Why So Socialist?

Although I was born in New York, I spent enough of my formative years in Utah, known, apparently, mostly for labyrinthine liquor laws. The reputation is both exaggerated and founded in reality.  Not having lived there for a while, I haven't thought much about Utah laws from a political/legal standpoint. I saw this article in The Economist the other day and I've been wondering on and off since why our most "conservative" states tolerate such blatant socialism.

Basically, in nine states, the government maintains a direct monopoly over liquor sales.  As the article points out, "these lonely outposts of American socialism are not the country's most liberal states." In fact, in the three most conservative states in the country, Idaho, Alabama, and (yes) Utah, the state government controls all access to wine and hard alcohol. [Utah allows markets to sell 3.2 beer; I am not sure about the exact situation in either Idaho or Alabama]. Even more, they do not merely control access; they are the sole purveyors of spirits--in short, the governments of Utah, Alabama, and Idaho are commercial enterprises. Socialism. But they HATE socialism in Utah, Alabama, and Idaho, where most politicians stand so far to the right that they complain that the NRA's stance on gun rights is too soft. How the heck did this happen???


Before I digress into the political/legal issues, I will skip ahead to the end of the story: Ultimately, 1) the states need the revenue; and 2) the states control sales because it limits access. Yeah, I know, #2 is kinda obvious, but remember that there are other ways to control access, such as raising taxes or limiting store hours, etc. I'll get to that in a bit.


More after the Jump...


Public Goods and Efficiency
The article asks, "What on earth is the government doing in the liquor sales business in the first place? Liquor sales aren't a public good. The private sector is clearly able to handle that service more efficiently than the government can." 


There's a lot packed into that sentence; to explain a little: The general model in the US is that government should stick to "public goods," that is, goods (the word is used broadly, it's not limited to tangible things) necessary for the public good, but require centralized control in order to produce the good. Think roads, libraries, the army. Without a government, such goods would not be produced at all, or would be produced in a way that would leave too many out in the cold. Legal/economic/political theorists call this "efficiency," a term that also encompasses negotiation, coordination costs, resource allocation, and a whole bunch of game theory that has resulted in many many many Nobel prizes, so I will not delve into them further. For most other goods, it makes more sense for the private sector to control allocation (i.e., capitalism) because the "market" can determine optimal price and consumption levels much more efficiently than a centralized decision-maker.


The other area where the government is often better (i.e., more efficient at handling) than the private sector is managing what could be called "bads." The easiest example is making murder illegal. The counter-intuitive problem is that it's not always clear what is "a bad" and what is "a good." I will explain that in more detail in the next section, but the article points to this divide in the socialist liquor distribution system: "[For many people,] liquor sales aren't a public good ... they're a public bad" more like heroin, and says that "apparently, some Virginians oppose privatising [sic] the ABC stores on the grounds that this will lead to increased alcohol consumption and hence to greater crime." That the whole thing is socialist doesn't really matter; people don't mind socialism when they think the result is better for them. I noted that this treats alcohol like heroin, even though most people would think that the closer model is cigarettes (and, indeed, in most states it is.)


Legal economists (and political scientists, and politicians, and voters) have struggled with the next step: if something is bad, how do we stop it? And, even more difficult, how do we deal with bad results of good things?


What is Good and What is Bad, and When Goods Need Bads
Ok, so we have public goods (roads) and public bads (murder). The question is what to do with everything in between. There are very few purely good or bad things--everything has a cost. And when I say "cost," think about it as broadly as possible. 


Think about roads. Obviously, there is the actual cost of paying for the materials, which comes from taxpayers, some of whom won't use the road, or won't use the road at a level corresponding to the taxes they pay. We also need to find the land. Imagine building a road through a series of properties. The "transaction costs" associated with such a negotiation make it extremely difficult (and nigh-impossible for a private entity or unorganized individuals) to create a path from A to B. Getting the landowners to the table requires resources ("coordination costs.") Any landowner could block the entire process by "holding out," demanding a high price (he might be greedy, he might hate roads, he might even love his land enough that no money will compensate his loss).  


Now, think broader. Cost includes economic impact, of course, but it also includes potential economic benefits left unrealized. If this seems obvious, it's not--the idea that they are equivalent was considered radical just 40 years ago;  Coase's paper showing this won a Nobel Prize and is widely held as the single-most cited idea in all of social science.


A prime example is pollution that results from industry. Clearly, less pollution is better than more pollution. However, in our imperfect world, we can't eliminate such pollution. For a more concrete example, let's use... a concrete factory. Concrete is a "good;" it is needed to build homes and roads and hospitals. So we can't eliminate pollution by eliminating concrete. We could attempt to solve this problem by pushing the cost of pollution onto the polluters, the owners of the plant. This is not as simple as it sounds. One problem, of course, is defining "cost." How do we account for long-term health effects? What is the "cost" of the eyesore of having a concrete factory in your backyard? Even assuming that we can somehow get an appropriate "cost," how do we make an owner pay? Do we fine them? If so, do we pay the fines to those who are "hurt" by the factory? And who manages that process? If the fine (or tax) is too high, then the price of concrete increases, and everyone is hurt. If it's too low, then some people will be hurt by the "extra" pollution, and the owners of the factory are effectively being subsidized by those being harmed. There are two other ways of dealing with "costs," sometimes called "property rules" and "liability rules." A property rule would start with the assumption that everyone has a right to be free from pollution; for simplicity's sake, let's just agree that such an absolute rule doesn't work well in this case.  A liability rule is like a contract or tort: one side pays the other.


