The Economic Cost of Alcohol: Estimates for California

The Annual Catastrophe of Alcohol in California, a self-described "landmark research study" by the Marin Institute provides an excellent example of how to inflate cost estimates beyond any possible reality.

Reasonable estimates require looking at both sides of the equation. For example, to understand the economic status of a family, we have to look at both income and expenditures. One without the other is meaningless and misleading.

However, the Marin Institute only estimates the costs of alcohol abuse. Completely ignored are the economic benefits, which are substantial. The total economic benefit of the beer industry alone to the state of California is enormous. It supports about 212,000 jobs and over eight billion dollars in wages each year plus over two and one-half billion in state and local taxes. The wine and spirits industries additionally support thousands of jobs and pay large state and local taxes. And the tax rate on distilled spirits is even higher than that on beer and wine.

Of course, there are also economic costs to the state associated with the abuse of alcohol. To calculate these, the Marin Institute makes estimates and then makes estimates based on those estimates and then combines all other estimates-based-on-estimates.

But that's only the beginning of the problem of estimates. The authors assert that "alcohol is responsible for severe reductions in individuals' quality of life in California. We estimate that the disability caused by injury, the personal anguish of violent crime victims, and the life years lost to fatality are the largest costs imposed by alcohol. The total value for this reduced quality of life in California is between $30.3 billion and $60.0 billion." They finally decided to choose the figure of $48.8 billion.

But how is "personal anguish" an economic cost? If personal anguish has an economic value, shouldn't the pleasure provided by consuming alcoholic beverages also have an economic value? Of course, the widespread pleasure derived from consuming alcoholic beverages is completely ignored in this evaluation. But neither anguish nor pleasure is either a cost or an income to the state of California.

Similarly, the costs to the state of lost productivity due to disability or death are false costs. Economist Steven Barsby has explained the deception. Consider, for example, an executive who leaves an annual salary of $500,000 to take a job as a teacher for $50,000 per year. The executive and the executive's family experience a loss of income but the state hasn't suffered a cost of $450,000 per year.

If an alcoholic dies prematurely, Marin calculates a large career-long economic loss to California. But workers don't owe the government or society anything except decent citizenship and the payment of taxes. Therefore, society loses nothing economically. However, if the worker dies near retirement, the state benefits economically by not having to pay social security benefits.

In short, the disability, death and personal anguish costs to the state estimated by Marin are phantom costs that don't exist.

The economist Weinberg points out that using Marin's neo-prohobitionist logic can support a very different conclusion. Moderate drinkers earn 10 to 17 percent more on average than do abstaining workers. This percentage can be considered a reflection of increased productivity. The increased productivity of the over one hundred million moderate drinkers in the U.S. represents a contribution of many billions of dollars to the multi-trillion dollar receipts of all business in the country, dwarfing the costs of alcohol abuse.

Although the United States benefits economically from alcohol consumption, the abuse of alcohol is highly undesirable.

 

Resources:

  • Auld, Christopher. Society, drinking, and income. Journal of Human Resources (forthcoming).
  • Corcoran, Mary, et al. Most workers find jobs through word of mouth. Monthly Labor Review, 1980, 103, 33-35.
  • Hamilton, Vivian and Hamilton, Barton H. Alcohol and Earnings: Does drinking yield a wage premium? Canadian Journal of Economics, 1997, 30, 135-151.
  • Leifman, Hakan, et al. Abstainers in late adolescence: Antecedents to and covariates of sober lifestyle and its consequences. Social Science and Medicine, 1995, 41, 113-121.
  • Montgomery, Jane D. Social networks and labor-market outcomes: Toward an economic analysis. American Economic Review, 1991, 81, 1408-1418.
  • Putnam, Robert. Bowling Alone: The Collapse and Revival of American Community. NY: Simon and Schuster, 2000.
  • Skog, Ole-Jorgen. Social interaction and the distribution of alcohol consumption. Journal of Drug Issues, 1980, 10, 71-92.

Additional Reading:

  • Peters, Bethany and Stringham, Edward P. No Booze? You May Lose: Why Drinkers Earn More than Nondrinkers. Reason Foundation Policy Brief 44. Los Angeles, CA: Reason foundation, 2006.
  • Chatterji, Pinka and DeSimone, Jeffrey. High School Alcohol Use and Young Adult Market Outcomes. Cambridge, MA: National Bureau of Economic Research, 2006.

filed under: Economics

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