An Insurrection and 2 Constitutional Amendments:

Thanks to Eugene Volokh for his invitation to guest blog on alcohol control policy.

There's been little public debate or legislative action in this area for many years, despite the fact that alcohol abuse remains our most important drug problem. But that's about to change. The governors of New York and California, among others, have called for an increase in alcohol excise taxes as part of their budget-balancing plans. The Amethyst Initiative to generate debate on the national minimum drinking age has been gathering steam. And the three-tier regulatory system for alcohol distribution is under attack in the courts.

I have selfish reasons to welcome this renewal of interest, since I've been doing research on alcohol control off and on for 30 years and just published a book on the subject (Paying the Tab, Princeton University Press). But surely any sensible account of the public interest when it comes to drug policy would put alcohol control high on the list of issues worthy of our attention.

Over the next few days I'll attempt to make the case for raising alcohol excise tax rates. And just to prove that I'm not really a "neo-prohibitionist" (as the industry spokesmen like to label me) I'll point out the reasons why I think the case for lowering the minimum drinking age is pretty strong.

Needless to say alcohol control and taxation have played a prominent role in US history. A distilled spirits tax was the first domestic revenue measure — enacted by Congress in 1791, it led to the Whiskey Insurrection and the subsequent assertion of federal authority by President Washington and Secretary of the Treasury Alexander Hamilton.

Between the Civil War and World War I, federal alcohol excise tax collections accounted for the bulk of internal revenues (as much as 80% in some years). This source became less important with the adoption of the 16th Amendment in 1913, which legalized the federal income tax. From a public-finance perspective, the 16th Amendment cleared the way for the 18th Amendment's prohibition on the "manufacture, sale, or transportation of intoxicating liquors."

After disillusion with that Noble Experiment arose (it didn't take long), one of the leading proponents for repeal, Pierre S. DuPont (retired chairman of General Motors), recruited his fellow millionaires to the cause by reminding them that a legal alcohol industry would generate tax revenues, thereby displacing the need for the despised income taxes.

Last year was the 75th anniversary of Repeal. In 1933 there was a huge nationwide beer blast to celebrate the end of Prohibition, but the anniversary passed largely unnoticed. It should have gotten more attention. After all, the legacy of Prohibition is very much with us. Historian David Musto observed that "This 'dreadful example' is now so firmly established that it has become a maxim of popular culture, a paradigm of bad social policy, and a ritual invocation of opponents of a variety of sumptuary laws."

Sure enough, Prohibition was a failure in the sense that it did not magically end drinking, and it engendered vast amounts of crime and corruption. But the modern interpretation of the Prohibition experience has gone well beyond those facts to a conclusion that "you can't legislate morality" and that drinking in particular is somehow unaffected by the terms on which alcoholic beverages are sold in the marketplace.

A careful look at the actual Prohibition experience tends to refute that conclusion. During the 1920s alcohol of uncertain quality was available from shady sources at prices substantially higher than before the War. While there are of course no official statistics on alcohol consumption during that period, all the indicators suggest a substantial reduction in consumption and abuse -- especially among working class folks.

Contemporaneous studies by economists Clark Warburton, Irving Fisher, and others made that case in convincing fashion. And when Martha Bensley Bruere conducted a survey of other social workers across the country for the National Federation of Settlements in the mid-1920s, she received reports indicating that most of the South and West had become quite dry, and that family problems associated with alcohol had fallen off considerably.

Newspaper reporters, providing the "first draft of history," tended to miss this big-picture story. Then as now, they focused on the wealthy and glamorous, the Yale grads with their hip flasks, and often missed the bigger story that Prohibition was, in a sense, "working."

Under the 21st Amendment, alcohol control was largely relegated to the states, although of course Congress reinstated excise taxes (but did not end the income tax!). The states had little experience with regulating commerce in alcohol. To provide them with guidance, John D. Rockefeller, Jr. commissioned a study by Raymond B. Fosdick and Albert L. Scott that produced an impressive piece of policy analysis called Toward Liquor Control.

