By Mark Thornton
Posted on 10/26/2006

Congress purported to act to protect the values of the American people when it passed the “Unlawful Internet Gambling Enforcement Act.” The result has been a serious blow to a growing industry. Whose values was Congress protecting? It had nothing to do with the American people at large. Congress was protecting the “values” of casino owners and those who work in the state lottery racket.

This “enforcement act” bans credit card transactions involving internet gambling websites. The bill was added to port security legislation at the last minute giving no one the chance to read it and little political opportunity for Congress to amend it or vote against it. It was the capstone to another very bad session of Congress.

The first fallout from this legislative bombshell was its impact on the major internet gambling companies who lost half their stock market value. Americans are reported to make up about half the global demand for internet gambling. These are the companies that were best serving their customers, providing them with relatively safe and low-cost opportunities to gamble.

Due to the nature of internet commerce, online gambling sites had already taken several measures to demonstrate that they provided a fair and reliable service. Competition between gambling websites had also produced enhanced consumer satisfaction as new safety features were added and copied across the marketplace for internet gambling.
For example, with online gambling you can go to a practice casino website where you can learn the rules, how to play the games, and the relevant strategies without risking real money. Once you are experienced and comfortable with the process you can then proceed to the real casino where real money is wagered. Do physical casinos offer such opportunities?

These online companies are competition for casinos and state lotteries and because of their lower cost, online casinos can offer their customers a much better payout rate — the percentage of bets that are paid out in winnings. Online casinos have a much higher payout rate with the best online casinos offering a rate exceeding 97 percent. State lotteries that target low income groups have a payout rate less than 50 percent.

We are told that families will no longer have to face all the dire consequences and socially destructive forces of gambling via the internet, but internet gambling companies actually solve many of the so-called negative externalities associated with brick-and-mortar casino gambling. Internet gambling does not undermine community values, expose women and children to socially undesirable activities, or introduce prostitution into communities. All of the so-called “unsightly” problems with Las Vegas-style casino gambling are not present with internet gambling.

Yes, people still lose money gambling, but that is not unlike “losing” money when I go to the grocery store, the baseball game, or Many people find gambling fun and rewarding even though they know the odds are against them. The proliferation of online gambling has turned casino gaming into a normal good without the special allure that government bans once provided Las Vegas.

Online gambling also provides good jobs for people who want them. I am not a real gambler, but I recognize that gambling has created economic development in places where it otherwise had not occurred (think Las Vegas, Indian Reservations, Atlantic City, Mississippi). Online gambling is likewise creating jobs in development in places like poor island nations in the Caribbean

Will the ban work? The legislation is similar to the alcohol prohibition of the 1920s. It does not prevent Americans from gambling online so we are still free to search for potential websites. It only prevents the companies from making credit card transactions with US citizens so that the most “legitimate” online companies who “play by the rules” will exit the market. Other companies will operate in the underground economy. New companies will enter the market using techniques to get around the legislation.

People are generally safe using their credit cards online, but the new financial transactions will inevitably be less secure, more cumbersome, and subject to more fraud and abuse. The big, safe and secure sites have too much to lose from bad business practices and government attacks and these companies are precisely the ones that are most likely to go out of business in the United States. Their replacements in the underground e-economy are likely to be smaller companies that pose more risks to consumers.

This legislation will not stop internet gambling and will only make American online gamblers less safe. It is nothing more than a cheap election year ploy — covertly enacted — that purports to protect Americans and maintain moral values. The hypocrisy of the legislation goes beyond the exemption for brick and mortar casinos because it also allows internet gambling for horseracing and state lotteries. Don’t be surprised if Congress even reverses itself after the election when the overseas internet gambling companies have the opportunity to lobby (i.e., buy off) the Congress.

More than anything else, this legislation is the very pinnacle of puritanical nannyism. Here the government is declaring what you do in your home with your own money to be illegal. Even if it did work perfectly, it violates a critical stricture of the free society. As Mises noted, if we allow government to regulate such behavior there is nothing to prevent complete tyranny.

Congressman Paul observed they have no business telling us what is useful behavior and what is not:

The big government nanny-state is based on the assumption that free markets can’t provide the maximum good for the largest number of people. It assumes people are not smart or responsible enough to take care of themselves, and thus their needs must be filled through the government’s forcible redistribution of wealth. Our system of intervention assumes that politicians and bureaucrats have superior knowledge, and are endowed with certain talents that produce efficiency.

The trouble with online gambling was that it was too successful in the eyes of many. To what extent were brick-and-mortar companies involved in lobbying for this? Forbes puts it this way:

U.S. gambling resorts and casinos like MGM Mirage and Harrah’s Entertainment — which is reportedly being eyed by a private-equity consortium — may be the few to profit from the new law, along with the horse-racing industry, lotteries and fantasy sports operators, who have all been carved out of the new law.

If we want to know who was really behind the move, we need only ask: Cui Bono?

Mark Thornton teaches economics at Auburn University. He is a senior resident fellowat the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War.

Author: GamesAndCasino