- “UPS is trying to get FEDEX reclassified under federal law as a way of screwing a competitor.”

Reason TV:

July 4th 2008
The Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581
U.S.A.

Attention: Office of the Secretariat

RE: “Concept Release on the Appropriate Regulatory Treatment of Event Contracts”

To Whom it May Concern:

It is an honour for me as Chief Executive Officer of Intrade the Prediction Market Limited (“Intrade”) to provide price discovery information on thousands of event markets free of charge to notable institutions such as yourselves at the U.S. Commodity Futures Trading Commission, the U.S. Navy, the Federal Reserve Banks of New York, Richmond, and Chicago, the European Central Bank, the Bank of Japan, the American Enterprise Institute – Brookings Joint Centre, CATO Institute, and the Bank of England. We have similarly supplied our price discovery event market information to political organisations, students and staff at every Ivy League College, and students and staff at over 50 universities worldwide.

We estimate that over 300 global media businesses such as The New York Times, The Wall Street Journal, The Washington Post, The Financial Times, The Los Angles Times, Chicago Tribune, Economist, Bloomberg, Reuters, Forbes, Time, Fortune, CNN, CNBC, Fox, ABC and others have used Intrade event market information.

Investment firms on Wall Street, and the other major financial centres of the world, have solicited and been provided with Intrade price discovery event market information. The above lists are not exhaustive.

Further, Intrade provides free real-time transparent price discovery event market information to millions of people from the general public. While Intrade serves a global community and has registered members from 162 countries, our 82,000 plus membership are predominantly resident in the United States. The predictive probability information on event markets that we supply to the general public is both intuitive and readily and rapidly assimilated without the necessity for paid subscriptions or a financial education.

Intrade has been transparent and industrious, as have others, in nurturing the development of the event market industry. Intrade as a profit-maximizing business does of course expect to significantly benefit from its dedicated employment. However the benefits to society at large will be equivalently great from Intrade’s focus on event markets.

While U.S. institutions and society benefit from Intrade’s services it is perversely unclear as to whether Intrade, and indeed myself, are considered persona gratis by the United States. However, we are more optimistic than ever that Intrade as the de facto leader in the event market industry sector will soon have the ability to stand on a firm, transparent and appropriate regulatory footing thanks to the process that the CFTC has accelerated through their request for comments on how to regulate event markets.

Not since the Industrial Revolution have the risks and their commensurate opportunities of dealing with great uncertainty and rapid change that we all face been so high. Much of this change and uncertainty is technology driven, with most countries, organizations and households accepting, in theory at least, that they must change.

The recent implosion of credit markets is just one example of the great uncertainty and potential for events impacting citizens of the United States and farther afield.

To adapt to a changing world in an orderly and optimal manner requires access to information, robust decision-making processes and the courage and determination to grasp the opportunities that a dynamic world offers. The CFTC and indeed the United States itself has access to the information, the decisionmaking expertise, and a historical track record of determination and accomplishment.

But the relentless change that we all face will be best dealt with if we have the best information, in real time, to reduce uncertainty, risk and stress. Event market information can and has increased the quality and timeliness of decision-making. Event markets can act as a democratic mechanism that gives voice to the broadest range of event stakeholders and, in so doing, aggregates a peerless information set. By encouraging the aggregation, distribution, validation and appropriate use of the best event market information, society will benefit even more than it does today from event markets. To do otherwise than to encourage event market development would be a societal travesty.

The dynamic nature of the world that we live in, where the pace and systematic impact of change seem to be increasing, will be greatly aided if event markets are given a certain regulatory footing in the United States and other jurisdictions. This, coupled with the fact that markets excel in aggregating information and estimating the value of a product or the likelihood of an event occurring, testifies to the logic that the price discovery that event markets produce should now be encouraged by the CFTC.

The CFTC by clarifying the status of event markets now will be of great service to Americans. In this regard the CFTC has an important opportunity and one that the CFTC seem very positively biased to grasp in light of its statements, such as…
- The CFTC state on their website that they have “An Important Mission in the Ever-Changing World of Finance.”
- “The CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency.”
- “The CFTC is also mandated to enable futures markets to serve the important function of providing a means for price discovery and offsetting price risk.”

CFTC Acting Chairman Walt Lukken, when announcing the execution of a memorandum of understanding with the SEC on March 11, 2008, stated: “The regulatory structure that oversees the U.S. financial markets embrace innovation, growth and competition in the global marketplace, without compromising market integrity, customer protection and the public good.”

The above statements, in addition to the Concept Release by the CFTC, are very encouraging. It is specifically this price discovery and risk management mandate that justify the CFTC’s embrace of event markets, should justification be needed.

