Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (15 page)

Historically, states have been largely successful in curtailing interstate shipping. As noted previously, interstate shipping was one of the crucial concerns of the temperance movement, because without the power to enforce restrictions on cross-border shipping, any attempt at control within states was bound to fail. This is why the suspension of the Commerce Clause contained in section 2 of the Twenty-First Amendment was critical to the control of alcohol distribution. The Commerce Clause has long been interpreted to forbid states from banning interstate trade, including trade in alcohol.

In several important early cases, the Supreme Court upheld this suspension. For example, in
State Board of Equalization v. Young’s Market Co.
, 299 U.S. 59 (1936), the plaintiffs sued to prevent the state of California from assessing a $500 importer’s license fee on all companies wishing to import alcohol into the state. The Court’s opinion, as expressed by Justice Louis Brandeis, held that it is perfectly legal for the state to determine how alcohol may enter its border. The fee remained. Furthermore, discriminating between in-state and out-of-state vendors lies within the scope of discretion conferred by the Twenty-First Amendment. These powers of the state were further reinforced in
Mahoney v. Joseph Triner Corp.
304 U.S. 401 (1938) and
Indianapolis Brewing Co. v. Liquor Control Commission
305 U.S. 391 (1939) (Melzer 2004, 287–88).

Exceptions were made limiting state authority over alcohol distribution in national parks (
Collins v. Yosemite Park & Curry Co.
, 304 U.S. 518 [1938]) and in international airports (
Hostetter v. Idlewild Bon Voyage Liquor Corp.
, 327 U.S. 324 [1964]). These marginal market cases were followed by a more substantive decision in
Bacchus Imports, Ltd. v. Dias
, 468 U.S. 263 (1984).

In that case, a high liquor tax (20 percent) instituted in Hawaii had clear benefits to local distillers who were exempted. Noting this unfair advantage, the Court overturned parts of
Young’s Market
and
Joseph Triner
, clarifying that the Twenty-First Amendment does not wholly supersede the Commerce Clause, because this would mean the federal government has no control over how alcohol is distributed. Rather, the Court determined that the amendment allows for restrictions on imports only when these restrictions are applied to domestic distributors as well. Accordingly, the Court found that price restrictions imposed against out-of-state distributors exceeded the mandate set by section 2. States were no longer allowed to price discriminate but could still maintain barriers to importation, as long as the barriers were uniformly applied to in-state and out-of-state distributors. Future cases would need to weigh the benefits of the amendment against the economic costs of constraining commerce (Melzer 2004, 293).

These exceptions to the power of state control over alcohol distribution have coincided with changes in the underlying market structure. As noted, wholesalers have consolidated into a few large organizations, thus narrowing access to lucrative profits. In addition, the rise of the Internet—and the online retail industry that emerged from it—has caused conflict between consumers and wholesalers. The greatest source of tension has come from wine connoisseurs, fed up with the obstacles created by state-maintained monopolies. Using online retailers, these individuals found new opportunities to purchase expensive, rare wines but have come up against import restrictions enforced by wholesaler monopolies (Freedman and Emshwiller 1999).

“Won’t Somebody
Please Think
of the
Children
?”

Wine connoisseurs apparently have enough political panache to challenge the status quo. Some states have passed laws in the past decade to eliminate the requirement that outside suppliers must contract with state-supported (or state-run) wholesalers. This development has not gone unnoticed by wholesalers. Wiseman and Ellig (2007) show that legalization of direct shipment to consumers in McLean County, Virginia, reduced the spread between interstate and in-state prices by nearly 40 percent in the sample of wines they survey. By circumventing this apparatus, interstate competition succeeded in decreasing retail prices, cutting into the profits received by Virginia wholesalers.

Bootleggers have continued to fight aggressively against measures that would disrupt the status quo. Part of this effort has involved calling upon their ever-willing allies, the Baptists. But there is more, as cooperative interactions evolve to coordinated ones. Wiseman and Ellig (2007) describe the formation of a grand Bootlegger/Baptist coalition, coordinated by state-government regulators and 31 state attorneys general. These coordinating efforts allowed wholesaler trade associations (both state and national organizations) to pair with a dream team of Baptist interests including the National Association of Evangelicals, Phyllis Schlafly’s Eagle Forum, Gary Bauer’s American Values, and Concerned Women for America.

