Econ 101 - The Cost of OBF Beer

By the way, as an aside, with my little rumination on the price of a token at the OBF remaining the same for eons, it occurs to me to point out that while the price may not have risen for beer the cost certainly has.

To phrase this as a question for my students and other economics groupies: the buzz tent aside, all of the beer require one token a pour, so do all of the beers cost the same? Answer: no.

To see why you have to think like an economist. In economics the true cost of something includes the opportunity costs, what you have to forego to get it. Well, at the OBF some popular beer have long lines while for others you can walk right on up. Thus the costs are different - the more popular beers cost more because you have to wait longer, thereby foregoing the opportunity to chat with friends and the like.

So when I say the price of the tokens has not changed, that is not the same as saying the cost has not gone up - it has, in the form of bigger crowds and longer waits.

Class dismissed.

The Oregon Brewers Festival

I got back from my little vacation just in time to fulfill my annual obligation to meet up with old Lewis & Clark College buddies at the OBF.  We bumped our little rondez-vous up to Thursday this year as it has gotten so popular that even meeting on Friday at the Noon opening exposes us to uncomfortably large crowds.  Fortunately Thursday is still reasonable and the weather yesterday couldn't have been more delightful.

But this raises the question in my mind (and in the mind of my fellow economics major): why after all these years is the price essentially the same as it ever was - or in real terms even cheaper? Put another way, why don't they double the prices and start to limit the crowds?  This suggestion was met immediately with derision form our humanities major friends who considered the suggestion elitist and just the sort of crap you could expect from economists.  I suspect that the answer is in the objective function of the OBF organizers.  The festival is supposed to be a showpiece for craft beer and the more people they can expose the better.  They want the festival as big as can be.  For those of us who dislike crowds fortunately there is still Thursday, which is reasonable in terms of population.  I shall get nowhere near the festival today or this weekend.

But you should: there are some great beers to be sampled.  I particularly liked Boundary Bay's German Tradition Double Dry Hopped Pale Ale.  It was excellent and the German Tradition hops interesting if a little astringent.  This year's Collaborator Pilsner is a real winner and will be an excellent choice for the weekend which is supposed to get hot.  Green Flash's LeFreak is interesting and great - hoppy Belgian.  FInally for you hop heads look no farther than THE HOPOPOTAMUS inspired Hop Valley Alpha Centuri Binary IPA.  Er, what were those hops again?  Ah yes, Simcoe, Cascade, Amarillo - a coincidence? I think not.  And I have become a huge fan of Kolsch, especially on hot summer days, so if you are looking for a refreshing beer in the 90-something degree heat try the Three Creeks Creekside Kolsch.  You will not be disappointed.

Oh and for the love of all that is good and true: avoid the Three Skulls Hop The Plank IPA, it is horrible.

Sadly THE HOPOPOTAMUS was not invited, but based on the AGs recent interpretation of the homebrew law, the OLCC would have banned its consumption anyway.

Anyway, go, have fun and explore good beers.  One obvious trend that mimics the local scene is the rise of Belgian styles, so this is a great opportunity to get to know those as well as the traditional hop forward styles we Northwesterners love.

Oh and check out all of the banners flying in the tents.  These things are getting seriously old now and there are as many defunct breweries represented as thriving ones.  Which just goes to my point about the inherently turbulent nature of the business.

Four Great Northwest IPAs

I am in full vacation mode again for a few days while relatives are visiting, so I leave you with this bit of eye candy.  This is from a great NW IPA - off contest that I held with some friends.  They are, in L-R order, Ft. George Vortex, Pelican's IPA, Bear Republic Racer 5 and Ninkasi's Total Domination IPA.  Not pictured: THE HOPOPOTAMUS, which was there in a bottle but never got opened.

The Ft. George was in a growler that was by then two days old, so it was not at its freshest peak so it was at a disadvantage, but it was clearly the most fecund: it smells, tastes and feels alive and all in the best possible sense. Racer 5 is probably the other beer that has that floral essence infused and it is no accident that these two are the two unfiltered beers.  Both Pelican and Ninkasi are cleaner in that sense, a crisper mouthfeel and taste.  What I find remarkable about the Total Domination is the balance between crispness, flavor and nose. It was my pick when pressed - it is a phenomenal beer.  But the really good news is that you don't have to pick and you can let your love of variety (a general assumption in economics about peoples preferences, by the way) carry you away to the far reaches of the beer cooler in the market.