The traditional view of pollution was that the factory owner should "pay" those harmed by their factory, either ahead of time (contract) or based on actual harm (like a tort). The traditional view further believed that the initial bargaining position of the two sides determined the "final" position. That is, the traditional view held that a beginning "liability rule" where landowners could demand payment in exchange for their costs would have a different long-term economic balance than a world where the rule protected the right of the factory owners to create the (externally) harmful concrete. And here we get back to Coase, and then back to Virginia's laws. (I hope.) 


Coase showed, as I mentioned, that all costs are essentially equivalent. We can envision a system where the landowners can "contract" for the cost of harm to their property or enjoyment of same: the factory owner pays them directly, or pays a tax, whatever. We can also envision a system where a factory owner  starts with the right to create as much pollution as needed unless he is paid to stop or reduce the pollution: surrounding landowners pay him to stop.  Coase argued that in a truly efficient system, the result is the same: factory owners pay landowners for the right to pollute, or landowners pay the factory owner to not pollute. We end up with a factory owner who is maximizing his utility, landowners maximizing their utility, and a society with about the right amount of concrete, at about the right price.  


The problem, therefore, is not the rules, but the difficulty (i.e., efficiency) of negotiating the rules. One of the results of Coase's work is that the government should get involved in things where the costs of negotiating the solution prevent an efficient solution. In a very small world, with one landowner and one factory, negotiation costs are minimal; this is a classic contract situation; it doesn't make sense for the government to interfere with such transactions--there's nothing to add. But in other situations, there are different roadblocks to negotiation. Even in our two-person world, imagine that neither side knows what the "cost" will be until later: if the landowner is massively harmed (concrete dust causes cancer), what then? In this situation, it is efficient to create a legal system with courts and suits for damages. Or, consider my discussion of roads, above. In a situation where negotiation costs are prohibitive because individuals might "hold out," it may be efficient for government to create rules for eminent domain to force sale of the land for roads. On the other hand, there is no "holdout problem" in a market for, say, lettuce. Farmers grow it, consumers buy it; the price is generally regarded as fair to both sides. But if a single grower controlled the market for lettuce, that grower might raise prices artificially--a monopoly. And people would complain; the government would get involved, if only to ensure that the market was not unfair. For the most part, no one complains about the government monopoly on roads. And no one (as far as I know) thinks that the government should not have a monopoly on outlawing harmful drugs,  murder or rape. However, imagine the ruckus if a government announced that it was going to control all aspects of the lettuce market.


Now, imagine your state government announcing that in addition to regulating the drinking age, it was going to purchase every retailer of liquor in your state; it was going to set, by statute, the price of liquor, limit supply to approved manufacturers, and require everyone who sells alcohol be an employee of the state. 


Clearly, a government inaugurating such a system would face considerable pressure. Not only socialist, but bigger government! And, on the other hand, as the article points out (you thought I forgot about the article, didn't you?), it would seem to make sense to sell other drugs through similar outlets if revenue was the goal. Note that not a single state in the Union has such a system for cigarettes, which are legal but have, like alcohol, generally recognized harmful effects. 


This is a "meta-Coase" problem. The starting point matters because we don't have any of the classic styles of "rules." The various sides cannot negotiate the costs precisely because the government is not just the source of the negotiation costs, but has a perverse incentive to prevent any negotiation at all, not because the government wants to maintain its monopoly (i.e. "socialism,") or because the system maximizes revenue (if it did, other products, like cigarettes, should be sold the same way, or other tax-neutral means could be explored) but because inefficiency is the point of the policy.  The legislators (and members of the public) who argue that alcohol has harmful side-effects that justify the peculiar regulation must be seeing something that I'm not. Yes, public sale of alcohol has negative social consequences to those who do not consume alcohol (tee-totallers get hit by drunk drivers; they have to pay for health-care for indigent alcoholics). But, as discussed above, so does the building and operation of concrete factories. As the article mentions, alcohol is a "weird good," because it's not clear that more or cheaper liquor is better for society. However, the same can be said for beef. I love beef; I'm just making a point! Vegetarians have to pay for the social costs of unhealthy eaters, and they have to pay for the long-term health consequences of, for example, hormones and antibiotics consumed by us carnivores. Beef seems like a "weird good," too. So what gives?


Clearly, I realize there are some straightforward political processes at work. Legislators cannot be perceived as raising taxes, even if privatizing the system would simply be taxing alcohol where the state claims the revenue as "profit" today, and so would actually be tax-neutral. And the liquor distributor lobby, believe it or not,  likes this system because they only have to negotiate with the state. 


I hope to return to this topic again, mostly because it appears that the peculiar regulation of alcohol is an irrational result of accidents of history, much like other social/legal issues, such as the illegality of marijuana and anti-gay-marriage laws. Not that marijuana or gay marriage laws are pejoratively  irrational; just that there is no "rational" (in the sense of objectively and logically distinguishable) legal reason for the difference between cigarette sales on one hand and marijuana on the other, or for giving legal rights to certain pairs of lovers and not to others. Or, to explain it another way, using a combination of Occam's Razor and Romer v. Evans, where there is no explanation for a policy other than personal dislike, the law should not be sustained.  


The question here, I guess, is whether the continuation of a particular source of revenue is sufficiently rational, by itself, to support the otherwise-irrational policy? Especially one that is so darn... Socialist, in some of the most anti-socialist states in the country?