Reason Magazine - Staff

Rolling Off the Rolls

info@reason.com (Rick Henderson) info@reason.com (James Plummer) — Sat, 01 Nov 1997 00:00:00 EST

As the economic recovery enters its sixth year, the Federal Reserve Bank of San Francisco has discovered something odd: A record share of the working-age population--67.25 percent--is either employed or looking for work. And those numbers started rising in the middle of last year. It's not unusual for people who haven't had a job to start trying to find one at the end of a recession, but not at this stage of a "mature" recovery. What is going on?

The May issue of the bank's publication Western Economic Developments suggests that last year's welfare reform bill is one of the causes. A report on "Labor Force Developments and Welfare Reform in the United States and the Twelfth District" (which includes Alaska, Hawaii, California, Oregon, Washington, Arizona, Nevada, Utah, and Idaho) looks at one of the largest groups on the welfare rolls--single mothers. Since August of last year, when the welfare bill went into effect, the annual labor force growth rate for single women with families has jumped from 2.4 percent between July 1995 and July 1996 to an annual rate of 6.5 percent in the succeeding months.

Not all single mothers are on welfare, of course. And not every woman seeking work immediately found it. The unemployment rate of single mothers went up during the same period.

The report also notes that "black women, Hispanics, and white teenagers, all of whom have higher than average unemployment rates, accounted for about 60 percent of the total growth in the labor force over the past twelve months"--suggesting that unemployed individuals who might have gone on welfare before last August have instead tried to get jobs.

Fine Wines and Wine Fines

info@reason.com (James Plummer) — Sat, 01 Nov 1997 00:00:00 EST

Coffee. Condoms. Salsa. Socks. You can have the finest of each, delivered monthly to your doorstep, anywhere in the United States. In this era of niche marketing, it seems that anything you could possibly desire is just a phone call or mouse click away. Except fine wines--their availability is limited by your state's liquor laws.

Lately such laws have been getting tougher. Last year Kentucky joined Florida, Georgia, and Tennessee in making it a felony to ship alcohol across state lines for personal use. This summer Maine repealed its law allowing residents to order wines from states that afforded Maine businesses the same privilege. Now sending or receiving wine for personal use is a misdemeanor in Maine, as it is in about 15 other states. Bob Frohling, head staffer of a task force on the wine industry for the National Council of State Legislatures, expects more of these laws. "At least a third of the states will reintroduce felony legislation next year," he predicts.

The states' interest in all this is quite simple--money. In recent years, Frohling estimates, the mail-order alcoholic beverage business has taken in $500 million to $1 billion annually, about half of it in wine sales. The business is growing rapidly, with many wineries taking orders on the Internet and placing ads in increasingly popular wine magazines. That's a lot of untaxed commerce.

As a hangover from Prohibition, states have special authority to regulate interstate trade in alcoholic beverages. The 21st Amendment, ratified in 1933, immediately ended the federal prohibition of alcohol and turned the booze over to the states, declaring, "The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

About a dozen state governments have laws of the kind Maine recently repealed, allowing residents to receive small amounts of alcohol for personal use, provided the shipper's home state has a reciprocal law. But the practice has been outlawed in at least 20 states, including the four where both wine shippers and purchasers face felony charges if they dare to sell or buy a rare vintage not available at the corner liquor store. "We shouldn't be ranked up there with ax murderers, but I guess that's where we are," says Matt van Steenwyk, managing partner at Adelaida Cellars in Paso Robles, California. Many of Adelaida's customers have to cross their fingers and hope a nearby wine shop carries a selection from van Steenwyk's family winery.

The impetus behind the new laws isn't limited to revenue-hungry state governments. The classic coalition behind "blue laws" that ban liquor sales on Sunday consisted of Baptists, who didn't want anyone drinking on their day of rest, and bootleggers, who enjoyed windfall profits on Sundays. The Baptists are still around--most states with laws against direct alcohol shipments have a rich prohibitionist history. But the role of the "bootleggers," the people who benefit financially from restrictive laws, is now played by local distributors and vintners eager to limit competition.