When I demanded that they pick one, the others found it hard to choose a favorite as well, especially since, after a few sips of each, all subtlety is lost - you palate has been nuked.  Since the Vortex was slightly stale, the other winners were Racer 5 and Ninkasi, but the Racer 5 pick was thought to be for Pelican (see below).  We all agreed that you cannot go wrong with any of these.  In fact, they were picked because they represent my very favorite beers over all.  I wanted to add a Hair of the Dog Blue Dot to this flight, but alas it is not in season (oh please, Alan Sprints, make this a year round beer!) and I would have added Double Mountain's IRA, but they do not bottle and I had been in Astoria not Hood River.  So I recommend any of these without reservation and since Ft. George is not available in a bottle, get it when you can.  Double Mountain is easy to find in Portland, but for some reason the IRA is not - always with the Hop Lava.  That's what a cute name buys you, I guess.

Oh and, by the way, we started this as a blind test but we all found it easy to tell which was which.  Almost immediately there was a consensus.  Except for one problem, we all mixed up the Pelican with the Racer 5.  Which, in retrospect, is embarrassing - they don't seem alike at all, especially the way they look.

THE HOPOPOTAMUS would have stood up pretty well against these beers but I decided not to as I wanted to keep it a fair fight.  We did later crack my latest attempt at a NW Best Bitter.  Which is getting there but still a work in progress.  I switched to Whitbread Ale yeast and got some surprising results.

Anyway, got to go entertain the in-laws.  Have a great weekend - pick up one of these beer and let me know what you think.

Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

Word that Roots Brewing was in trouble has been passed around for quite some time now, and recently John Foyston reported on the fact that Roots was up for sale, but it was still a bit of a shock (and quite sad) to get the word that Roots was closed for good.

But while the beer enthusiast in me is saddened, the economist in me sees this as (curiously perhaps) a sign of a very healthy beer economy in Portland.  A few weeks ago I attended Greenlight Greater Portland's annual Economic Summit and, while talking to Joe Cortright, Rich Read of The Oregonian came up and we were talking about the economy and small businesses. I was quoted as saying that it doesn't bother me to see many start-ups fail and what I meant by that is that in a healthy competitive economy many new ideas will be tried, will try to find markets and will not succeed because of other better ideas or more well-run businesses. The key is that new businesses are tried - and in a healthy marketplace only the best ones will survive.  Survival of the fittest if you will, but in economics we call this process of new and better ideas and businesses taking the place of established ones as 'creative destruction' and we view it as a good thing. [The term was popularized, though not coined, by Joseph Schumpeter] In Portland it is quite shocking to get bad food or bad service in a restaurant because there are so many great ones out there that if you don't do it very well, you won't last.  This is a good thing.  What would be bad is if we didn't see this dynamic and mediocre businesses succeeded.

Let me say straight out that Roots problems were not with the beer itself, which was fantastic, but with other aspects of the business.  My own history with Roots is troubled: the only two times I went to the pub with the intent to get a meal at lunch, I found the pub closed when it was supposed to be open.  I have bought their beer in the bottle many times, but I was one of the customers that got a bottle that shouldn't have been on the shelf, it was, quite simply, bad.  Complaints of bad service at the brewpub abound and with so many great choices for brewpubs around town, it is not hard to see why Roots quickly found itself in trouble. The point is it probably wouldn't have been in trouble in an economy in which there was not much brewing going on, so what the closure of Roots symbolizes is that, regardless of how wonderful the beer was, there is so much other wonderful beer being produced and served in Portland.  Long live Beervana, indeed.

The other thing that Roots' demise made me think of is the example of short-run and long-run shut down conditions that we typically talk about in a variety of economics classes, especially intermediate micro.  In econo-speak the short-run is any amount of time in which there are fixed costs.  Take for example a lease on a building in SE Portland: if you sign a one-year lease and you are on the hook for the lease payment regardless if your business is open or not.  In this case, it may make sense to keep the business running even if you are loosing money.  Why? Well, if you are able to cover your variable costs (labor, electricity, inputs, etc.) and part of your fixed costs (maybe one-half of your lease payment) it is better than shutting down and having to pay your entire fixed cost without any revenue.  In the long-run (a time period in which there are no fixed costs) you would shut down, because you would not renew the lease and so negative profits are a sufficient shut-down condition.