Intrade has listed 211,607 individual event markets and aggregated and distributed predictive event market information on subjects such as Arctic Oil Drilling, Climate Change, Commodities, Company Earnings, Constitutional Referenda, Currencies, Disease Outbreaks, Earthquakes, Economic Numbers, Entertainment Awards and Earnings, Indices, Euro Adoption, Federal Reserve Announcements, Gas Prices, Gasoline Tax, Geo Political Events, Homeland Security in the U.S., Mergers & Acquisitions, Social Security Reform and U.S. Taxes. This list is far from exhaustive.

No other platform has listed more event markets than Intrade. To the best of our knowledge and belief the event market leadership position that is often ascribed to Intrade is wholly justified from a review of the breadth of the event markets listed and information we have aggregated and distributed. Information, as noted above, that is used by governmental agencies, businesses, academics, and the general public to reduce uncertainty and in so doing increase the speed and quality of decisions being made.

While the obvious benefits to the general public in terms of price discovery and decision-making of some Intrade event markets will be more obvious than others, we can make robust arguments that all have the potential to serve the dual purpose of price discovery and a mechanism for offsetting price risk.

The CFTC by clarifying its position on event markets will give all event market stakeholders valuable direction on market and participant eligibility. Whether used at the federal government level or by the individual citizen, event markets provide a magnificent opportunity to use price discovery information in managing economic risk. Here are just a few examples from the 211,607 event markets we have listed.

Intrade has listed markets on the probability of the Homeland Security alert level being above or below a certain level at a certain date. “The United States spends roughly $100 billion per year on homeland security” according to the White House. The costs of migrating from a threat level of “Guarded” to a threat level of “Elevated” have very significant costs for the government, business, and society. By utilizing event market price discovery information on the probability that the alert level will be at a certain threshold on a given date, the economic consequences of the threat level can be managed in a more insightful way.

Jason Ruspini has suggested markets to Intrade on whether the marginal personal income tax rate for single U.S. filers will be equal to or greater than a range of specified percentages for tax years 2009, 2010 and 2011. Having spoken directly to a number of tax paying citizens from the United States, the transparency of this information undoubtedly serves a public good. Is there a Unites States resident taxpayer who will read this comment who is not interested in the taxes she or he will pay next year?

On a more macro level, Intrade has listed a market on whether the cold fusion experiment of Dr. Yoshiaki Arata will be replicated in a peer-reviewed scientific journal before 31 December 2009. The possible impact of such a development to our energy needs little hyperbolae. The fact that President Bush requested $25 billion for the U.S. Department of Energy’s 2009 Budget speaks to the importance of maximum transparency in such matters. It may also be interesting to note that $493 million of the $25 billion was allocated to Fusion Energy Services. Does transparency to such price discovery information serve positively the United States and others? Absolutely!

Professor Koleman Strumpf suggested that Intrade list a market on whether Blu-Ray Disc sales will outnumber HD-DVD disc sales in the United States in 2008. If an organisation’s employees or profits are potentially influenced by the outcome of this event, as were Toshiba’s, the main supporter of HDDVD, then access to such information is both valuable and gives opportunity for welfare maximisation.

Intrade has also listed, at the request of University of Westminster Business School, markets on whether the number of violent crimes committed in 2010 will be lower than those committed in 2007. Intrade has additionally listed at the request of a United States resident member of our platform a market on the impact of U.S. Government debt if a non-Democrat is elected president of the United States in 2008.

Professor Eric Zitzewitz, Professor Robin Hanson, Professor Justin Wolfers and others at the forefront of event market academia have all suggested event markets to Intrade in the past that have been listed and which provided event market information both for academic study and business and general public use.

Imagine if you were a resident of a state such as Florida that is frequently exposed to severe storms and how crucial information on the likelihood of a storm hitting your state can be if your business, family and friends are likely to be impacted by such an occurrence. Intrade lists event markets on such
eventualities.

The event markets listed on Intrade provide price discovery information on whether an earthquake measuring 9.0 or more on the Richter Scale will happen anywhere in the world in 2008; whether Avian Flu H5N1 is confirmed in the United States in 2008; whether the U.S. carries out an overt attack on North Korea; or even whether Robert Mugabe departs his presidency in 2008. These significant events are highly relevant to millions of people in the United States and elsewhere.

President Bush stated in an address on global climate change that: “This is a challenge that requires a 100 percent effort; ours, and the rest of the world’s.” It seems to us impossible to make a “100 percent effort” to address the challenge of climate change without using event markets to aggregate information, such as that provided by Intrade’s market on whether 2008 will be one of the warmest years ever recorded.

All of the markets cited above give information on the probability of the event occurring. Some of the information aggregated and distributed by Intrade has been more predictive than other. The predictive accuracy of Intrade’s event markets and event markets generally have been cited and studied extensively by academics and others including, but not limited to Professor Robin Hanson, Professor Charles Noussair, Professor David Paton, Professor Leighton Vaughan Williams, Dr. David Pennock, Professor Eric Zitzewitz, Professor Mark Perry, Professor Erik Snowberg, Professor Marco Ottaviani, Professor Justin Wolfers, Professor Koleman Strumpf, and Professor Paul Tetlock.