It reviewed alternative control schemes from Europe and Canada, seeking a set of "rational" regulations that would supply "unstimulated demand" for alcohol without bringing back the corruption and abuse of the pre-War saloon era. Fosdick and Scott envisioned an era of experimentation by the "laboratory of the states" from which we would learn what worked.

To an extent, that promise has been realized. The states have gone their separate ways in regulating the supply chain, licensing retailers, setting excise taxes, and (until Congress intervened in 1984), setting the minimum drinking age. In the last 25 years, economists and epidemiologists have analyzed the results and learned a good deal about how alcohol control policy affects drinking and abuse.

So here's the irony. The true lessons of the Great Experiment with Prohibition have been lost, the evidence hopelessly distorted in the retelling. (It was never much of an experiment anyway, since there was no natural control group.) But since Repeal the laboratory of the states has generated considerable data on the effects of supply control. The analysis of those data provide pretty good guidance to the questions that will be debated in 2009.

Price Matters:

There is a "national effort to reduce alcohol related problems," so says the mission statement of the federal agency charged with researching these problems and disseminating the findings. I'm willing to believe it, but would like to pose a question: in pursuing this national effort, are lower prices of liquor and beer likely to help or hurt? Because for better or worse, price reductions are the de facto policy of the federal government.

Here's the story. Federal alcohol excise taxes have been an important component of alcohol prices, and particularly prices of distilled spirits, since Repeal (or really since the Civil War, with time out for Prohibition). The federal tax is set as a flat amount per unit of ethanol, regardless of value.

For example, in 1951 Congress set the tax at $1.68 per fifth of 80 proof liquor. In today's dollars, that's the equivalent of $13.50 per fifth. But Congress has only succeeded in raising the tax twice since 1951, and by meager amounts, so that instead of $13.50, the current tax is just $2.16 per fifth.

Even if there were no markup on taxes (and there in fact is), the result is that the current price of a bottle of spirits is over $10 lower than it would have been if Congress had simply indexed the liquor tax to the Consumer Price Index in 1951 and then left it alone.

The states have also been slow to raise their nominal tax rates on liquor and beer. The result — inflation has deeply eroded the value of alcohol excise tax rates. It's not surprising, then, that the price of spirits (adjusted for overall inflation) has been falling over time. Just in the last 25 years, the price for package sales has declined 12%. The price of a 6-pack has also declined, by about 8%.

Meanwhile, the price of cigarettes has been following a quite different trajectory, thanks in large part to state and federal tax increases since the Master Settlement Agreement of 1998. Over 40 states have raised their tax by more than 25 cents, and 11 have raised their excise tax by more than one dollar per pack. What's going on here? Why is one "sin tax" so popular politically, while another has been largely neglected?

These days, increases in the cigarette tax are being touted as a public health measure, sure to reduce initiation by teens and help adults to quit or cut back. While economists have long supported this conclusion with direct empirical evidence, the idea has been difficult to sell to the public and the legislators. Smoking is addictive, and addicts will get their "fix" regardless of the cost, right? But now it seems that everyone is a convert to the power of taxation and price in the campaign to reduce smoking.

As it turns out, the evidence that higher prices discourage alcohol consumption and abuse is strong, and of just the same sort as the evidence that supports the conclusion that higher prices reduce smoking.

The most persuasive evidence comes from the laboratory of the states. Since 1981, I, my collaborators, and other economists and epidemiologists have analyzed the effect of state tax increases on alcohol sales but also on other outcomes, such as mortality due to alcohol-related causes. The results consistently favor the view that taxes (through their effect on prices) matter.

The legislators and the public are not buying it. For some reason, there is profound resistance to the idea that beverage alcohol is a commodity with the usual downward sloping demand curve. The alcohol industry knows better -- they must believe that higher taxes can't be passed on to consumers without a reduction in sales and consumption, or else why would they fight tax increases so fiercely? But when I make the argument to non-economists, I get a skeptical hearing.

The more refined skeptics accept the premise that higher prices lead to a reduction in sales, but speculate that that reduction is entirely due to the behavior of moderate drinkers — those who do not drive drunk or abuse their children or lose productivity to hangovers or do long term damage to their organs.

