Today’s whiskey rebellion tastes like cronyism, smells like mean spirits

Craig Schlesinger Advocate, Young Voices
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Adult beverage fans are undoubtedly aware of the craft brewing and distilling revivals that swept the U.S. in recent years. The craft movement is understandably popular since it provides an influx of options at the intersection of quality and economical. One particularly unamused player in the spirits industry, however, is Brown-Forman, the maker of Tennessee’s famous Jack Daniel’s whiskey.

Although distillers in Tennessee employed different techniques and a variety of base products like corn, barley, and rye to produce whiskey for over a century, last year the company successfully urged the state to pass legislation requiring anything labeled “Tennessee Whiskey” not just be distilled in Tennessee, but also made from at least 51 percent corn, filtered through maple charcoal, and aged in pricey, new oak barrels each year. State lawmakers are currently considering an outright repeal of last year’s law that unfairly benefits the world’s most renowned Tennessee Whiskey.

It’s no secret that people lobby the government to curry favor. In fact, it’s been going on for centuries. Gordon Tullock, a founding figure of public choice theory, identified many of these concepts and originated the idea of what became known as rent-seeking, which occurs when large companies utilize their financial position to lobby politicians with the express purpose of increasing profits through legislation. As David Henderson explains at the Library of Economics and Liberty, “Tullock’s insight was that expenditures on lobbying for privileges are costly and that these expenditures, therefore, dissipate some of the gains to the beneficiaries and cause inefficiency.”

Incumbent firms in any given industry are prone to use their considerable resources to seek out regulations that protect their economic interests and secure competitive advantage over rivals through codified increases to the cost of doing business. This behavior can lead to moral hazard when politicians base policy decisions on the lobby rather than efficiency. Anybody that’s watched at least twenty minutes of Netflix’s “House of Cards” is already subliminally well-versed in the implications of public choice and rent seeking.

But Jack Daniel’s already enjoys a more than comfortable market share of over 90 percent in the battle of the Tennessee Whiskeys. Why this standard-bearer is suddenly concerned with codified quality criteria after approximately 150 years of distilling is puzzling. Even more perplexing, however, is why they would seemingly waste their own resources to lobby the state when their dominant position in the Tennessee Whiskey market is already remarkably secure. Brown-Forman spokesman Phil Lynch claims they’re merely attempting to preserve the integrity of Tennessee Whiskey though rigid standards that ensure top quality:

Any place that produces a product, in this case we’re talking about distilled spirits, that has a particular premium to it or particular ways you will make it, has standards to entry. The standards of identity for Tennessee whiskey are the same that they’ve been, [the legislature] just never codified them.

In other words, you must make your whiskey like Jack Daniel’s makes theirs! Not only is this law anti-competitive, it’s also blatantly anti-innovation. Jack Daniel’s master distiller Jeff Arnett admits as much, saying there is “only one way to make Tennessee whiskey” and that last year’s law “protects a process and name that [they’ve] spent nearly a century and a half investing in.” Jack Daniel’s even stores its whiskey in new barrels produced at a Brown-Forman plant, a luxury that smaller distillers competing for their share of the Tennessee Whiskey market don’t enjoy.

Recent explosions in American whiskey are largely attributed to experimentation with different barrel combinations and various flavors like cinnamon, honey, and maple. Distilleries brought their new products to market, branded as Tennessee Whiskey, in the “spirit” of competition, innovation, and providing a diverse array of options to consumers. But in the absence of a full repeal, the ingenuity behind this modern day whiskey rebellion may well be stifled by stricter regulations that dictate what exactly constitutes a Tennessee Whiskey.

Brown-Forman needs to focus on how their initial success was won, creating the best product on the market and securing brand loyalty through consistent output and product quality. Their insistence on lobbying the state to regulate the definition of Tennessee Whiskey will only succeed in creating market distortions while increasing their own expenses and those of their competitors. If Brown-Forman is truly concerned with preserving their “particular premium” and “the standards of identity for Tennessee Whiskey,” then the merit of Jack Daniel’s, as well as other brands claiming to be Tennessee Whiskey, should be decided by consumers in a competitive marketplace, not behind closed doors by legislators and lobbyists.

Craig Schlesinger is a Young Voices Advocate working as an independent consultant specializing in managerial economics and financial analysis. Craig’s writing has been published by The Wall Street Journal, Los Angeles Times, USA Today, The Miami Herald, Tampa Bay Times, South Florida Sun-Sentinel, and The Tennessean.