Was Prohibition the best thing that ever happened to drinkers?

Seriously. National Prohibition was the culmination of some eighty years of state and local prohibitions. Its “failure” discredited alcohol prohibition so badly that almost all states discarded it quickly. Countywide prohibition still exists in some of the Deep South (though not in any major cities, as far as I know), and many small townships are still dry, but drinkers today are rarely unable to obtain a legal drink, and that’s been the case for decades.

A few years before Prohibition went into effect under the Eighteenth Amendment in 1920, about 32 states had gone dry and 15 had “local option” prohibition (which was basically a way to encourage and hasten county-level prohibitions). The local option movement in particular had been very successful; about two-thirds of the states had local option by 1913. (After 1913 about half of the local option states went all in for state prohibition, likely in connection with the Anti-Saloon League’s drive for national prohibition. But even before that big drive, there were about 10 dry states and 30 local option states in 1910.) Few of the state prohibitions imposed in the forty years before Prohibition were repealed — that is, not until national Prohibition was repealed. It’s entirely possible that many of those states would have stayed dry for a long, long time, maybe even to this day, if the prohibitionists had quit while they were ahead instead of trying to impose prohibition everywhere.

Yet nearly all of those historically dry states gave up the ghost on prohibition shortly after national Repeal in 1933. Only a handful of states, if I recall correctly, kept their statewide bans through 1940. The last holdout was Mississippi in 1966. My point — and I do have one! — is that the apparent abject failure of national Prohibition probably discouraged many temperance-minded politicians and electorates from holding onto prohibition at the state or local level.

Are you saying Prohibition wasn’t an abject failure? You’re not saying it was a success, are you? No, but it was a qualified failure, not a complete failure. (This is the general consensus among historians, by the way. Jack S. Blocker, Jr.’s article “Did Prohibition Really Work?” is a good place to go for the details.) Alcohol consumption did fall during Prohibition; according to careful estimates by economists Jeffrey Miron and Jeffrey Zwiebel, who are anything but pro-Prohibition, alcohol consumption fell about 70% early on and regained only about half of that decline in later years. Prohibition seemed to work well enough in rural areas, small towns, socially conservative areas, and generally where there was widespread support for it. Which was a lot of the nation, especially acreage-wise. (This is kind of like those red-vs-blue county-level maps of support for Republicans vs. Democrats in presidential elections.) Prohibition failed in the cities, where drinking was more popular than temperance. It failed spectacularly in New York City and Chicago, the nation’s two largest cities at the time. Press coverage of speakeasies, flappers, Al Capone, and general flouting of Prohibition in the nation’s two largest media markets would tend to give a skewed impression of how Prohibition was faring nationally. “Prohibition was a failure” became such strong conventional wisdom that virtually nobody thinks of bringing it back. Even some of those few dry holdout towns, like the ones I’ve working on a paper on (Kensington, Takoma Park, and Damascus, Maryland), have jumped on the wet wagon.

We can also thank Prohibition for the death of the old all-male saloon, which gave way to the fuller inclusion of women in our drinking places and rituals. (See Catherine Gilbert Murdock’s excellent book “Domesticating Drink” for a fuller account.) Prohibition spawned countless new cocktails, as spirits, being much more easily concealed than beer, soared to new heights of popularity. While Prohibition’s unintended legacy isn’t all positive — for example, it made American beer even blander and more homogenous (I have a paper on this that I can send you) — the perception that it failed outright arguably means that the overwhelming majority of American drinkers can get a drink wherever they want. Speaking of which . . .

Happy National Weak-Ass Beer Day!

April 7 occupies a special place in American beer history. Despite the title of the post, it’s a good place.

On April 7, 1933, after thirteen years of Prohibition, Americans could legally drink beer again. Thus, National Beer Day. But there was a catch.

Prohibition wasn’t over. The 18th Amendment, which gave us national prohibition, would not be repealed until December 5. Although Congress had already voted for the repeal amendment on February 20, that amendment still needed the approval of three-fourths of the states to become law. That approval happened in record time, by December 5, but that’s still eight months later than April 7. So what happened on April 7?

