Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (14 page)

4. Sin and Substance: Who Are the Real Bootleggers and Baptists?

We now explore the most obvious candidate for applied Bootlegger/Baptist analysis: illicit substances and their regulation by government. Readers familiar with the American television series
The Untouchables
,
The Wire
, or
Boardwalk Empire
are armed and ready to hear about the dubious dealings of politicians who declare “war” on drugs and alcohol, at least in the world of fiction. But friends, we are not weaving prime-time drama: the stories to follow are real.

Life is often stranger than fiction. In the televised world, it may be hard to tell the difference between the drug lord and the precinct boss as they go about organizing a cop-protected market for crack cocaine. But in the real world of booze, cigarettes, and weed, which we explore, things are a bit more complex. Helped along by good Baptists, Bootleggers can obtain legal protection for their enterprises by way of federal or state regulation. Everything is seemingly above board. But when we look beneath the boards, there are surprises galore.

As we explained in the preface, the “Bootlegger” and “Baptist” labels were chosen in homage to the original coalition of unlikely interests that was so successful in championing Sunday closing laws, which shuttered liquor stores one day a week. At the height of its success, this coalition entirely shut down the legal sale of alcoholic beverages in counties, states, and— ultimately, during Prohibition (1920–33)—the nation as a whole.

What was the moral motivating force for the closings? Sin. The behavior engendered by alcohol created an obvious target for moral crusaders but an equally meaningful, if less obvious, opportunity for Bootlegger interests. Alcohol markets have been deeply regulated for decades if not centuries. The Bootleggers and Baptists did their work years ago. As we show, alcohol distribution takes place within a well-protected cartel arrangement, which has been tested in the courts many times. When threats arise that might disturb the cartel, as they have recently with the sale of retail wine, Bootleggers and Baptists rise to the challenge.

In contrast, the regulation of tobacco marketing practices, while well established in important ways, is still evolving. This means that Bootlegger/Baptist interaction is more frequent—and more valuable to interest groups such as tobacco companies seeking to lock in their profits. The result has been a string of important, though transient, cases of Baptists winning small victories while Bootleggers win the larger war. Tobacco interests have effectively achieved a government-enforced cartel that succeeds in limiting output, while seemingly placating the interests of concerned Baptists.

Finally, marijuana is an illegal substance at the federal level but tolerated to varying degrees in some states—particularly for medicinal purposes. Because of these exceptions, some regulatory walls are beginning to crack, with specialized markets emerging and increasing calls for legalization. In 2012, voters in Colorado and Washington approved ballot initiatives to add those states to the ones that legalized the recreational use of cannabis. As a result, Bootleggers that operate in the illegal market are threatened, and Baptists are somewhat uncertain how to position themselves. Alcoholic beverages and tobacco products are examples of Bootlegger/Baptist–assisted cartelization of markets for legal products. In sharp contrast, marijuana is largely an illegal product that is only now approaching the point where a government-managed cartel is possible.

In each of these cases, Bootlegger/Baptist interaction is highlighted in the evolving political market where regulatory institutions are devised. This chapter makes the point that even with substances that society generally discourages, actual efforts to constrain their use are often guided as much by self-interested Bootleggers as they are by public-spirited Baptists.

Alcohol, Retail Wine, and the War between the States

The state of Georgia, until quite recently, required that each alcohol supplier designate just one wholesaler as the sole product distributor for an entire region of the state. Bootlegger motivation enters the picture immediately. Wholesalers, endowed with a distribution monopoly in a particular region, sold their wares to retail outlets at prices well above the competitive market rate. In other words, “the state not only permits but in fact
requires
that each wholesaler hold a monopoly on the brands he carries for his particular territory” (M. Smith 2002, emphasis in original). The arrangement can be viewed as a long-standing, profit-sharing, government-protected cartel that is light years away from free-market capitalism.