It may at first seem surprising that religious organizations would cooperate in opposing such an innocuous market practice as interstate shipping. As one incredulous headline put it, “Bizarre Coalition Opposes Direct Shipment of Wine: Big Money and the Religious Right Join Forces against Wine Lovers” (Marcus 2005). Nevertheless, wholesalers convinced religious organizations that such interstate competition would cause an increase in underage alcohol consumption. Their argument is that direct shipping lacks the sort of enforcement found at “bricks and mortar” retail outlets. Despite a variety of safeguards designed precisely to prevent this outcome—such as age verification both by online vendors and by shipping agents and strict penalties for suppliers found shipping to minors—the notion that direct shipping causes spikes in underage drinking has proven successful in motivating the religious right.

Marcus (2005) reports how a certain Rev. Mark Creech, echoing arguments made by Juanita Duggan, CEO of the Wine and Spirits Wholesalers of America, proclaimed that direct shipment would lead to a “shadow alcohol trade that is unchecked and unaccountable” and further that “Jesus would have never approved the actions of a bunch of greedy Internet wine retailers who were determined to distribute ‘strong drink’ at the expense of the nation’s children.” It appears that wholesalers have relied on an age-old sentiment in mobilizing their moral cover: by invoking a danger to the plight of the nation’s children, no matter how unfounded, these Bootleggers have succeeded in bringing Baptists on board.

Granholm v. Heald
and the Potential End of the
Three-Tier System

Still, the onset of online shipping created ongoing headaches for the three-tier system, as evidenced by testimony delivered before Congress by Todd Zywicki, director of the Federal Trade Commission’s (FTC) Office of Planning and Policy, in 2003. Among other things, Zywicki reiterated that the three-tier system both reduced access to certain wines and increased prices for consumers. Furthermore, he noted the results of an FTC staff report, which had found that “on-line wine sales do not add to the problem of underage drinking” (Zywicki 2003).

Yet at the same hearing, Juanita Duggan, CEO of the Wine and Spirits Wholesalers of America, testified that direct sales create a slippery slope toward greater underage consumption that will eventually involve beer and liquor as well. Although her emphasis was mostly on the greater opportunities for underage drinking, she also alleged that the FTC had exaggerated the price discrepancies between online and brick-and-mortar retailers and claimed the agency had not properly accounted for true shipping charges. She even took a swipe at wine connoisseurs, reminding her audience that they represent an elite fringe of consumers—the broader majority of whom, she argued, favor current policy (Duggan 2003).

This acrimony among wholesalers, the religious right, and wine connoisseurs reached a peak with the landmark Supreme Court case
Granholm v. Heald
, 544 U.S. 460 (2005), which consolidated two separate disputes from New York and Michigan. Both dealt with bans on direct shipping from out-of-state wine vendors. In a 5-4 decision, the Supreme Court ruled in favor of consumers against wholesalers, finding that bans on direct shipping were unconstitutional. The Court reasoned that section 2 of the Twenty-First Amendment, which states have repeatedly invoked to justify the bans on direct sales, does not supersede the dormant Commerce Clause, which bars states from discriminating against out-of-state vendors.

Aftermath: Don’t Count a Good Bootlegger Out

The
Granholm v. Heald
decision struck a significant blow to wholesalers. Since the decision, many states have moved to repeal bans on direct sales. According to the Wine Institute, 39 states currently allow at least some limited form of direct shipping to consumers (Wine Institute 2012). Although the tide may be turning against this particular Bootlegger/Baptist coalition, it would be premature to forecast its demise. A recent House resolution calls for a strengthening of state-based alcohol regulation that would remand to the states their authority over alcohol distribution in their borders (H.R. 1161, 2011). It is too early to tell how successful such legislation will be in turning back the tide of market competition. Regardless, its mere appearance shows that this coalition may be made of sterner stuff than its antagonists had hoped.