April 7 was the date designated by Congress for legal sales of “non-intoxicating” beer and wine, in a law passed on March 22, as the states began the process of ratifying the repeal amendment. (The first state to do so was Michigan on April 10, so Michiganders get yet another day of celebration.) The law was called the Beer-Wine Revenue Act (or the Cullen-Harrison Act, for its sponsors). It basically said that alcoholic beverages that were 3.2% alcohol (by weight, that is, which equates to 4% by volume, or ABV) were not intoxicating. That mattered because the Prohibition amendment had outlawed the manufacture, distribution, and sale of intoxicating liquors, without specifying a threshold for “intoxicating.” The enforcement act for Prohibition, the Volstead Act, defined intoxicating as anything over 0.5% alcohol by weight. So the Cullen-Harrison Act simply changed the definition of “intoxicating.”

Now, generations of college students could tell you that “3.2 beer” can be plenty intoxicating, as long as you drink enough of it, but that’s beside the point. The point is that Americans were thirsty for beer, as Prohibition didn’t do much to hurt wine and spirits consumption but seems to have had a devastating impact on the beer market. “3.2 beer,” or 4% ABV beer, is some weak tea, as most mainstream beers today are 4.5-5.0% ABV and most craft beers are 6.0% or (often much) higher, but people took what they could get.

So if you want to do National Beer Day right, find yourself a beer that’s 4% ABV or less. And good luck with that — even Mich Ultra is 4.2%. I’m celebrating with a 7 oz. Miller High Life “pony” (4.5%), which is the lowest ABV I could find.

PS For full-strength beer, December 5 — Repeal Day — is your day. By the way, I’m intrigued by the claim of the F.X. Matt brewery in Utica, which makes Utica Club beer, that Utica Club was the first beer served after Prohibition, on December 5. Seems unlikely, as other breweries had been at it for eight months and probably had some full-strength beers ready to go at the stroke of midnight on December 5. But I’d love for someone at the brewery to try to convince me.

Alright, Hamilton!

The latest currency news is that Treasury Secretary Jack Lew is going to put a woman’s face on US currency for the first time. That is good news, of course, and way overdue. But the devil is in the details, and so far the details are not good. I say this as a believer in women’s equality and in modern economics.

First, the bill in question is the ten-dollar bill. Why the tenner? Of the four bills we use regularly — the one, five, ten, and twenty — this is the most redundant and the one we see the least of. You need those ones and fives to make change and pay for drinks, and twenties are what come out of the ATM. If you didn’t see a ten spot for a whole month, would you even notice? So it reeks a bit of tokenism to put a woman on our least important of the top four bills. The names that have been mentioned are fine — Harriet Tubman, Eleanor Roosevelt, Sojourner Truth, etc. — but Lew’s suggestion that there might be multiple ten dollar bills, with different women’s faces, seems to compound the tokenism. There’s not one woman in US history who’s important enough to warrant her own bill?

The other big problem is that the current occupant of the ten-dollar bill is the perhaps the most deserving American of a spot on our currency: Alexander Hamilton. As one of the authors of The Federalist and then as the first Treasury Secretary, Hamilton consistently advocated for the building blocks of a modern, functioning economy, as opposed to the feudal system of slave agriculture that dominated the South or the “nation of small farmers” that Thomas Jefferson idealized (despite being a rather large slaveholding farmer himself). Hamilton’s was a lonely position at a time when about 90% of the American population lived in rural areas and was engaged in farming. And Jefferson, then as now, was the more popular, inspirational, romantic figure of the two. But Hamilton eventually prevailed, as the nation industrialized and adopted a modern system of banking, including two central banks which finally eventually evolved into the Federal Reserve System in 1913. When a central bank does its job properly, recessions, deflation, and financial panics are less severe. Their track record is far from perfect, to be sure, but that’s a debate for another thread. Jefferson opposed a central bank, as did his fellow Founding Virginian and successor, James Madison, who had the bad timing to let its lease expire just before the War of 1812, when the nation could have really used a central bank. Madison relented after the war and Congress chartered a new central bank, but its lease was allowed to expire in another bit of ill timing, just before the Panic of 1837.

