Thursday, July 29, 2010

On Big Government - Or Not

I couldn't decide what sort of title to give this post, so I just went with the catch-all "Big Government."  Barney Frank, while no hero of mine, has been a leading advocate of re-legalizing (including taxing and regulating) online gambling after the UIGEA was passed several years ago, surreptitiously tacked onto a safe ports bill that was supposed to protect us from terrorists. 

Yesterday, the House Financial Services Committee passed a bill that would "effectively legalize online poker and other nonsports betting, overturning a 2006 federal ban that critics say merely drove Web-based casinos offshore."

Of course, one main motivation is taxes - money that's desperately needed by the states:

"The bill would direct the Treasury Department to license and regulate Internet gambling operations, while a companion measure, pending before another committee, would allow the Internal Revenue Service to tax such businesses. Winnings by individuals would also be taxed, as regular gambling winnings are now. The taxes could yield as much as $42 billion for the government over 10 years, supporters said."

I don't really want to get into the debate about gambling (online or otherwise) being good or bad, although I was pretty surprised at how negative the comments on NY Times article were, considering how liberal their reader base usually is.  Supporters of legalization also point out that the activity is already happening - the revenues are just going to offshore companies.  The legalization most impacts the companies' abilities to market to US customers, while it's already easily possible for US players to get online and gamble via foreign sites.  Also, legalization and regulation could result in a safer (less rip-offs) environment for users.

But there's a much bigger moral picture here.  I don't think it would surprise anyone to learn that I'm in the "let people do what they want camp,"  which favors allowing online gambling.  (side note: the issue I care most about, despite the fact that I play online almost never, is online poker - which is a game of skill.  Still, this doesn't mean that there won't be a large number of people who, if online poker is legalized, wouldn't lose a large amount of money playing poker online - there would be.  In other words, even though it's a game of skill, there will be many unskilled participants who will still feel ill effects, just like they would playing online blackjack, because they don't have the skills required!).  The quote I want to discuss is Barney Frank's:
“Some adults will spend their money foolishly, but it is not the purpose of the federal government to prevent them legally from doing it.”

Now, I'd be hard pressed not to agree with that statement.  The problem I see comes when the next step is that people who DO spend their money foolishly are then rewarded with money from the federal government (I don't think it's really up for debate - this happens).  See, if the government is going to compensate people who demonstrate lack of judgment / stupidity / ignorance / "foolish spending of money," then, I'd rather the government tried to prevent those people from doing it in the first place.  Of course, this isn't really practical - you can't ban only gambling addicts and people who have no clue about money management from online gambling.  Herein lies the problem:  I want to protect my own right to gamble online, while at the same time preventing other people from losing all their money gambling online and then going to the government (aka: ME, the taxpayer)  for assistance. 


disclosure: long PYGMF (PartyGaming stock)


EconomicDisconnect said...

First off your Hussman write up was really great; I had missed that whole thing so thanks!

WooHoo Online poker!

I really miss playing the sit and go's on Party Poker. I never played after the ports bill (could have at plenty of sites) beacuse I am fear of the government and a good citeien! I really hope this goes through.

EconomicDisconnect said...

I also wish I could spell when I am typing fast.

EconomicDisconnect said...

Thanks for the CR link in the last thread, what a mess so I guess they will do it.

EconomicDisconnect said...

I figured i would annoy you all night so I forgot to add:

Massachusetts is very close to passing the casion bill. One in Boston, one in metro west and one in the southern part of the state. Obviously I am all for it. Who do you think would be interested in the Boston location? Wynn? Trump (does he still do casino's?)? Other? It will be years off but just wondering.

Kid Dynamite said...

no idea. Trump is a joke. i'm no fan of his. who knows. i get the impression Wynn is trying to be pretty conservative - i don't know if Boston would be a huge market - maybe - but maybe not if they're doing 3 in state casinos

Nemo said...

The problem with gambling is not that it is "intrinsically evil". And the problem is not that it causes dumb people to lose money.

No, the problem with gambling is that it provides financial rewards for utterly useless and non-productive behavior, and thus encourages people to be useless and non-productive.

