Does Pot Contribute to GDP?

As Tyler and I explain in our textbook, GDP is the market value of all finished goods and services produced within a country in a year. Sounds simple but there are always edge cases including whether or not illegal goods should count towards GDP. According to the definition, illegal goods should count towards GDP. But in practice they often don’t. In part because some people think that counting illegal goods would signal approval (or that not counting them signals disapproval) but also because it’s hard to count the market value of illegal goods. Do we really expect the BEA to survey drug dealers and prostitutes about the price of their goods and services?

But what happens when an illegal good is legalized? The market value of any finished legal good should definitely count towards GDP but just adding it to GDP on the day of legalization causes problems. Did the economy boom the day pot was legalized? Did the recession end that day? Did we all become wealthier? Some countries shrug and just add footnotes.

In 1987, Italy, whose citizens are famous scofflaws when it comes to reporting income and paying taxes, announced that it was adjusting GDP upward by about a fifth to reflect the underground—but not necessarily illegal—economy. Overnight, Italy became the fifth-largest economy in the world, surpassing the United Kingdom. National euphoria ensued. Italians dubbed it “il sorpasso,” the overtaking.

But when Canada legalized pot in 2018, Statistics Canada decided not just to add pot to GDP but to backdate all their previous GDP statistics to create a consistent series. The Walrus has the interesting story.

The teams had to invent codes to capture classifications for new line items. Among them: 71.0105, in the classification of instructional programs for cannabis culinary arts and cannabis-chef training, and 71.0110, for cannabis-selling skills and sales operations.

…Apart from hammering out semantic protocols, StatCan faced two central hurdles in determining how to count cannabis: How much do Canadians use? And what does it cost? But the economists at StatCan wanted to calculate those numbers not just for the final quarter of 2018, when cannabis became legal, but for every year back to 1961, which is as far back as the national accounts go, at least in their current form.

…So the cannabis team dug back through decades of surveys on drug use, addiction rates, law enforcement, and health data to figure out how much cannabis Canadians were consuming back in the day. It started small, with as little as twenty-four tonnes a year in the early 1960s. By 2015, it was close to 700 tonnes. Until the 1990s, when the US war on drugs ramped up, a lot of that came from abroad. Now, we’re a major exporter.

Still, StatCan craved more detail. So, in 2018, analysts hooked up with researchers at McGill University’s department of chemical engineering for a year-long scrutiny of wastewater in Halifax, Montreal, Toronto, Edmonton, and Vancouver. (Halifax clocked in with the highest cannabis load per capita and roughly triple the usage of Vancouverites. Go figure.) That pilot project has now been suspended for lack of money, says Barber-Dueck.

The latest figures show that more than 2 million Canadians use cannabis at least once a week, and more than a third of those use it every day. But what have they been paying? Barber-Dueck says that the team ploughed into historical databases of weed prices, talked to law enforcement officers, and canvassed longtime illegal growers, mining their memories. British Columbians were especially forthcoming. “People are pretty open about it and have been for years,” Barber-Dueck says.

As the legalization date approached, the team created the crowd-sourcing app StatsCannabis, complete with a cannabis logo. “Statistics Canada needs your help collecting cannabis prices,” the app pleads, adding, “Your data is protected!”

The technique had its drawbacks, Peluso notes. Heavy users of cannabis are the most frequent participants in the surveys by default. But they’re also filling out the survey right after they’ve made a purchase. “When you survey heavy users of a psychotropic substance, the error band is always a little bit bigger. You’re picking up people whose—How shall I put it?—whose awareness might be slightly compromised.”

So does pot contribute to GDP? It does in Canada but not in the United States!

Neither Canada nor the United States include prostitution in GDP although the Netherlands does. The United States has higher GDP per capita than either the Netherlands or Canada but if we included pot and prostitution our GDP per capita would be even higher and would better reflect our true standard of living relative to these other countries!

Hat tip: Ryan Briggs on twitter who notes that as another consequence Canada’s CPI now includes pot prices, at a weight of .55%.

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