As noted earlier here, here and here, the federal govenment’s crackdown on Internet gambling is a a wasteful exercise in nanny-state futility, but also damaging to important American markets. Following up on that theme, University of Texas finance professor Paul Tetlock and Robert Hahn, director of the American Enterprise Institute-Brookings Joint Center, pen this NY Times op-ed appropriately entitled “Short Odds for Ignorance” in which they make the point that the Internet gambling ban will likely shut down important and productive information markets such as TradeSports:
The bigger economic story is how this act, by effectively prohibiting Internet betting, could unintentionally slow the emergence of new tools that have the potential to improve the productivity of the private sector and the government. Sadly, this is an aspect of the measure that both its supporters and its opponents seem to have overlooked. [. . .]
For instance, we now have markets for predicting political and economic events, where you can wager on the monthly unemployment rate or the outcome of the presidential race. (If you visit TradeSports.com, you can bet on Hillary Clintonís chances of becoming the next president: a contract purchased for $1.91 would yield $10 if she wins ó implying that the senator has about a 1 in 5 chance of winning.)
Why should we care? Because information markets, which essentially reflect the collective wisdom of savvy bettors, can help us make more accurate forecasts. Information markets have outperformed experts in a number of areas, whether itís predicting point spreads in football games or elections or printer sales. There are more than 20 Web sites that offer information-market securities, including those run by Goldman Sachs and the University of Iowa.
These markets work for several reasons: first, almost anyone can participate; second, people think hard when they have to back up their predictions with money ó buy the right presidential contract and you win, buy the wrong one and you lose; third, the profit motive encourages people to look for better information.
Many academics across the political spectrum believe that information markets could be critical in improving decision making by governments, nonprofit organizations and the private sector. Yet, because of current regulatory restrictions, the Iowa market is the only place in the United States dedicated to improving our understanding of these markets. Also, those information markets whose purpose is to make money have generally based themselves offshore, partly in reaction to existing state and federal restrictions on Internet gambling.
You may recall that, a couple of years after the 9/11 attacks, the Pentagon floated the idea of setting up information markets for predicting terrorist attacks. Those plans were scuttled because of the misdirected public outcry by those who could not bear the thought of someone profiting off of predicting something that could result in human suffering. Now, Congress is preventing Americans from access to other important information tools because of a misguided desire to impose a paternalistic law outlawing something that is not even a significant problem.
And these legislators are working for us?
I sure don’t understand the defense of sleazy Internet gambling sites, in the interest of ‘information markets’. That would be like defending houses of prostitution in the interest of ‘sex education sites’.
Information has long been a entity at any number of outlets. Colleges and universities are funded to be information markets. (although they are rapidly turning into corporations). Newsletters, newspapers, magazines, and professional journals are published with the goal of distributing information. Public television, and public seminars, some even at public venues such as libraries disseminate information. I know these sources are boring because they require thinking. However, to defend offshore gambling because ‘information markets’ support that cheesy enterprise is entirely misguided.
It is interesting that a state like Iowa is picked as one that is offering an information market. Iowa is a rural state with a suffering economy that appears to offer only new casinos as a growth industry (I know, I live there). It is a devastating paradox to those of us who care about the state, to see a flight of educated professionals always leaving the state; college graduates find opportunity elsewhere, because the state is now a hotbed of gambling and casinos offering great entry-level jobs to bartenders, waitresses, and security guards. Not to demean thos jobs, but not the economic engine that drives a flourishing 2000s economy.
A recent casino was built near the University of Iowa (which is offered in the editorial as supporting a market of information). Apparently that information will be dedicated to the odds of beating computerized one armed bandits that operate in a casino a few miles from campus. A casino that was floated on water balloons to make it quasi-legal.
A recent visit to the casino showed no excess of Univ of Iowa students, but a crowd of small town Iowans who are participating in the only smoke-filled, booze-fueled growth industry the state now has to offer. The college kids were likely studying, so they can assume positions in more industrious states. It would seem to me that the defense of gambling as an ‘industry’ is defending a market sector that bleeds resources from true economic development.
