Four Reasons Why the U.S. Crackdown on Internet Poker Is a Mistake

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Yesterday, I described my own personal moral code regarding government prohibitions, which led me to be outraged by recent actions by the U.S. government shutting down the three major internet poker sites for American players.

Forgetting about my own moral standards, which are probably of interest and relevance only to myself, there are four other reasons why the government’s actions make no sense:

1) Prohibitions that focus on punishing suppliers are largely ineffective. Prohibition of internet poker is no exception.

When there is consumer demand for a good or service, it is extremely difficult to fight the problem through government punishments of suppliers. Illegal drugs are a good case in point. Americans want cocaine. Over the last 40 years of the “War on Drugs,” we have expended enormous amounts of resources locking up drug dealers. (Contrary to public opinion, the punishment of drug users has been relatively limited; by my estimates 95 percent of the prison time served has been by sellers of drugs, as opposed to users.) Especially when the demand for a good is inelastic, squashing supply is ineffective. Making life difficult for incumbent suppliers entices new entrants eager to meet existing demand.

How do I know that the U.S. crackdown on internet poker sites is ineffective?  Within 30 minutes of my account on Full Tilt Poker (one of the big companies affected by the crackdown) being shut down, I was able to start an account at a different poker site, depositing $500 via my credit card with no problem.

2) Relative to the consumer surplus generated by online poker, the externalities caused are small. Government interventions should focus on cases where the opposite is true.

Americans love poker. In a given year, Americans pay billions of dollars to be able to play the game online. I don’t think I am exaggerating when I estimate that more than 5 million Americans have played poker online. Professional poker players are celebrities. The typical online poker player is not hurting anyone else, just like the typical movie goer or sports enthusiast. There are, of course, gambling addicts (some might say I live with one). Addicts impose costs on others. But, the nature of internet poker, with readily enforceable limits on how much money can be downloaded in a given period, is actually a much better environment for regulating addictive behavior than are poker casinos.

3) From a moral perspective, it is inconsistent for the government to condone and profit from gambling on the one hand, while criminalizing private providers of internet poker on the other.

It would be understandable if, for reasons I disagree with, the government adopted a consistent stance against gambling of all sorts. But, governments are enormous beneficiaries of gambling income, both through lotteries and sanctioned casinos. So there can be no moral high ground on the issue. I am certainly sympathetic to the government’s desire to glean tax revenue from gambling activities. The right way to do that, however, is not a prohibition, but rather a regulatory framework in which governments take their cut of the action. For all parties involved, that sort of system is more efficient than the current approach.

4) Even under the government’s own laws, it would seem that there is little question that online poker should be legal.

While I personally think the logic underlying the UIGEA (the law governing online gaming) is deeply flawed, it is nonetheless the law of the land. Under the UIGEA, games of skill are exempted from the law, which is supposed to apply only to games of chance. So legally, whether online poker is legal comes down to the court’s interpretation of whether poker is predominantly a game of skill. If you’ve ever played poker, it would seem self-evident that poker is a game of skill. If you need any further evidence, Tom Miles, a professor at the University of Chicago Law School, and I recently wrote a paper that uses data from the 2010 World Series of Poker to confirm what was already obvious with data.

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  1. Darren says:

    I think the whole thing with the government getting involved has to do with the fact that the government is not getting any cut of the money. If there was some way they could get some money from people playing online, I’m sure the opinion of the government would change. It’s all about money…

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  2. Tony says:

    “by my estimates 95 percent of the prison time served has been by sellers of drugs, as opposed to users”

    I’d like to know more about this statistic. Because my understanding is that part of the problem with the current law is that they classify users as dealers based on the quantity of drugs recovered, versus having to show any proof of selling activities.

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    • Chris says:

      re drug sales and punishment

      Quantity is highly determinative of why [personal use vrs sales] you are possessing a drug. I can only speak for California, but sales charges all require proof of intent to sell or actual sale.

      The “problem” is that a lot of users sell to support their habit. And steal, rob, and commit burglary to support their habit. Me, I don’t care much why someone commits a crime, it is the crime I care about.

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  3. William says:

    Great article. On the last point, there is no difference between poker and buying stocks.

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    • Joshua Northey says:

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      • Rajat says:

        Generally when you buy or sell stock, you are buying or selling it from another individual. The company behind that stock never sees that money unless it’s doing an IPO or something similar. Trading stock is essentially betting on what you expect to happen in the future. If you think the price will go up, you buy stock; if you think it will go down, you sell it. If you are right, you made some money, but the person on the other side of the exchange probably lost money.

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      • Joshua Northey says:

        If the securities were not so liquid they wouldn’t be nearly as valuable. That is the the piece you are completely missing.

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      • caleb b says:

        The reason a company has stock is supposed to be to raise capital and expand operations. But companies are run by people and therefore the real reason companies go public is so the executives get a HUGE payday. This is also why most companies get sold.

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      • Krista says:

        I don’t think that “gambling” on stocks is the same thing as “gambling” on poker for the reason that liquid capital markets do facilitate the investments of companies in their businesses and that enhances economic growth which enriches everyone. But poker is not simply transferring wealth from the dumb to the smart. You could look at a concert that provided a bunch of wonderful songs as transferring wealth from those who can’t sing to those who can and claim that there is no benefit to that. But the truth is more complicated. Those who play poker – even – maybe especially – the losers are entertained by their activities. And the poker pros get paid for providing that entertainment by keeping the games going. The pros deserve to be paid for the contribution to the entertainment of most of the poker paying public in the same way that any professional who provides entertainment to the less talented public would be paid.

