Leeches and Rent Seekers in the Wine Business

wine wholesaler rent seekersIn the realm of economic theory there is a concept known as “Rent Seeking”. Unlike much of economic theory, its meaning isn’t very complicated. In fact, Wikipedia has boiled it down quite nicely:

“spending resources in order to gain by increasing one’s share of existing wealth, instead of trying to create wealth….Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity.”

The most common form of “rent seeking” occurs when a business or association of businesses seek through lobbying and campaign contribution new laws that provide them with preferential treatment, allowing them to hurt their competitors while lining their own pockets despite offering no new or innovative service or product.

For fans of economic theory in my audience, we happen to be witnessing a perfect example of an attempt at rent seeking right now in New York. As it usually is in the wine industry, this case of attempted rent seeking is being pushed by large wine wholesalers in collusion with a lawmaker willing to be paid to play the wholesalers’ game.

In New York State, most small wine wholesalers that service New York City retailers and restaurants keep their warehouses across the river in New Jersey. It’s convenient and much less expansive than housing the wine in New York. When these smaller wholesalers deliver wine to retailers and restaurants, the trucks load up at the New Jersey warehouse, drive over the bridge and deliver the wine.

However, now one of the largest wine wholesalers in New York, Empire Merchants, is pushing a new law that, if passed, would force all wine sold in New York to stay “at rest” at a New York warehouse for 24 hours before being delivered to its destination. The new law would force those wholesalers with warehouses in New Jersey to open new warehouses in New York. This would be incredibly expensive for these small wholesalers, put some of them out of business and raise the price significantly for consumers on thousands of wines. However, Empire, along with Southern Wine & Spirits—one of the other large New York wholesalers that has pushed this kind of law in the past but failed—would reap the benefit of seeing many of their competitors go out of business and by picking up an array of new products to distribute as these smaller wholesalers fail in the face of trying to comply with the new law.

Let me try to offer an economic analysis of this proposed “At Rest” law: It’s absurd, in every respect.

One of the primary definitions of “rent seeking” is that the rent seeker provides no new or innovative service and no new product, yet benefits from regulatory changes that they have sought. This is exactly what would happen if the bill in question, S3849, is passed into law.

But these large alcohol wholesalers can’t get the job done all by themselves.

It turns out that Empire Merchants, the large New York wine wholesaler seeking the change in the law, has recently given $33,000 to Senator Jeffrey Klein—who introduced the bill. Now I know that this looks like a bribe. In fact, it look exactly like Senator Klein is being bribed by Empire to do their dirty work. But I’m told it isn’t a bribe:

“Senator Klein, like any serious legislator, regularly meets with both business and labor groups to listen to their perspective on pending legislation,” a Klein spokesman said. “Whenever there’s opportunity to create jobs — and to do so in a way that has already earned the support of both business and labor — Senator Klein will consider it.”

See, the Senator is simply looking to create jobs. It’s all OK.

Of course, those small wholesalers that will go out of business because of the legislation will have to let many of their New York employees go. But again, no problem. Empire  and Southern Wine & Spirits will pick up the business. It’s unlikely that they’ll hire anything like the number of New York residents that lose their job because of the Senator’s “concern for New York jobs”…But that’s the way it goes.leech

The truth is this: Wine, beer and liquor wholesalers across the country, particularly the larger ones, are the biggest rent seekers in America. They have for decades continually lobbied for and paid for legislation that diminishes competition, hurts others in the industry, and hurts consumers, all while allowing them to continue to stay in business when Economics 101 tells us that their simplistic services would not be used nearly as much as they are today if they did not hide behind the skirts of the lawmakers they support and who in turn mandate the use of wholesalers.

Take the Three-Tier System, for example. No one except America’s wholesalers think legally mandated use of a middle man wholesaler is a good thing. And yet, the majority of states require that any wine ending up on a retail shelf or a restaurant list must first go through a licensed wholesaler. Wholesalers rarely do anything to market these wines. They have nothing to do with their production. They don’t help build any brands but the very largest. They don’t educate the consumer. They don’t prevent counterfeit wine from entering the marketplace. And their services are not needed to collect state taxes. Yet there is the three-tier system, in place and depressing the American marketplace more than any other single regulatory structure or economic circumstance the wine industry and wine consumer faces.

America’s wine, beer and spirit wholesalers are the very embodiment of “Rent Seekers”.  And we are seeing them again trying to flex their illegitimate muscles in New York by putting smaller, niche wholesalers out of business, by making the business climate for difficult for restaurateurs and retailers and by making it more difficult for consumers to find the wines they want and, when they do find them, making them pay more for the wines.

I read one economist who suggested that a better name for Rent Seeking would be “Leeching”. That’s a claim with which it is difficult to argue..

4 Responses

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