Wholesalers and retailers don't like the fact that wineries can bypass them by selling their products directly to the consumer. Distributors typically portray restrictive laws as necessary to keep the tax base from eroding, since out-of-state wineries don't pay state taxes. They also play the child card. Rep. Leo Daughtry, a Republican North Carolina legislator and wine wholesaler, recently told the Raleigh News and Observer, "There's the idea of control [on the sales] to keep it out of
the hands of minors. With mail-order, you have no idea
who they're shipping to." But these purchases are made by credit card, and most states that allow direct shipping, as well as most wineries, require a signature from an adult upon receipt. Most delivery companies (it is illegal to send any alcohol through the U.S. mail) require age verification as well.

Daughtry supported (but, he insists, played no part in crafting) a law signed by Democratic Gov. Jim Hunt requiring anyone who ships wine to consumers in North Carolina to purchase a wholesalers license. Wholesalers must own, rent, or lease property in the state to get a license. The North Carolina Beer and Wine Wholesalers Association said the law was necessary because direct shipments have increased dramatically, encouraged by the convenience of Internet shopping.

A calcified, state-licensed system leaves little room for innovation. Two hundred years ago Thomas Jefferson tried unsuccessfully to start a vineyard in Charlottesville. In the past decade or two, however, resourceful and creative Virginians have been able to beat the hostile climate, and the Virginia wine industry is widely considered to be second in quality only to California's. But such experiments can't succeed if they can't find their market, and the ability of consumers to try new wines is limited by where they live.

Van Steenwyk cites Adelaida's Chenin Blanc as an example. Twenty years ago, "We called it Chenin Plonk. It was a terrible wine." Chenin Blancs were over-planted and cheaply made, and they earned a reputation as a bottom-end wine. Believing a Chenin Blanc made with care could be a great wine, Adelaida cultivated and fermented its own grapes. "We sent it out to our club, and now there are a thousand people who love this wine, who drink this wine," says van Steenwyk. "That never would have happened if I had to use the normal distribution channels." Adelaida, since it was willing to bear a risk comfortable distributors weren't, had a hit on its hands.

Van Steenwyk says mail-order wines "salt the mine," expanding the market and creating demand that wholesalers and retailers fill. Faced with more choices than ever, consumers looking for the right wine visit wineries, attend local tastings, and use the Internet and special-interest publications to gather information. With direct marketing and home delivery, retailers lose their chief advantage in serving their customers: convenience. To survive, they have to know their customers' tastes, keep abreast of the latest vintages, and stock and recommend appropriate wines. "The good ones can take care of themselves," van Steenwyk says. "They know their customers better than I do."

Small wineries like van Steenwyk's bear the brunt of the laws restricting interstate sales. "The big wineries could care less," says Dave Chesterfield of Gold Medal Wine Club. Van Steenwyk agrees. "The wholesalers don't get the deals from me and other small wineries," he says. "They get the deals from Gallo." Famous-name wines from large companies already have a sturdy distribution network. They are sold in grocery stores and wine shops throughout the country, so they don't need direct shipments to make money or make a name for themselves.

The resulting paucity of choices irritates wine aficionados like Clint Bolick, director of litigation at the Institute for Justice in Washington, D.C. "It's extremely frustrating that you can mail-order almost anything, but you can't mail-order your favorite wines," he says. "As with most other wine enthusiasts my tastes run to the small wineries. If there's no mail-order business, the odds of finding my favorite wines in a Virginia ABC store are virtually zero." It's the small wineries that are able to take risks on a premium Chenin Blanc. Large wineries, if they have guaranteed contracts with a distribution system that enjoys a near-monopoly, have little incentive to innovate--or to change the law.

Even medium-sized vintners, if they have alternative means of distribution, may not be hell-bent on deregulation. Louisiana, which used to ban all direct wine sales from out of state, now permits them if the winery obtains a license and pays taxes. But for Gloria Ferrer Champagne Caves, a 70,000-case-a-year winery in Sonoma, California, the paperwork and taxes "are more hassle than it is worth to us," says Tom Scot, the company's hospitality director. "I have other avenues, and this one isn't big enough for us."

It's not clear how effective the restrictions on interstate wine sales are. Although Scot is quick to say his vineyard ships "to the states only where it is legal to do so," and Bolick sometimes finds himself paying a premium to specially order wine through an ABC store, another Virginia wine enthusiast names two out-of-state wineries he still receives deliveries from. But he quickly adds, "don't mention us grateful Virginians if you speak with either of them." Neither winery is mentioned in this article.