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      • jay wiley says:

        sir are you kidding me,the smart(well to do)have been fleecing the poor in this country for well over 100 years.the legal system ,right on down to the banks and local politicians.please tell me that you cant possibly believe that after we pay our taxes,. government agencies should be able to tell us what to do with the money we earn.

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  4. John B says:

    The main difference between casinos and other privately run gambling providers is that the private companies give the player much better odds of winning than government run lotteries or scratch off tickets.

    Yes, the paternalistic government that wants to “protect” you takes a much larger cut of the sums played than the evil casinos.

    So when the government wants to “protect” you from online gaming, be wary.

    Like the other commenters have written, once they get a cut, the governments will jump right in–but they will require the rules to be changed to maximize their take, and hurt the players’ chances.

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  5. Chap says:

    Is anyone else having trouble with the link?

    Surely there can’t be a difference between betting on your ability to beat other people at poker, and betting on a horse race. Maybe poker would get a free pass if people wore outrageous hats while taking part?

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    • Cheryl7760 says:

      Poker no different than betting on horses? Are you serious?

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      • Horseman Of the Apocalypse says:

        As far as being a game of skill? Ye s.

        There is little difference. Understanding a racing form takes more skill than learning the odds of poker. The perception of betting on horses is only skewed because too many people bet on it based upon non-skillful reasons. e.g. I think that horse’s name is interesting or it has my birthday.

        Just as a poker player with more skill can be beat by the cards, you can win money betting the ponies based on your skill at doing so.

        I think the “skill” argument is relative. Just because you don’t understand it doesn’t mean there is no skill involved.

        Success in anything relies upon skill and chance combining. Most “games” have a skill component that cannot be denied. It’s only things like slot machines and lotteries that are purely dumb luck.

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  6. QP Mike says:

    I agree with all of these reasons. #2 seems like the most unexplored and potentially compelling. Most of the world focuses only on the social costs of problem gambling on the 1%-ish of society that is affected by it, while ignoring the social benefits to the other 99%. I would love to see an actual, earnest cost-benefit analysis that accounts for the good parts of poker, which the vast majority of its players are enriched by.

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    • Joshua Northey says:

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      • LPSJack says:

        My experience is quite the opposite. I manage a private social club structured around a Texas Hold’em league. Every game, there are 5 winners and 25-35 losers. Yet, you see the same members every month ready to play again. There are some members that have been playing for years, yet have not cashed but maybe once or twice if at all. They are clearly playing because they enjoy it.

        The only time I have heard any mention of disappointment in playing is when a player, through their actions and decisions, is out of the game very early. This is quite likely because they did not get the expected value of their buy-in in entertainment.

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      • QP Mike says:

        Yeah, that’s fair. It’s probably hard to avoid being biased by one’s personal experiences.

        In my case, for me and most people I know, poker has been all upside. I think it depends a lot on whether or not you approach the game as gambling, or if you approach it as a strategy game. It’s been a great way to socialize and network, a great competitive outlet, and a uniquely fun mental exercise. It’s been the impetus for me to build my personal discipline, to overcome heuristic probability biases in understanding risk management, and to live a healthy life to keep my brain at peak performance. I would guess that most poker players (other than the few who are predisposed to problem gambling) enjoy the game for at least some of these reasons, even if it’s not as dramatic or explicit as in my case.

        In fact, if not for my interest in poker when I started college, I may have never gotten interested in fields such as economics and probability at all. So I may have never bought Levitt’s books. Now if THAT’s not a reason to support poker… ;)

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      • STRACIL Pan says:

        Players who dont know what they are doing or know how to play are generally losers. A player who has a semblence of the game will generally break even and that is the same as winning from an entainment perspective. Not all players are going to be a Doyle Brunson or a Danial Negranou but following the general rules of poker they can win and have an enjoyable time doing it.

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  7. Joshua Northey says:

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  8. James says:

    I think you’ve missed the really major objection to this internet poker crackdown, which applies even to those of us who have absolutely no interest in poker. It is that the US government is trying to impose its laws on sites that are located in other countries, and thus not within its proper jurisdiction. It’s as though Iran were to charge me with blasphemy for some of the on-line comments I’ve made about Islam.

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    • Not Quite says:

      The US did not crack down on those sites in regard to foreign poker players. Those foreign players can still play on those poker sites for money. The US is controlling the activities of people within the US. The same way they can stop contraband at the border.

      Do I agree with the stance of the US? Not at all. I think it’s silly and is purely because of special interests like casinos and brick-and-mortar poker rooms.

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      • Randy Hudson says:

        The US seized the Domain Names used by the sites, which interfered with US players and non-US players to the same extent. Only because the sites immediately put up new domain names (pointing to the same sites) were players (again, both US and non-US) able to access the sites.

        The US also seized bank accounts and other funds, including funds owned by or allocated to non-US players. That already has provoked the demise of Absolute/Ultimatebet, leaving both their US and non-US players unable to recover funds. Full Tilt has been slow in paying their non-US players, apparently because of cash flow problems following the US action.

        The US actions hurt non-US players, not just the companies that served US players.

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