Tour Portland by Bitcoin

Depending on whom one asks, Bitcoin is the future of currency, a useful tool for conducting transactions with vast untapped potential, or a speculative bubble of no lasting consequence. Enthusiasm for Bitcoin also signals various commitments, as Tyler Cowen notes, such as for libertarianism and technological optimism. Bitcoin has had a big week, with Overstock.com agreeing to accept it and The Chicago Sun-Times trying out a Bitcoin paywall.

The less obvious uses of Bitcoin are also intriguing. Writing at the Umlaut, Eli Dourado explains how the programming language that makes Bitcoin work opens up all kinds of possibilities, including contracts, micropayments, and proof of identity. It’s enough to convince me that Bitcoin or a successor cryptocurrency will likely be increasingly relevant and that it’s worth getting familiar with how to use it. And though I’ve in all likelihood missed my chance to strike it rich, there are far worse gambles than speculating on Bitcoin from my living room. It’s cheaper than Vegas and the drinks are better.

But if one is holding on to bitcoins for any reason beyond speculation, one will eventually want to spend them. There are lots of ways to do this online. Transfers between friends are also easy. But what about a night on the town? Where can one go to, say, turn bitcoins into beer?

To find out, my friend Tom and I consulted CoinMap.org to plot an evening out in Portland exclusively patronizing businesses that accept Bitcoin. As one might expect, it gets a little weird.

Sadly, we weren’t able to experience what likely would have been the weirdest stop on our itinerary. At Float On in southeast Portland, customers exchange dollars or bitcoins for 90-minute sessions in a sensory deprivation chamber, floating in complete darkness and silence. Float On’s FAQ promises that floaters will not drown, that it’s not New Age mumbo-jumbo, and that “only a small percentage of floaters turn into proto-human monkeys.”

Would I hallucinate a UFO abduction, be inspired to take up impressionist painting, or perhaps receive a vision of Bitcoin’s future value? I didn’t get to find out. Float On was booked until 2 am the night of our adventure, which was a little later than we were willing to commit to. The business closed for renovations the following day, promising to re-open in February. I was looking forward to this, but it will have to wait for some other time. I suppose it’s good to know for future reference that if one craves sensory deprivation at two in the morning, there’s a place in Portland to find it.

Our first stop instead was browsing the Mirador home goods store on southeast Division street, which was pleasant, if not quite as mind-expanding as a plunge into sensory deprivation. The store offers everything from standard pots and pans to more Portlandian items like home cheese-making kits. Tom picked out a cutting board and a cocktail strainer, and I made my first Bitcoin purchase, a small brush for cleaning out metal straws. I’d been needing one of those!

The checkout process at Mirador was the smoothest of all the places we visited. The clerk rang up our orders, then used a computer to generate a QR code containing a unique Bitcoin wallet address and the total price of our purchase. We simply held our phones up to the screen, approved the transfer, and the transaction was completed within seconds.

Our next stop was just two blocks away at Papa G’s vegan organic deli, which offers dishes such as a tofu dog, tempeh reuben, and house “nochos.” While the aromas at Papa G’s were enticing, we were not its target demographic and spent a while mulling our options. Eventually we settled on a couple of their house made drinks, a hibiscus cooler and ginger beer kefir. These were both good and refreshing. For those seeking harder stuff, the deli also offers a selection of bottled beers.

Checkout was completed by scanning a QR code taped to the register that is linked to a Bitcoin wallet controlled by the owner. This was fast and easy, but leaves the staff without a direct way of verifying the transaction.

A few minutes north is Madison’s Grill, a place I’d passed by many times but never visited until last week. Madison’s began accepting Bitcoin at the urging of local enthusiasts and hosts the Portland area Bitcoin Meetup group. The menu offers standard pub fare like burgers and fish and chips, and the fourteen-handle tap list includes both familiar brands and a rotating selection of craft beers, among them Awesome Ales and No-Li on our visit. This is easily the best place to convert bitcoins into beer in Portland. Given the rise in Bitcoin’s value from when I first bought in a few days before, my beer was essentially free.

We ended up sitting next to the owner, Steve Brown, an outgoing guy who’s having fun with his experiment being the first full-service bar and restaurant in Portland to accept Bitcoin. Though not yet a huge part of his business, the venture does seem to be paying off with new customers and press.

Madison’s is also notable for being the only place on our crawl that has found a way to integrate tips into their Bitcoin transactions. These are recorded by wait staff and factored into their paperwork at the end of the night, much like a credit card tip.

No tour of Portland is complete without a visit to food carts, so our next stop was Whiffies Fried Pies in the pod at southeast 12th and Hawthorne, just one block away from Madison’s. Whiffies makes sweet and savory fried handpies that I’ve enjoyed many times in the past. Tom and I both opted for the BBQ brisket and mozzarella pie, which came out steaming hot and delicious. This is my pick for the best place to trade bitcoins for food in Portland.

Just like at Papa G’s, checkout here was completed by scanning a QR code linked to the owner’s account.

Along with its coffee shops, breweries, and food carts, Portland’s hospitality industry is famous for its strip clubs. Out of town guests make a point to visit them, the local alt-weekly reviews their steak offerings, and the likes of Tyler Cowen and Josh Barro comment on their economic strategies. While there are plenty of sleazy ones, others feel like good dive bars that just happen to have naked women in them. It’s a strange dynamic, perhaps best summed up like this: In other cities, you go to the strip club and don’t tell your wife. In Portland, your wife invites you.

Thorough research demanded that we conclude our evening at the Kit Kat Club, a new bar that claims to be the first strip club to accept Bitcoin. (This is only the second nerdiest reason I’ve gone to a strip club, the first being the time I went to the Boom Boom Room to see magician Reed McClintock perform card tricks.)

Implausible as the idea seemed, we hoped that this might mean that one could tip performers in Bitcoin, perhaps through creative use of tattoos and QR codes. Alas, that isn’t the case, and for obvious reasons they don’t want customers using phones that could just as easily be recording video as transferring currency. That aspect of the business remains a cash affair. (That said, it seems that an enterprising, tech-savvy dancer could set herself up to accept Bitcoin individually. Paging Lynsie Lee.)

