Regulatory Capture — 1933 vs. 2015 — Updated 18 October 2015

A friend says that private industries “may be able to build in regulatory capture from the first day of legalized marijuana” in some states, and asks if the alcohol industry had any “influence on how the newly legal alcohol industry would be regulated after Prohibition was repealed.”

My impression is that regulatory capture didn’t happen so quickly after repeal of alcohol Prohibition. 

The production function reconstituted itself pretty quickly – Dan Okrent’s book Last Call goes into this.  Folks who had been producing, and who either had gone underground or inactive during Prohibition or had been semi-legit (church wine and legal-in-Canada liquor) got a running start.

But the retailing function started more afresh.  The saloon was discredited.  So Rockefeller and his Toward Liquor Control project had a chance to influence the public – and keep retailing of liquor and sometimes other alcohol in public hands in the many monopoly states.

And the three-tier distribution system was intended to spread the power out.

Industry was hardly silent.  The tax-writing Committees of Congress heard from industry before deciding on tax laws.  Tax on Intoxicating Liquor, Hearings Before the Committee on Ways and Means, House of Representatives and the Committee on Finance, United States Senate, 73d Congress, Interim, 1st and 2d Sessions 124 (Dec. 11-14, 1933).  There were beer hearings before that.

Part of the difference, I think, is that the some of the Drys, including extremely wealthy people like Rockefeller and Pierre DuPont (who went on to become the one-man Liquor Commission in Delaware), saw that the battle was being lost.  They realized that they could not get the answer they wanted on Whether (to legalize).  So instead of Just Saying No, fruitlessly, to the “Whether” question, they seemed to figure they could do some good by working on the answer to “How.”  So they helped shape the industry structure.

Part of their motivation was temperance; part of it was a desire for revenue (with the hope of reducing the income tax, a hope that proved futile when FDR started spending).  Part of it was an opinion developed from recent history that the profit motive was a threat to the community and needed to be eliminated or restricted.

I see no parallel efforts today.  Wealthy folks who are interested in marijuana seem to be in two categories: do-gooders who want to legalize (analogous to Wets), and businesspeople who want to make money from marijuana.  I don’t see anyone analogous to Rockefeller and DuPont, Drys who were far-sighted enough to see that Prohibition would not last – and hoping to make the best of reality.  Patrick Kennedy and company are Just Saying No still.

Meanwhile I wonder if the answer to the question whether alcohol and marijuana are complements or substitutes is  . . . complements.  That guess is based on Big Alcohol (which probably knows the answer) staying on the sidelines and not spending to defeat marijuana legalization, despite the “Safer than alcohol” barbs being thrown.

Another distinction is that with alcohol in 1933, the federal government went first, and the field opened suddenly and unambiguously for the states.  The Roosevelt Administration was keenly interested in alcohol revenue to fund the New Deal. Now, with marijuana, the states are stepping up one by one, and the federal government is sitting on its hands – and happily collecting the lucky-but-helpful 280E tax.  I don’t know that that distinction makes a difference in the question of regulatory capture, but suspect it may.

This is all anecdotal and impressionistic. Lots to think about here.

UPDATE:  My friend writes: “the initiative process gives corporate interests a chance to have regulatory capture from the first, but the legislative process, though corruptible, does not.”  I wonder.

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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