Let the Wine Flow

By / 9.29.2010

PPI just released a new policy memo by Jeff Siegel: “Let the Wine Flow: Why Congress Shouldn’t Restrict Free Markets in Beer, Wine, and Spirits.”  It’s about an issue that will be the subject of a House Judiciary Committee hearing today—and one that is also very close to my own heart: booze.  After reading Jeff’s piece and seeing the witness lineup for this hearing, I had to take a break from our big week of infrastructure events to say a few words about this piece on H.R. 5034 and today’s hearing.

This booze war is good stuff.  Any issue that mixes alcohol with economics, congressional politics, and constitutional law is right up my alley.  Even putting aside my personal bias as an enthusiastic consumer, the political history of the alcohol industry in America is incredibly fascinating, and the newest chapter being written this week is no exception.

Regulation of alcohol in this country has provided some of the most interesting stories in our history about the role of government in regulating economic activities by private industry and individual consumers.  After all, what other consumer product has ever been important enough to us as a nation that we amended our Constitution to ban it from the market, and then amended it a second time to legalize its sale again?  Although most of us probably think of prohibition as a one-time quirk of American culture that is well behind us, the regulatory legacy of prohibition is strong and still shapes the industry today.

Because of our national fascination with controlling alcohol in commerce, the three-tier structure of our alcohol industry today is more an accident of history than a system shaped by economic forces.  With the repeal of prohibition, the 21st Amendment implicitly endorsed the three-tier approach imposed by the states by explicitly giving states the power to regulate the alcohol industry.  At the time, giving distributors a legally-protected role in the market was seen as a safeguard against past corruption and abuses by large alcohol producers that had in large part inspired prohibition in the first place.  Since that time, a lot has changed in the industry, but the distributors have continued to enjoy protected status as state-sanctioned middlemen.  It’s pretty nice work if you can get it.

Apparently, those same distributors now feel that their place in the market is being threatened to the point that they have asked Congress to step in and help them by making it nearly impossible for anyone to challenge state alcohol laws on constitutional grounds.  The distributors claim that the three-tier system enforced by the states is under attack by the growth of direct shipping from small wineries and microbreweries, along with the direct buying power of large wholesale outlets like Costco and Walmart.  Producers, consumer groups, free-market think tanks, and an outraged community of wine bloggers have tried to debunk that argument, countering that this is a pure political power play by the distributors to further entrench their position as rent collectors in state alcohol markets.

This bill is an odd thing if you actually read the text of it (which I’m not sure many staffers did), because it’s not at all clear what it’s trying to accomplish unless you’re familiar with the background of the Supreme Court’s 2005 Granholm decision that limited the states’ ability to regulate alcohol under the 21st Amendment when the state regulation unfairly restricts interstate commerce.  As a recovering lawyer, I admit that I find the Granholm decision really interesting: a 5-4 decision with an unusual mix of justices in the majority, and hardcore textualist Scalia agreeing that the phantom idea of the dormant commerce clause trumps the clear language of the 21st Amendment.  But for sane people who would rather stab themselves in the eye than read the entire decision, the takeaway was that states can no longer pass laws to protect their local alcohol industry by discriminating against alcohol producers from outside the state.  That’s good for out-of-state wineries and breweries who want to bypass distributors and sell directly to consumers and retailers, and bad for distributors who lose part of their markup business when that happens.

What the bill actually does, more or less, is to give states free rein to ignore the Granholm decision by making it really, really hard for anyone to challenge state alcohol laws in court for running afoul of Granholm.

That’s a bold step for Congress to take, and for pretty questionable reasons.  Which means that even for a recovering lawyer, the jurisprudence is less important than the political story that’s at work here.  Because as a recovering Hill staffer, this bill turns my stomach.  The language (if you can follow it) is so shamelessly overreaching that when I learned that it has 146 cosponsors in the House, I knew immediately I could name at least 146 legislative staffers who are not very good at their jobs.  It baffles me to think how anyone could advise a member of Congress to add his or her name to legislation that is such an obvious political liability waiting to happen.  And then I remember what good receptions the beer wholesalers used to throw, and how much young legislative aides appreciate free beer.

But now that the Judiciary Committee is taking this bill seriously and giving it a full-blown hearing, it’s worth thinking critically about the serious questions underlying the distributors’ position.  First, is the three-tier system mandated by the states in danger of collapsing?  That is, do the distributors have a valid claim that Congress needs to take action to protect the current system against erosion by market forces in interstate commerce?  And second, is the system of state-by-state government structuring of the industry, which has produced the three-tier system, worth protecting in the first place?

But as Jeff Siegel points out in his memo, the debate surrounding this bill hasn’t been about these questions, and as often happens in Congress, the real-world outcomes are obscured by rhetoric and misdirection:

Ultimately, this is an issue of choice and competitiveness. It’s one thing to have an honest debate about the pros and cons of the three-tier system and whether it still makes sense, almost 80 years since the 21st Amendment put it in place. But that’s not the debate we’re having. Instead, the debate is whether Congress should tie its hands for no good reason, and make it harder for small businesses to compete in the alcohol distribution market. It seems like a debate that’s hard to justify having.

Given the growth and innovation we have seen in the alcohol industry, and the benefits to consumers of a vibrant national market for new products, it’s hard to see how anyone can make a valid case that the Granholm decision needs to be rolled back, or that distributors can’t continue to flourish in a competitive market, even if they no longer get to put their hands on every product moving into and out of state markets.  But apparently someone has made the case successfully to 146 cosponsors in the House, so maybe I need to let them buy me a beer and explain it to me one more time . . .