Paying the Tab: The Costs and Benefits of Alcohol Control

Published by EH.NET (April 2008)

Philip J. Cook, Paying the Tab: The Costs and Benefits of Alcohol Control. Princeton: Princeton University Press, 2007. xiii + 262 pp. $35 (cloth), ISBN: 978-0-691-12520-6.

Reviewed for EH.NET by Mark Thornton, Ludwig von Mises Institute.

Philip Cook does not offer us an economic history here, but his book should still be of interest to American economic historians and anyone interested in addiction, alcohol and related problems. He ably reviews and dissects an extensive literature to make the case for additional alcohol control policies. Despite its scientific focus, Cook is openly normative and the Duke University economist opens his book (p. xi) with the remarkable statement that “an important remedy has been neglected ? the systematic regulation and taxation of the [alcohol] industry.” When one looks back at the history of experimentation with alcohol policy in America, this statement seems both remarkable and curious. Have we perhaps left some stone unturned?

Chapter 2 recaps the history of alcohol reform policies and their inevitable failure. Some attempt is made by the author to make the case for Prohibition (i.e. the Eighteenth Amendment) in that estimates of alcohol prices, consumption, and abuse showed small gains. This seems quite implausible given that people could legally make their own wine and beer at a much lower monetary cost than before Prohibition. Given all the social problems that Prohibition created, it is difficult to consider it a success. This chapter does demonstrate that the “public choice” considerations cannot be ignored because they seem to have dominated policy throughout American history.

One thing that did come out of Prohibition was the Alcoholism Movement that sought to understand and treat alcoholism. Early scientific efforts moved the blame from the product (i.e. alcohol) to the disease (i.e. alcoholism) much in the same way as the earliest temperance movement. This time period also witnessed the emergence of Alcoholics Anonymous which has grown to become the most successful and widely used treatment method. Cook also covers other treatment approaches that have emerged on the market, but rightly cautions that alcoholism is not the sum total of the alcohol problem.

In Chapter 4, Cook puts drinking in quantitative perspective noting “a variety of pitfalls” and “that what we most want to know is the hardest to measure reliably.” It seems in general that heavy problem drinkers consist of about 10 percent of the adult population. The empirical problem is how to identify and reform “problem” drinkers ? drunk drivers, binge drinkers, and those who just drink too much and ruin their own health. Another problem noted by Cook is that “it is unlikely that any available intervention (short of rigorously enforced rationing) would truncate the distribution in this fashion.”

Anyone who has been at an “open bar” and “cash bar” event at the same location and with the same attendees knows that the law of demand applies to alcohol and in Chapter 5 the author reviews the attempts to empirically prove this fact. The evidence does indeed show that if drinking alcohol is made more expensive ? whether by higher prices or other means (e.g. strict drinking and driving laws) ? people will drink less.

Chapter 6 investigates the short-run consequences of drinking, such as vehicle accidents and violence. Obviously alcohol and injuries are related, but here the author examines the proportion of injuries that should be attributed to alcohol. For example, drunk drivers tend to be “reckless” people in general and to get into more fatal crashes even when sober. The studies examined here suggest that higher prices for alcohol would result in fewer injuries, but he neglects the work by Benson, Mast and Rasmussen (1999a and 1999b) on this subject, which finds that the impact is probably much less than currently thought.

In Chapter 7 the long-term effects of alcohol consumption are examined. It seems clear that long-term heavy consumption leads to cirrhosis of the liver and death and yet moderate adult consumption extends life by preventing circulatory diseases. The author does challenge the “French Paradox” thesis ? moderate red wine drinkers live longer than teetotalers ? on a couple of points. However, by this point I became completely disillusioned at the possibility of empirical testing such health matters. When you combine knowledge of how these studies are funded, with the inherent difficulties in such testing, one can only conclude that you have to take all these studies with a grain of salt.

The bulk of the book is an attempt to convince the reader that alcohol is a social problem in this country and it succeeds in this task. The second task of the book seems to be to convince the reader that alcohol taxes reduce alcohol consumption. On this issue I am likewise convinced. The third task is to make the case that higher excise taxes on alcohol will help address the problems of alcohol consumers. On this point I am not convinced. Taxes apply to all consumers, not just those who cause problems and therefore are too blunt an instrument to solve problems in anything other than a marginal manner.

The author believes that a small tax will have a small impact and a large tax will have a large impact. I believe that a small tax will have no impact on problem drinking and that a large tax would stimulate substitution and an underground economy in alcohol. Higher alcohol prices drive people to substitute some prescription medications, legal substitutes and illegal substitutes, for some alcohol. In addition, large tax increases would stimulate the underground economy for alcohol products. There are a surprising number of people who are already making homemade beer and wine and that number would balloon with significant tax increases.

The final chapters discuss policy options. At this point it is clear that the author has committed one crucial error of omission in that he almost completely neglects non-governmental approaches to the problems with alcohol. Taxes, regulations, and restrictions are considered and evaluated but market and social solutions are downplayed and the moral hazard created by the social safety net is completely ignored. For example, in today’s society medical and emergency room services are provided to everyone, even illegal aliens. As a result people can behave recklessly and know that their injuries will be addressed. The government also provides welfare, food, unemployment insurance, and disability payments in its comprehensive safety net. People would behave differently if they were totally dependent upon employers, private charities, family, and social institutions and had no access to government provided or mandated benefits. Social institutions would be stronger and more important and people would fear being alienated, stigmatized, or ostracized from such institutions.

The market carefully monitors people’s behavior with a wide body of mechanisms. Employers now effectively forbid employees from drinking on the job or prior to coming to work, especially for jobs such as airplane pilot. Labor law restricts their authority in these matters. Problem drinkers are also forced to pay a heavy price in terms of lost wages and fewer promotions, but the safety net diminishes the effect of this punishment. Tax-advantaged, employer-provided comprehensive health insurance is no check on alcohol consumption ? it encourages it, but individually-purchased health and life insurance coverage in the market would discriminate against smokers and problem drinkers, just as auto insurance companies discriminate against drunk drivers today.

This is not to suggest that such a radical change in policy is likely to happen, but it does suggest that additional government interventions are unlikely to solve the problems in an effective way and that such interventions will have “unintended consequences.” Furthermore it does provide an outline of policy reforms that could provide marginal benefits at low cost. The market works because it directly targets the bad behavior associated with irresponsible alcohol consumption.

References: Bruce L. Benson, David W. Rasmussen, and Brent D. Mast, “Deterring Drunk Driving Fatalities: An Economics of Crime Perspective,” International Review of Law and Economics, Vol. 19, No. 2 (June 1999): 205-25.

Brent D. Mast, Bruce L. Benson, David W. Rasmussen, “Beer Taxation and Alcohol-Related Traffic Fatalities,” Southern Economic Journal, Vol. 66 No. 2 (Oct 1999): 214-49.

Mark Thornton is a Senior Fellow of the Ludwig von Mises Institute and the Book Review Editor of the Quarterly Journal of Austrian Economics. His works include The Economics of Prohibition, Tariffs, Blockades, and Inflation: The Economics of the Civil War with Robert B. Ekelund, Jr., The Quotable Mises, and The Bastiat Collection. He is currently working on a new English translation of Richard Cantillon’s Essay on the Nature of Commerce in General (1755) and a book on Cantillon’s Essay: New Discoveries from the Founder of Economic Science.