In this scenario, the abusers have zero elasticity, while moderate drinkers are price elastic. To which I could point out (and do) that in fact it is these heavy drinkers who should be most likely to respond to price, since they're the ones for whom drinking places a real dent in the household budget.

But ultimately my belief in the efficacy of tax as a basis for controlling abuse does not rest on such qualitative arguments -- it is based on the empirical evidence. In the 1960s there were actually some experiments on the effects of price, including several conducted in alcoholism-treatment clinics. Token economies were set up that offered the patients drinks at a price -- either a certain amount of "work" or loss of privileges.

These experiments demonstrated that alcoholics were price sensitive. But they have not been replicated, since offering drinks to alcoholics is a tough to sell to the Institutional Review Boards these days.

Much more directly relevant are the studies based on "quasi-experiments," including the dozens of instances in which states have changed their tax rates. We can observe what happens to an outcome variable (for example, a mortality rate) in states that raise their tax compared with states that don't raise their tax in a particular year.

Thirty years of peer-reviewed research has documented that even small increases in alcohol excise tax rates have desirable effects. Among the specific findings are that tax increases: • Reduce alcohol sales and binge drinking • Reduce highway fatalities (stronger effect for youths) • Reduce the rate of STD transmission (stronger effect for adolescents) • Reduce youth suicide rates (under age 24) • Reduce the cirrhosis mortality rate • Reduce rates of robbery and rape

Economists are sometimes defined as people who, when told that something works in practice, want to know whether it works in theory. In my own experience that does not just apply to economists -- evidence that contradicts ones own theoretical perspective tends to be ignored or discounted.

Unfortunately the preconception that leads to skepticism in this area is false. It is not true that alcohol abusers as a group are so highly motivated to get their "fix" that price is no object.

A Free Lunch?

In the pre-Prohibition era, the saloons would advertise a "free lunch" for the working man. The catch was the expectation that the working man would have a beer with that lunch. The beer was definitely not free. Thus the most famous saying associated with economic science -- "there's no such thing as a free lunch" -- originates with alcohol retailing.

Given that historical reference, I enjoy the irony that alcohol taxation is a "free lunch," or at least close to it. An increase in the federal alcohol tax could benefit most people directly (in the sense that they would come out ahead financially), while increasing economic efficiency for all.

Let me fill in the background on this not uncontroversial claim. While taxes usually impair economic efficiency by distorting incentives, that is not necessarily the case. If there are negative externalities associated with a particular activity, then it is "underpriced" and will lead to over-indulgence. Compelling examples include carbon emission and driving during rush hour.

Needless to say, drinking, while a pleasurable activity to many (including me), generates negative externalities. If you add up the deleterious effects on crime and highway safety and STD transmission and the quality of parenting, it is easy to surpass a dollar per drink on average. The public is inadvertently forced to share that cost, only a small part of which is covered by alcohol tax revenues. (The current federal excise tax amounts to 5 cents per beer, and even the highest state tax rates are lower.)

It would be more efficient if drinkers were confronted with the full price of their decision of how much to consume. Raising the tax rate can help accomplish that purpose. And it would be fairer to have the drinkers pay the social costs (in proportion to their drinking), rather than have those costs borne willy-nilly in everyone's insurance premiums, income tax rates, uncompensated risks, and so forth.

However, while it the "drinker pays" approach seems fairer than the current system and certainly more efficient, it is far from perfect. The problem is that that average social cost conceals a great deal of variation.

A drinker who enjoys one glass of wine or beer with dinner every night is unlikely to impose any cost on others as a result. If that same person drank all her weekly ration on Saturday night before driving home, the total tax bill would be the same, but the social-cost calculus would be far different. The public consequences of private drinking choices depend on who, when, and where, not just how much.

Thus the alcohol tax appears to be a crude remedy at best.

Instead of taxing alcohol, it seems that it would be preferable to "tax" the socially costly consequences of abuse directly: Impose still heftier penalties on drivers convicted of driving while intoxicated. Have social workers finger negligent and abusive parents for sanctions. Step up enforcement against alcohol-related violent crime (and maybe those drunks who put themselves at foolish risk of being victimized). Subsidize condom distribution. And so forth.

