Crawl Across the Ocean

Sunday, August 07, 2005

Remind Me Again, Why Do We Own This?

Is it time to nationalize the tobacco industry? There were a few headlines made last week by a book which recommends exactly (or something like) that. You can read the preface and the executive summary of 'Curing the addiction to Profits: A supply-side approach to phasing out tobacco', at the site of the Center for Policy Alternatives. I haven't read the book, but based on the executive summary and the preface, the argument seems to be as follows:

1) It is in society's best interest to enact measures which will reduce the incidence of smoking.
2) It is in the nature of corporations whose product is cigarettes to fight any measures which would reduce the incidence of smoking.
3) If cigarettes were manufactured and distributed by a government agency this resistance would be eliminated / reduced.
4) Therefore, the government should replace tobacco companies as manufacturer and distributor of cigarettes.

I think it is fairly safe to assume that a majority of people would agree with the premises 1) an 2), so it is just premise 3) and the resulting conclusion (4) which are in doubt.


David Olive had an article in the Star the other day which attempted to explain why it makes sense for the distribution of liquor in Ontario to remain a public monopoly (under the control of the Liquor Control Board of Ontario (LCBO)). I say attempted because, while I normally find Olive to be pretty good, this particular article seemed weak, as if Olive himself knew he was trying to make the best of a bad case.

Chris Selley does a pretty good job deconstructing Olive's article in detail over at Tart Cider, but the main point I want to make here is that Olive's approach to arguing for the existence of liquor stores is to argue that the government does a better (or at least as good) job running it's monopoly than the private sector would do if liquor could be sold by private retail outlets. That is, the government is more efficient than the private sector.

Regular readers will know that I'm a big fan of Joseph Heath's, 'The Efficient Society' which argues that, contrary to popular conception, most markets fail and there are many industries which can be more efficiently managed through other (non-market) means such as, in some cases, the government. Says Heath, "Markets tend to work very well when it comes to exchanging medium-sized dry goods. Other types of exchanges can be much more difficult - sometimes impossible - to organize."

But of course alcohol *is* a medium-sized dry good. And thus precisely the kind of item which you would expect the private sector to do well at managing the market for. There is nothing special about alcohol which makes it likely that a government could distribute it more efficiently than the private sector that couldn't also be applied to soft drinks, milk or bottled water and I don't see Olive ever arguing that 7-Up should e only sold at stores run by the Soft Drink Control Board.

Both theoretically and empirically, the argument that a government monopoly will do a more efficient job of distributing alcohol to the population than private enterprise is a non-starter. Even if one were to stretch and say that the current management of the LCBO is so good that they are more efficient than the private sector for the moment, any kind of organizational disruption could lead to a deterioration in performance. If this happened to a private provider they would just go bankrupt and be replaced by better providers, but with a government monopoly you are stuck with what you've got (see Ontario Hydro).

What puzzles me is why Olive would even bother arguing this way to begin with (and he's not an isolated example, almost all of the arguments I've seen opposing privatizion of the liquor stores are similar). I imagine that when the LCBO was setup after the days of prohibition, the founders did not set it up with the goal being that it should distribute the maximum quantity of alcohol to the population as cheaply and conveniently as possible.

I'm no historian, but it seems to me that the purpose of having a public monopoly in sales of liquor was so that it would be legal enough to shut down black markets and the associated organized crime, while at the same time trying to minimize the volume and convenience of alcohol sales.

Now you might argue that times have changed, people are more responsible than they once were (or people aren't as uptight as they once were) and there is no longer a need to treat alcohol as a social ill to be minimized. It involves weighing on the one hand the increased enjoyment of life people get from easier/cheaper access to alcohol and on the other hand increased loss of life from drunk driving / family disruptions due to alcohol addiction and so on.

People who argue that making it easier and cheaper to buy alcohol won't cause any increase in alcohol related social problems are (in my opinion) dreaming. On the other hand, people who argue that we should keep a public monopoly on alcohol sales because that is the more efficient approach have already conceded on the social impact side, choosing instead to argue on unwinnable ground.


