Crafting Beer Policy: An Interview with Bart Watson, Chief Economist for the Brewers Association (Part 1)

What’s in a beer? Is it simply a fermentation of hops, yeast, grains, and water? In many instances, yes. You would also be wise to highlight some beers that include other ingredients, such as juniper in a Finnish sahti or a version of the popular IPA style made with spruce tips. Yet how these components come together and arrive at your local taproom is partly due to specific policy choices and economic history.

Over the past half century, the U.S. brewing industry grew from only 89 breweries in 1978 to 9,709 last year—9,552 of which are craft breweries. Government played a significant role in this rapid expansion. For example, President Jimmy Carter legalized homebrewing in 1978 with H.R. 1337, a regulatory change often attributed as one of the drivers of modern craft beer’s ascent. The legalization of homebrewing allowed people to experiment with different beer styles and develop brewing knowledge, inspiring and preparing them to open their own craft breweries.

Economic and policy issues continue to impact the craft brewing industry, from agriculture and climate change to market access and consumer choice. The Brewers Association, which represents and advocates on behalf of U.S. craft brewers and homebrewers, confronts many of these industry challenges.

To understand this intersection of regulation, economics, and craft beer, the Chicago Policy Review’s Will Macheel spoke with Bart Watson, Chief Economist for the Brewers Association, for a two-part interview. Watson holds a PhD from the University of California, Berkeley and is a Certified Cicerone.

In the first part of the interview, Watson discusses the role of a beer economist and the history of beer regulation in the United States. Part two  explores contemporary regulatory issues facing craft beer and where the industry is headed.

The following interview, conducted on April 5, 2023, has been edited for length and clarity.

CPR: Can you walk me through the responsibilities of your role as a chief economist?

Bart Watson: I don’t know that I’m a traditional chief economist. I get to go to the National Association of Business Economics meeting occasionally and the job that I have varies fairly significantly from a lot of other chief economists.

But I do a couple of things: One is tracking the craft brewing market itself, which is as much a statistics job as it is an economist’s job. But what’s going on with craft brewing by business model, by region, by size of brewery, and within that, then trying to provide insights about the market to our members.

Similarly, we do a lot of statistics and benchmarking data for our members. What’s the cost of goods sold for a typical brewery of various sizes? What are labor costs looking like?

The next piece is more traditional chief economist, which is looking at the wider economy and supply chain and bringing some of those insights and data to members. So again, they can put their business in context, but they can also plan ahead and think about some of those things—obviously we focus the most on the raw materials that are most critical to brewers. I spend time tracking the hops market or the barley malt market, but broadly just economic insights for members.

Then the other big hat I wear is in government affairs, and my PhD is actually in political science—I’ve always done political economy so a kind of overlap of politics and economics—but looking at both state and federal level impacts of changes, and doing economic impact analysis. We put out a big economic impact analysis for federal and all the states every year, providing a more quantitative, fact-based background to any policy fights that we’re engaged in since it always helps to have the data on your side.

CPR: What was that transition like from academia into more of an applied role at the Brewers Association?

Bart Watson: It’s one they don’t really prepare you for in academia since in academia they train you to be an academic. It was fun to apply the things that I learned in graduate school. I’m lucky I get to talk to graduate students and PhD students in particular. I always put at least a small bug in their ear that you’re gaining valuable skills that may not seem valuable outside of academia but do have lots of real world potential in terms of research design, thinking critically, analysis programs, and speaking skills. I think a lot of PhD students have taught classes and they don’t realize how valuable it is to be able to just get up and present things lucidly to people. There’s a lot of good data people out there but fewer people who can present the data.

It was a good transition. I was planning to be an academic. I found the Brewers Association job because I was doing a lecture on excise taxes. I was actually teaching a course to a mixture of Master in Public Policy and Master in Public Health students at the University of Iowa. I did a lecture on whether excise taxes are a public policy or a public health tax. And I found the Brewers Association website, and they had a job and I applied. The rest is history.

CPR: Was beer a focus of your research in graduate school?

Bart Watson: No, my dissertation is on comparative retail trade and how political fights in the ’60s and ’70s set the groundwork for how barcode technology was implemented by large retailers. It has almost nothing to do with beer. But it was very similar to the types of things you would look at—regulations and how they influence various business outcomes.

CPR: Let’s transition to a broader overview of modern craft beer. In your mind, what was the single policy change in the United States that has had the most to do with the rise of craft beer?

Bart Watson: It really depends on what dimension you want to talk about. The two that always get pointed to at the beginning are the legalization of homebrewing and the first cut in the federal excise tax. Those certainly set the stage for cultural changes and some business competitiveness for small brewers to compete.

Though the excise tax cut wasn’t a huge cost difference, it at least helped a little bit. However, other countries saw growth at the same time, so the tax cut can’t be the only explanation for what was going on. When you talk about the number of breweries in the country, the biggest changes are clearly the state, not federal laws, that allow those breweries to sell directly.

