A State Liquor Monopoly's Self-Contradicting Defenses
Privatization opponents warn that it will raise prices, boost consumption, and kill children.
Growing up in Pennsylvania, I became accustomed to a system for distributing alcoholic beverages that struck people from most other states as bizarre. Beer could be purchased only from bars, restaurants, or, if you were willing to buy a case at a time, state-approved distributors. Wine and distilled spirits were available only from drab state-run outlets with inconvenient hours, limited options, indifferent service, and prices higher than those charged by private liquor stores in neighboring states. I was therefore surprised to read Pennsylvania Gov. Tom Wolf's explanation of his decision to veto a bill that would have privatized the liquor business in his state. According to Wolf, the current system is better for consumers.
Wolf's opposition to privatization was not that surprising. The bill, which he vetoed on July 2, was passed by a Republican-controlled legislature, and Wolf, a Democrat, values the revenue from the state liquor monopoly as well as the support of the union that represents the people it employs. But Wolf's explanation of his decision was audaciously counterintuitive. "During consideration of this legislation," he said, "it became abundantly clear that this plan would result in higher prices for consumers. In the most recent case of another state that pursued the outright privatization of liquor sales, consumers saw higher prices and less selection."
Wolf was referring to Washington, which privatized liquor sales in 2012 under a ballot initiative that was overwhelmingly approved by voters in 2011. It's true that prices went up after the initiative was implemented. Last year The Seattle Times reported that "the average price per liter, after tax, from June 2013 to April 2014 was $24.39, about 11 percent higher than in the same period two years prior, before privatization." But prices did not go up because benevolent public servants were replaced by avaricious capitalists. Prices went up because taxes went up.
In an effort to reassure voters concerned about reduced state revenue, the privatization initiative imposed "license fees" equal to 10 percent of distributors' sales and 17 percent of retailers' sales. Those levies were added to liquor taxes that were already the highest in the country. As Scott Drenkard, an economist at the Tax Foundation, told The Washington Post last year, "The whole point of privatization is increased choice, increased flexibility, increased availability of different products. But if you raise taxes like they did in Washington, to try to sweeten the pot and make it a vote-getter, you're going to run into problems."
Wolf also claims privatization in Washington resulted in "less selection," but it is hard to see in what sense that is true. A 2012 price list from the Washington State Liquor Control Board includes about 50 varieties of bourbon and about 70 varieties of Scotch. By comparison, Total Wine & More in Seattle currently offers 289 varieties of bourbon and 381 varieties of Scotch.
The Total Wine & More in Cherry Hill, New Jersey—less than 10 miles from Philadelphia—likewise has a bigger selection than the Pennsylvania Liquor Control Board (PLCB) offers: 236 varieties of bourbon and 355 varieties of Scotch, compared to 122 and 80, respectively, on the PLCB's price list. Total Wine's prices are generally better too: for example, just picking three products I often buy, $25 vs. $30 for Bulleit rye whiskey, $44 vs. $52 for 10-year-old Ardbeg Scotch, and $37 vs. $44 for Herradura reposado tequila (all in 750-milliliter bottles). Is there any reason to think businesses like Total Wine could not offer similar variety and prices to Pennsylvanians?
According to the Pittsburgh Post-Gazette, Wolf and his fellow Democrats "warned that prices would rise as private businesses sought profit." To anyone familiar with basic principles of economics, that makes no sense. No doubt merchants would love to charge $100 for a bottle of Ardbeg if they could sell the same number they do at $44. But they can't. In fact, anyone who tried would see his sales of Ardbeg plummet to zero because his competitors would be charging a lot less.
The PLCB probably would not sell much Ardbeg if it tried to charge $100 a bottle either, since it faces competition from retailers in neighboring states. But crossing the border is inconvenient (especially if you live in the middle of the state), so the PLCB has more leeway to raise prices than private merchants with various nearby competitors do. Other things being equal, more competition leads to lower prices, so it is hard to see why Pennsylvanians would have to pay more for a bottle of whiskey if the state monopoly were replaced by profit-driven businesses competing against each other—unless consumers were simultaneously hit with higher taxes, as in Washington.
Wolf is not the only opponent of privatization making such implausible arguments. His allies at United Food and Commercial Workers (UFCW), which represents most of the PLCB's 3,000 or so employees, insist it's a "myth" that private liquor sales are good for consumers. The UFCW, whose talking points Wolf may have been cribbing, warns that privatization would mean higher prices, less selection, and less availability. That claim contradicts not only economics but another argument the UFCW likes to deploy: that privatization will lead to more drinking, more alcohol abuse, and more traffic fatalities. Or as a UFCW-sponsored TV spot put it last year, "it only takes a little bit of greed to kill a child."
