Revisiting Mandated Three-Tier System for Alcohol

What is the deal with the Three-Tier system (3TS)? No, this isn’t the beginning of a Seinfeld joke, it’s a legitimate question about 3TS, or a government-mandated monopoly that forces brewers to use wholesale services as the sole middlemen between brewers and retailers – a system propped up by the Wholesale Association lobby and a system that quite frankly gives wholesalers a bad name.

The 3TS was implemented across the country after prohibition ended in 1933 by most states to control the sale of alcohol. The “stated” design was to keep breweries from selling directly to the consumer, stop tied houses from opening, limit consumption, and promote small brewers. The 3rd party wholesaler was mandated as a middleman to be the only way brewers could reach market with their product.

Wholesalers do provide considerable value when producers are able to voluntarily contract their services as the brewer’s growth necessitates it, but that’s not what the debate is. The issue has been to indulge the talking points of a mandated 3TS as if they were beneficial. The idea should be revisited by examining what were its original goals and what this system has truly created some 84 years after its implementation.

There is a quote about bad policy, “Great in theory, but awful when practiced in reality.” The 3TS not only rings truth to this statement, it goes a step further. The theory’s given for the 3TS were never the intent and reviewing the unsupported claims should shed light on the reality it creates; promoting big beer and the status quo at the expense of the small entrepreneur brewer.

Claim No. 1: The Three-Tier System is the reason for the large number of breweries available today.

The facts support just the opposite: The large numbers of breweries in the U.S. are in spite of and shows no correlation with the forced use of the 3TS.

In 1900 there were 2.38 breweries per 100,000 people in the United States; today there are 1.55 breweries per 100,000, with some 5,000 breweries to choose from. The ups and downs along the way are revealing.

Between the year prohibition was repealed in 1933 and today, there have been an average of 0.31 brewers per 100,000 people. A time period uninterrupted by the mandated use of the 3TS.  After the initial jump in breweries the year prohibition ended, from 1941 to 1978 there was an 89 percent drop in the total number of breweries, with only 10 percent of the total number surviving after 37 years under the mandated 3TS.

In the 37 years since 1978 to 2015, the number of breweries increased an astonishing 5523 percent, to a total of 4,269 breweries. These two starkly different results of identical time span under a mandated 3TS reveal that at best the system has no relationship with selection. At worst, it may actually hinder brewery growth. The correlation grows when a comparison is made between states that have no self-distribution cap, and those states that limit or ban it.

This dramatic growth in brewer choice closely related to national legislation legalizing home brewing – which in time drew hobbyists into the business – alongside numerous states reducing regulatory burdens on brewers. For instance, some key states for beer production allowed brewers to sell their own product at market and allowing complete voluntary choice for brewers when they decided to use wholesalers.

Claim No. 2: Without the mandated 3 Tier System, ‘tied houses’ would take over the country.

There is a faulty argument here: The advocates and beneficiaries, the Wholesalers Association, of the 3TS are sounding an alarm that any tied house is evil. A tied house is a bar owned by the brewery that will sell only the owning brewerers products. In an email exchange, researcher Jarrett Dieterle of the R Street Institute said;

“There is no inherent evil in Tied Houses. Tied House fears are anachronistic in today’s economy, which features many examples of producers selling their products directly to consumers without any harm. WE allow Apple to sell their computers in Apple Stores, and many alcohol producers even sell their bottles of alcohol in their tasting rooms.”

The problem in the past 84 years has been the lobbying efforts of giant breweries and wholesaler associations advocating the 3TS status quo. The only brewers active after Prohibition were the corporate giants capable of weathering the drought making other products. These big companies, such as Budweiser and Miller, also had the lobbying power to endorse a system that would keep out competition, thus the mandated use of a middleman under 3TS. Which based on the historic trend in brewery numbers, has done quite well.

It is revealing there was more choice with tied houses per capita before prohibition than any point after and still to this day.

