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.]