The bar incorporates aspects of cabaret, with an emcee and themed performances, but it’s still very much a strip club. The staff was fun and friendly. Stumptown Dumplings offers food; their pork dumplings with chili hoisin were pretty good, though they require a separate non-Bitcoin transaction. My only knock against the place would be the beer selection, which is bottle-only and dominated by mass market lagers. Is there much of an overlap between people who spend bitcoins and people who go to strip clubs? I have no idea, but if there is, Kit Kat is the club they’re looking for.

Below, a few assorted thoughts and observations from our Bitcoin crawl…

Ease of use: Getting set up with Bitcoin was easy. I signed up with CoinBase for my primary account, linked that to my checking account to purchase Bitcoin, and transferred Bitcoin to a Mycelium wallet on my cell phone to spend while we were out.

Integration: Though all of our transactions went smoothly, Bitcoin payments aren’t yet easily integrated into the point of sale systems of the places we visited. In some cases, the money was sent to an owner who wasn’t on the premises. Staff could potentially verify transactions by watching a customer’s phone screen, but this is hard to monitor closely. At Madison’s they asked for a name and phone number as back up. Right now people paying with Bitcoin are early adopters and trust is high, but better integration with POS systems would make bar and restaurant use of Bitcoin more secure.

Tipping: As mentioned above, Madison’s was the only one of the four bars and restaurants we visited that factored tipping into their accounts. At every other stop we needed cash for tipping staff, making it impractical to spend a night out using only Bitcoin. (However if a restaurant wanted to switch to a percentage service charge model, that would be easier to handle.)

Privacy: I think that only one of the businesses we patronized generated a unique address for each Bitcoin transaction. Since the blockchain documenting Bitcoin transactions is public, anyone who knows the address used by a business can see how much money it has received. Right now this is a small enough part of their volume to be of little concern, but if Bitcoin becomes more popular one can imagine that they may not want to broadcast their sales so easily.

Volatility: It should go without saying that the volatility of Bitcoin prices is a concern for businesses to consider. Right now, I doubt many local businesses would have any trouble converting their Bitcoin receipts to dollars if they don’t want to carry a large balance. On the other hand, if they’re optimistic about Bitcoin’s future value, they may want to hold on to them.

New customers: Perhaps the best reason to start accepting Bitcoin now is to attract new customers. There are people who want to spend bitcoins and they currently have few options for where to do so. There is a benefit to being one of the first in an industry to accept the currency, both for being discovered by new clients and for getting press coverage. Even if one is skeptical of Bitcoin and rapidly converts all sales to dollars, it could be worthwhile to get on board before competitors do.

Advantages over credit cards: Credit card transactions take time to post, they can be reversed if a customer protests, and the associated fees are significant. Standard Bitcoin transactions are fast, irreversible, and cheap. (It is possible to structure Bitcoin transactions so that they can be arbitrated and reversed, but getting a refund for a standard exchange requires the retailer’s consent.) I doubt Bitcoin will replace Visa anytime soon, but these are advantages for a small business to consider.

One additional way restaurants might use Bitcoin is to hold reservations. Popular restaurants lose revenue when a reserved table sits empty. Even if a restaurant takes a credit card number to charge in the case of a no-show, it’s possible that the customer will contest the payment. Restaurants could instead require a deposit of Bitcoin to hold a table and then either return it when the party arrives or deduct an equivalent amount from the bill.

Taxation: Perhaps the biggest disadvantage to accepting Bitcoin is figuring out how to factor it into one’s taxes. This seems to be a gray area at the moment and could get complicated.

Bottom line: There’s a lot of room for expansion when it comes to accepting Bitcoin. Integrating it into one’s business will probably get easier over time, but there are also advantages to being among the first to try it out.

Recent reading

In Meat We Trust: An Unexpected History of Carnivore America, Maureen Ogle — I first heard of Maureen Ogle through her engaging history of beer in the United States, Ambitious Brew. I enjoyed that book, so I was pleased to receive an advance copy of her newest work.

In both books Maureen tells the stories of industries that began with local producers, consolidated into industrial scale, and then saw the rapid recent growth of smaller, quality production alongside the corporate giants. But she doesn’t she go for an easy narrative of good versus evil. The story of meat is driven by changes in production, transportation, regulation, and the incentives they impose on the market. This is very much a microeconomic history: the industry is the way it is because entrepreneurs made understandable choices in the pursuit profit.

Maureen takes an ambivalent view of modern meat production, as, in reality, do most of us. We abhor the cruelty of factory farming and the environmental destruction wrought by consuming so much meat. We also like being able to enjoy meat in plentiful, affordable quantities, whether it’s humanely-raised and artfully prepared or greasily devoured at a fast food restaurant. As she notes in the introduction, meat is like gasoline. It’s easy to extol moderation when it’s cheap, but few desire the hardship of making it expensive.

To readers seeking a condemnation of modern meat production, this book may come across as insufficiently damning. Even so-called “pink slime” gets its due. “[The] process was simply a high-tech version of what frugal cooks have done since humans stood upright: it allowed processors to utilize every available morsel of protein and calories,” she notes in the concluding chapter. “Only a food-rich society like ours enjoys the luxury of dispensing with frugality.” But this hard-headed approach to the subject is exactly what makes In Meat We Trust worth reading. There is probably no better source for understanding our carnivorous society, in all its plenitude and horror.

Average is Over: Powering America Beyond the Age of the Great Stagnation, Tyler Cowen — This is Tyler Cowen’s follow up to The Great Stagnation, examining economic trends stemming from what he describes as “some fairly basic and hard-to-reverse forces: the increasing productivity of intelligent machines, economic globalization, and the split of modern economies into both very stagnant sectors and some very dynamic sectors.” The basic ideas are summed up pretty well in this New Yorker interview. One exchange from that apltly describes my friend circle in Portland:

I think there will be much larger numbers of people who live somewhat bohemian, [freelance] lifestyles, who culturally feel very upper-middle-class or even upper-class, but who don’t have that much money. (Think of many parts of Brooklyn.) Those individuals will be financially precarious, but live happy, productive lives. How we evaluate that ethically is very tricky. Still, I think that’s what we’re going to see.

