Craft Brewing as a Model for Helping the Middle Class

(Bloomberg View) -- Derek Thompson of the Atlantic has a very interesting article about the craft-brewing industry that has been receiving a lot of well-deserved attention. In an age when most industries are becoming more concentrated, beer is slowly becoming less so:

Craft Brewing as a Model for Helping the Middle Class
Craft Brewing as a Model for Helping the Middle Class

The industry is employing a growing number of Americans -- 128,768 as of 2016. Craft-beer sales in the U.S. grew 6.2 percent in 2016, while U.S. exports of craft beer rose by 4.4 percent. These gains are coming even as overall beer sales were flat, meaning big corporate brewers are in decline. The craft-beer revolution has also increased quality and variety (as any beer drinker knows), making consumers willing to pay more for beer.

A less-concentrated industry is good news, since monopoly power has been linked to lower wages. But the rise of craft beer is even better than the numbers suggest. Small breweries provide the kind of outlet for individual entrepreneurship and initiative that is often sorely lacking in today’s corporatized economy. Financial barriers to entry are relatively low -- home brewing costs almost nothing, and a microbrewery can be started for as little as $1.25 million, a bit more than double the size of the average small business loan. And unlike a technology startup, craft beer doesn’t require exceptional engineering talent, business networks or location in a tech cluster city.

In other words, craft beer offers one small way in which an enterprising, hard-working individual can bootstrap themselves to the middle- or upper-middle-class and accumulate some capital, without moving to the big city or getting a degree from a top school. It’s one tiny step toward creating an American version of what Germany calls its “mittelstand” -- a network of small businesses that anchors the middle class and spreads economic activity to outlying regions.

How can the U.S. government help replicate the success story of craft beer? Thompson’s article provides some insight into why the beer industry is bucking so many national trends. Essentially, the government put its thumb on the scale for smaller companies:

“Thing of value” laws make it illegal for beer producers to offer gifts to retailers in an attempt to purchase favorable shelf space. Other rules make it illegal for producers to buy shelf space, which saves room for smaller brewers… More recently, many states have made exceptions for small craft breweries to sell beer directly to consumers in taprooms.

Is it OK for governments to encourage industrial fragmentation like this? Standard economics says that monopolies are bad for the economy, but most economists instinctively distrust regulatory solutions like this. Meanwhile, economic analyses almost always leave out goals like middle-class dignity and regional economic equality. These seem like goals that the U.S. government shouldn’t ignore, even if economists give them short shrift.

I have warned about the dangers of government protecting businesses. But in the case of craft beer, there are important differences. First, the regulations Thompson cites don’t protect specific business models against disruptive innovation. Second, they favor small upstarts instead of big incumbents. The result seems to have been unambiguously positive -- beer drinkers seem happier with their choices than ever before, and no one is going to shed a tear for Budweiser’s shrinking market share.

Most importantly, it’s worth asking if this success story can be repeated elsewhere. What other industries could governments protect as outlets for the restless entrepreneurial energies of the beleaguered middle class? To answer this question, it helps to think of markets that are similar to the brewing industry along key dimensions. They should make products in which consumers care about variety and quality rather than just price. They should have low start-up costs. And they should have limited economies of scale; the product should be simple, not require a large workforce, and be customizable with novel or high-quality characteristics.

Beyond other types of alcohol -- where similar changes are already afoot -- the entire food and drink industry seems like a great candidate. Upscale consumers increasingly care about the quality and variety of the food they buy -- hence the popularity of the local food movement. The economy gains little from having companies like General Mills and Pepsi dominate the shelves, and small farmers, food processors, and drink makers seem fully capable of providing a more interesting, high-quality selection.

A second possibility is clothing. The startup cost for making clothes is low, and many people like wearing items from independent designers. I witnessed this for myself when a friend started making clothes in her apartment, ultimately creating a small fashion brand catering to women in science and engineering fields.

There are other industries where the craft approach could work -- furniture, perhaps, or other household goods. In these markets, governments should consider policies that allow small craft brands to outcompete large producers -- at least, until the small brands reach a certain size. Whether that means allowing direct sales, banning certain types of incentives from market-share leaders, or other approaches like tax benefits will depend on the existing mix of regulations and laws in each specific industry and state.

In general, though, governments should think about ways to help independent small businesspeople create and sell high-quality products. Craft beer shows one path forward for the middle class.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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