SHOULD THE GOVERNMENT BE IN THE BUSINESS OF ALCOHOL?

Government agencies around the Midwest have been in the news lately about their liquor systems. Michigan’s liquor system has become a complete folly under which product availability is running short, while Iowa Alcoholic Beverage Division faces claims from a whistle-blower that it illegally and excessively marked up the price of alcohol product.

NOTE ON IOWA LAWSUIT

Before I discuss the facts of the lawsuit, I want to mention that this blog will not draw a conclusion on whether Iowa is guilty or not of the allegations in the whistle-blower lawsuit. Whether Iowa is guilty or not of the offenses alleged is for a court to decide and not this blog. Second, I don’t think it is fair to the government officials accused that I presume them guilty or innocent without knowing all the facts.

IOWA LAWSUIT

The former top accountant for the Iowa Alcoholic Beverage Division alleges that for years the agency illegally and excessively marked up the price of liquor products. [1]

The Iowa Alcoholic Beverage Division is the exclusive liquor wholesaler in the state and retailers has other option than to purchase liquor from the state. Under Iowa law the state can markup product by 50%.

MICHIGAN DISASTER

I recently published a blog post on the Michigan disaster that is occurring real time. HAS MICHIGAN LOST COMPLETE CONTROL OF ITS LIQUOR SYSTEM. Like Iowa, Michigan is the exclusive liquor wholesaler for the state. Michigan utilizes three private entities to distribute spirits on its behalf. One of these parties, Republic National (Republic) distributes about 2/3rds of the spirits products in Michigan.

Problematically, Republic has problems with its new distribution center and because of this the market is suffering. Republic controls popular brands like Captain Morgan and Tito’s. Many of these products are experiencing a shortage because of Republic’s snafus and Michigan’s liquor distribution system.

Republic can’t get orders out based on their malfunctioning system, and because of Michigan’s control system, Republic is the only option for distributing these brands.

Even though Republic goes around giving speeches on how things are improving, this does not mean people are getting their full allotment of liquor.

In fact, Republic’s incompetence has real world effects. Many mom and pop liquor stores do their best business around the holidays. If there is a shortage of products their sales go down in what should be a prosperous season. As with any business, a couple of good months can carry the year. Although stores like Meijer and Kroger can cover the loss more easily through size and a variety of products, these small retailers do not have the same advantage.

So, could we see some small retailers struggle or even go out of business because Republic’s folly? It is definitely not unforeseeable?

 

WHAT QUESTION SHOULD WE BE ASKING

I think it is time to start the debate on whether government should be in the business of liquor and how does the public benefit from government control?

Let’s look at Iowa’s system without the accusations of the lawsuit. Is it the most optimal system to have the government be the sole setter of prices and control the supply?

With no competition present, market forces will not dictate the price, but the price will be set by government officials who have no market accountability for setting a price too high. Second, the supplier has no option but to live by the state’s terms. If it is unhappy with the prices set by the state or the conditions of the agreement it can’t go anywhere. This is essentially a franchise agreement on steroids.

As Michigan shows us, the state controlling the system can lead to an unmitigated disaster.

Brands like Tito’s lose sales and have no option but to stick with the same old situation and listen to Republic’s pep talks to the Michigan Liquor Control Commission and wonder why they have no control in a country that is suppose to have a free market economy.

 

BENEFIT OF CONTROL V. THE MARKET

One argument not coming from the states is the measurable benefits of a controlled system. We have not heard how having the government dictate price, supplies, and terms benefits retailers, suppliers, and ultimate consumers.

The Tennessee Wine case indicated that a state needs to provide evidence that its discriminatory laws promote a legitimate purpose such as health, safety, and welfare.

Shouldn’t we ask the states to provide the same evidence for their liquor control systems? And if they can’t provide this evidence, is it better for the market to dictate the terms of engagement and not the government?

In the end, we see some of what occurs in the market-controlled system. Michigan’s system has led us to a dead-end situation. And the only way out is to hope, pray, and wait that the Leviathan gets its act together in time for the holidays!

 

 

[1] https://siouxcityjournal.com/news/state-and-regional/iowa/lawsuit-iowa-illegally-marked-up-liquor-prices-for-years/article_38c18560-95b1-52d8-a314-ef3916fc9106.html

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