Initially reading the book, I didn’t think my own career in the spirits industry was likely to be affected very much by the need to work with intelligent machines. Robotic bartenders? A novelty, and change-resistant regulators would be wary of taking humans out of the exchange. Smart software to create novel recipes? That’s only part of the job, and we already have The Flavor Bible. But on further reflection, I realize a lot of my relative success in the industry comes not because I’m good at making drinks — lots of people are — but because I’ve combined that well with social networking and blogging. The topic of how to make a long-term living making drinks is one that comes up often, and understanding how to use SEO and online platforms is a factor to consider in this and so many other lines of work.

If you follow Marginal Revolution or have read Cowen’s other books, you’ll know whether or not you’ll like this one. I found it thought-provoking throughout and even enjoyed the long sections on competitive chess, a field in which Cowen sees signs of where other jobs and life pursuits are headed. (Freestyle chess, which combines teams of humans and computers, reminded me very much of David Brin’s recent science fiction novel Existence, recommended in the previous round-up.)

Smoke: A Global History of Smoking, Sander L. Gilman and Zhou Xun — Given the ubiquity of cigarettes in the twentieth century, its easy to forget that tobacco was unknown to Europeans prior to the arrival of Columbus in the New World. It’s easier still to forget that tobacco has been enjoyed in many forms and contexts, from pipes and cigars to religious rituals and enemas. There’s much more to tobacco than addiction and cancer, and this compilation of essays gets at nearly all of them.

“Havana Cigars and the West’s Imagination;” “The Houkah in the Harem: On Smoking and Orientalist Art;” “Smoking in Modern Japan.” These are just a small sampling of the subjects covered, all of them amply illustrated with art, photos, and vintage advertisements. I know of no other book like it, and if the topic of tobacco is at all of interest than it is worth picking up.

The costs of convenience

Abandoned liquor store

Over at Blue Oregon, politico and former pub owner Jesse Cornett argues against liquor privatization, satisfied with the system the way it is:

Bar and tavern owners obtain their liquor almost the same way that anyone in Oregon does: they buy it from a liquor store. It comes with a small discount and can include delivery. When I called in my order, they would ask when I wanted it. Right away? Sure. See you in 30 minutes. At a certain time? Great, we’ll see you then. Run out of a particular product late in their hours? Just pop by. Call on your way and it’s sitting at the counter waiting for you. The system works exceptionally well for Oregon’s pub, bar and restaurant owners. Obtaining liquor was much more convenient than any other product.

Jesse is absolutely right about this. Oregon’s system makes buying liquor simple. To stock the bar I manage, I make one phone call, receive one delivery, and write one check. Easy! In contrast, our wine buyer deals with more than a dozen distributors, taking separate deliveries and writing individual checks for each of them. Pain in the ass!

So yes, the current system is convenient for bar managers. But that’s a terrible reason to keep it in place. It leaves unaddressed, for starters, the cost to the bars. Licensees in Oregon receive only a very small (about 5%) discount off retail. The set price means we don’t spend time bargaining or making deals, or what is known in less regulated states as “doing your damn job.” It also means we pay more for our liquor, making it harder to put quality spirits in our menu cocktails.

The situation is even worse when we want to bring in relatively esoteric spirits from other states. Oregon distilleries benefit from the fact that the state’s monopoly buyer, the OLCC, gives them de facto favorable treatment. The agency is very likely to “list” their products, meaning it will purchase them in bulk and sell them at a lower price. That’s good for local distillers, but not so good for out-of-state producers and the consumers who want to buy their spirits.

As an example, I requested aquavits made in the Midwest as special order items this year. To the OLCC’s credit, they both eventually arrived, but our system renders the prices exceedingly high. The Gamle Ode Dill Aquavit sells in Oregon for $42.45 a bottle. In its home state of Wisconsin, I see it selling for $29.99. The North Shore Aquavit from Illinois? $47.25 in Oregon, $27.99 at Binny’s in Chicago. Shipping costs account for a portion of the difference, but not nearly all of it.

Advantaging local distillers over out-of-state producers shouldn’t be the goal of our distribution laws. It may even be unconstitutional. I have no doubt that skilled local producers will continue to thrive in a private market, just as they do in the privatized beer and wine system. And if there are some producers who cannot survive without the government buying their product in bulk, then maybe they shouldn’t be in the business.

(As a point of contrast, Matt Yglesias notes at Slate today that Washington, DC’s unique openness to importing spirits is part of what has made the city’s bar scene so fantastic. Oregon would do well to follow its lead.)

If Jesse’s argument were correct, there would be no reason not to extend it to restaurants’ other inputs. If a state monopoly on liquor is so great, why not monopolies on beer and wine too? Or on meat and cheese and fish and bread and vegetables? It would be so much easier on the chefs! But no one would take these ideas seriously, because we’ve long since figured out that essentially free markets are the best way to distribute normal goods. Liquor is a mostly normal good – and to the extent that isn’t because of negative externalities, taxes are a far better way of addressing that than inefficient distribution is.

As I never tire of reminding people when it comes to questions of distribution, markets are for consumers. Not only consumers who want local products, but all consumers – even the ones who just want stuff that’s basic and cheap. They would very much like to pick up a bottle for a few dollars less than they pay now and not have to visit a special store to get it. This is why privatization is likely to happen eventually, regardless of how it affects bar managers and local distilleries. Consumers are tired of dealing with a distribution system designed for the 1930s.

And this is where Jesse has a good point: There are going to be winners and losers with privatization, and distributors and large retailers are going to exert their influence to ensure that they get an advantage. This is one reason that Washington state’s privatization measure bars entry to new, smaller stores. If Oregon privatizes via ballot initiative, as appears increasingly likely, then we may end up with similar problems.

The solution to this is acknowledge that getting privatization right is difficult, but doable, and to demand that the legislature write a bill that learns from Washington’s mistakes and puts consumers first. The alternative is to wait for ballot initiatives written by retailers, one of which will inevitably pass.

[Photo by Joseph Novak used under Creative Commons license.]

[Disclosures: In addition to working as a bartender, I consult for several spirits brands and beverage-related products. I have not worked for retailers or distributors.]

Tobacco tax skepticism

My latest article for The Atlantic provides four reasons to oppose the new tobacco taxes proposed in the White House budget.

New taxes on pipes and cigars?

