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Wholesalers and Assemblymen
A New York bill on the sale of alcohol provides a case study in regulatory failure.


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For two very different sets of reasons, two very different sets of people traditionally form alliances in favor of restrictions on the sale of alcohol: bootleggers and Baptists. The Baptist supports restrictions in order to save our souls from the sin of consuming Demon Drink. The bootlegger does so because selling in a black market is a great way to turn a profit. Legislation curbing the sale of alcohol is justified in the Baptists’ moral language, but it benefits, ironically, the illegal purveyors. The bootlegger-and-Baptist problem, first articulated by economist Bruce Yandle, explains the strange coalitions around so many laws (like why pot-growers fret about legalization of marijuana in California) and is one of the most basic and well-known problems of regulation.

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Well known except, evidently, in Albany, where legislation closely resembling the iconic example of regulatory failure is pending in the New York State Assembly. Bill A06884, introduced by Democratic assemblyman Robin Schimminger, would “amend the Alcoholic Beverage Control Law to insure that alcoholic beverages distributed in this state pass through those authorized to sell the product.” Specifically, it would “require the manufacturer of an alcoholic beverage to identity [sic] the entities that are authorized to distribute, at wholesale, the product.” This is being done in order to “protect against counterfeit or ‘grey market’ goods and would serve . . . in the collection of state excise taxes.”

Stephen Bainbridge, UCLA law professor and wine blogger, tells me that this will mean that “a limited number of wholesalers will be exclusively entitled to import wine into the state of New York.” In the past, wine retailers and restaurants could “do grey-market purchases, to bypass the big wholesalers, and buy directly from the winery, or go to the auction market or private collectors.” But if the bill passes, “every bottle of wine sold in New York has to go through a licensed wholesaler.” There are only five such in New York State, and they would control “the flow of inventory from produces to retailers.”

So while the bill on the surface looks benign (who is in favor of counterfeit wine?) a closer examination shows its suspicious resemblance to the bootleggers-and-Baptists case, with wholesalers taking the place of bootleggers, and assemblymen the place of Baptists. The Assembly, if it passes this bill, will think it is advancing a moral cause by stopping counterfeiters. But the main beneficiaries of this legislation will be not oenophiles, but the wholesalers, who will be able to hike their prices, and thus their profits, once auctioneering rivals are pushed out. Wine drinkers could also face a more limited selection, with fewer niche options. Jay McInerney, the Wall Street Journal’s wine blogger, predicted that those who are “looking for a bottle of ’89 Rayas, or even ’09 Trimbach Clos St. Hune . . . will be unlikely to find them in New York if this law passes.” Auctioneers and collectors don’t provide much of the quantity of wine in New York, but they do provide much of its diversity — the rarer, more specialized selections.

In short, proponents of this legislation are inviting a new problem. But are they even solving an old one? How bad a problem is counterfeit wine? It’s hard to tell — such is the nature of forgery — but wine experts say not very. Nobody would counterfeit your typical $18 bottle of Sauvignon Blanc — the wine most of us buy is not expensive enough to tempt prospective counterfeiters to take the risk of prosecution. Bainbridge notes that “the limited extent to which there is a counterfeit-wine problem tends to be in very old, very rare, expensive collectible wines.” The demographic that consumes these wines is a narrow slice of the electorate and one that most New York voters would think, if they ever thought about it, does not require the Assembly’s special solicitude.

But even so, does this market require regulation and surveillance? It surely does. But that surveillance is done within the market — by connoisseurs who take steps to make sure they don’t get conned on a four-figure purchase, and auctioneers and collectors who carefully guard their reputations. Professor Bainbridge notes that “wineries are making much more sophisticated labels and bottles that are much harder to duplicate,” and requiring auctioneers to provide “documentation of where and when auctioned bottles were bought.” In other words, the market is policing the market.

Since the justifications in the bill itself don’t withstand scrutiny, what is the real reason for its introduction? I tried contacting Robin Schimminger, the Democratic sponsor of the bill, multiple times, and he refused requests for comment. But it may be worth noting that he received $32,400 from the beer, wine, and liquor industries during his 2010 reelection campaign, according to followthemoney.org. The individual donors in those industries don’t all have the same interests. Still, that’s a pretty good sum for an assemblyman from a district on the extreme end of western New York.

No doubt, New York has more pressing and costly problems than Bill A06884. But it stands out as a remarkably perfect example of several regulatory pathologies, corruptions, and failures bundled into one: A politician imagines a market failure where there is none, and restricts license to sell in that market to a few powerful players, all under a veneer of safety, in a way that rewards a few concentrated and politically connected interests and harms widely dispersed consumers, while destroying a niche market cherished by a few. The whole thing sounds like the devilish thought-experiment of a public-choice economist.

The bill should be opposed. More important, it should remind us of the problems endemic to so many other extensions of our regulatory apparatus.

— Matthew Shaffer is a William F. Buckley Fellow at the National Review Institute.  



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