In return for this generous market position, wholesalers provide certain services to the state. Most important, wholesalers are responsible for collecting excise taxes for Georgia’s Department of Revenue. In fourth quarter 2012, these amounted to $46.0 million of $4.4 billion in total revenues (U.S. Census Bureau 2013). In addition, wholesalers coordinate with retailers to restrict price-cutting, keeping the resulting regulatory cartel profitable. Wholesalers must post prices with the Department of Revenue and maintain them for a set amount of time (M. Smith 2002).

Such arrangements prove supremely beneficial to wholesalers but limit retailer price flexibility and restrict supplier choices in brands carried. The controls also cause consumer prices to be higher. One would expect such an arrangement to be politically unpopular. Nevertheless, as we show, the structure of this industry survives through cooperative efforts by highly motivated Bootlegger and Baptist interests.

Prohibition and the Onset of the Three-Tier System

Prohibition (1919–33) was the ultimate Bootlegger/Baptist arrangement and a watershed event in the history of alcohol distribution in the United States. The national shutdown of legal producers and sellers had a lasting impact not only on how alcohol is consumed—for example, through various blue laws—but also on how alcoholic beverages navigate through various channels of distribution. Although the Twenty-First Amendment, which ended Prohibition in 1933, may have again legalized the consumption of alcohol, it also endowed states with an unprecedented discretion to intervene in alcohol markets, an outcome that resonates today.

Prior to Prohibition, various temperance groups—such as the Prohibition Party, the Women’s Christian Temperance Union, and the Anti-Saloon League—lobbied state-by-state to curtail the consumption of alcohol. In a series of Supreme Court cases, the temperance movement gained momentum one decision at a time. In
Mugler v. Kansa
s, 23 U.S. 623 (1887), the Supreme Court decided that states could ban alcohol production within their borders, not only for commercial distribution, but for private consumption as well. In other words, people could be prohibited from making booze for personal consumption because those actions “would tend to cripple, if it did not defeat, the effort to guard the community against the evils attending the excessive use of such liquors” (quoted in Anderson 2004, 5–6). The decision set the stage for an expansion of illegal—genuine bootlegging—activity.

The bootlegger heydays were short lived. The anti-saloon movement was stymied in its effort to control interstate shipments. In
Bowman v. Chicago & N.W. Railway Co.
, 125 U.S. 465 (1888), the Supreme Court held that the Commerce Clause barred interstate prohibition through state enforcement, because Congress had made no exception for alcohol distribution in the original language of the Commerce Clause (Anderson 2004, 6–7). Invoking a doctrine often dubbed the “dormant” Commerce Clause, this decision appeals to the principle that states cannot bar interstate commerce, even when state practices do not explicitly violate an existing federal statute, because to do so would intrude upon the exclusive purview of Congress.

This setback for the temperance movement and bootlegger profits was buttressed by the Court’s holding in
Leisy v. Hardin
, 135 U.S. 100 (1890). States could not bar sales of imported alcohol even if a statewide prohibition law was in effect (Anderson 2004, 7–8). This effectively gutted the ability of states to control alcohol consumption, because consumers could simply have alcohol imported from states that had not banned production. As explained below, the issue with interstate distribution of alcohol and its tension with the Commerce Clause became a focus of contention not only for early legislation but also in debates that continue to the present day.

Clearly, following these decisions, legislation at the national level was required to cartelize the production and sale of alcohol. The first such legislation was put into effect in 1910 with the Wilson Act, which stipulated that alcohol imported into a state was subject to the same laws as alcohol produced within the state (Anderson 2004, 8–9). With alcohol distribution now regulated at the federal level, states no longer faced the obstacle presented by the Commerce Clause in regulating consumption. Later court decisions limited the constraint to regulation of direct sales, as opposed to imports in general—a bootlegger’s dream come true! Now, a state could limit the internal legal market by way of state regulation, but illegal sellers remained free to bring in the booze.

Not until the enactment of Prohibition with the Eighteenth Amendment, ratified in 1919, was alcohol distribution effectively regulated nationwide. By barring production altogether, states now had the power to control alcohol distribution—at least in theory. We will not go into the details of the epic disaster that was Prohibition, beyond noting that it was a national nightmare for all but the illegal sellers (Meier 1994; Okrent 2011; Thornton 2007). Cooperation between state and federal authorities was largely absent, with rampant corruption undermining any possibility of credible enforcement. Violent organized crime networks, meanwhile, came to control the entire alcohol distribution supply chain.