Ireland

My first Huffington Post column was posted last week. It’s on Ireland’s economy, against the backdrop of the G8 summit in Northern Ireland. Check it out.

Or, if you already did, check this out instead:

If markets could talk

The stock market would be telling the Fed something like this:

Sounds crazy, but that’s how present discounted value works. (And thanks to my daughter for the meme.)

This week the Dow fell 3% this after Fed Chair Ben Bernanke’s announcement that eventually the economy would get better and then the Fed would gradually take its foot off the accelerator. That is, the Fed would taper off its quantitative easing (QE; emergency mass purchases of long-term bonds) when unemployment (now 7.6%) fell to 7.0% and then, as announced before, would start raising short-term interest rates back toward normal levels when unemployment fell to 6.5%. He didn’t say this was going to happen soon, and reiterated that the (near-) zero interest rate policy would continue until unemployment falls to 6.5%. Granted, he sounded mildly optimistic that the economy would recovery sooner than expected, but he presented no new data on that score, so it’s an easy prediction to shrug off. Not that the markets did.

The present-discounted-value approach to stock pricing says that a stock is worth its company’s expected future profits in all years to come, divided by a discount factor that is based on the long-term interest rate. The lower the interest rate, the higher the stock’s price should be. The odd thing here is that if the economy picks up, corporate profits should too, which should offset the higher interest rates that Bernanke is hinting at. It may be that corporate profits are already high and are not always easy to predict, whereas long-term interest rates are known now. The 10-year Treasury bond rate rose from 2.2% to 2.5% after Bernanke’s announcement, a 14% increase that is right about in line with the 15% drop in stock prices. (The 10-year Treasury yield is still at a near-historic low, by the way.)

The financial media tend to report any significant-looking drop in stock prices as an economic calamity, overlooking the most basic facts about the stock market, namely that it is volatile and its short-term swings have very little macroeconomic impact. The less we worry about short-term market reaction to the Fed, the better off we’ll be. Jared Bernstein has an excellent piece on the Fed’s announcement, to which I don’t have much to add, only to say that I don’t see much new in the announcement, other than some optimistic predictions and an exit strategy for QE (which had to end sometime).

The only downgrade that matters

Remember these words: “means of extinguishment.” The full quote is “The creation of debt should always be accompanied with the means of extinguishment,” and it’s from Alexander Hamilton, the father of our national debt. Hamilton believed that the federal government could do the nation a big favor by carrying a debt as long as it had sufficient revenue streams to eventually pay it off; such an arrangement, he said, would give the US “immortal credit,” which could come in very handy whenever we had pressing needs or good public investment opportunities that justified borrowing more money.

This has been on my mind because the (yawn) “fiscal cliff” negotiations, whatever their outcome, are really just the latest round in an endless series of self-destructive battles over whether to honor our own budget commitments by raising the debt ceiling so that we can pay for them. I’ve written about Congress’s debt-ceiling looniness before, and how it would be better not to have such votes at all. Think the proposed budget has too big a deficit? Fine, then don’t vote for it. But to vote for it and then refuse to pay for it is not only cynical and hypocritical, but sows suspicion that the government is a deadbeat.