So I do not think gambling should be illegal, any more than playing video games should be illegal. But I do think gambling winnings should be taxed north of 95%. (As should the profits from high-frequency trading, for exactly the same reason.)

Which reminds me: I do not see what off-shore vs. on-shore has to do with taxes. Don't you owe the taxes regardless of where you were gambling? Just jail a few ordinary folks for tax evasion and they should get the idea.

Kid Dynamite said...

Nemo, the problem with that is who decides what is "utterly useless and non-productive behavior."

for example, lotteries - they are utterly useless and non-productive behavior - and it can be easily argued that they do more harm than good to exactly the class of people they are supposed to help - but their revenues certainly fund things that are not utterly useless and non-productive.

aside from that, though, in our society, "utterly useless" or "social value" should not be the determinant of what is legal.

i'm going to ignore your way off base comment on HFT, except to say that I'm impressed that you managed to invoke Kid Dynamite's Law by bringing it up! well done.

Kid Dynamite said...

Nemo - sorry - i should change "should not be the determinant of what is legal" to "should not be the determinate of what is legitimate" - as you rightly noted that you didn't think gambling should be illegal, just highly taxed.

i don't think Jersey Shore has any moral value or societal use, but i also don't think we should try to get rid of it by charging viewers $100 to watch it and thus make it unappealing.

Nemo said...

Nemo, the problem with that is who decides what is "utterly useless and non-productive behavior."

Oh, that's easy: The duly elected Legislature. They make this sort of decision all the time. In fact, that is sort of their entire purpose: To encourage actions useful to society and to discourage harmful (or useless) ones. Promote the General Welfare and all that.

I know you just turn off your mind whenever you read "HFT" -- which must be very convenient -- but in this case, it is very on-topic. Every argument you have made (or will make) about gambling applies to HFT. Every argument I have made (or will make) about gambling also applies to HFT. That is because any rational person can see that HFT is gambling. That is not a value judgement; that is just a statement of fact.

The value judgement comes next. Let me start with those Jersey Shore actors... Truth be told, I would tax them pretty heavily, too. But at least they provide entertainment to millions (even if it's millions of idiots). More relevantly, taxing entertainers is not a high priority for me because they have no palpable skills. The real crime of gambling -- and even moreso, finance -- is that it encourages very smart people to do approximately nothing for a few years, then rewards them with sufficient wealth to retire to New Hampshire and sit on their a**es for the rest of their lives.

I mean, if I were given so much for doing so little, I could retire and still look at myself in the mirror. I would need to get an honest, productive job to avoid feeling like a total parasite on civilization. I cannot imagine living my life having produced nothing and then consuming so many of the fruits of others' labor.

But I am unusual. I believe we each have a moral obligation to create more than we destroy during our lives. I also believe that obligation is strongest for the most talented. Which is why I find the financial sector (and gambling) disgusting.

Of course, I do not expect you to agree. People who work in Finance have this impervious wall of rationalizations in their minds causing them to believe they actually earn their money. If they did not, they would not work in Finance.

But it is not a feature of capitalism that the most parasitical and non-productive class in our society is the best compensated; it is a system failure. (Just like well-compensated lawyers are a system failure. Lawyers and financiers have this much in common: Their jobs are about as important as a janitor's, but they can get outrageous compensation in the same way as a football ref who could legally be bribed by the teams. I mention this because I know you are considering responding with some blather about "efficient markets". "If I got paid that much, I must have done something worth that much", etc. Manifest BS. Nobody is worth what the top financiers get paid. Nobody.)

I do take some consolation in the knowledge that the entire system will eventually collapse and possibly take the parasitical classes down with it. Call me a starry-eyed optimist.

Anyway, gambling for small stakes "just for fun" is no big deal and is not what I am getting at. But being able to make a career out of it ought to be impossible; that this is false is simply a market failure, providing rewards vastly out of line with the wealth created.

I once believed that any activity between consenting adults should be legal, on the grounds that it does not harm anybody else. Then I grew up.