According to Bloomberg, President Obama will be proposing new tobacco taxes to fund pre-kindergarten programs:

Obama’s 2014 budget proposal, to be released April 10, would finance a pre-kindergarten program for 4-year-olds with higher taxes on cigarettes and other tobacco products. The president outlined the program in his annual State of the Union speech to Congress. He’s seeking to increase spending in areas such as education while Republican lawmakers are pushing for additional budget cuts as a way to reduce the federal deficit.

White House spokesman Jay Carney declined to elaborate on the proposed tobacco-tax increase. “Wait for specifics,” he told reporters at a briefing yesterday.

Never mind for now that cigarette smokers already suffered a more than doubling of the federal tax in Obama’s first year in office. The “other tobacco products” part of this proposal is reason to worry for those who enjoy pipes and cigars.

The 2009 tobacco tax increases to fund the Children’s Health Insurance Program created some significant disparities among similar products. Pipe tobacco was taxed at a far lower rate than roll-your-own (RYO). Large cigars sometimes get much more favorable treatment than small cigars. As a result, producers and consumers shifted to pipe tobacco instead of RYO and added just enough weight to small cigars to qualify as large. The distorting effects of these taxes were immediate and striking:

These changes are almost entirely a matter of legal classification. Actual consumption patterns haven’t changed in the way the chart suggests. Neither pipes nor premium cigars have enjoyed an explosion of new consumers as a result of these taxes.

Nonetheless, the government wants to fix this disparity. A report from the General Accounting Office, the source of the chart above (PDF), estimates that in the first two years of new taxes these substitution effects may have cost the treasury up to $1.1 billion.

One way to fix the disparity would be to lower taxes on RYO and small cigars, but that’s not going to happen. So don’t be at all surprised if the proposal from the Obama Administration includes tax hikes on pipe tobacco and large cigars, imposing substantial new costs on consumers and retailers.

For more, read Michael Siegel’s take on the tax proposal. And for a longer explanation of how smoking bans, higher taxes, and FDA regulation threaten the premium cigar industry, see my December article in The Atlantic.

Update 4/10/13: Via International Premium Cigar and Pipe Retailers on Facebook, this is apparently the language in the budget proposal:

Increase tobacco taxes and index for inflation

Under current law, cigarettes are taxed at a rate of $50.33 per 1,000 cigarettes. This is equivalent to just under $1.01 per pack, or approximately $22.88 per pound of tobacco. Taxes on other tobacco products range from $0.5033 per pound for chewing tobacco to $24.78 per pound of roll your-own tobacco.

The Administration proposes to increase the tax on cigarettes to $97.65 per 1,000 cigarettes, or about $1.95 per pack, increase all other tobacco taxes by about the same proportion, and index the taxes for inflation after 2014. The Administration also proposes to clarify that roll-your-own tobacco includes any processed tobacco that is removed for delivery to anyone other than a manufacturer of tobacco products or exporter. The rate increases would be effective for articles held for sale or removed after December 31, 2013.

As predicted, all loose tobacco would be treated equally, resulting in a huge tax increase for pipe smokers. Details on cigars are lacking, but it looks they would be hit too.

Incentives matter, tobacco taxes edition

One of the topics I’ve been researching for a forthcoming article is the effect of the higher tobacco taxes imposed by the Childrens Health Insurance Program Reauthorization Act (CHIPRA). CHIPRA raised tobacco taxes across the board but it didn’t raise them equally; some products were hit harder than others. The most relevant disparities are between roll-your-own (RYO) tobacco and pipe tobacco, and between small cigars and large cigars.

Before CHIPRA, pipe tobacco and RYO were both taxed federally at $1.10 per pound. After CHIPRA, the former increased to $2.83 while the latter increased to $24.78. Since the two products can be treated as substitutes for each other, this naturally led to manufacturers and consumers shifting to products labeled as pipe tobacco for use in rolling cigarettes. A similar shift affected the cigar market, where it became advantageous for some producers of small cigars to slightly increase the weight of their products to qualify as large cigars. (Direct comparison of taxes on small and large cigars is complicated by the fact that small cigars are taxed by weight and large cigars by value.)

I knew that these market distortions were occurring, but I didn’t realize just how substantial they were until reading a report from the General Accounting Office (PDF) from earlier this year on the effects of CHIPRA taxes. Here in two charts is a dramatic illustration of unintended consequences at work:

At first glance this may look like booming business for producers of pipe tobacco and cigars, but of course that’s not what’s happening. The changes are almost entirely nominal. Yet since they reduce tax receipts for the government, the pressure is on now to fix the disparity by raising taxes yet again. This would be another blow to producers of traditional pipe tobacco and large cigars, as well as the retailers who sell their products.

Just Do It

It’s not everyday that one sees a corporation exert its dominance over government as openly and brazenly as Nike did to Oregon Governor Kitzhaber and the legislature this week. From The Oregonian:

Turmoil over Nike’s taxes surfaced Monday when Kitzhaber made a surprise announcement that he was ordering lawmakers into an “extraordinary” special session with four-days’ notice. He said he was motivated to act fast after being approached by Nike officials who were asking for greater tax certainty before proceeding with a major expansion.

Nike got the guarantees it wanted. Kitzhaber defended the policy by citing figures regarding the corporation’s economic impact — figures provided by Nike without verification:

In speeches and press releases, Kitzhaber and Nike representatives claimed that the company offers an average annual compensation of $100,000 to its employees and that employment in Oregon has grown 60 percent since 2007. Kitzhaber, citing a Nike economic analysis, said the company’s expansion could trigger up to 12,000 direct and indirect jobs and a $2 billion-a-year boost to the state economy.

Those numbers were repeated by supportive lawmakers on Friday, although Nike has not provided data to back up those claims. The company has declined to release the economic report done by AECOM.

Kitzhaber’s spokesman, Tim Raphael, said that the office took the figures from fact sheets provided by Nike, without any independent verification. Nike refused requests from The Oregonian for evidence or context regarding the figures.

The tax deal doesn’t change anything in the short term, but it’s a sign of a sick relationship between the state and large corporations.