Standard & Poor’s (S&P) famously downgraded the federal government’s debt in August 2011 (from AAA to AA+), and the other two major bond rating agencies (Moody’s, Fitch) are threatening to do the same if Congress can’t reach some kind of agreement to reduce the debt/GDP ratio in the long term. After the subprime scandal, in which the rating agencies routinely rubber-stamped dodgy subprime mortgage-backed securities as AAA, these agencies have zero credibility, but that doesn’t mean they’re always wrong. The S&P said its downgrade “was pretty much motivated by all of the debate about the raising of the debt ceiling. . . . It involved a level of brinksmanship greater than what we had expected earlier in the year.” Yes — if Congress can’t be counted upon to honor its own commitments, which include paying back the principal and interest on previously issued Treasury bonds, then why should bond buyers regard Treasury bonds as completely safe? The more Congress continues to play these games, the more rational it is to conclude that maybe Treasury bonds are not so safe.

Labor Day joke

Q: If there’s a Labor Day, why isn’t there a Capital Day?

A: Every day is Capital Day.

Alan Krueger, impeccable choice

. . . to be the new chair of President Obama’s Council of Economic Advisers. Krueger is a world-class economist who has produced much fascinating, groundbreaking research, and he has ample Washington policy experience. Although Krueger is typically classified as a labor economist, not a macroeconomist, his research is far-ranging and his opinions on macro issues, as expressed in his columns and Economix blog posts for the New York Times, look sensible and well supported.

On the other hand (and there has to be an “other hand” — I’m an economist, after all!), will Obama listen to him? Christina Romer and Austan Goolsbee, Krueger’s predecessors at CEA, gave Obama excellent advice about the need for a strong fiscal stimulus but he ignored it, opting for a stimulus only about half as large as they urged. Neither of them could possibly have agreed with this summer’s bizarre pivot away from jobs toward deficit reduction at a time of 9% unemployment, not to mention the way it opened up the president to Republican debt-default brinkmanship.  No wonder Goolsbee was so delighted to leave the job.

The usually excellent Ezra Klein was on “The Rachel Maddow Show” tonight, and for once I’d say he got it wrong. He said Krueger’s policy work experience with Larry Summers in the Clinton and Obama administrations and his tennis partnering with Tim Geithner make him just another insider, not a real change. I see no evidence that Krueger is as willing as Summers or Geithner to kowtow to Wall Street interests, and at this point even Summers seems to be calling for a fiscal stimulus instead of short-term deficit reduction. It looks to me like Krueger is cut from similar nuanced-Keynesian cloth as Romer and Goolsbee, but better connected. The CEA chair who plays doubles with Geithner has a better shot of making a difference.

Taking their chances on the wall of debt

This morning’s surprise news is that, after last night’s fiasco in which House Speaker John Boehner could not round up enough votes for his own deficit reduction plan, 10-year Treasury bond prices are not only not down, they’re actually up, by a good bit. Interest rates on Treasuries, which move in the opposite direction as T-bond prices, are down 10 basis points to 2.84% (as of 11:14 a.m.). What gives?

Well, for one, the bond market may not have been expecting much from Boehner. The media had already been saying that he’s a much-weakened House Speaker, after watching his failure to rein in his Tea Party faithless. And any House Republican plan would likely be dead on arrival in the Senate anyway.

Another possibility is that as it becomes more likely that the government bumps up against the current debt ceiling on Aug. 2, that counterintuitively, T-bonds might actually be seen as safer, as Chris Isidore writes in CNNMoney. Why? Because the single biggest actor on the U.S. economic stage, the federal government, would be officially dysfunctional, even more so than it is now. Today through Aug. 1, at least, the government can meet all of its financial obligations. If Aug. 2 is indeed D-Day, then on Aug. 2 the government becomes a deadbeat, at least to somebody. And quite likely, it would not be T-bondholders. This assumes that (1) the government would still be allowed to issue more debt in order to pay off its maturing debt and (2) the Treasury would prioritize the interest on that maturing debt above its other obligations. As notes on NPR this morning, most commentators seem to agree that it is in the national interest to not stiff any of our bondholders, as an actual default would surely cause interest rates to skyrocket. If Aug. 2 is the beginning of Treasury triage time, then the government would more likely stiff someone else, like government employees (please please start with members of Congress!) and government claimants who lack political clout (i.e., not seniors or the military). This creates a lot of chaos, as people don’t know when they’ll be paid, which makes them less likely to spend or repay money and creates pressure on credit markets. In sum, the market reaction may just be the usual “flight to safety” that occurs when markets think conditions are about to get worse and also more chaotic. This would be consistent with the beating that stocks have been taking lately.

