Washington's legal marijuana mess: can pot regulators beat the law of supply and demand?

• Author: Sullum, Jacob
• Position: Cover story

Seattle Hempfest, a three-day gathering of cannabis activists, entrepreneurs, and consumers, bills itself as the world's largest pot "protestival." But last year's Hempfest, which attracted about 200,000 people to three waterfront parks on the third weekend in August, was also a victory party. The previous November, 56 percent of Washington voters had approved I-502, an initiative that made it legal for adults 21 and older to possess up to an ounce of marijuana, which if all went as planned they would eventually be able to buy at state-licensed stores.

Seattle police officers marked the occasion by handing out 1,000 one-ounce bags of Doritos to which they had affixed stickers explaining the new legal regime. Among other things, the stickers pointed out that it was still illegal to smoke pot in public. Not many Hempfest attendees heeded the warning. Despite the self-consciously political nature of the event, the vast majority of people there seemed less interested in public policy than in getting high, eating, listening to music, and checking out the wide array of cannabis-related merchandise, including tiny portable vaporizers, huge, multicolored glass bongs, and paraphernalia for consuming marijuana concentrates.

As usual, the scores of speakers who ascended Hempfest's various stages to give their five-minute spiels about pot policy generally attracted little attention, let alone applause. One exception was Alison Holcomb, the lawyer who took a leave of absence from her job at the American Civil Liberties Union of Washington to run the I-502 campaign. "Today is a new day," Holcomb told a cheering crowd under sunny skies. "All of you who are here who voted yes on Initiative 502 last year, thank you so much. You truly have changed the world."

That much was hard to deny. Together with Colorado, where a legalization initiative was approved on the same day, Washington had shown it was possible to opt out of the war on pot. No other jurisdiction had ever legalized the marijuana business once it was prohibited, and now Uruguay was on the verge of becoming the first country to do so. "The world is watching," Holcomb declared as her y-year-old son stood beside heron the main Hempfest stage. "By the end of this year, we may see the wall of prohibition coming down." That sentence coincided with a dramatic burst of feedback noise from the band setting up on stage behind Holcomb. "It's very exciting," she said with a laugh.

Not everyone at Hempfest was quite so pleased with I-502, which had created bitter divisions within the marijuana reform movement. "It's not legal yet," warned Douglas Hiatt, a Seattle criminal defense attorney and longtime cannabis activist, in a profane and angry speech. "We've got to be able to grow it. We've got to be able to sell it freely. We've got to keep it in the hands of patients with no taxes.... We've got to really legalize it for everyone, every way they need it.... Tell the politicians to stop fuckin' around and get it done!"

Steve Sarich, executive director of the Cannabis Action Coalition, sang a similar tune. "They're gunning for us," he told an audience of medical marijuana activists. "We need to stop the liquor control board from taking over control of medical cannabis.... We are not going to give up our rights."

Medical use of marijuana, which has been allowed since 1998 in Washington and since 2000 in Colorado, helped pave the way for broader legalization in both states. But Washington, unlike Colorado, never got around to licensing and regulating medical marijuana suppliers, who operate in a legal gray area. So while Colorado's medical marijuana industry evolved into that state's recreational marijuana industry, legalization in Washington seems destined to sweep away most of the existing cannabusinesses. That prospect has aroused resistance from the current players and anxiety among their customers, who worry that the new stores, which will be regulated by the Washington State Liquor Control Board (LCB), may not be able to serve their needs at an affordable price--a concern heightened by the likelihood that the state legislature will sharply reduce the amount of marijuana patients are allowed to grow for their own use.

The fact that Colorado's marijuana industry was better developed and legally more secure helps explain why recreational consumers there were able to buy pot from state-licensed stores at the beginning of 2014, while consumers in Washington are still waiting. "Colorado already had the industry built up," Holcomb says. "It was simply a matter of changing the status of operations." The LCB's latest projection is that pot stores will begin opening in July, but that may prove overly optimistic. Even if some retailers do open for business this summer, there may not be enough marijuana to supply them. Despite its advantages, Colorado experienced initial shortages that sent prices soaring. In Washington, which is moving more slowly partly so that growers can be licensed and operating before retailers are, the problem may be even worse.

In fact, Washington's regulators are deliberately engineering a shortage. Keen to prevent diversion of newly legal marijuana to other states, which might trigger a federal crackdown, the LCB is imposing a cap on production and strictly limiting the number of retailers. The amount of marijuana cultivation allowed by the state is calculated to supply just 25 percent of the market, while the number of retail licenses will be much smaller than the number of existing medical marijuana suppliers. Seattle, which has about 200 dispensaries (including delivery services), has been allotted just 21 state-licensed pot stores. Legalization in Washington seems to be replacing something resembling a free market--the largely unregulated medical marijuana business--with something closer to Soviet-style central planning.

'A Lot of Innovative Interpretation'

A couple of weeks after last year's Hempfest, the U.S. Justice Department announced that it would not try to block marijuana legalization in Washington and Colorado as long as those states adopted sufficiently strict regulations. In a memo to U.S. attorneys, Deputy Attorney General James Cole listed eight "federal enforcement priorities" that he said should guide decisions about whether to prosecute state-licensed marijuana businesses. The priorities included interstate trafficking, distribution to minors, sales of other drugs, and the involvement of organized crime. As long as marijuana growers and sellers complied with state law and did not implicate any of the eight priorities, Cole suggested, targeting them probably would not be a good use of federal resources.

The day that the Cole memo came out, Jenny Durkan, the U.S. attorney for the Western District of Washington, issued a statement of her own. Durkan, whose district includes Seattle, wanted to clarify that the businesses currently supplying patients in that state with cannabis had no place in the Justice Department's vision of a properly regulated marijuana market. "The Department guidance is premised on the expectation that the state will implement strong and effective...