The CBO would like to thank you for smoking

Hikes on tobacco taxes are an easy sell to voters because smokers are presumed to pass their health care costs on to society, creating a negative externality that non-smokers have to pay for. The actual budgetary impact of smoking is more complicated: Smokers, by dying earlier than those who abstain, save governments a considerable amount of money. There is a lot of research to back this up, the latest coming from the Congressional Budget Office in The New England Journal of Medicine. The CBO examined a hypothetical increase in federal cigarette taxes indexed to inflation:

Outlays would be lower in that initial phase because decreases in per capita health care spending would outweigh the costs of greater longevity. From about the middle of the second decade onward, however, the effects of increased longevity would outweigh decreases in per capita health care spending, and outlays would rise; but until about the mid-2060s, that growth in outlays would be more than offset by the increase in tax revenues from higher earnings. The largest deficit reduction from the health-related effects — about 0.005% of GDP annually — would occur from about 2030 to 2035. After the mid-2060s, the deficit would be larger than otherwise because the higher outlays would outweigh the health-related revenue increase.

Factoring in the additional excise tax revenues, the researchers project that a tax increase would nonetheless result in a very small reduction in the deficit. Absent those revenues, the federal government is made fiscally worse off by people quitting smoking or never taking it up in the first place.

Michael Siegel, who is usually good at dispassionately evaluating arguments on their merits, is furious:

The rest of the story is that it is despicable that the Congressional Budget Office believes that it is appropriate to evaluate a public health policy based on whether it might save lives and therefore increase Social Security and Medicare spending. In doing so, the CBO is borrowing a page right out of the tobacco industry’s playbook. This type of analysis would never be done for an issue such as mammography, because anyone who advanced such an argument would be raked over the coals.

Like Philip Morris, the CBO should disavow its report and apologize for the argument it advances.

Finally, while it is shameful that the CBO has advanced this argument, it is also shameful that the journal agreed to publish this argument, thus giving it legitimacy. Both the CBO and the journal owe readers and the public an apology.

There is an obvious difference between mammograms, which are a treatment, and taxes, which are involuntarily taken from consumers. Not everyone buys into the argument that smokers should be taxed for their own good. For many, the best case for cigarette taxes is that smokers shift health costs onto the state. The CBO study is relevant to that argument.

In any case, the CBO makes clear in its commentary that budget effects are only one factor that should be considered:

Consequences for the federal budget are only one factor that lawmakers may consider when developing policies to promote health. Others factors include effects on people’s health and well-being, views about the appropriate role of government in influencing behavior, the burdens that policies might impose on people in various circumstances, and effects on the budgets of state and local governments.

Emphasis mine. Siegel, while admirable for his advocacy against junk science in the anti-tobacco movement, often misses the mark on issues related to paternalism.

Recent reading

The Family Meal: Home Cooking with Ferran Adria, Ferran Adria — As I’ve gotten more into cooking over the past year, my biggest obstacle to doing more of it is taking on recipes that are too complicated, too time-consuming, or require too many esoteric ingredients. As a result I enjoy cooking when I get around to it, but all too often I end up getting food out and putting off trying new things.

Ferran Adria of elBulli, the legendary restaurant famed for its innovative culinary techniques, is not the person I thought would reverse this. But his book of home cooking, which collects recipes from the “family meals” elBulli served their staff each night, does exactly that. The dishes by necessity tend to use readily available ingredients that are mostly inexpensive; each dish is given in quantities for two, six, twenty, or seventy-five diners. The methods are fairly simple and make the most out of light lists of ingredients. I brought it with me to Upper Peninsula Michigan and was able to cook from it there; if you can source items in the U.P. you can source them anywhere. I still have a lot more to try from this book, but so far everything has been good. More importantly, it’s a book that I’m actually using with frequency.

A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, Luigi Zingales — Recommended by everyone from Tyler Cowen to Brad Delong to Paul Ryan, this is an impressive book. It’s libertarian without being ideological, diagnosing the cronyism that plagues our economics system and offering institutional solutions to fix it. Capitalism has taken a bruising in the past decade, not least of all from its supposed defenders. Zingales’ “promarket populism” hits exactly the right tone; I’d unhesitatingly recommend this to friends on the left and the right.

Ron Paul’s eEVOLution: The Man and the Movement He Inspired, Brian Doherty — I hadn’t planned on buying this book but picked it up when Brian Doherty visited Powell’s in Portland. Having read Brian’s previous book and followed Reason magazine’s daily coverage, would I really enjoy an entire book about Ron Paul? The answer is yes, and I finished the book appreciating Paul’s career more than I had before.

Turley is right, but privatization is hard

Jonathan Turley has an op/ed in USA Today arguing for privatization of spirits sales and the end of state liquor boards:

Seventeen states continue to exercise control over liquor as absurd relics from the 1930s. Ironically, there is no better example of the failures of central planning than the “ABC stores” around the country from Alabama to Pennsylvania. Indeed, if Karl Marx were alive and trying to buy Schnapps today, he might reconsider aspects of Das Kapital after dealing with our central alcohol planners. [...]

Most states have gotten rid of these boards and fared well in relying on the market and conventional regulations to protect consumers. Just last month, Washington state embraced the free market and got rid of its state control. Thirty-three states rely on what Adam Smith called the “invisible hand” of the market where consumers choose among products — and the law of supply and demand handles the rest. However, eleven of the seventeen control states — Alabama, Idaho, Maine, New Hampshire, Vermont, Oregon, North Carolina, Ohio, Pennsylvania, Virginia and Utah — exercise direct control over the retail sale and price of liquor, sometimes even owning the ABC stores where it is sold.

In the long run, Turley is obviously right. There’s nothing special about spirits that makes them uniquely amenable to state distribution. As with most normal goods, consumers would be best served in a bottom-up, unplanned market with minimal barriers to entry.

The problem, alas, is getting there from here. As clearly demonstrated by Washington state this year, privatization is difficult. Any process of privatization will have to contend with entrenched interests that include distributors, retailers, state employees, and the state itself all seeking to bend the new regulations to their benefit. Economists call this regulatory capture. Or, in this case, deregulatory capture: Using the guise of deregulation and privatization to protect their own interests.

In Washington’s case, latent support for privatization was widespread. Yet it was Costco who did the work of getting an actual initiative on the ballot. Included in the initiative was a rule restricting most new retail licenses to stores of 10,000 square feet or greater. This is good for large retailers, but not so good for consumers or for smaller entrepreneurs who’d like to take a more boutique approach.