P.S. If you took 6.001 or 6.004 in the mid-90s, there is a non-zero probability that I was your recitation instructor. Small world, huh?

Have a nice weekend.

Kid Dynamite said...

ah hah Nemo - I wasn't wrong when I thought you were intelligent. first off, i think you meant you could NOT retire and still look at yourself in the mirror - i'll assume you typo'd the "NOT" out...

second - i did not take 6.001 or 6.004.

but the crux of the issue - just because you don't see social value or purpose doesn't mean there is social value or purpose.

Do you feel the same way about ALL trading as you do about high frequency trading? i'd be flat out shocked if a man (i'm stereotyping you as a male, here, sorry if i'm wrong) of your intelligence tried to claim that trading has no social value - investors need counterparties to take the other side of their trades, and those counterparties are speculators, or "traders."

Now, you may not understand that there is value created by all the millisecond microsecond picosecond battle of the bots stuff that you don't like, but in the end, it's someone taking the other side of your trade, or someone trying to do the same thing the "slow" trader is doing - and it's impossible to argue that traders don't provide value in financial markets.

(side note: i love the phrase "that's not an opinion, it's a fact" - i use it all the time - and you used a version of that in claiming that HFT is just gambling. I'm pretty surprised to hear that claim from someone intelligent, unless you are trying to say that they are the HOUSE - the casino who tries to make a small built in edge. THAT is correct. If you think the HFT guys are gambling, well then, you need to read up, because you're way way off on that "fact.")

now, do they provide "value" in accordance with their pay? that's a tough one. the easy answer is "no." at the same time, if they don't provide "value" they don't get that pay... the recent crisis distorted all of that, of course, and i know of multiple traders who made a BILLION dollars one year, probably got paid $30MM on that, and then LOST a BILLION $$$ the next year - and of course they didn't have to give back the comp. does that suck? sure. were they overpaid? hmmm. tough to say. ask the shareholders! Make a billion take $30mm? Just because $30mm is a lot of money doesn't mean the person isn't worth it - that's another pretty tough debate. just because it's a lot more than most people make also doesn't mean it's too much.

Wall Street is an easy scapegoat. I love how everyone complains about the guys who "ruined their 401k," but no one complained on the way up. No one complained that their 401k was being artificially inflated. No one complained that they were getting too rich too easily on the paper value of their portfolios. No one complained when they took equity out of their homes and spent it. No one complained about being given mortgages they shouldn't have ever gotten and couldn't afford - NO ONE - that's a very important point.


Kid Dynamite said...

part II:

The problem is the bailouts. Even though the goal of the bailouts was to save the financial system (And note - i've been a huge OPPONENT to the bailouts from day one) - the most visible result is that it saved Wall Street - even though it saved the financial system too (temporarily at least). This also results in a whole lot of neverending whining/complaining/bitching/jealousy/I-want-mine-too from Main Street - and that's tough to argue with. I completely understand it. You shouldn't be bailed out of your bad mortgage, and Citigroup shouldn't have been bailed out of their bad debt. But they were - so now you want yours.. it's a vicious cycle that all results from the bailouts. MORAL HAZARD on a massive scale, i think - or some offshoot of it - not just continued risk taking by the bailout-ees, but furor by the non-bailed-out.

i got a little off topic, which i guess was in essence the "Value" of wall street. Again, it's tricky, because YOU (the royal YOU, not "Nemo") couldn't do my job as well as I did it. That's not my opinion, that's a fact. I was good at what i did. So, i certainly earned some portion of my pay. Since my pay was based on the profit my group generated, and the profit we generated was based on our skill, i'd say we absofuckingLUTELY "earned" it. There was quite literally zero probability that we were paid based on falsely marked fantasy profits in illiquid products that would eventually blow up, because our PnL was derived entirely from super liquid products that were marked to market daily (stocks, futures).

Again, the recent crisis and stories of monkeys selling and packaging CDOs and earning tens of millions of dollars may be one area of people who didn't "Earn" it, but Wall Street is made up of more than just one group trading one little product.