It would be great to see Roots rise again, perhaps as a commercial brewery only, but with the rapidly evolving dynamic of the local beer scene, it is hard to see Roots capturing the attention of the local beer crowd again.  Just like a chef who closes a restaurant, it may be time for Craig Nicholls to re-invent himself and his beer company.  And I think Roots will be far from the last brewery to close locally, with so many new places opening up, the forces of creative destruction will be pretty fierce.  Even though craft beer continues to whittle away at the market share of the macro-brewers, it is likely that the struggles to find shelf-space, tap handles and pub crowds will become more and more intense.  But just like the wonderful and creative food scene that has arisen in Portland, this dynamic is likely to create better and better beers and pubs.  So embrace it, I say.

Beer Pints Per Mile

A comment on my post about how to choose airline travel for maximum efficiency directed me to the AirScape Engineers Blog wherein I found this wonderful little chart (more on the specifics of the calculations can be found there):

Mode	kW-h/km	kcal/mile	Miles/gallon	kW-h/mile	beer-pints/mile
Bicycle	0.0361	50	629	0.058	0.23
747	0.2521	350	90	0.407	1.59
Electric Car	0.1550	215	146	0.250	0.98
SUV	1.5128	2098	15	2.440	9.54
Train	0.0820	114	277	0.132	0.52

Now, why "Beer Pints Per Mile" isn't the metric of choice in the field is beyond me - it is brilliant!  Here is how I figure it: distance from my house to the Pilsner Room, Deschutes Portland Pub, Rogue is about 6 miles, or 12 miles round trip.  Thus by riding my bike, which I always try and do, burns about 3 pints.  It is rare that I even make it to three pints unless I am lounging for many hours, so essentially my beer consumption is entirely guilt free!  HUB is only about 3 miles, so a round-trip is only 1.5 pints, but then they serve their beer in crazy 13-point-something ounce glasses, so I'm good for about two.  It would be interesting to know how walking fares in this comparison.

Anyway, time for a biking-themed shirt that says "powered by pints"!

And, by the way, AirScape is an Ashland (or Medford?) based company that sells house fans to use natural ventilation to cool houses.  Cool.

Taxes Again

Now the Beer Stimulus Bill is hitting the national media: this time the Wall Street Journal, under the tag "can beer stimulus hop up the economy?"  Ha, I like it when the WSJ gets clever.

Can microbreweries revive the economy? That’s the hope of Sen. John Kerry (D., Mass.) and a bipartisan group of senators who are pushing a plan to cut taxes on the nation’s legion of small brewers in hopes of stimulating hiring among craft brewers.

The plan, which was introduced by Sen. Kerry, would lower the per-barrel excise taxes on small breweries’ first two million barrels of beer per year (that’s 62 million gallons) and would triple the size of what the government classifies as a small brewer — to breweries that produce six million barrels a year from two million currently. Some co-sponsors include Sens. Olympia Snowe (R., Maine) and Ron Wyden (D., Ore.), whose states, not surprisingly, rank high on the list of states with the most breweries per capita (see chart below).

So-called craft brewers are one of the few industries to thrive through the recession. The segment grew from 7.2% by volume last year and 5.9% in 2008. The segment has even become a haven for budding entrepreneurs that have been let go from corporate jobs. “There’s not that many success stories in American manufacturing today and craft beer is one of them,” says Jim Koch, founder of The Boston Beer Co. which makes the various Samuel Adams beers. Mr. Koch — whose company is in Mr. Kerry’s home state — has been leading the charge for a lowering of the excise tax on small brewers.

Mr. Kerry’s office estimates that the tax decreases would free-up some $44 million — small potatoes in a $14 trillion economy — that the senator (presumably) hopes would be redirected toward new brewing tanks or hiring new workers. Sam Calagione, founder of Dogfish Head Craft Brewery in Delaware, says lower excise taxes would half his $750,000 federal tax bill. “It could be employees or capital equipment, but it would all go toward growing the company,” he says.

We do have one quibble. Mr. Kerry’s press release states that “Massachusetts started the small craft beer revolution,” but many other historians say that the current craft brew renaissance has its origins in Northern California, where San Francisco’s Anchor Brewing and the short-lived New Albion Co. kickstarted the movement in the ’60s and ’70s.

