Alcohol

How Your Beer Bought John McCain's $500 Loafers

Uncovering the government subsidies behind Cindy McCain's family fortune

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Sen. John McCain (R-Ariz.) has made no bones about his disgust for greed. In the primaries, he contrasted his own record of public service with the private sector career of opponent Mitt Romney, whom McCain derided as a "profit manager." More recently, as the world's capital markets fell into a full-blown crisis, McCain has struck a populist chord, lambasting the "unbridled greed" that he says drives Wall Street.

Though ostensibly more free market than his opponent Sen. Barack Obama (D-Ill.), McCain (he of the eight houses, 13 cars, and $500 loafers) has never been shy about laying into what he feels are the excesses of capitalism, including the way lobbyists can bribe lawmakers to jigger the system to their liking. The problem for McCain is that the fortune he married into came by way of alcohol wholesaling, an industry that isn't remotely free market, is awash in excess, and that wouldn't exist were it not for rigorous system-jiggering from high-powered lobbyists.

When McCain married his second wife Cindy Lou Hensley in 1980, he became one half of a very wealthy household. By some estimates, Cindy McCain's stake in her family's Hensley & Co. beer distributorship puts her net worth around $100 million. The Hensley company gave McCain an executive position shortly after he married the heiress, helped catapult him into public office, has thrown heaps of money at his campaigns over the years, and in addition to providing him with a charmed life, has played a significant role in putting him an election away from the White House.

Over the course of his career, media outlets covering McCain have delved pretty extensively into the history of Cindy McCain's father and his company, as well as the ethical issues McCain will have to face if he's elected and his wife still serves as the company's president (McCain generally recuses himself from federal legislation pertaining to alcohol regulation—he won't have that option as president). But thus far, there's been little examination of the beer wholesaling industry as a whole. To be blunt, the entire industry is a farce. It's an artificial, anachronistic, government-created entity that's anti-competitive and full of lobbyists and special interests. It raises the cost of each bottle of beer you drink, though "Joe Six Pack," as McCain's running mate might put it, receives no value for the added cost.

Alcohol wholesalers (in this context, wholesalers and distributors essentially have the same meaning) thrive thanks to what's known as the "three-tier system" of alcohol distribution, a series of laws that date back to just after the end of prohibition in 1933. The 21st Amendment gives states the power to regulate the sale of alcohol within their borders. Some states decided to assume control of all alcohol sales (they're known today as control states). Most of those that didn't adopted laws mandating a state-based middleman between alcohol producers (brewers, distillers, wineries) and retailers (restaurants, grocery stores, liquor stores). There are some exceptions, but generally in three-tier states no one is allowed to buy directly from a producer. Everything must go through a distributor. And while it's possible to envision a role for a beer or wine distributor in a freer market for alcohol, it's clear that the industry wouldn't be nearly as lucrative or prominent as it is today were it not for these protectionist laws.

In the book Strange Brew: Alcohol and Government Monopoly, California State Northridge Professor Glen Whitman explains the origins of the antiquated system. It was put in place largely to appease temperance activists, who still held sway in some parts of the country. Angsty prohibitionists feared what they called "tied houses," bars that were owned by liquor producers. Before prohibition, tied houses, they said, had lured blue-collar workers in with free salted pork sandwiches on their lunch breaks. The salty meal would make the laborers thirsty, at which point they'd purchase alcohol from the bar—leading, the temperance activists said, to decreased production, drunkardness, and all-around moral decay. (According to Whitman, this is also the origin of the phrase, "There's no such thing as a free lunch.") A state-mandated middleman, the thinking went, would prevent these devious marketing practices.

The wholesaling industry has thrived ever since. For decades wholesalers have quietly added 18-25 percent to every bottle of beer, glass of wine, and shot of liquor you pour down your gullet. And there's been little resistance to them, for a few reasons. First, wholesalers don't interact with consumers. They take their markup between producer and retailer, out of the sight of the people whose money they're ultimately taking. Second, they're rather powerful. Alcohol wholesaling is a lucrative, concentrated industry that reaps enormous benefits from policies whose costs are spread out across the general public. Which brings up the third reason distribution laws aren't frequently challenged:  They haven't had many obvious opponents. Until recently, the only people hurt by the three-tiered system were consumers, and again, the cost per consumer was too negligible, hidden, and entrenched for anyone to notice.