The state made sure to keep its cut of spirit revenues too. Voters supported privatization envisioning California-style low prices. The Tax Foundation explains what they got instead:

… the initiative introduces several new fees which not only make up for the lost profit, but are likely to actually increase the state’s total revenue from alcohol sales. Private retailers are burdened with a new liquor retailer license fee of 17 percent of gross revenues, as well as an annual renewal fee of $166. Also, liquor distributors must pay a liquor distribution license fee of 10 percent of gross revenues. Unfortunately for consumers, these new fees will end up costing them more at the check-out than the old system they replaced.

When the Washington initiative first came up for debate, my friends and I in Portland, Oregon envisioned crossing the border to shop for liquor. In fact, the opposite has occurred: Consumers in privatized Washington are coming to state-controlled Oregon to buy their booze.

None of this means that privatization is not a worthy goal; it’s absurd that nearly eighty years after Prohibition ended we still have state boards determining which products consumers can and cannot buy. But advocates of privatization and deregulation need to be smart lest they give these goals a bad name (remember Enron, anyone?). Competition and privatization are not the same thing; we should seek the former without fetishizing the latter. And no amount of privatization will lower prices if the state imposes high taxes on the supply chain.

It’s too early to judge the results of Washington’s attempt in full, but that state’s experience should serve as a warning. When advocates present privatization as a magic bullet without bothering to get the details right, consumers may end up spending a lot more than they bargained for.

[Update with disclosure: For those of you who don't read here regularly, I should mention that I work or have worked in various guises in the spirits industry. Opinions here are my own.]

An Economist Gets (a Zero Martini) Lunch

economistTyler Cowen’s new book An Economist Gets Lunch is, as he would say, self-recommending. When I lived in the DC area Cowen’s ethnic dining guide was a reliable source for finding good restaurants off the beaten path. If you read Marginal Revolution you already know his style and have a good idea of whether you’ll like the book. A few of the policy-oriented chapters are perhaps too brief to convince devoted skeptics of genetically modified organisms or long-distance trade, but they inject a healthy dose of economics into the conversation about how to improve the food system. I highly recommend it and agree with almost all of it.

Like Cowen, I place a high value on making every meal count. Given the nature of my job as a brand ambassador for a spirits company, however, I must often take a different approach than he does to seeking out good restaurants. When I travel I’m rarely able to eat in the suburbs, unless I’m going to an airport or distribution warehouse. And I definitely can’t avoid the places with vibrant social scenes selling lots of drinks – not if I’m doing my job properly, anyway. Yet despite this I still manage to eat very well.

With the exception of wine, Cowen seems to have a blind spot for alcohol. He notes that Prohibition sent American food into decline by shuttering many of the better restaurants, but aside from wine pairings one doesn’t get the impression that he would have missed the drinks had he been alive then. Post-Prohibition he laments the continued popularity of drinking spirits with food through the 1940s. Beer is noted mainly for its high mark-up. I don’t think cocktails are mentioned at all. The section on dining in Tokyo does recommend izakaya bars, but only secondhand via an email from another blogger and with the preface of “the sake aside…”. His book is about food, not drinks, but given how often the two go together – and more importantly, how often informed consumers of one are also informed about the other – paying so little attention to their intersection leads one to miss out on some good dining opportunities.

Cowen notes that the influence of alcohol on food can run in two directions. On the plus side, profitable drinks serve as a cross-subsidy for quality food, helping cover costs of rent and labor. On the negative side, an emphasis on drinks and sociality can take the focus off of meals and attract customers who come for other reasons. Just as a restaurant with a great view can skate by on mediocre food, so can one full of attractive, happy, socially lubricated people. The challenge is to find the places where quality of the food and the drink is high.

I’m happy to report that there are ever more places doing both very well. For a long time drinks received too little care in part because two of the same forces that damaged American dining – Prohibition and World War II – cast an even longer shadow on American drinking. The former threw talented barmen out of work or overseas. Both events were disastrous for quality wine, beer, and spirits. Home brewing of beer wasn’t legalized until 1978, helping open the field to new entrants. Spirits and cocktails have taken an especially long time to recover, due to complex and restrictive laws regarding distribution and service that differ in every state. The rediscovery of vintage cocktails and spirits began taking off in the late 1980s and has only recently expanded widely.

The upshot is that the quality driven parts of the drink industry attract people who are passionate about all aspects of food and drink. To succeed one has to taste widely and pay attention to technique; it would be surprising for this passion not to transfer to related domains in food. When I want to find good places to eat in a city I don’t know, I ask for recommendations from a bartender or barista who cares about what they do. They rarely steer me wrong.

This same thinking applies to customers. People who have cultivated their taste in drinks demand good food to go with their beverages, and I think it’s increasingly difficult for a good restaurant to skimp on its bar (if it has one) without putting off informed consumers. The same is true for bars: If they’re serving high-end drinks, they’ll want any food on offer to be of comparable quality. The rise of the gastropub is an example of this, but it extends to many types of cuisine. In my current home of Portland, Oregon, new, high-quality ethnic restaurants often make a point of hiring a talented bar staff. Some of the best new French, Thai, Mexican, and Japanese places to recently open here have included very respectable bars. (It helps that the barriers to obtaining a liquor license are fairly low in Oregon.)

When quality cocktail bars do serve food, they can be among the best options in a city, especially at night. For example, on a recent trip to Nashville I arrived too late to find anything but places with active bars still open. I went to Patterson House, a “speakeasy” themed cocktail lounge considered one of the best in the city. Drinks get by far the most attention here but they do offer food. It was quite good and, I think, better than almost anything else I’d find in the city at that hour. If you want to make every meal count, sometimes you have to go to the cocktail bars.

Reading An Economist Gets Lunch inspired me to think explicitly about how to find good food in American bars. Here are a few general suggestions based on my own experience:

Avoid places with lots of vodka and light rum. These can be bought cheaply and are easy to dress up in crowd-pleasing ways with liqueurs, fruit, and herbs. If these are what the customers are demanding than the food may be equally designed for broad appeal.

In contrast, look for ingredients that signal a knowledgeable staff and consumers. Italian amari, herbal liqueurs, rhum agricole, quality mezcal, batavia arrack, and – lucky for me – genever are good indicators. If I see a bar stocked with these I’ll want to see the food menu.