Thank You for Smoking! (No Advertising Necessary)

We now move to our second sinful substance, tobacco. On June 22, 2011, the U.S. Food and Drug Administration (FDA) issued an order requiring cigarette companies to have graphic labels on cigarette packages that warn of the harmful effects of smoking (FDA 2011; McKay and Kesmodel 2011). The action resulted from the 2009 Family Smoking Prevention and Tobacco Control Act,
¹
which mandated labels that cover the top 50 percent of cigarette packages (front and back), nine specific rotating warning messages, and a requirement for graphic presentation of harms caused by smoking.

Aware that the label warnings were in the works—because the FDA rule emerged from earlier negotiations with Congress—members of the tobacco industry challenged the regulations in court. They argued that strict FDA regulation would keep the industry on the straight and narrow but also claimed violation of their First Amendment rights (Strauss 2011).

One example of the imagery then mandated by the FDA, but now moot, shows a picture of a dead man in a casket with a label reading, “Warning: Smoking Can Kill You.” In July 2012, the U.S. Court of Appeals for the District of Columbia Circuit left the broad regulations standing (Yost 2012), but another industry suit focused exclusively on the advertising mandate. In August 2012, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of the industry, arguing that the FDA had provided no evidence linking the mandated ads to a reduction in smoking (Dooren 2012). For now, the Supreme Court has declined to rehear the case. The government is not seeking further review, leaving the industry with a highly profitable cartel formed by decades of regulation and now managed by the FDA.

The FDA’s dramatic intervention in the marketplace generated extraordinary benefits for some members of the industry. Legislation that placed the tobacco industry under FDA control was just what some Bootleggers wanted. Members of the industry, rather counter-intuitively, supported the 2009 legislation that mandated the gruesome messages, as did anti-smoking groups that fought long and hard for FDA control of the industry. Once again, Bootleggers and Baptists formed a winning coalition—at least for the Bootleggers.

In more ways than one, the stories we tell here can be linked to the polluters’ profit theory. Over decades, each major federal regulation has established restrictions on competition or costly activities that combined with a price-insensitive product to generate “polluter profits.” And, of course, each restriction seemed to offer the prospect, but not the substance, of tough government regulation, thereby inspiring anti-smoking interest groups to stay the course. Just as Br’er Rabbit feigned dismay at being thrown into his briar patch home, so did these Bootleggers appear subdued while secretly rejoicing at their good fortune.

We next discuss four episodes involving federal regulation of tobacco marketing practices and explain how the actions fit the model of Br’er Rabbit’s briar patch. Two of the episodes involve warning labels. Another concerns television advertising, and the final episode involves extreme cartelization of the industry by way of the 1996 Master Settlement Agreement (MSA) that was negotiated in a coordinated effort by state attorneys general. The MSA allowed the industry to raise prices to fund a transfer of some $200 billion to the 50 states.

Each episode displays a noncooperative Bootlegger/Baptist interaction that nonetheless saw tobacco come out on top, even when the Baptists thought they were winning.

Early History of Tobacco Product Regulation

Regulation of marketing practices is nothing new to the tobacco industry. In what is now U.S. territory, government control dates at least to 1629, when colonial authorities in Massachusetts Bay prohibited settlers from planting tobacco except in small quantities used for medicinal purposes (McGrew 1972), much as medicinal marijuana is tolerated today in some states. Tobacco bans reach even further back than colonial times. In 1604, King James I of England wrote
A Counterblast to Tobacco
. He described smoking as “a custome loathsome to the eye, hateful to the nose, harmeful to the brain, dangerous to the lungs, and in the black stinking fume thereof, nearest resembling the horrible Stigian smoke of the pit that is bottomeless” (Gascoigne 2001). Modern anti-smoking groups would suggest King James got it right.

As might be expected, anti-smoking and other health interest groups—one of several categories of Baptists in this story—have a long history of activism; there were several hundred anti-cigarette leagues in the United States with more than 300,000 total members by the turn of the 19th century (Thornton 1997). Partly owing to their efforts, 26 states banned the sale of cigarettes to minors by 1890, and 16 states totally prohibited cigarette sales by the end of 1909 (Troyer and Markle 1983, 33–34).