Bucking the laws can be risky. Maryland's Alcoholic Beverage Control Board recently nabbed California's Kendall-Jackson Winery in a sting operation. An ABC employee ordered one bottle of wine delivered to his home and a case delivered to his office. Kendall-Jackson elected to pay a $35,000 fine rather than face restrictions on its license to supply wholesalers. The board fined another California vintner $5,000. Maryland law provides for "the seizure of any contraband product and any vehicle or conveyance used to transport such contraband"--a policy that may have prompted FedEx's recent decision to refuse all shipment, legal or illegal, of any alcohol into or out of Maryland.

There are ways to dodge the restrictions. When potential customers call Adelaida only to find that their state prohibits mail-order wine, van Steenwyk says, "They ask, `What's the work-around?' Then they ship it to their brother in another state, and when they visit their brother they come home with their wine."

If they have a broken taillight, they'd better hope the highway officer who pulls them over isn't familiar with laws regulating personal transport of alcoholic beverages. Many states require residents who bring wine back with them from other states to pay taxes or obtain a permit if the amount exceeds a certain limit, typically a case. It's doubtful that such rules deter many oenophiles. Says Bolick, who tours Sonoma Valley wineries once a year, "I can carry extremely heavy luggage back from California." So far he has not spotted any wine-sniffing dogs at the airport.

Don't Leave Home

info@reason.com (James Plummer) — Wed, 01 Oct 1997 00:00:00 EDT

You're on vacation overseas. You reach to settle the dinner check, and then you realize: Your wallet's gone. Your credit cards are missing. You've been robbed. What will you do? While you wait for replacement traveler's checks and credit cards, you ask Aunt Sally back home to wire you some money. No problem--as long as she first checks with your Uncle Sam.

As the drug war moves into the Information Age, the Clinton administration has proposed new regulations for wiring money overseas. Called "another nail in the coffin of financial privacy" by Financial Privacy Report Publisher Mike Ketcher, the new rules would force anyone sending more than $750 abroad to provide identification to the financial institution wiring the money and have the transaction reported to the Treasury Department.

Current regulations require that all cash transfers of more than $3,000 be recorded by the wiring service and that all wires over $10,000 be reported to the government. The Treasury Department reports an increase in the number of transfers below the current reporting thresholds from the United States to Colombia, attributing it to drug dealers sending money to their higher-ups in South America.

Yet law-abiding people who wire money in amounts below the reporting threshold may be under the watchful eyes of law enforcement. In Texas, where businesses must report financial transactions of more than $1,000, the Federal Register notes that "surveillance" has been used to track the difference between the "number of people observed patronizing" a money-transfer business and "the number of customers reflected in business records." Treasury predicts that merely filling out additional paperwork will cost those who wire money overseas an extra $2.4 million. The department is expected to hand down the new Bank Secrecy Act regulations by the end of the summer.

Driving Adolescents Crazy

info@reason.com (James Plummer) — Wed, 01 Oct 1997 00:00:00 EDT

The much-ballyhooed soccer moms may have even less time to deal with getting to work, buying groceries, and picking up their kids before the day care center closes. A bill cruising toward passage in California would cut off one source of relief for many stressed-out parents: unrestricted driving privileges for their 16- and 17-year-old children.

Before getting a license, drivers younger than 18 would have to hold a learner's permit for six months and have a parent certify that the teens had completed 50 hours of "supervised driving practice" with an adult. After minors get their licenses, they won't be allowed to carry any passengers younger than 20 for six months--unless an adult over 25 is in the car . (No longer could older children ferry their younger siblings to the mall or basketball practice.) And for the first year after they get their licenses, 16- and 17-year-olds will be barred from driving between midnight and 5 a.m. without an adult present. Breaking the law could result in community service. The law includes exemptions for school activities, work, and family and medical emergencies.

The bill is a part of a growing trend to restrict teen driving. The restrictions on passengers would make the California bill the nation's toughest on teens, but eight states have nighttime driving restrictions and 44 states have lower rates of acceptable blood alcohol concentrations for drivers under 21, says the Insurance Institute for Highway Safety. Another bill, introduced in the California Assembly, would bar licenses for students who miss 15 days of school.

Advocates of the new laws stress the dangers young drivers face. IIHS statistics show that teenage drivers, who represent 10 percent of the population, account for 14 percent of highway deaths.

But older people are death risks as well: Thirteen percent of the population is 65 years or older, and that group accounts for 17 percent of highway fatalities. So why aren't legislators trying to limit retirees' driving privileges? Grandma can vote. Junior can't.

