Legalizing recreational pot may have boosted economic activity in the first 4 states to do so

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Roberto Pedace, Scripps College; Amanda Marino, San Diego State University; Curtis Hall, Drexel University, and James D. Brushwood, University of Arizona

(THE CONVERSATION) The research summary is a brief overview of interesting scholarly work.

The big idea

According to our new study, banking activity in the first four U.S. states to legalize recreational marijuana grew significantly more than in other parts of the country despite federal laws that prohibit financial firms from involvement in cannabis.

This is not to say that banks illegally profited from the booming cannabis trade by accepting deposits from cannabis companies or granting loans to them. Our data does not confirm this – and these practices remain illegal under federal law. Rather, we think our findings suggest that legalization may have stimulated more economic activity in general.

Using data from regulatory deposits, we compared bank deposits and loans in the first four legalizing states – Colorado, Washington, Alaska and Oregon – with those of all other states. We looked at quarterly banking data from 2011 to 2017, which covers several years before and after legalization was enacted in the four states.

To ensure that we are capturing the effect of legalization on deposits and lending and not other possible factors, we have adjusted our data to account for other differences between banks and states that may have influenced these trends. .

We found that bank deposits increased, on average, an additional 4.3% in these four states after legalizing marijuana compared to states that had not yet done so. Loan volume increased 6.5% in states where marijuana was legal.

These results suggest that banks were either indifferent to the potential risk associated with accepting cannabis-related deposits or optimistic about the chances that regulation would adapt to the needs of legalizing states. These findings are important because every dollar of new deposits increases the supply of loans, which can help with economy-wide financing, growing more than cannabis businesses.

why is it important

States began legalizing recreational pot in 2012. And in 18 states, it’s now fully legal.

Yet the drug remains illegal under federal law.

This conflict between state and federal laws creates regulatory risk for banks operating in those states, as they could lose their federal insurance or even be criminally prosecuted if they were found to have received deposits from companies or people connected with the sale of cannabis.

Our findings are important because a well-functioning banking system, which includes accepting deposits and lending those funds, is vital for economic growth. The conflict creates friction in the ability of banks to perform this function.

What is not yet known

Due to lack of data, our study limited its analysis to the first four states that legalized.

What is unknown from our study is whether the effect we documented holds true for banks in states that have legalized more recently. One possibility is that, until there is a major crackdown from federal authorities, banks will become more open to providing services to cannabis consumers, leading to an even greater increase in banking activity.

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