Public overserved on benefits of privatizing liquor sales

Where’s our cheap booze?

Isn’t that what we voted for? Cheap booze? There was more to Initiative 1183, of course, and the whole scenario was complicated by various percentages and markups and considerations and predictions. Certain smart people argued that I-1183 would not necessarily give us cheap booze, but arriving at that view required a little knowledge and research and I frankly just don’t think most of us gave it much of a thinking-over.

We voted for cheap booze. What we got, mostly, was more expensive booze. Some kinds of booze are quite a bit more expensive. The single-malt scotch I like – smoky, peaty, pretentious – went from 50 bucks at the gubment store to 81 bucks at my neighborhood grocer.

A barrel of store-brand vodka at Costco is no doubt a better deal, but still. This is not what the invisible, blessed hand of the market was supposed to do. Why has the hand not done what we’re told, constantly and with utter conviction, the hand does? Whose fault is this?

Some hypotheses:

1) It’s our fault, part 1: We raised fees on liquor sales.

Most of us who voted for cheap booze, in the form of I-1183, also voted for new fees of 27 percent on liquor sales. Surely this is the reason for the increase in liquor prices.

Well, no. At least not according to the Washington Restaurant Association. The association was among the biggest proponents – after Costco – of I-1183. It claimed, in its “Facts on I-1183,” that liquor privatization would exert a “downward force on prices.”

One of the association’s facts was this: The new fees in I-1183 were way lower than the markup the state was taking. They would not exert an upward force.

2) It’s the gubment’s fault, for all its crazy taxes.

Some have argued that privatization has merely exposed the state’s outrageously high liquor taxes. That may be. But our outrageously high liquor taxes are exactly, precisely as outrageously high as they used to be.

3) It’s our fault, part 2: We drank the Kool-Aid.

We drank buckets and buckets of the stuff. The private sector is efficient. Gubment is wasteful. The private sector benefits consumers. Gubment monopolies harm consumers. Had the opponents of I-1183 come right out and claimed that businesses would charge more for booze than the state, most people would simply have not believed it, so drunk are we on this Kool-Aid.

“The public fell into this perception that, if the government’s involved in it, it has to be inefficient,” said Chris Marr, a former state senator and member of the state liquor board. “It’s the same reason Halliburton is handling military logistics overseas.”

Marr is one of the folks who was not surprised by the price hikes. When the state was in the liquor biz, he says, it was the fifth-largest customer in the nation, and it benefited from bulk pricing. State economists estimated that the private sector markup would be up to 20 percentage points greater than the state markup. Marr figures that even now, store margins are lower than they will be eventually.

“The price was (very unlikely) to go down, and most likely is going to go up,” Marr said.

4) It’s the private sector’s fault. Taxes are the same, new fees are dramatically lower than the state markup, and so the increase must arise from the margins someone is charging.

But how could this be true? After all, as an editorial in this newspaper recently argued, the whole point of privatization was to benefit consumers. That’s the reason business exists – to benefit consumers. The invisible, blessed hand of the market has no other interest – no other aim or goal – than driving down prices for you and me.

Except when it doesn’t. I called Bruce Beckett, vice president of government affairs for the Washington Restaurant Association, and asked him if his organization had been incorrect about the “downward pressure” on prices and all the benefits that would come to consumers.

Beckett argued that it’s not that simple. For one thing, it’s very early, and the distribution infrastructure is still being put into place, he said. For another, the state has implemented a couple of rules that have impeded the market, he says – limiting the amount of certain sales and charging 17 percent retail-level fees on sales that should be charged 10 percent wholesale fees.

But Beckett also said distributors – there are basically two of them – have jacked up their profit margins. Here’s the way he does the math: The difference between the state’s former markup and the new license fees leaves about 29 percent, on average, for profit before the typical private-market price would surpass the state price.

In many cases, the margins charged by distributors are much, much higher right now, as they shift from a “sweetheart deal” with the state to the uncertainties of a competitive market, he said.

To me, this more or less seals the argument: The private sector didn’t deliver the cheap booze. Beckett has not lost faith. A lot of this remains to be worked out, he says. We’re less than three months into a new system. The market has not yet had time to do its thing.

“It’s all just starting,” he said.