Of course these remedies, while seemingly better targeted, are costly in terms of use of public authority and revenues. So let's look again at whether alcohol taxes are really all that "crude." It is relevant and revealing to look at the distribution of alcohol consumption.

Per capita consumption in the United States runs about 500 drinks per year, where a "drink" is a 12-ounce beer, a 5-ounce glass of wine, or a 1.5 ounce shot of 80-proof spirits (all of which have about the same amount of ethanol) But that average also conceals a great deal of variation: about 35 % of adults abstain, and drinking is very concentrated within the larger group who do drink.

The famous 20-80 rule of marketing applies -- 20% of the consumers of most any commodity account for 80% of the total purchased. Removing the abstainers, that means that 13% of adults consume 80% of the ethanol, and thus pay 80% of the tax. (I've checked this estimate against actual self-reported drinking, and it works pretty well.)

What's more, only about 7% of adults drink more than that 500-drink per capita average. That means that 93% of the American public contribute less than average to the alcohol tax.

As a thought experiment, consider increasing the alcohol tax by 10 cents per drink and then distributing the proceeds annually to every adult, $50 each. All but 7% would come out ahead on this deal. Given the preventive effect of higher alcohol prices, even that group would benefit from lower auto insurance rates and in other ways.

This thought experiment reminds us of the nice feature of alcohol taxes -- unlike other prevention measures, this one generates revenue. And taxes no longer seem quite so crude or unfair, being nicely concentrated on the heaviest drinkers where we also find most of the abuse and social costs.

Of course in practice the distributional consequences of an alcohol-tax increase depend on how the money will be used. This year the extra revenues from any tax increase will be put to closing state budget deficits, which is to say that they will take the place of an increase in some other tax rate or a cut in expenditure. The ultimate question when it comes to distributional and efficiency consequences is how the alcohol tax stacks up against the alternatives.

The discussion of distributional consequences also must include mention of jobs. The alcohol industry has fought against nominal tax increases with great success on this basis. Not content to see tax rates erode with inflation, they are campaigning to have Congress roll back the 1991 increases, arguing that alcohol taxes reduce national employment. Of course this claim is not to be taken seriously.

The excise tax rate affects the size of the alcohol industry (and ancillary industries, such as funeral homes and trauma surgery). But aggregate employment is not affected by the beer tax, only the portion of the economy devoted to beer.

I'm sure at this point you are eager to hear just how high I would go when it comes to alcohol taxes in an ideal scenario. One standard would be to return the tax to the level that prevailed in some previous period, such as 1951 or 1975 -- whenever the "good old days" occurred in your life or mine. I think that historical standard is an interesting reminder of trends, but provides little real guidance.

Another possibility is the public health standard, namely to save as many lives as possible. The problem is this -- The higher the tax, the more lives are saved, up to some level so high that we are back to Prohibition. The public health standard takes no account of the pleasures of drinking, and thus provides no basis for balancing pleasure against cost.

The most defensible approach in my mind is to set the tax equal to the average marginal social cost of a drink, perhaps with some distinctions between beer and spirits, or between on-premise and off-premise service. Estimating the precise levels would require careful up-to-date analysis. But we don't have to do that precise analysis to know for sure that the social costs are much higher than the current tax rates. In particular, the increases that are being proposed by various governors this year are just a small step in the right direction, far less than the full social costs.

Any complete account of the public interest in alcohol taxation must deal with a few other issues -- with the alleged health benefits of drinking (which I'll turn to in a subsequent blog), and with possible substitutions. Would higher taxes lead consumers to substitute illicit drugs or dangerous moonshine?

The concern about an upsurge of moonshining or home manufacture in the face of higher prices is misplaced. Even if the 1950s, when federal taxes were a multiple of what they are today, illicit production filled only a miniscule piece of the market.

Some folks may try their hand at home beer- or wine-making, but unless it's an enjoyable hobby it would not be a productive use of your time even if commercial prices increased by 50%.