But the ability for breweries, first in the form of brew pubs—and we see a lot of brew pub laws passed in the early 1980s—and then taprooms for manufacturing breweries to sell direct, clearly is one of the most influential policy choices that has allowed the vast number of breweries that we have today. I don’t know that that’s the most critical for the craft brewing revolution writ large since rebuilding beer culture and home brewing is probably more important there. But those are some of the key pieces. The cultural stuff around home brewing was very influential. And then setting the stage for a business model where small breweries could more effectively compete at a micro level. I think a lot of that is tied to the direct sale of brew pubs and taprooms.

CPR: Is the idea behind homebrewing as a determinant of craft brewing expansion that people could experiment at home with different styles of beer and become familiar with recipes that the macro breweries weren’t putting out at the time?

Bart Watson: Yeah, I think there’s multiple dimensions. There’s been a little bit of academic research on this.

Michael McCullough, Joshua Berning and Jason L. Hanson have a paper on this where they show correlation between timing of homebrewing legalization in states and the number of brewers in those states. It created knowledgeable people who could open a brewery with some credibility and knowledge, whereas that didn’t exist before.

On the demand side, homebrewers became early evangelists and consumers of craft beer. Nobody knew what an IPA was until you were a homebrewer. So, when commercial brewers started coming out with these, they had some demand there.

They were also activists for some of the regulatory and legal changes. I think that’s a piece of it as well.

Finally, our association is a marriage of a homebrewing association and a small producer association. Clearly, there are synergies there. And the homebrewing community was certainly a part of getting the small brewing community off the ground.

CPR: What role has competition policy and antitrust played in the history of craft beer? And how have concerns changed over time about market power since the mid-twentieth century?

Bart Watson: I’m not sure it’s played that much of a role. We really haven’t had that much competition policy or oversight in brewing. The general prevailing antitrust theory for a long time has been bigger as long as there is some level of competition, which generally means more efficiency and it’s better for consumer prices and so it’s good—the Chicago School.

When we saw this massive consolidation slowly and then more rapidly over time in the brewing industry, generally that was seen as a positive thing because you had bigger producers who were achieving bigger scale and could drive down prices for consumers.

That did, at some level, create space for craft brewers in that it created a large, consolidated, pretty monolithic market. The large brewers for many years were not interested in making beer for these niches because that wasn’t their business model. They had dominance and they kept that dominance by scale, efficiency, marketing and branding, and all those other things that big companies do.

You could argue that this extreme consolidation is one reason we got craft brewing because the market became one thing in two colors that were branded differently but otherwise looked very, very similar. And so that consolidation—craft brewing was a natural reaction to that.

The role of antitrust policy moving forward is interesting. We’re starting to see rumblings that the Chicago School is not going to be the only way that regulators are going to look at the market. I don’t have anything too definitive to point to other than we’ve gotten a big competition report on beverage alcohol that certainly talks about small producer access issues as something that perhaps needs to be remedied and needs to be looked at differently. We’re also starting to see a few lawsuits, and the Federal Trade Commission is bringing charges against Southern Glazer’s.

Antitrust policy has had some role in U.S. beer and beverage alcohol, but it’s mostly been small things. So we have gotten consent orders that form now the third largest beer company in the U.S., Constellation Brands, which exists because when ABI bought Grupo Modelo, the Department of Justice made sure that they couldn’t buy those assets in the U.S., so they had to spin those off to what was Barton Beer and is now Constellation.  It played some role. We saw some small changes around the ABI-SABMiller merger. Though in the U.S., they were fairly small and I don’t think have had huge effects on the overall consumer marketplace.

CPR: What’s the role of the U.S. Department of Agriculture (USDA) in supporting hop breeding research and production?

Bart Watson: The USDA has certainly played a role. Public breeding is one of the things that got us part of the craft beer revolution. Cascade hops, which I think were one of the flavors of the early craft beer revolution, come out of public breeding.

In recent history, public breeding stagnated, and so there really wasn’t much of a viable public breeding program. The Brewers Association, amongst others, stepped up to try to change that—both partly through our own money, more through our lobbying, have gotten money back into public breeding. Now there’s a viable public breeding program out of Prosser in Washington state.

But if you look at hop breeding in the last 10 years, all the new hops coming out are private varieties, not public. So we’ve seen the development of these owned varieties, owned by growers or dealers, mostly grower-dealer groups. All the ones that roll off craft beer drinkers’ tongues these days—Citra, Mosaic—are all under plant patents and aren’t available to everyone.

Hopefully, we’re going to see a public breeding program, not only to create more robust competition, but to serve as a source of plant material so that we can see development outside the Pacific Northwest where there’s been lots of great investment. Best hops in the world are growing there. But from a climate risk and a local agriculture point of view, it would be great to have more diversity in where hops are grown in the U.S. One of the goals of the public breeding program now is to provide plant material that can hopefully kickstart breeding in more places.