Why Markets Should Be Skeptical Of Federal Cannabis Reform

Federal cannabis reform and legalization is a question of “when” not “if.” But based on the structural dynamics of Congress and the complexities of administrative action, the “when” could be a very long time from now.

It’s A Slow Burn On Federal Cannabis Reform

America’s views on cannabis have come a long way since the days of “Reefer Madness“and”Just Say No.” Today, 68% of Americans think cannabis should be legalized. This is widespread support: Democratic, Republican, young, old, non-religious, religious, northerners, southerners all have majority or near-majority support for legalization, according to Gallup.

Yet the prevailing federal treatment of cannabis continues to be from a time more than 50 years ago when less than 15% of Americans supported legalization. In 1970, Congress passed the Control Substances Act that placed cannabis as a Schedule I drugs. It’s in the same category as heroin or LSD, defined as having no currently accepted medical use and a high potential for abuse. To this day, it’s still a crime at the federal level for anyone to grow, process, dispense, or even use cannabis.

This view is at odds with most Americans and the growing number of states that have in some way legalized the use of cannabis. The recreational use of cannabis has been approved in 21 statesoften through state ballot referendums, with 39 states allowing some form of medical use.

In a federalist system with federal and state governments, this has led to the confusing circumstance of cannabis being both legal and illegal in certain jurisdictions. Risk-averse institutions that face federal regulations largely remain on the sidelines of the cannabis market.

But the grassroots movement is not going unnoticed in Washington, DC Federal lobbying by the cannabis industry has increased 100x over the past decade. Institutionalists like former House Speaker John Boehner (R-Ohio), who once opposed cannabis, now lobbies on behalf of it.

Hundreds of cannabis bills have been introduced in Congress, the House passed legislation decriminalizing cannabis, and there’s a bipartisan push to pass legislation this month to give cannabis companies greater access to financial services in states where it’s legal.

The momentum is clearly on the side of cannabis reform.

A Majority Is Not Enough For Cannabis In The Senate

Majority support may be enough to pass a state ballot referendum or even legislation in the House, but the Senate is a different institution. Majority support for cannabis in the country is not how bills get passed.

There are 100 senators, two from each state. California, the most populous state and the first to legalize medical cannabis back in 1996, has the same power as Wyoming, the least populous state with no state-level cannabis reforms.

Senators from the 26 smallest states constitute a majority in the Senate. According to the latest US Census data, a small-state Senate majority would represent just 18% of the US population. What’s more, the Senate filibuster prevents cannabis legislation from passing without a 60-vote supermajority. That means senators from the 21 smallest states, representing just 11% of the US population, can block most legislation from passing.

Republicans do not represent all of these small states, but they represent most of them. Only six Republicans, or 12% of the GOP caucus, represent a state that has approved recreational cannabis use. Meanwhile, 21 Republicans, or 43% of the GOP caucus, represent the 11 states with no recreational or medical cannabis markets.

That includes Senate Minority Leader Mitch McConnell (R-Ky.). The soon-to-be-longest-serving Senate leader relishes his power to defeat cannabis legislation. Democrats often try to attach legislation, like the SAFE Banking Act to provide a federal safe harbor for state cannabis banking, to “must-pass” legislation like government funding and defense authorization. McConnell consistently ridicules Democrats for this approach, using his power to block attaching any cannabis provision to a larger bill.

The problem for cannabis supporters is that Democrats don’t have the votes within their caucus to hold a simple floor vote. SAFE Banking may have 60 votes, but progressive Democrats have made clear they don’t support a piecemeal deal compared to broader cannabis reforms. Yet a more comprehensive bill would likely lose support of Republicans, and some Democratswho are only comfortable with smaller efforts.

With Republicans taking over the House next year, cannabis reform does not appear to be a top priority for Republican leadership to bring to the floor. This could leave cannabis legislation languishing for years to come, especially if Republicans win back control of the Senate in 2024.

The Administrative Hoops To Cannabis Reform

Instead of legislative action, the Biden Administration does have the power to unilaterally change the legality of cannabis. That’s through re- or descheduling cannabis as a Schedule I drug. But it’s not so simple. The last administrative review took five years to completeending in a rejection to reschedule cannabis.

The process begins with a petition to the attorney general or a request for the Department of Health and Human Services (HHS) to review a drug such as cannabis. Then, the Food and Drug Administration (FDA) evaluates the drug from medical and scientific perspectives, including a look at the drug’s potential for abuse. The attorney general also conducts his or her own review. Based on the FDA’s analysis, the HHS secretary develops a recommendation for drug scheduling and passes it to the attorney general, who then can decide whether to proceed with a rulemaking to re- or deschedule.

President Joe Biden in October asked his HHS secretary and attorney general to review “expeditiously” how cannabis is scheduled. But the timing of Biden’s announcement, one month before the midterm elections, seemed more aimed at bolstering turnout among young voters than a heartfelt view on reforming cannabis. The teetotaling Biden historically has been opposed to major cannabis reforms. He may not put the pressure on his administration required to review the scheduling of cannabis before the end of his first term.

The economist John Maynard Keynes said, “the markets can remain irrational longer than you can remain solvent.” The market for cannabis is only growing. As more Republican-leaning states take action and a younger generation of lawmakers takes over, there’s an unmistakable destination for cannabis decriminalization. But the federal government is no stranger to taking its time in meeting the market and the wider country where it is at. It’s reason enough to be skeptical about major cannabis reform in the near term.