The Michigan Liquor Control Commission (LCC) has given us a case study in how not to privatize. What went wrong?

The problem is that the LCC did not leave the business of liquor distribution. It divested itself of many activities, but stayed around to act as wholesaler, price setter, and extractor of "profits" from each bottle sold. Truly effective privatization would have meant commercialization—walking away from the business lock, stock, and (half) barrel. Instead, Michigan consumers got a distilled version of privatization and a botched solution to an old problem.

According to Ken Wozniak of the LCC, attempts at reform of Michigan’s liquor distribution system have been going on for years. Until 1991, however, actual privatization of the liquor system wasn’t taken seriously. Since that time, Governor Engler has made known his desire to get out of the liquor business. One move that Engler made to facilitate privatization was the appointment of former State Senator Phil Arthurhultz to chair the Liquor Control Commission. Arthurhultz has said that Engler did so because "I had a reputation as the Senate majority floor leader for getting things done."

The Good News

In January 1996, Arthurhultz introduced his plan for privatizing the state’s liquor distribution system. The plan included closing state liquor warehouses, ending hauling contracts to state-operated regional stores, canceling operation contracts for these sites, discontinuing delivery charges, reducing the state-mandated mark-up on liquor from 65% to 58%, and allowing Specially Designated Distributors (party stores) to sell liquor directly to restaurants and bars.

The Bad News

The state chose to remain, however, in the liquor wholesaling and price control businesses. It set the price of liquor and continues to reap millions each year by mandating the retail mark-up. In other words, the administration chose a strategy that lessened the state’s role dramatically, but not entirely. This appears to have inspired other state legislators to introduce bills designed to correct perceived flaws in that plan, which caused significant delays in the passage of a final bill.

In 1995, MPR interviewed Chairman Arthurhultz. During the interview, he noted that past attempts at privatization of liquor distribution had failed, "in some instances," because there were "too many cooks stirring the pot." Not much has changed. By failing to shed the responsibility for liquor distribution in its entirety, Arthurhultz got a kitchen full of braumeisters trying to spoil his brew.


By failing to shed the responsibility for liquor distribution in its entirety, Arthurhultz got a kitchen full of braumeisters trying to spoil his brew.


Commercialization

Virtually ignored in the liquor debate was the concept of commercialization, that is, exiting the business entirely. By commercializing the state’s liquor operation, legislators might have found a solution more palatable to them than the plan offered by Arthurhultz. Commercialization would have kept Michigan from being the only state that plays liquor middleman while allowing free enterprise to handle retail operations.

Throughout the past century, government began providing commercial services previously provided by the private sector. Solid waste removal is probably the most common example. But several years ago, Traverse City bucked this trend and decided to leave rubbish hauling up to private citizens again. Today, government plays no role in the city’s removal of trash. It is left to the responsibility of citizens. This is precisely how the state should have commercialized the distribution of liquor.

States that allow prices to be set by market forces, rather than government mandate, enjoy liquor prices substantially below that of Michigan (see graph on page 14). These lower prices may account for higher sales. The Detroit News reported in April 1996, "Michigan liquor sales [declined] about 9 percent since 1995 compared with 3 percent to 4 percent increases in surrounding states."

Very small changes in incentive can change purchasing behavior. Many liquor sales that would have occurred in Michigan no doubt occur just over the border in states such as Indiana (see graph), with the accompanying tax revenue accruing to the Indiana, rather than the Michigan, state treasury.

Some opponents of commercialization argue that the state should remain involved in liquor distribution because liquor is a dangerous substance when abused. But this argument is not applied to ammunition, beer, cars, cigarettes, guns, or wine, despite the fact that each can be dangerous when misused. Many states have left the liquor business in recent years. Studies show no noticeable differences in consumption patterns between states that play a major role in liquor distribution and those that do not.

It may not be easy to remove state government from its liquor operations. As long as state-imposed price markups feed the public treasury, the state will not want to leave the liquor price control and wholesaling businesses.