In his rebuttal to David Olive, Chris Selley suggested that alcohol should be treated like any other controlled substance, citing cigarettes as an example. But cigarettes aren't really the most useful comparison. We can divide controlled substances (which are also consumer products) into two groups. Those which used to be considered perfectly acceptable but have gradually become less acceptable, and those which used to be considered unacceptable but are gradually becoming more accepted. In the first group we have cigarettes as the main example, with junk food as another candidate. Guns might fall into this group as well. The second group contains alcohol as well as gambling and marijuana and, arguably, sex (prostitution).

Given the substantial political inertia in our society, it is unsurprising that, if you take two products which are considered equally (un)acceptable at the present moment, it is likely that the one which was acceptable in the past is more likely to still remain in private hands while the one which was unacceptable in the past is more likely to be in public hands.

So a better comparison for alcohol than cigarettes is another product subject to a government monopoly: gambling - and the comparison is, if you'll pardon the expression, a sobering one.

I happened to run across this blog about issues with gambling around the world. The post in question is called, "Another Canadian Province addicted to Gambling" and it's a reprint of a Halifax Herald article describing the battle over Video Lottery Terminals (VLTs) in Nova Scotia:

Nova Scotia should make it tougher to gamble, says the head of the Atlantic Institute for Market Studies.

Brian Lee Crowley says he's not proposing gambling be outlawed, just made more difficult to indulge in.

"I'm pretty sure we're not getting the difficulty the ease of access to VLTs has caused around the province," Mr. Crowley, president of the right-of-centre think-tank, said in an interview Monday.


Governments have to become more objective about gaming and its costs, he said.

"When you are getting as much money as they are from it, you can't," Mr. Crowley said."

At one point in time, government was in the gambling business, like alcohol, not because it was a nice stealthy way to raise money, and not because the government is 'more efficient' than the private sector at providing convenient access to gambling, but because a government gambling monopoly could provide enough gambling to avoid the creation of a black market, without just opening the doors wide open and ending up with countless lives ruined by gambling addictions.

Just imagine, if you can, a provincial government these days actually trying to deter it's citizens from gambling. If gambling is a drug, then governments have become pushers extraordinaire, producing a seemingly endless barrage of (annoying) advertisements tempting you to part with your money for the sake of some imagined good life which you just might win access to.

I'm not one for ideology, most times, but I do generally believe in the principles of free enterprise, so I was blown away by this quote from the article,
"Last week, Premier John Hamm said there will always be gambling in Nova Scotia, and the best way to deal with it is to regulate the industry.

Mr. Hamm said the revenue the province receives from gambling is important.

"We would rather have (gambling dollars) going to government and paying for health care, education, than going to the private sector and making a number of Nova Scotians millionaires off of the proceeds of gambling," the premier said Thursday after cabinet."

First of all, there's a big difference between regulating an industry and owning it. But second of all, does Hamm feel that he'd rather have potato profits going to government and paying for health care, education rather than going to the private sector and making a number of French Fry millionaires even richer? Perhaps we was taken out of context but it sounds like he is literally arguing for communism.


So what's my point? My point is that, if we are concerned with efficienct production and distribution of consumer products, we are better off to leave things to private enterprise. If we are concerned with providing enough of a market to avoid a black market while still trying to minimize the long term consumption of something, then the picture is less clear.

On the one hand, having private players in a market can create powerful lobbyists who will try to increase consumption of the product and fight efforts to reduce consumption. On the other hand, having the government run one of these (highly profitable) markets can create a powerful lobby which will try to increase consumption of the product and fight efforts to reduce consumption. Furthermore, this approach combines the entity trying to reduce consumption for the good of society (government) and the entity trying to increase consumption for the good of health care and education funding (government) into one highly conflicted entity (as Olive noted).

Another angle to consider. On the one, uh, foot, having a number of smaller entities competing will tend to drive prices down causing consumption to go up while having a single monopoly player will tend to drive prices up, reducing consumption. On the other foot, small players competing fiercely with thin profit margins (think retail stores selling cigarettes and lottery tickets) don't make powerful lobbyists, while a monopoly or oligopoly firm will have lots of political and financial clout to lobby for rules to support increase consumption.

