a unit) of marijuana was $8.60 on the street, while its cost of production was only $1.70. In a free market, a $6.90 profit for a unit of marijuana would not last for long. Entrepreneurs noticing the great profits to be made in the marijuana market would start their own growing operations, increasing the supply of marijuana on the street, which would cause the street price of the drug to fall to a level much closer to the cost of production. Of course, this doesn’t happen because the product is illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust ensures that the supply stays relatively low. We can consider much of this $6.90 per unit of marijuana profit a risk premium for participating in the underground economy. Unfortunately, this risk premium is making a lot of criminals, many of them with ties to organized crime, very wealthy.

Stephen T. Easton argues that if marijuana were legalized, we could transfer these excess profits caused by the risk premium from these growing operations to the government:

“If we substitute a tax on marijuana cigarettes equal to the difference between the local production cost and the street price people currently pay–that is, transfer the revenue from the current producers and marketers (many of whom work with organized crime) to the government, leaving all other marketing and transportation issues aside we would have revenue of (say) $7 per [unit]. If you could collect on every cigarette and ignore the transportation, marketing, and advertising costs, this comes to over $2 billion on Canadian sales and substantially more from an export tax, and you forego the costs of enforcement and deploy your policing assets elsewhere.”

One interesting thing to note from such a scheme is that the street price of marijuana stays exactly the same, so the quantity demanded should remain the same, as the price is unchanged. However, it’s quite likely that the demand for marijuana would change from legalization. We saw that there was a risk in selling marijuana, but since drug laws often target both the buyer and the seller, there is also a risk (albeit smaller) to the consumer interested in buying marijuana. Legalization would eliminate this risk, causing the demand to rise. This is a mixed bag from a public policy standpoint: Increased marijuana use can have ill effects on the health of the population but the increased sales bring in more revenue for the government. However, if legalized, governments can control how much marijuana is consumed by increasing or decreasing the taxes on the product. There is a limit to this, however, as setting taxes too high will cause marijuana growers to sell on the black market to avoid excessive taxation.

When considering legalizing marijuana, there are many economic, health, and social issues we must analyze. One economic study will not be the basis of Canada’s public policy decisions, but Easton’s research does conclusively show that there are economic benefits in the legalization of marijuana. With governments scrambling to find new sources of revenue to pay for important social objectives such as health care and education expect to see the idea raised in Parliament sooner rather than later.”

Economically, I think legalization and taxation is a no-brainer.  The less easily defeated arguments come from people who argue that all drug use is bad (the old Puritan argument that drove Prohibition) or that marijuana is a stepping-stone drug.  In any event, Obama’s directive to stop prosecuting marijuana users in states that approve medical marijuana use is one small step on the road that should ultimately lead to legalization and taxation.  I have no doubt that it’s a very long road.  But the journey has begun.