Note:“Breweries/100K people” in blue, is considerably lower than during any point before prohibition, while consumption rates have remained similar or higher before and after prohibition.

Claim No. 3: Consumption rates were incredibly high before Prohibition, and the Three-Tier System controls/ limits the sale of alcohol.

This is “the” case of Bootleggers and Baptists – occasions when one group actually benefits from laws intended to hinder it.

The best part about Claim No. 3 is that it is in complete contradiction to a wholesaler’s business model and claim “[The 3TS] provides the best method for smaller breweries and wineries to get their products into a diverse marketplace.” If this statement were 100% true the law would not be needed. Wholesalers benefit by using government to coerce brewers to use their services by law; meanwhile, temperance groups, oftentimes associated with religious organizations, endorse the 3TS for the sake of limiting the consumption of alcohol. Wholesalers are able to benefit from the temperance claims while distancing themselves to say they are the best way for a brewer to sell their product.

This contradiction aside, perhaps the mandated 3TS does promote large brewery consumption. Using data from the National Institute on Alcohol Abuse and Alcoholism, the highest point of alcohol consumption after 1850 in the U.S. was between 1973 and 1985 – a period that saw the smallest number of breweries per capita than any other time besides Prohibition.

In addition, comparing 18th and 19th century consumption to 20th and 21st century use may be like comparing cider to Orange Belgium Ale. Alcohol was more so socially acceptable because of its necessity for survival. With little to no access to sanitary water, Americans and alongside the world used alcohol to fend off disease. Consumption rates in any area with poor sanitization should be taken with a grain of salt, or, if I may, an ounce of rum.

Final Thoughts

Be on the lookout for additional unsubstantiated claims by the Wholesaler Association advocating for the forced use of their service. These top three arguments of the wholesalers reveal it to be a forced system wrought in cronyism, sustained by lobbyists, and persistent in misleading claims. These unfounded claims need to stop being promulgated as fact.

A system of free choice and association does not necessitate that small brewers win out, but it does ensure consumers receive the value they desire, wholesalers attract business based on the value they provide, and entrepreneurs have equal access to markets free of coercion based on the value they produce.

*Graph information is derived from the NIAAA, Brewers Association, and US Census Data.

Ending the Burden of the Regulatory State

Joining the show is Yaël Ossowski the Senior Development Officer for Students For Liberty, Public Relations Director for the Consumer Choice Center, and North Carolina Native.

We discuss a wide array of topics and the effects many regulations from UBER to Sunday alcohol sale laws not only have on the companies they are directly imposed on, but also on the choices the consumer is then faced with. Surprise surprise, quite often the consumer is left behind, then adding insult to injury is told its for their own good.

Be sure to check out what Yaël Ossowski is doing alongside his podcast The Innocents Abroad.
Follow  on Twitter at @Yaeloss

Find out what Consumer Choice Center is doing next!


This Bill Is Full of ‘Holes’!

There are currently no laws regulating body piercers in the state of North Carolina. Lawmakers in the state are trying to change that by using a time-tested route: find unrelated troubling statistics, find it concerning that people are left “unprotected,” and create a “common sense” bill designed to protect the uneducated and fearful public.

The politician is credited for being a caring and paternalistic provider of the unknowing and fragile citizens, while the unrepresented small industry they wish to tax, oops, I mean regulate is small enough that few will care.

In an N&O article Representative Kevin Corbin (R-Macon) pointed to HIV and Hepatitis C cases tripling from 2010-2015 as reason enough to sponsor HB 250, requiring professional licensing for piercers, similar to that already required for tattoo artists.

In phone conversations with  Corbin, and later Director of Macon County Public Health Center Jim Bruckner, it was disclosed that this figure is just a generic rate of infection across the state. There is no data on the role piercings or tattooing has played in that increase. Keep in mind this was the evidence that gave them reason to introduce this bill.