This is kind of a lame conclusion to come to after all this rambling, but, to be honest, I don't see a clear, universally applicable solution. In fact, the best solution might vary even for the same product depending on both the time and the place. I recall doing a school project investigating the feasibility of selling make-your-own wine kits in Europe. Looking into the existence of players already in the market it quickly became apparent that products were competing on different criteria in different markets. As you moved South in Europe, into countries like France and Italy and Spain, make-your-own wine kits emphasized quality, with the goal being that you could make wine almost as good as what you could get from a vineyard. Further North in Europe, and especially in Scandinavia, kits emphasized speed, with the goal being that you could get really drunk, really cheap. In this context, it is perhaps not surprising that liquor laws are a lot stricter in the North of Europe than they are in the South.

So my answer is, no easy answers, each case has to be looked at on its own merits. For cigarette manufacturers, there is so much momentum already against the tobacco companies that I would be inclined to leave the status quo as is. Canada has declining smoking rates which are among the lowest in the world, and, as much as political interference and lobbying by the tobacco companies drives me crazy, I would be hesitant to break up a system which generally seems to be headed in the right direction.

For alcohol, I think Ontario is probably mature enough in its attitude towards alcohol that it could afford to ease the rules slightly without doing so much social damage that it offsets the increased satisfaction for consumers. Following B.C.'s example of allowing independent beer and wine (but not liquor) stores might be a good way to start.

For gambling, I think public pressure is required - like that being applied in Nova Scotia. This pressure needs to go beyond just having VLTs banned from bars, to banning advertisement for gambling period. Given the natural synergy between organized crime and gambling I'd be opposed to any privatization on this front, but I do think that as citizens we need to begin staging interventions to help get the government off its gambling addiction and make it remember why it is in that particular business in the first place - to reduce gambling not to increase it.

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  • Alberta has shown that privatization of liquor distribution has accomplished exactly two things - increased the price and reduced the selection.

    If you just think of liquor as somethingto slog back and get hammered on - cheap beer/wine and your standard hard stuff, then perhaps private companies can do as good a job as the government. However, the prerequisite of a private company is to make a profit and you can't do that efficiently (and the corporate bean counters will always have their way in the end) by stocking slow, and very slow moving items. Government liquor stored however work on essentally a cost recovery basis with a small profit going to general government revenues. Because of their focus on serving the whole community rather than what just flies off the shelf, you can go into a government store and get liqueurs, spirits, wine and beer from all over the world. Government run liquor stores increase your multiculturalism, private ones decrease it.

    By Anonymous Anonymous, at 3:11 PM  

  • I'm not convinced. Either the government is using sales of fast-selling items to subsidize the other items (which would likely transfer wealth from poor to rich, I suspect) or they are making money on their slower selling items.

    You could argue that, because it isn't trying to make a profit, the government can provide products the private sector can't and thus do a better job of serving a market, but I remain skeptical. Given that alcohohl seems like the kind of finicky consumer product where capitalism is at its best, that sounds to me like an argument for communism.

    Still, I'd be interested in a systematic comparison of price and selection under private competition and public monopoly - it's possible I'm missing something.

    By Blogger Declan, at 3:51 PM  

  • good holy hell, doug alder. i didnt know multiculturalism was the freedom to get hammered on the crizzown, south african shiraz, a nice bosnian shlivovitz, jose cuervo, some appleton estate rum, lychee liqueur, and a few bottles of kingfisher all in one sitting. im suddenly a big fan of multiculturalism now... word!

    By Blogger ainge lotusland, at 4:22 PM  

  • oh and p.s.: my experience in america/with cold beer and wine stores in vancouver has been that private liquor retailers in yuppie areas tend to engage in this "multiculturalism" more than the pub down the street from my house in the burbs, where i forgo my sam adams and tsingtaos for a few molson whatevers (at least theyre cold and boozy)

    By Blogger ainge lotusland, at 4:25 PM  

  • Ah, multiculturalism, how sweet the taste.

    By Blogger Declan, at 9:20 PM  

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