That's changing. Bulk retailers like Costco and Wal-Mart have waged lawsuits against some of these laws, with mixed success. The popularity of microbrews, niche wineries, and the ability of both to reach consumers over the Internet has also put a dent in the distributors' empire; wholesalers are among the leading advocates for banning alcohol sales over the web.

But it gets worse. Many states have placed further restrictions within this already artificial market. Some states, for example, give wholesalers exclusive rights to distribute alcohol in a particular region, effectively creating government-enforced monopolies. Other states (including Arizona) have enacted "franchise termination laws," which make it more difficult for retailers and/or producers to switch distributors once they've started doing business with one. Producers and/or retailers get locked in. If they feel their existing distributor is taking too much of a markup, isn't offering a wide enough variety, or is otherwise performing poorly, there's little they can do. The effect is to squeeze out the upstarts and the competitors. According to Whitman, the number of alcohol wholesalers nationwide has shrunk by 90 percent since the 1950s.

The Hensley company provides a good example of how these laws can hurt consumers. Hensley is the fourth largest beer distributor in the country, one of the largest privately-held companies in Arizona, and holds a 60 percent market share in the parts of Arizona it serves. It also distributes Anheuser-Busch products exclusively. Beer-producing giant Busch began an incentive campaign in the late 1990s aimed at getting distributors to drop the products produced by its competitors. In those parts of the country where a given distributor has a huge, government-abetted market share, such arrangements put the squeeze on the variety of options available to consumers (Anheuser-Bush's national market share rose five percent during the campaign, to 50 percent nationally).

Alcohol wholesalers put out several arguments to justify their existence. None of them are very convincing.

First, they say that wholesaling provides a convenient bottleneck for the government to collect taxes on alcohol. Given that state governments manage to collect sales tax at the retail level on just about everything else, that isn't terribly persuasive.

Three-tier advodacy groups like the National Beer Wholesalers Association also improbably argue that without their members' careful scrutiny and warehousing, we'd be seeing outbreaks of death and disease caused by tainted alcohol—as if the existence of wholesalers and their markup is all that's preventing alcohol producers from poisoning their customers. Again, not all that persuasive.

For its next argument, NBWA then employs Frederic Bastiat's Broken Window Fallacy, boasting that the government-created industry adds 91,000 jobs and effects an impossible $15 billion impact on the U.S. economy. If those figures are accurate, why not require all consumer products to pass through three tiers? In fact, why not add a fourth or fifth tier, too? We could wipe out unemployment! The argument, of course, is preposterous. Without laws mandating their existence, whatever it is that beer distributors claim they generate for the economy wouldn't disappear. That money would merely go to consumers in the form of cheaper beer, wine, and liquor.

The most dubious argument from wholesalers is that because of the potential for abuse, alcohol is different, and therefore consumers and retailers can't be trusted to buy it directly from producers—and certainly not off the Internet. That argument reeks of posturing because the same wholesalers invoke the mantra of "personal responsibility" (correctly, in my opinion) when they lobby against alcohol regulation in every other form. Browse a few wholesaler trade publications, and you'll usually find an article lamenting the government paternalism inherent in excise taxes or restrictions on marketing alcohol in the same issue as, for example, an article warning that America will turn into a nation of winos and drunkards if we let Costco or Wal-Mart buy directly from alcohol manufacturers so they can give their customers a bulk discount on booze.

But let's get back to John McCain. What does the candidate lecturing Wall Street about greed think about the alcohol wholesaling industry? Is it fair? Should government be subsidizing (if not outright creating) an industry by forcing consumers to pay more for alcohol—for which they get little to no added value in return? And who's greedier, the family who exploits that system to amass a small fortune, or the brokers and traders McCain derides for pursuing profits in a free market?

Radley Balko is a senior editor of reason.