The possibility of substitution to other intoxicants is a real one, but the evidence again points the other way. As it turns out, drinking and illicit drug use are not alternatives -- rather they tend to go together. Almost every illicit drug user also drinks, and a high percentage of those who seek treatment for drug abuse also have problems with alcohol. One analysis of alcohol tax changes found that marijuana smoking declined with higher alcohol taxes -- the two intoxicants are complementary.

In any event, the evidence on the virtuous effects of tax increases that I cited in my previous blog is based on data analysis of what happens in states that raise their tax in comparison with states that don't. The effects on mortality and all the other outcomes incorporate and reflect all the substitutions that consumers make in response to those higher alcohol prices.

The Amethyst Initiative

Prohibition was never completely repealed -- only those that were deemed of mature years by state legislators were extended the right to purchase alcoholic beverages. The states adopted minimum age laws ranging between 18 and 21. Congress got into the act in 1984, establishing a de facto national minimum age of 21 by threatening the states with loss of highway funds if they didn't get in line. They all did.

Recently the Amethyst Initiative has gained prominence in its call for a reopening of debate on the national minimum. Amethyst is funded by the Robertson Foundation and headed by retired Middlebury College President John McCardell Jr. The 100-plus college presidents who have signed on are no doubt tired of dealing with widespread alcohol abuse on campus in a legal environment in which they must give at least lip service to the absolute ban on drinking.

Here are my thoughts: 1. I doubt that Congress will pay much attention to this initiative, at least in the near future. 2. If I'm wrong and some states lowered the minimum age to 18 or 19, there would be an net increase in alcohol-related problems among teens. 3. Nonetheless, denying college-aged youths the right to drink is so out of line with our collective judgment about adult status, and in particular the age at which we confer the rights and responsibilities of adulthood, that I am inclined to support a rollback in the age minimum.

We tried this before. In the early 1970s, when Congress was still respecting the 21st Amendment, most states lowered their minimum drinking age. That was the time when the Baby Boom cohorts were coming of age and 18-year-old men were subject to the Vietnam draft. The 26th Amendment was adopted in 1970, giving 18 year olds the right to vote. Denying young men who were getting shot up in the war the right to drink when they came home seemed perverse to legislators -- especially when those men could vote.

Twenty-nine states lowered their minimum age by 1975. I and a colleague analyzed the effects on highway fatalities, finding that the relevant age group experienced about a 10% increase in states that lowered their age for all beverage types from 21 to 18, compared with states that didn't change their law. Other research documented this and other indications of increased abuse. President Reagan appointed a commission that documented the problems (with some exaggeration) and ultimately sold Congress on establishing a national minimum.

(Note that we analysts could recite all the theoretical reasons why an age-based prohibition could have perverse effects on health and safety. Those arguments have some truth, but were ultimately trumped by the data. The net effect of lowering the minimum age was to increase alcohol abuse.)

Things have changed since the 1970s, and in some ways it seems likely that the costs of lowering the minimum age would be less now than then. In particular, youthful drunk driving has been curbed by zero tolerance laws, tougher DUI enforcement, and a change in culture that supports having a designated driver. While highway safety remains an important consideration, the greatest acute cost of youthful drinking these days is in its effect on the crime rate. In any event, freedom is still not free in this area.

Yet giving 18-20 year olds the right to drink has a lot going for it. After all, 18 year olds currently can vote, serve on juries, and hold most public offices, enlist in the military or work at any job without parental consent, undertake contractual obligations including marriage, and legally purchase lottery tickets, cigarettes, and shotguns. They are held fully accountable for criminal acts and are too old to receive the protection of the statutory rape laws.

It is also true that while the minimum age law does some good, it's widely violated -- in fact, it's hard to think of another law that is so widely scoffed at. The great majority of older teens choose to drink, with whatever effect that may have on their respect for the law generally.

By the way, even though I support the Amethyst Initiative, I do not think we should do away with a minimum drinking age entirely. High-school students tend to be dangerous to themselves and others, and before age 18 are more children than adults. Parents often welcome some help in providing checks on self-destructive adolescent behavior. But at age 18 or 19, despite the fact that youths are not fully mature (physically or mentally) and still prone to all sorts of hazardous behavior, it is time to swallow hard and make the booze legal.