Edifice Wreck

info@reason.com (James Plummer) — Wed, 01 Oct 1997 00:00:00 EDT

The San Diego City Council isn't very happy with Richard Rider.

His meddling has made the council stop its $200 million expansion of the city's convention center. The council had already started appropriating money to prepare for construction when the California Supreme Court stepped in. Rider, the 1994 Libertarian Party candidate for governor, had noticed that the council forgot to ask the voters, as required by law, what they thought about this whole thing. The court said he may have a point.

The city charter and Proposition 13 require that all bond issues be put to a vote. But the San Diego government thought it could get around that requirement by creating a paper entity, the San Diego Convention Center Expansion Finance Authority, to issue the bonds and expand the center. The city would then lease the facility from its own authority. This popular trick of local governments in California is known as "lease revenue." Carl Fabian, lead counsel for Rider and his fellow plaintiffs, calls lease revenue "the phoniest thing you can imagine....They're just transferring money from one pocket to another."

The Supreme Court may agree. After local politicians and journalists repeatedly dismissed the suit as frivolous, and some public officials even threatened countersuit for lack of probable cause, the court agreed to hear the case. Rider v. San Diego goes to trial this fall.

San Diego will argue that the 1947 law authorizing these paper agencies (passed to build a parking lot for the National Football League's Rams when they moved from Cleveland to Los Angeles) doesn't require that bonds they issue be put to a vote. Rider and his allies say the bogus corporations must be held to the same legal restrictions as their parent bodies. A decision is not expected before early next year.

Tobacco Deal's A Sweet One For Net Censors

info@reason.com (James Plummer) — Fri, 22 Aug 1997 00:00:00 EDT

The Supreme Court's decision to strike down the Communications Decency Act marked an important victory in the digital war for free speech. But the $300 billion-plus tobacco settlement may give censors a back door to more government control of the Internet.

When the high court overturned the CDA in June, netizens across the country and around the globe celebrated. Unfettered speech had always been reality on the radically decentralized Internet. The court enshrined that reality in law.

"The interest in encouraging freedom of expression in a democratic society outweighs any theoretical but unproven benefit of censorship," the court wrote.

But cyberwarriors shouldn't rest on their laurels for long. Less than a week before the court's ruling, cigarette companies and states' attorneys general made another decision. Theirs doesn't carry the force of law - yet -but it does represent the opening bid in an auction for the rights of companies and consumers.

If approved, the $368 billion tobacco deal would have the nation's largest cigarette rollers bow to all sorts of restrictions on their speech. Under the settlement, people and cartoons could not be shown in ads; any tobacco ads that might end up in the hands of children could only use black-on-white text; and tobacco- related billboards, hats and race cars would be scrapped altogether.

And, according to the agreement, "The new regime would . . . prohibit tobacco product advertising on the Internet unless designed to be inaccessible in or from the United States."

If the settlement becomes law, it will set a disturbing precedent for restricting all forms of online speech, commercial and otherwise.

The defeat of the CDA hasn't slowed down the censors. Anti-porn crusaders were writing new laws restricting online speech even before the act was struck down. And lawmakers seeking to regulate less-protected forms of speech, such as advertising, haven't given the court's ruling a second thought. Minnesota recently passed a law prohibiting wine sales over the Internet, declaring: "No shipper located outside Minnesota may advertise interstate reciprocal wine shipments in Minnesota."

But information, including advertising, is accessible on the Net from almost anywhere in the world. The tobacco agreement "could cause a lot of general problems for cigarette companies, because if they want to advertise where it's legal, they can't," says Eugene Volokh, a law professor at the University of California at Los Angeles who studies speech on the Internet.

Conventional online wisdom says that the Internet interprets censorship as an error and routes around it. But Volokh argues that new regulations on speech would be "too enforceable.... Restrictions on advertising are enforced relatively more easily than other restrictions on speech because advertisers have a fixed abode."

The largest problem with such a rule may be the message it sends to other countries, Volokh says. Other nations will be tempted to imitate these restrictions or make them tougher. And any company with a global commercial presence would have to limit its online presence to what is allowed by the most oppressive country it does business in. (For instance, one of the largest emerging markets these days is China.)

The demise of the CDA bolsters the Internet's promise as a safe haven for the free exchange of ideas. But a creeping array of regulations and proposals suggests this promise may be too good to be true.

This article appeared as a guest editorial in Investors Business Daily, August 22, 1997.