Public-choice problems, what they are, and an example of defeating one

In my research brief, I explained what a public-choice problem is. I also explained what made them so hard to solve:

Public-choice problems are difficult problems to overcome. Political issues usually pit Left vs. Right, Democrats vs. Republicans, or even Urban vs. Rural. These, however, pit a small group of organized insiders vs. an unorganized jumble of everyone else mostly attending to more pressing matters.

Sometimes, as with occupational licensing, the political Left, Right, and Center can all agree that the current policy is wrong. But more often than not, this rare kumbaya of political unity still isn’t enough to overcome dedicated, entrenched special interests.

That’s not to say they can’t be overcome, of course. But it takes more than a usual political effort:

If people get organized — if the governor gets involved and makes it a legacy matter, if something happens to galvanize the public, etc. — then it can be done. Or if reviewing the policy is removed from politics, such as by scheduled sunset with periodic review.

It’s not easy, which is why it’s best not to get a special interest entrenched in the first place.

Last week’s signing of House Bill 363 was an example of beating back a public-choice problem. That bill frees up craft breweries from the strict 25,00-barrel-per-year cap on self-distribution. This system gave distributors a great deal of power but forced brewers into a tough choice not based on market dynamics: stay small or give up all distribution to a third party.

As Jon Guze explained:

While there are a small number of exceptions for small brewers and vintners, larger producers are not allowed to sell directly to retailers at all. Instead, they must deal with a limited number of licensed wholesale distributors who enjoy a profitable oligopoly on this trade. In addition to enriching the distributors at the expense of retailers and consumers, this expensive, three-tier system of producer/distributor/retailer protects the big producers by giving small producers a powerful incentive to stay small. …

Speaking recently at a conference at Johnson and Wales University, [Olde Mecklenburg Brewery’s director of sales] Ryan Self emphasized another reason why the brewing company is reluctant to exceed the 25,000 barrel-per-year threshold: turning its marketing over to the distribution cartel would mean firing 11 of its people.

Brewers fought this system for years, and their effort enjoyed bipartisan support and public sympathy. But that wasn’t enough. John Trump wrote about what else helped bring about long-needed reform:

The passage of H.B. 363 signals at least a temporary end to a reform campaign that began more than a decade ago, as craft brewers took on the N.C. ABC system and a well-funded and entrenched network of wholesalers and distributors.

“Anyone familiar with the political dynamics of alcohol distribution in North Carolina knows that has been what has been accomplished is no easy task,” NoDa co-founder Suzie Ford said before the signing.

The failures, in fact, came by the bundle.

Just last year, House Bill 500, which Cooper eventually signed into law, originally included a provision allowing craft breweries that produce more than 25,000 barrels of beer a year to self-distribute, if they chose to. That provision, along with one making it easier for breweries to terminate their contract with distributors, was stripped from the bill after fierce objections from the wholesalers. Before that, lawmakers introduced bills to increase the cap to between 60,000 barrels and to as many as 200,000 barrels.

Those efforts, too, were in vain.

Negotiation and compromise were key to the success of H.B. 363, but those factors were probably secondary to a lawsuit and pending trial brought by craft brewers. The brewers’ complaint said certain state statutes were unconstitutional and consequently sought a permanent injunction against enforcement of the state’s distribution cap and franchise laws. The distribution cap and franchise laws, they said, were inflicting injury and threatened to impose additional damage to the brewers.

The lawsuit, because of the new law, has gone by the wayside.

While the H.B. 363 reaffirms support of the Beer Franchise Law and the three-tier system for the distribution of malt beverages, it does ease up on limits for production and distribution, which were severely restricting brewers’ plans to grow and expand.

That law, as Kent said, adds a new, mid-level classification of brewers. Brewers can now self-distribute 50,000 barrels of their products, as opposed to the previous 25,000. The legislation also gives growing brewers more flexibility in choosing where and how to distribute their beers around the state.

Breweries that exceed 50,000 would not lose the ability to self-distribute, although the new law affects only those breweries that sell fewer than 100,000 barrels of beer per year. Before, if a brewer sold 25,001 barrels per year, by state law, every barrel produced — including the first — would have to go through a third-party wholesaler/distributor.

H.B. 363 allows brewers such as John Marrino of the Olde Mecklenburg Brewery in Charlotte to go all in with plans for expansion. Marrino, who mostly limits distribution of his beer to Mecklenburg County, is ready to start construction on second multi-million-dollar brewery and restaurant in Cornelius, north of Charlotte near Lake Norman.

Jon Sanders / Director of Regulatory Studies

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As director of regulatory studies at the John Locke Foundation, Jo...

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