As I said, I don't believe that Congress will repeal the national minimum. There are various partial measures that might have a better chance. For starters, a handful of states allow underage youths to drink with their parents, at least at home, and other states could adopt that more permissive stance. Enclaves like residential colleges and military bases are relatively safe places, and there might be a carve-out for such insulated environments.

(Actually military base commanders, while generally obligated to observe the local minimum age law, can declare a holiday on the minimum drinking age under special circumstances, such as a return of a combat unit.)

If there was room to compromise, I'd introduce Mark Kleiman's idea of a "learners permit" approach to youthful drinking, whereby a "drinking license" would be given to 18 year olds and subject to suspension if they abused it. The zero tolerance laws on the highway could be maintained to age 21 even if the minimum purchase age were reduced.

It will not surprise anyone who has been scanning these posts that I believe that higher alcohol taxes would help curtail youthful abuse, regardless of the minimum age law, and could serve as a freedom-enhancing, low-cost substitute for age-based prohibition. (Years ago Gary Becker endorsed this idea in his Newsweek column.) Ideally I would want youths to face a higher tax than adults because the external costs of their drinking are so much higher on average. But I haven't figured out how to accomplish that!

[Several who have posted comments on my previous blogs have asked me to respond to their queries. I'll provide a general response tomorrow in my final post.]

Last Call:

I've decided that my final guest blog will be a response to some of the posted comments, rather than a new essay.

Thanks to those of you who took the time to read some of my posts, and to keep a cordial tone in your comments. I learned something from reading them, especially about home brewing!

A few of you were interested in knowing more, or having a cite to back up a factual claim. Of course I hope you will consult my book, Paying the Tab. It is quite thorough in presenting the arguments and evidence.

Several comments suggested that I didn't know the difference between correlation and causation. Actually I believe that I do know the difference. My technical contributions to the alcohol literature have focused on taking advantage of natural experiments to learn the effects of changes in policy. The book explains this matter is detail. It also discusses the evidence on minimum drinking age, discussing two of the issues raised by bloggers -- the state border effects and the effect on the older age group.

I was baffled by comments to the effect that I believe all drinking is bad. My friends would be amused, and it's surely not what I said in my blogs. Like every other commodity, alcohol has benefits and also costs. The difference for alcoholic beverages is that the costs are not fully reflected in the price. A higher excise tax would help with that problem.

(One great virtue of the price system in a private enterprise economy is that the prices signal relative scarcity and provide an incentive to economize appropriately. But when there are externalities -- when property rights are incomplete -- the price system does not do those jobs very well without some intervention.)

There were many comments to the effect that taxes designed to change behavior in particular ways are fascist or at least represent an unacceptable imposition on freedom and are certainly no business of government. For what it's worth, I see alcohol excise taxes as less of an imposition on personal freedom than many other types of alcohol regulations that are intended to limit abuse, including the high minimum age.

A number of comments appeared to take me seriously when I listed some of the options for regulating adverse consequences of drinking -- including penalizing DUI more severely etc. The purpose of that paragraph in my third post was not to advocate any of those changes (far from it) but rather to point out that a much-touted alternative strategy to tax increases -- penalizing the consequences of abuse -- can be costly and oppressive.

Several comments noted that there is evidence that moderate drinking promotes health. So there is. But the main epidemiological evidence is correlational, and very flimsy. Similar evidence has been profoundly misleading in other medical areas, such as hormone replacement therapy.

We'll probably never do a randomized controlled trial with drinking, and without that it will be very difficult to sort out the causal effects of drinking. Incidentally, just as it is true that moderate drinkers live longer than abstainers, it is also true that moderate drinkers are paid more than abstainers. One speculation (by one of my former students) is that that association is causal, the result of social capital. That's an interesting idea, but I don't believe it.

The statistical-inference problem is that people who abstain are different in all kinds of ways (some not readily observable) from those who drink. Differences in longevity and earnings may be the result of those other characteristics, rather than the drinking per se. My advice: Don't start drinking just because you want a raise in salary or cleaner arteries.

(I've read that pipe smokers live longer than nonsmokers on average…)

Cheers!