My main quibble is why is the assumption that any extra revenue would be reinvested and not taken as profit?  The idea that a tax break means more workers hired is silly.  The number of workers are the result of the optimal number needed to produce the beer demanded by the market.  I made this same argument when Measures 66 & 67 were being debated. In any case  here is the cool interactive chart:

Number of Brewers, by State

State	Total Brewers	State Residents per Brewer
Alabama	5	932,380
Alaska	14	49,021
Arizona	26	250,007
Arkansas	4	713,848
California	221	166,320
Colorado	103	47,956
Connecticut	16	218,828
Delaware	7	84,548
Florida	39	469,957
Georgia	16	605,359
Hawaii	8	161,025
Idaho	16	95,239
Illinois	41	314,672
Indiana	28	227,743
Iowa	18	166,809
Kansas	17	164,831
Kentucky	7	609,892
Louisiana	4	1,102,699
Maine	31	42,466
Maryland	21	268,267
Massachusetts	38	170,999
Michigan	70	142,906
Minnesota	22	237,291
Mississippi	1	2,938,618
Missouri	29	203,848
Montana	27	35,831
Nebraska	15	118,895
Nevada	16	162,510
New Hampshire	15	87,721
New Jersey	18	482,370
New Mexico	16	124,022
New York	56	348,041
North Carolina	33	279,467
North Dakota	1	641,481
Ohio	42	273,474
Oklahoma	7	520,337
Oregon	93	40,753
Pennsylvania	75	165,977
Rhode Island	5	210,158
South Carolina	14	319,986
South Dakota	5	160,839
Tennessee	14	443,921
Texas	36	675,749
Utah	14	195,459
Vermont	19	32,698
Virginia	32	242,784
Washington	100	65,492
Washington DC	3	291,031
West Virginia	6	302,411
Wisconsin	66	85,272
Wyoming	10	53,267

OLCC

Astoria is where I am at for a quick break and a nice respite from the heat, but I have a moment to chime on on this little debate: doing away with the OLCC.

To me the OLCC has always been a bit of an anachronism: an unnecessary bureaucracy and regulation of a market that surely has externalities but is easy to regulate at arms length like most states do.  [Kinda like the prohibition on self-serve gas...]  I don't really see the point of the OLCC other than to provide liquor licenses.  Taxes on alcohol can correct the inefficiency in the market created by externalities.

Anyway, since I am in Astoria, I might as well try the local beer.  Astoria Brewing at the Wet Dog has some pretty tasty beer, but the food and the deck last night on the river was even better...and 70 degrees.  Nice.  Ft. George is next.

Where it all Began

I missed this one.  In 1985 when the law was changed to allow people who made beer to sell it directly to the consumer two dudes named McMenamin opened the first Oregon brewpub, the Hillsdale Public House. Here is John Foyston:

Beervana was born in Captain Neon's Fermentation Chamber in Oregon's first brewpub, McMenamins Hillsdale Pub, where they started brewing after a 1985 law made brewpubs legal. This photo was taken in October of 1985 and shows Mike (from left) and Brian McMenamin with their first brewer, Ron Wolf, in the brewery.

I entered nearby Lewis & Clark College in the fall of 1986 and by 1989 was able to take my custom to the nearby pub and from whence my romance with craft beer began. Ahh Terminator...

Taxes

This was brought to my attention (with the comment "must be an election year"):

Beer-brewing in Oregon generates more than $2.3-billion every year. Senator Ron Wyden proposes a federal tax cut for small breweries in hopes of expanding the industry even more.

...

"The fact of the matter is...Oregon makes beer, and beer makes good paying jobs for our people," explains Oregon Senator Ron Wyden.

Senator Wyden is proposing a major break for small breweries: taxes on the first 60,000 barrels would be cut in half. Ninkasi expects to produce 32,000 barrels this year, so this tax cut would save them more than $100,000.

"We started with a very small pool of resources to build a brewery, so to reduce the amount of federal tax by half would be a third of that bottling line cost or three full-waged employees a year," says Jamie Floyd, Ninkasi Owner. "Those are pretty big significant additions to the brewery."

Oakshire Brewing doubled their production this year to 4,000 barrels and, as a fairly new business, could definitely use the tax break.

...

Ninkasi and Oakshire are 2 of 78 brewing companies around the state generating more than $2 billion a year. Senator Wyden says he sees the potential for the industry's future growth and more job opportunies as well.

"Obviously there is so much economic hurt in our state right now that I'm making my special focus those industries that we can really look at as having an opportunity to generate good paying positions and employment," concluded Wyden.

Senator Wyden says the tax cut proposal has bipartisan support. He hopes to pass the bill before the end of the year.