Got that? Thanks to privatization, alcoholic beverages will be more expensive, less appealing, and harder to buy. And consumers will respond by drinking more.
Praising Wolf for his veto last week, the UFCW noted that the decision pleased "public health experts" and quoted a statement from the Pennsylvania Driving Under the Influence Association: "Research has shown that privatization leads to increased availability of alcohol, increased availability leads to increased consumption, increased consumption leads to an increase in alcohol-related problems, such as increased assaults, alcohol-related automobile crashes and deaths." That's on the same website where the UFCW warns that privatization leads to decreased availability of alcohol "as rural stores close and others have just a few shelves of alcohol crammed in among many other items." (The experience in Washington, where the number of liquor retailers jumped from 329 to more than 1,400 after privatization, suggests otherwise.) It's almost like PLCB employees, keen to preserve their jobs, will toss out any argument they think might work, whether or not it makes sense or is consistent with their other claims.
Even while arguing that the state liquor monopoly serves consumers better than private businesses ever could, Wolf allows that there is room for improvement:
Modernization of our state liquor system would provide additional revenues to the Commonwealth and save important, family-sustaining jobs. We can support and bolster consumer convenience without selling an asset and risking higher prices and less selection for consumers. I am open to options for expanding the availability of wine and beer in more locations, including supermarkets. I have also put other compromises on the table, including variable pricing, direct shipment of wine and expanding state store hours.
To get a sense of what "modernization" looks like at the PLCB, consider the agency's ill-fated experiment with wine vending machines in grocery stores. The PLCB rolled out these custom-built contraptions, each of which contained 1,000 bottles of 53 different wines, in 2010 as part of its effort to be more customer-friendly, the better to ward off calls for privatization. In addition to making a selection and swiping a credit card, a shopper seeking to retrieve a bottle from one of these semi-automated kiosks had to swipe his driver's license to prove he was 21 or older, look into a camera monitored by a remotely located PLCB employee to prove he was the person shown on the driver's license, and breathe into a tube to prove he had not started drinking yet. The cutoff was a blood alcohol content of 0.02 percent, so a single glass of wine or beer in the previous hour or so was enough to disqualify a would-be wine buyer, whether or not he planned to drive after consuming his purchase.
The PLCB expected Pennsylvanians to be thrilled by the novelty of buying wine at the grocery store, a freedom that most Americans take for granted. And maybe shoppers would have been more enthusiastic if the process had been simpler, if they had not been subjected to the indignity of a sobriety test, or if the machines had worked as advertised. The kiosks operated from 9 a.m. to 9 p.m. every day except Sunday—assuming they operated at all, which they often did not. Frequent malfunctions prompted the PLCB to take all of the machines offline for repairs in December 2010, just in time for the holidays.
In August 2011 Pennsylvania's auditor general reported that the PLCB had managed to lose money on this venture, even though it had a monopoly on wine sales and a vendor contract that supposedly guaranteed a profit. The PLCB expected to have 100 kiosks in grocery stores throughout the state, each selling at least 35 bottles a day. But only 32 machines were ever up and running at one time, and only 12 ever hit that sales target for even a week, possibly because customers did not like being treated like potential criminals and were annoyed by persistent mechanical problems. The PLCB officially pulled the plug on the wine vending machines in September 2011, citing an unresolved financial dispute with the Conshohocken company it hired to install and run them. The name of the company (I kid you not) was Simple Brands.
Pennsylvania House Speaker Mike Turzai (R-Allegheny), a privatization supporter, called the PLCB's wine kiosks "a silly type of an idea that only a government bureaucracy could come up with." That's literally true, since the machines were invented specifically to satisfy the PLCB's peculiar demands. They embodied the conflict between the PLCB's two main missions: generating revenue by selling booze and discouraging drinking by limiting the availability of alcoholic beverages. That same conflict leads Pennsylvania's governor and his fans at the UFCW to endorse blatantly contradictory propositions: The current system must be maintained because it makes drinking easier, and it must be maintained because it makes drinking harder. The more state liquor monopolies strive to emulate profit-seeking, customer-pleasing businesses, the more they undermine their reason for existing.
This article originally appeared at Forbes.com.