Go into the city. The density of consumers with expendable income, knowledge of food and drinks, and access to transportation that doesn’t require them to drive is in urban areas.

Laws matter. In some states regulations require that places selling spirits also serve food. Where these laws don’t exist, many of the best cocktail destinations won’t bother much or at all with food, so one might plan to eat and drink separately. (These laws are bad news if you just want to drink, since your drink prices may be covering the cost of an under-utilized cook and kitchen or bars may simply close earlier to save on labor. Virginia’s law creates particularly perverse incentives.)

Follow the food trucks. In cities with liberal regulations quality bars can team up with quality food trucks to outsource their kitchen. The truck parks outside and customers travel just a few steps to reach it. This is a fantastic way for each business to focus on its strengths and keep informed customers happy.

Charcuterie is your friend. Much of the preparation is done in advance and it pairs well with drinks, so it’s ideal bar food.

Don’t forget to Bone Luge.*

Finally, a note on behalf of cocktails. Cowen writes of the United States that our access to quality raw ingredients at affordable prices is inferior to that in much of the world. Thus, he advises, go for dishes that are composition-intensive, not ingredient-intensive. “The best option is buying prepared food from people who can put together sufficiently good raw ingredients in an interesting way.” He’s talking about cooking but its an apt description of what bartenders do.

David Wondrich describes mixed drinks as “the first legitimate American culinary art.” And why not? Mixology plays to our strengths. We are good at trade and distribution; we can take flavors from around the world, have them distilled for us (literally), and combine them to make novel creations. The toolbox available to a bartender in a well-stocked bar is incredibly broad (this is one reason I switched to making cocktails from making coffee, with its more limited range of flavor profiles). The skills needed for mixing cocktails are also highly transferable, requiring less tacit knowledge than the many complex processes that go into food preparation, so that a successful cocktail recipe is easily spread. These factors suggest that if your culinary interests extend beyond just food, quality cocktails and spirits offer rewards to exploration.

*Only kidding on this one. Maybe.

Get sweet on liqueurs

Pigou

My latest article at Culinate takes a look at a few liqueurs that have recently arrived on the market, highlighting three to try and cocktails in which to mix them. Read it here for details on some very good fruit liqueurs and the redemption of crème de cacao and crème de menthe.

The article also includes the recipe for the newest cocktail at Metrovino, a variation on the Pegu Club. The ingredients in a traditional Pegu — gin, lime, orange liqueur, and bitters — combine to create a grapefruit-like flavor, so substituting the excellent Combier Pamplemousse Rose grapefruit liqueur for the orange was one of the first things I tried with the spirit. Such a minor variation in recipe deserves at best a minor variation in name, hence the listing as Pigou Club on our menu. The number of our customers who know about both Pegu and Pigou is sure to be vanishingly small, but the allusion makes me happy.

1 3/4 oz. London dry gin
3/4 oz. Combier Pamplemousse Rose
1/2 oz. lime juice
1 dash Angostura bitters
1 dash orange bitters

Shake all ingredients with ice, strain into a cocktail glass, and garnish with a twist of lime peel.

Unintended consequences and genever houses

houseofbols

If you fly business class on KLM, you’ll be presented with a welcome gift from the airline: A small ceramic bottle of genever glazed in the style of Delft tiles and modeled after actual buildings in Amsterdam. This is a practice at KLM dating back to 1952, with a new house introduced each year. This I knew from my recent trip to Amsterdam. I have my own bottle, pictured above, of the House of Bols. This is the only one you can acquire without flying KLM or buying from collectors.

What I didn’t know is why this tradition developed. It turns out it’s an unintended consequence of regulation. Airline rules at the time capped the value of gifts to passengers at seventy-five cents, however they placed no restriction on the provision of drinks. KLM’s ingenious work-around was to hand out a single-serving of genever in a bottle that was worth far more than the spirit inside. Despite the cost-cutting that has deglamorized air travel in recent years, these ceramic bottles have become too beloved to eliminate.

See The Wall Street Journal for the full story, and thanks to my friend Edgar Hutte for the tip.

Defending Dudley

Republican candidate for Oregon governor Chris Dudley is taking some heat for comments he made suggesting that Oregon should add a tip credit to its minimum wage laws. (Tip credits allow businesses to pay less than the standard minimum to tipped employees on the assumption that the difference will be made up in gratuities; all but seven states make some sort of allowance for this.) The proposal is being used to drum up opposition to him from people in the service industry, as in this video:

If you’re a tipped employee already making minimum wage, then of course you’re not going to like this idea. But there are other considerations:

1) At $8.50 per hour, Oregon has one of the highest minimum wages in the country. We also have one of the highest unemployment rates. If you work or are seeking work in the hospitality industry here you’ve probably seen the crowds of people who show up in response to job ads; 700 lining up and even camping overnight at a new Olive Garden in Bend is an extreme example. Lines like that are an indication that the combination of a high minimum wage and no tip allowance is raising the demand for hospitality jobs while reducing their supply.

Many of these people lining up would likely be willing to work for less than the minimum wage rather than be unemployed. As a personal example, when I moved to Portland it took six months for me to find full-time employment behind a bar. I’d have gladly accepted a barback job for less than minimum wage in order to get my foot in the door somewhere, but it would have been illegal to negotiate such a deal.

2) The higher the minimum wage, the harder it is for employers to offer non-wage compensation. One of the biggest complaints from people in the hospitality industry is the difficulty of getting health insurance. Many of them might gladly trade a lower hourly wage for an equivalent contribution toward health insurance. (Actually more than equivalent, since health benefits wouldn’t be taxed. I’d be curious to see numbers relating minimum wage to provision of non-wage benefits, adjusted for other factors.)

As another personal example, the restaurant where I worked in DC paid less than the minimum wage, but employees who worked enough hours were eligible for insurance. That’s not a bargain we could make here.

To be clear, I’m not writing to advocate one way or the other on this issue. I’d just like to see better economic thinking in the discussions about it. Tip credits are portrayed as being bad for workers, but the trade-offs are more complex than that. Oregon’s current law favors employed hospitality workers over those seeking jobs in the industry and wages over non-wage compensation. These might be worthwhile trade-offs, but they are trade-offs, and so far I haven’t seen any acknowledgment of them in the critical responses to Dudley’s comments.