This law assumes people are incapable of protecting themselves and businesses have no incentive to provide a high-quality service or safety for their customers. Market competition, however, ensures business are highly incentivized to provide a safe and clean environment. A bad reputation and negative word of mouth from customers can put any company or person out of business. Government does not need to intervene for an industry to be “regulated,” consumer preference delivers the incentives for businesses to provide quality and safety to customers.

So if it’s not going to help, what does this bill do?

Increase health risks: This bill may actually increase the likelihood of problems that politicians wish to fix. Over the phone, I was informed of situations where illegal operations offer piercings at a low rate of $20 or $30 to pierce anything. These rogue piercers operate out of their car trunk with a tin box for their supplies and the unsanitary practice of simply wiping down used piercing needles on their clothes between uses. When inquired why people would use these services, the answer was “low cost.”

If it is the inexpensiveness of the piercing that drives people to get pierced out of a trunk, forcing already reputable piercing studios to incur an additional licensing expense will only drive more piercing customers to black-market providers. Moreover, after a few phone calls, I found $10 to be the common piercing price for studios, raising questions about the story above.

State-subsidized complacency: The N&O reported Corbin saying “I think most people think it’s regulated now.” Assuming this were true, does the state thereby generate a subsidized form of complacency with the public? Would piercing consumers act or react differently if they knew they needed to be cautious of their surroundings?

Regulations induce a form of subsidized complacency value on an industry. Mandated practices like wearing seatbelts are shown to promote complacency and even riskier behavior by consumers. If people believe the government is enforcing safety, they are more likely to be lulled into a false sense of security and as a result be less aware of their actions and surroundings to determine what is in their own best interest.

Revenue generator: The excuse is health, but the real reason is money. The law will do nothing to stop the people at the trunk; in fact, because of prices it may actually drive more people to the trunk of the car for piercings. What this bill does add is an additional licensing step and additional licensing fee generation for the state or county. Many states are already in a battle to deregulate the hair braiding industry and free it from rules that often require thousands of training hours and dollars to obtain a license just to braid someone’s hair. This law puts piercing on the path of being the new hair braiding.

This is purely a feel-good law that only has potential to cause harm and raise costs on consumers as well as the entrepreneurs providing safe and healthy piercing. If Rep. Corbin and the county health officials want to help, I suggest staying out of the way or just stating they do not regulate piercing. That way individuals can make informed and knowledgeable decisions free of coercion, understand the risks as well as benefits of piercing and decide for themselves.

*Originally published at the Civitas Institute 

Brewers Quest for Free Market Policy

Jim Caruso, CEO of Flying Dog Brewery, joins the show to clear things up about the fight in Maryland to raise the limit of on-site taproom sales. Guinness (owned by Diageo) is moving into the state but will the state general assembly create a special carve-out in the law for Diageo or will they enact policy that allows all breweries the same opportunity to grow?

We also have an in-depth discussion about the state of regulations on an industry that has been plagued with archaic laws pushed through by special interest groups. On top of that, we distinguish the difference between Pro-Business Policy and  Pro- Free Enterprise Policy.

A do not miss show!

Be sure to check out Flying Dog Brewery.

Also, check out the First Amendment Society which aims to raise the public consciousness of these rights by advocating on behalf of and organizing events that promote the arts, journalism and civil liberties.


Booze Equality for Distillers

Jarrett Dieterle, the governance project fellow with the R Street Institute and a fellow alcohol policy expert, breaks down the issues at hand in future distilling battles. Virginia has some of the most onerous restrictions on distillers than any other state and is stifling the growth of multiple award winning companies by overzealous regulations. When we think of

Virginia has some of the most onerous restrictions on distillers, more so than many other states and is stifling the growth of multiple award winning companies by overzealous regulations. Regulations promoted by special interest lobbies using the law at the expense of the little guy. When we think of whiskey a few big names come to mind, but why won’t we let local entrepreneurs succeed in their own way?

Be sure to check out Jarrett’s recent article Fighting for Booze Equality on ‘Alcohol Alley’