Prohibition ended with the enactment of the Twenty-First Amendment, ratified in 1933. Alcohol production was again legal but with the substantial caveat that states could control how it was distributed within their borders. In particular, section 2 of the Twenty-First Amendment states, “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of laws thereof, is hereby prohibited.”

Now, states could decide for themselves how alcohol would be distributed—not only when it was produced internally but also when imported. When it came to alcohol, the Twenty-First Amendment superseded the Commerce Clause. Alcohol, unlike any other product or industry, received special treatment. No other constitutional amendment has been aimed at one class of products (Melzer 2004, 282).

Three Tiers for Wholesalers

Exercising their newly endowed powers, most states adopted what is known as the “three-tier” system of suppliers, wholesalers, and retailers. Ostensibly, the three-tier system was created to avoid the rampant corruption and mob-engendered control of liquor rackets so prevalent during Prohibition (Freedman and Emshwiller 1999). By breaking the alcohol industry into three separate, independently operated—or in some cases state-operated—distribution components, state governments could use the tiered system to reduce the proliferation of alcohol. This consigned so-called alcohol empires to the dustbin of history. Of course, there is far more acceptance of alcoholic beverage consumption today than in the heyday of the anti-saloon league. States persist with the three-tier system largely for its considerable value in raising tax revenues and, most relevant to our theory, because of the deep Bootlegger/Baptist coalitions it inspires.

Coalitions form in response to a particular aspect of the three-tier system. As described previously, wholesalers are given an extraordinary amount of protection within their market domain, allowing them to collect higher profits than would be possible in a competitive market. Instead of mob monopolies, the system created legal wholesaler monopolies. In general, the profit-maximizing strategy for wholesaler organizations is not the same as for suppliers (B. Klein 1995). Wholesalers are eager to keep the market to themselves. Suppliers, in contrast, have an economic incentive to increase the number of wholesalers, which ensures greater exposure for their product—thanks to increased marketing effort by wholesalers competing with one another—and competitive pricing for wholesaler services.

This privileged position led to a wholesaling industry boom. By the mid-1960s, more than 10,000 wholesalers were in operation, mostly dealing with liquor. At present, the nation’s two largest wholesalers, Southern Wine & Spirits and Republic National Distributing Company, generate roughly $13 billion in annual revenues.

Eventually, this dynamic shifted, at least in terms of the number of firms, as more and more wholesalers consolidated because of economies of scale and certain wholesalers being more politically savvy than others in dealing with their political supporters. The National Beer Wholesalers Association maintains the third-largest political action committee in the country, donating $15.4 million from 2000 to 2010 to candidates seeking federal office (White 2011). Good politics has become as important as good business to wholesalers as the political cover generated by sympathetic representatives maintains the lucrative status quo for their operations.

While Bootlegger activity is rampant because of the generous subsidies provided through protection from market competition, Baptists are no less prevalent in this arrangement. Going back to Prohibition, the religious right made an indelible impact on the restriction of alcohol consumption. Britton, Ford, and Gay (2001) document the effect on alcohol regulation associated with high concentrations of Protestant conservatives in the regulated community. Greater restrictions on alcohol importation are significantly associated with a high concentration of Protestant conservatives. We return to shed further light on genuine Baptist activity shortly.

Direct Shipping As a Threat to the Three-Tier System

Perhaps the greatest challenge to the three-tier system has come from the expansion of interstate alcohol sales. Recall that restricting importation of alcohol is the cornerstone of effective state regulation. The three-tier system requires that all alcohol go through wholesalers before ultimately reaching consumers. But what if alcohol is purchased directly from outside retailers and then shipped directly to these ultimate consumers? Left to their own devices, outside suppliers would charge competitive market prices, which—even when accounting for shipping charges—undercut in-state establishments, thus eroding the previously well-entrenched market structure.