On Beer: Three Tiers For Tyranny

Originally published in the Front Range Voluntaryist, Issue #4, June 2017

In what will surely be touted as a free market win for Colorado businesses, lawmakers have gone off the rails and proffered a bill allowing brewers to expand tasting rooms by a factor of…two.

Current Colorado law allows for wineries and distilleries to operate sales rooms separate from their manufacturing locations, noticeably absent, are breweries.  The new legislation seeks to improve the situation, as all bills are purported to do.  The state Senate has approved a measure (SB17-253) that would allow breweries to open up to two additional tasting rooms without an attached brewery, allowing them to serve beer and sell six-packs to-go.  The bill would also allow brewers to sell beer at farmers’ markets and other temporary events, with restrictions.  The bill is expected to receive approval from the House and ultimately, the Governor.

What could be wrong with that?  It sounds great on the surface, but as with most things government related, we must review the history of how we got here in the first place and the pitfalls of disallowing consumer preference to guide the market. The legislation continues to firmly cement a manipulated market approach to the brewing industry that dates back to the post Prohibition era.  The history surrounding the current laws and proposed legislation encompass a whole swath of liberty-related concepts: the (un)reality of limiting government, government intervention into markets, personal liberty, crony capitalism, war, taxes, progressive “superiority” and  government “solving” problems that it most certainly created.  You might need a beer for this.

Passed in 1920, Prohibition created an expansive government net cast over the individual’s right to consume a beverage.  This was an era of massive government expansion, including but not limited to, the Federal Trade Commission, Selective Service, the Committee of Public Information (think Propaganda), War Labor Board, Food Administration Agency and above all, the Federal Reserve.   But how did Prohibition happen and how did we get to the current three-tier distribution system to begin with?  It took a massive effort involving the federal income tax, a social revolution to provide political viability and a war, but ultimately it involved convincing a “freedom-loving people [to] decide to give up a private right that had been freely exercised by millions upon millions… condemn[ing] to extinction what was, at the very moment of its death, the fifth-largest industry in the nation.  The original Constitution and its first seventeen amendments limited the activities of government, not of citizens. Now there were two exceptions: you couldn’t own slaves, and you couldn’t buy alcohol.”[1]  [Emphasis mine] Keep that fifth-largest industry emphasis in mind, we’ll get back to it shortly.

By enforcing prohibition, small breweries were decimated and after repeal only the large brewers were able to survive, so of course they would dominate the landscape. “Of the 1,345 American brewers who had been operating in 1915, a bare 31 were able to turn on their taps within three months of the return of legal beer—primarily the big companies that had kept their doors open producing ice cream or cheese or malt syrup during the dry era.”[2]  In the wake of repeal, power was returned to the states who sought to control the alcohol market by regulating the industry in the name of public safety (that age old government desire to protect us from ourselves) and to prevent the big companies from taking over the brewing landscape.  Enter the three-tier system, which is comprised of a supplier (brewer), wholesaler (middle-man) and retailer.  This system requires separate licenses for each tier along with a myriad of fees and regulations, but more importantly, it codifies a perpetual three pronged tax apparatus.

Remember the fifth largest industry bit from earlier?  Alcohol excise taxes filled a huge portion of the public coffers in the era leading up to Prohibition.  This was a major problem for the Prohibitionists, upon passage, all those tax dollars would evaporate; insert the federal income tax – problem solved.  The concept of a federal income tax had been roundly debated in the years leading up to 1913.  But should you ever doubt the malleability of the Supreme Court, in 1895 they deemed the federal income tax unconstitutional, by 1913 it was acceptable, and nowadays it is blasphemy to suggest the unconstitutionality, nay, immorality, of a federal income tax.  Not that we need unelected appointees in black robes to tell us that.