This editorial may support a fine ideal — information acquisition. The idea that a people can participate in activities as they wish, ie freedom, is a fine idea. However, supporting an information industry who’s goal is to help people make INFORMED BETS on sports, politics, and current events seems particularly aberrant. That drains resources from the true constructive use of information (making good choices about politics, economics and political/economic issues). It also raises concerns about public health issues — gambling ‘addiction’ is clearly a one such public health issue.
How sad is it that someone would look at an information site to place a bet on Senator Clinton’s chances of being elected president, rather than consult public sources of information on WHY Senator Clinton should or should not be elected president.
Gary, I think you and I are talking about two different issues.
No one has to be a supporter of Internet gambling sites or gambling in general to support the right of people to have access to markets that provide that service.
Moreover, although researching an issue objectively is almost always a good idea, evaluating an issue through an information market is simply another way in which a person can assess risk with regard to an issue. Such information — even though you might prefer not to use it — is a good thing, even something that you might want to consider in regard to researching a particular issue. It is certainly not something that the government should be attempting to constrict.
Finally, this doesn’t even address the hypocrisy of the government prohibiting an enterprise (Internet gambling) that it promotes in other forms (lotteries) and regulates (casinos).
In the end, your argument against allowing people to trade on information in free markets is analogous to people who don’t understand the benefits of derivatives markets. Through those markets, businesses are able to hedge risk and provide their product or service at a lower cost. In the same way, information markets are simply another tool that people can use to evaluate risk with regard to a particular issue.
Tom,
The problem with offshore gambling is that it is offshore. U.S. authorities have no ability to tax the enterprise and those states garnering significant tax revenues from existing gambling enterprises do not want to risk losing revenue.
Further, there is no way for U.S. authorities to regulate offshore gambling. When Enron fell, people (or should I say “people who vote”) lost significant sums of money. Since nothing in our society is ever the fault of an individual, regardless of how careless they may have been, someone had to be held responsible. There is no way for U.S. authorities to protect U.S. residents from being duped by those managing the offshore gambling enterprises.
Finally, gambling enterprises have long been known as wonderful places to launder money.
Bottom line, if you want to conduct banking, gambling or almost any other business outside the world of government regulation, you should expect governments to make your task difficult.
Charles, there will always be businesses that attempt to avoid tax liabilities by locating offshore. That does not pertain solely to the Internet gambling business. Congress does not react to other businesses locating offshore by prohibiting the business. Why so for Internet gambling?
Moreover, many Internet gambling operations are legitimate businesses, several of which trade on the London Stock Exchange. Several executives in those businesses actually advocate government regulation of the business to curtail the activities of the illegitimate operators. Again, the broad prohibition uses a sledgehammer where a scalpel would be more appropriate.
Tom,
Federal revenues from gambling are deminimus. Its the states that are pushing congress not to allow internet gambling.
As for offshore gambling entities being legitimate because some of them trade on the LSE, this in no way assures as that all internet gambling sites are run by legitimate interests. Would you exempt all gambling entities in the U.S. from all government regulation because some gambling entites had stock listed on a regulated stock exchange? Of course not.
Tom:
I sure agree with you about the hypocrisy in Govt sponsored gambling. It does appear ludicrous that on one hand most states now run a lottery racket, however the federal Govt wants to codify not allowing credit cards to pay offshore gambling sites (a policy what most credit card companies have adopted anyway). Apparently this is to extend the 1961 ‘Wire Act’. Why our congressman Leach introduced the bill is a mystery to me, unless he is upset about that new balloon-flotation casino in Riverside Iowa, about 15 minutes from his home.
On one hand, I dislike regulation of any sort. Who am I to sit in judgement of what another person wishes to do, as long as he engages in activity with adults. Gambling, paraphilic sex, food gluttony, steroid use..have at it and suffer the consequences. On the other hand, there are clear public health issues, cannibalization of resources, and an overall decline in the general fiber of the society can result.
Gambling might be the most benign of the group (whish we call motivated behaviors). However it can be devastating to those individuals who get carried away. This is my beef. I agree with you that I would not restrict markets; however I decry the inordinate profits made by these offshore sharks, and the people who defend them because it is a very lucrative market.
Investment firms investing in these corporation. Wow. I guess that would not be a moral ‘green investment’ strategy.