For more background on Oregon’s minimum wage and service industry employment see Patrick Emerson.

Mixing it up without IP

Man, do not steal a recipe for Eben Freeman:

After the seminar, I spoke to Freeman, who admitted he came up with the idea for the talk after becoming fed up with other bartenders and establishments taking credit for and profiting from his recipes and techniques. (Fat washing, for example, the process by which a spirit can be infused with, say, bacon, was pioneered in part by Freeman, yet is often attributed to others.) “Someone needs to get sued … to set a precedent,” he told me.

“In no other creative business can you so easily identify money attached to your creative property,” Freeman went on. “There is an implied commerce to our intellectual property. Yet we have less protection than anyone else.”

No disrespect to Freeman, who is understandably frustrated, but he fails to address the purpose of intellectual property in copyrights and patents. This is neatly summed up in the Constitution:

[The Congress shall have power] To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

Intellectual property exists to promote progress. Its purpose is not to ensure that no one’s ideas are stolen or that creative people can earn a living, unless those things are needed to promote progress in a field. The granting of temporary monopolies in the form of patents and copyrights is the price we pay for progress, not a goal in itself.

It might be completely true that bartenders are shamelessly stealing from each other, and that’s certainly something we should condemn, but we probably shouldn’t get the law involved unless we can show that this theft is causing mixology to stagnate. Along with fashion, cooking, and even magic, we’re in an industry that’s arguably better off with weak IP. This decade’s boom in craft cocktails is a sign that we’re doing OK without stricter protections, and I’d be worried that additional threats of lawsuits would have a chilling effect on the sharing of new techniques and recipes.

Perhaps Freeman or someone else has a workable, beneficial idea for expanding intellectual property related to cocktails, but I have a hard time imagining what that would be.

Update 9/1/10: Ezra Klein agrees.

Previously:
Two Pimm’s, one cup
Dark and Stormy and the piracy paradox
Dark ‘n’ Sue Me

Privatize the DMV

Matthew Yglesias calls on governments to improve DMVs, noting that many offices have inconvenient hours and locations. A better idea: Why not privatize them? Licenses to operate a DMV center could be sold to private businesses, which would then have an incentive to operate in ways that are pleasant for consumers. Better hours, better locations, better atmosphere. You could put one in a Starbucks or a Wal-Mart. Offer wi-fi. There are plenty of ways a business might make additional money by better catering to people who have to go there. Perhaps not all functions of the DMV should be privatized, but at least some of them could be.

This paper from the Cascade Policy Institute is from 1997, but it notes that several states already have some experience with this. In 2005 Radley Balko posted notes from satisfied customers in New Mexico and Arizona.

Markets are for consumers

One of my college economics professors had a maxim that he drilled into us students: “Markets are for consumers.” Economic logic can help to predict how certain changes will affect people up and down the supply chain, but if you start using that knowledge to protect producers’ interests at the expense of consumers, then you’re doing economics wrong. Markets are for consumers. (The maxim applies to monopolies too. They are problematic because they raise prices or are unresponsive to consumers, not because they wipe out competitors.)

Keep this maxim in mind as you read about the Washington Brewers Guild’s opposition to Initiative 1100, which will liberalize alcohol sales in Washington:

Beer brewers and drinkers opposed to privatization of state liquor sales? Indeed, says Heather McClung, president of the Washington Brewers Guild, which represents the state’s small craft breweries and, roundaboutly, craft-brew drinkers. Her industry is lined up against I-1100 – though still weighing I-1105 – the privatization measures headed for the November ballot and detailed in last week’s SW cover story. “There is something that is being left out of the discussion it seems,” says McClung.

I-1100, for example, is actively promoted as a modernizing of liquor laws, she says, when it’s actually a sweeping proposal that repeals 39 state laws, enabling the biggest retailers, distributors, and producers to own and give favorable pricing to each other. That, says McClung, of Seattle’s Schooner Exact Brewing Company, would eliminate the level playing field that small breweries such as hers need if they are to prosper.

At issue is a section of the initiative that would allow breweries to self-distribute and offer discounts to bulk buyers like Costco, grocery stores, and bars. Beer in Washington must currently sell at a uniform wholesale price: Costco pays the same amount for crates of it that a small retailer pays for a few cases. As a result, beer prices at large retailers are higher now than they will be if I-1100 passes.

Eliminating the uniform price requirement might make it harder for craft breweries to compete with the big beer companies who can offer greater discounts and benefits. Does this make the initiative anti-consumer? Only if you look exclusively at craft beer drinkers. Craft beers currently make up about 7% of the US market (probably somewhat higher in beer savvy Washington). The vast majority of beer consumers will benefit from being able to buy macrobrews at lower prices.

To put this another way, the Washington Brewers Guild is saying that the state should keep beer prices artificially high for 93% of the beer market in order to maintain the same broad selection for the remaining 7% (or whatever the actual figures are in Washington).

Personally, I doubt that the results will be as bleak as the WSG predicts. Craft brews are growing in popularity while macros are declining, and that’s unlikely to change. Smaller breweries are also starting to merge, operating independently while taking advantage of economies of scale. There may be some closures — this is true regardless of I-1100 — but craft beers don’t show any sign of going away.

However, even if I’m wrong, that doesn’t mean this is a bad bill. As much as I love good beer, it would be improper to elevate my preference to force of law. If the only way the current high number of small breweries can survive is by shackling their larger competitors, then we may need to settle for having fewer breweries. I hope that beer drinkers will continue pay more for quality, but that’s their decision to make. Markets exist for consumers — all consumers, not just the ones who like microbrews.

Additional notes: The question of tied houses is complicated, and arguably the matter of most concern. It’s the aspect of I-1100 I would be least confident in supporting.

File this story under the “Brewers Behaving Badly” label, which previously featured California craft brewers lobbying against laws that would allow beer companies to hand our more swag or offer free tastings in bars, Pennsylvania brewers opposing a measure to let consumers buy beer in 18 packs, and Michelle Minton’s coverage of Colorado brewers opposing the sale of good beer in grocery stores.

For more on liquor privatization efforts, see my recent post in the Examiner.

Hat tip to Drink Gal, who also has a good post on the subject.