It may also be that the bond market is reacting to other news, like the dreadful GDP figures that just came out today. Real GDP in the second quarter grew just 1.3% (worse than the consensus forecast of 1.8%), and first quarter growth was revised drastically downward to 0.4% (from 1.9%). These numbers are “growth recession” territory (where the economy grows but not fast enough to generate enough jobs to keep unemployment from rising), consistent with the rise in unemployment (from 9.0% to 9.2%) over the last few months. As with the debt-ceiling brinkmanship, these new signs of economic weakness are a plausible reason to pull money out of stocks and put it into Treasury bonds.

But why Treasury bonds, you ask, and not another safe haven? The simple answer seems to be that there are woefully few alternatives. As Isidore puts it:

‘U.S. Treasuries are such a massive market — about $9.8 trillion — that they dwarf the markets of other so-called “safe havens” such as gold, top-rated corporate debt or the bonds of other countries with AAA ratings.’

So worldwide investors still like their chances on the wall of debt that is U.S. Treasuries.

P.S. Richard Thompson’s duet partner here is not Linda Thompson, but Christine Collister.

Pouring water on a drowning man

Today’s New York Times editorial, “The Worst Time to Slow the Economy,” says it all. Voting against raising the debt ceiling is foolish even in the best of times, and it’s insanity right now. Congress already voted to raise the debt ceiling, or to do the equivalent, when it passed a budget with a deficit. It makes no sense for Congress to vote on the budget again.

Is the economy already in a double-dip recession? The rising unemployment rate (up to 9.2% for June, as announced on Friday, or 16.2% using the more inclusive U-6 unemployment rate) suggests it might be. See John Nichols’s column in The Nation for a good account of the unemployment crisis. Nichols says this is President Obama’s biggest problem, pointing out that no president since FDR has won reelection when unemployment was over 8%. (Nichols said over 7%, but he may have meant “over 7% and change,” as Reagan won reelection in 1984 when unemployment was about 7.5%. But at least it was falling, as it was for FDR in 1936 and 1940.)

While Nichols is correct that high unemployment is Obama’s biggest problem, it’s still true that the debt-ceiling impasse is Obama’s biggest worry. An act of supreme self-sabotage like not raising the debt ceiling could put the economy into free fall. As far as I can tell, Republicans who say it’s no big deal, like most of their presidential candidates, either (1) cynically are hoping it brings about an economic avalanche that sweeps Obama out of power or (2) cluelessly believe the Tea Party rhetoric about how “spending” has caused our current woes and think any shock that compels spending cuts will actually be good for the economy. It’s as if they were taught government purchases were a negative entry into GDP instead of a positive, i.e., GDP = Consumption + Investment + Net eXports – Government purchases, instead of GDP = C + I + G + NX.

If we’re lucky, the Constitution — in particular, the line in the 14th Amendment that says “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned” — will save the day. The whole concept of a debt ceiling as something that Congress can refuse to raise, even to pay off previously issued debt, looks unconstitutional to me. (Former Reagan adviser Bruce Bartlett has forcefully raised this option.) But then again, it’s up to the Supreme Court to make that determination, and, as far as I know, nobody has asked them to yet. Harvard Law School Professor Laurence Tribe, in a New York Times op-ed that I otherwise tended to find unconvincing, points out that someone with standing would have to sue the government and that “increased interest rates would have already inflicted terrible damage by the time the Supreme Court ruled on the matter.”

So maybe the Constitution won’t ride to the rescue. Is there hope for a long-term bipartisan budget deal that could convince Congressional Republicans to raise the debt ceiling? And could such a deal be amenable to those of us who don’t want to shred the social safety net? I guess we’ll find out in a couple weeks.