Let me be clear:  there is nothing inherently wrong with a wholesale distribution model.  If brewers want to use that type of service because it gets better exposure for their beer or because it’s the easiest, most cost efficient way to get their beer to market, fine. If the association is voluntary, there is no issue.  When forced under the heavy hand of crony capitalism, there is no free market; you have a cartel.  Speaking of crony capitalism, in the run up to WWII, big brewers bought up the maximum allowable amount of war bonds in exchange for lawmakers exempting brewery workers from military service.  Now there’s a leg up on the competition, your head brewers won’t get blown up in a far away land.  That being said, there is also nothing inherently wrong with big brewers, since a healthy marketplace will have a diversity of products encompassing multiple price points.  The problem lies with government intervention into a market.  As Clarence B. Carson summarized in The Freeman [May 1971]:  “Government intervention into economy is an employment of force to induce men to do what would otherwise be contrary to their interests and inclinations.” (Via Future of Freedom Foundation e-newsletter, 5/3/17)

For some brewers, the market is, and has to be, local and the regulation requiring a brewery at each location in order to be able to sell beer in a particular neighborhood or market presents a significant barrier to entry that is antithetical to the concept of the free market.   Simply put, if the consumer could just go straight to a tasting room the brewer keeps the profit and eliminates the markups associated with the middleman, retailer and taxes.  They can reinvest that profit directly into their brewing operation and potentially expand if the market allows – the risk being on the entrepreneur.  Such a system lets the locals decide with their wallet to determine how many and what kind of expansions will survive by creating an immediate feedback system; those with a poor product will fall by the wayside, those with the greatest innovation, will naturally move ahead.  To put things in perspective with real numbers: “selling a keg for $150 to a retailer middleman such as a bar simply makes little sense when that same keg can fetch $600 in the brewer’s own tasting room.”[3]  Additionally, when forced down the wholesale distribution model, the ultimate decision of how to run and expand one’s business is removed.  The current law disallowing tastings rooms without a brewing facility coupled with a forced distribution model makes entry into the market many times more difficult than it ought to be and represents a gross manipulation of a market.

Given the House and Senate sponsorship (31 in the House and 22 in the Senate) and a Governor with a hearty brewing history, it’s hard to imagine this bill not passing.  But instead of adding to, we should be subtracting from, the current antiquated laws.  Incrementalists will note that the legislation, although flawed, is a step in the right direction to allow brewers to expand and provide economic growth at the local neighborhood level.  But, this type of legislation is indicative of the difficulty of limiting government, given the opportunity, it will always expand and never contract.  It becomes a vicious cycle:  government creates a problem, blames the greedy corporations, creates regulations, which in turn create additional problems that require additional regulations…on and on ad nauseam.  Think about healthcare and why it is tied to employment: our benevolent government imposed wage restrictions in the run up to WWII and companies responded by offering healthcare as a perk to retain the best employees, but that is a whole other topic.  Let’s give them the benefit of the doubt: let’s say the three-tier system has aided the small brewers in the long run, albeit by a forced distribution system, but one that has prevented the big brewers from taking over everywhere.  Looking at the situation with “martian” eyes, excluding any knowledge of the prohibition era and looking at the current Colorado brewing landscape, there is no need for a forced distribution system now, nor any law limiting the number of tasting rooms.

Notwithstanding every other incremental tax, fee, permit or other regulation that is piled upon the beer brewing industry, the three-tier wholesale distribution intervention only increases costs and decreases competition.  The real reason the legislation is not going the other way, as in, completely removing the current regulations versus tinkering with it, is that free markets are disruptive; ultimately wreaking havoc for the those who are enjoying the continuation of protectionist laws enforced by the heavy hand of government.  In the end, bureaucracy has only produced more bureaucracy, do you really want another round?

[1] Okrent, Daniel. Last Call: The Rise and Fall of Prohibition (p.3). Scribner. Kindle Edition

[2] Okrent, Daniel. Last Call: The Rise and Fall of Prohibition (p. 358). Scribner. Kindle Edition.

[3] https://qz.com/637540/why-startup-beer-brewers-are-skipping-stores-and-selling-directly-to-locals/