Nearly all leading academics, not known for their attraction to unanimity, have publicly supported event markets. A great majority of these academics have been supplied with Intrade market data in the past, a service that Intrade intends to continue, for all study leads to an increase in transparency and understanding of event markets. It seems that the leading event market academics make no distinction between the benefits derived from academic owned markets like Iowa Electronic Markets and commercial market platforms like Intrade.

Yet many academics, with some notable exceptions, do temper their policy prescription to suggest a “safe harbor” for academic sites where research might be more generally available. As noted above Intrade has gladly supplied its event market data, typically free of charge to most of the leading prediction market academics and their students, and we are committed to encouraging the future study of event markets by continuing to supply our event market data free of charge or at very deep discounts. The academics that study event markets do a great service in developing our understanding of the strengths and weaknesses of event markets. Some commentators suggest that market liquidity and breadth typically benefit all event market stakeholders. Thus far commercial platforms like Intrade seem to be providing the greatest depth and breadth in event markets.

As Intrade has been a staunch supporter of event market academic study, and supplies greater depth and liquidity in its event markets than any other platform, it seems strange not to be a preferred purveyor. Perhaps the predominant reason many academics have held back from advocating and treating all event markets alike is a sense that initiatives to clarify or unwind the legislation restraining the optimal development of event markets is unlikely to be achievable. It seems many academics and commentators suggest a slow bureaucratic and pragmatic caution rather than focus on the optimal result. While the optimal result may be more challenging to achieve, for consistency, for better price discovery for the benefit of all, as well as for the development of Intrade, we encourage CFTC to apply common goals, objectives and standards for all participants.

While some evidence and event markets have highlighted that event markets do not always provide robust predictive information, the preponderance of the research suggests that event markets have both the ability and track record of providing the best available information upon which decisions may be based or optimised. Of course the uncertain regulatory status of event markets constrains the development of liquidity, price discovery and by logical extension societal benefits.

Intrade has received testimonials from numerous U.S. regulated businesses and private citizens which state they would like to trade on certain event markets but are unable due to the regulatory uncertainty. Therefore, unless and until event markets are given a certain status they will not develop to their full potential.

Based on the above and comments by many others, some of whom have been mentioned by name in this comment, the price discovery mandate that the CFTC has can only be served if event markets are embraced.

In terms of offsetting price risk and the opportunity for hedging, the overwhelming majority of markets listed by Intrade can easily be seen to have underlying economic implications and risks. For example, U.S. tax rate changes, a negative geopolitical event, an increase in the threat level to homeland security and the associated costs of a higher threat level, or indeed Social Security reform all have massive economic justifications across society.

As with the CFTC’s price discovery mandate, it is impossible for us to imagine how risks can be optimally assessed and managed without the status of event markets being clarified.

The CFTC are also sensitive to retaining the competitiveness of futures markets and retaining “competition in the global marketplace”. There has been much written about the United States losing its edge in global financial markets. Often cited is that burdensome and inflexible regulations, most notably the Sarbanes-Oxley legislation passed by Congress in 2002, are driving business to London, Hong Kong, Frankfurt and elsewhere. In this regard, the CFTC has an opportunity to be a world first and embrace event markets. In so doing the CFTC will ensure the United States’ leadership position is encouraged for the important and growing event market industry.

The greatest challenge in bringing about an appropriate and successful embrace of event markets by the CFTC is unlikely to be identifying and agreeing that the public good will be served, or that risks may be better managed. The challenge for the CFTC may well be the uncertainties relating to legal and jurisdiction issues. In these matters there are experts far better versed than Intrade to opine.

The financial events of the last six months in which virtually the entire world financial system stopped functioning to a greater or lesser extent has highlighted what can happen when many of the world’s largest financial institutions make concurrent similar mistakes. Such systemic contagion has led commentators to suggest a more fundamental approach to how and what we regulate. Where event markets are concerned we are hopeful that this is the case and that the level of regulation is such that the evolving stage of the event market industry is not stifled.

We are proud to be at the forefront of the development of the event market industry. We are determined to continue providing the best information on relevant event markets to the widest audience. We wish to solidify our regulatory position in the U.S. and elsewhere. We strongly encourage the CFTC to clarify the situation with regard to event markets for the benefit of all, even if there are costs to Intrade. We are highly optimistic that the CFTC will grasp this opportunity to benefit all society and we wish to serve our own most important role in an industry niche that we have been privileged to help shape.

Respectfully Submitted on behalf of the entire Intrade Team by
John Delaney
Chief Executive Officer

CC to Fax 202.418.5521 and e-mail: secretary@cftc.gov.

1. “Intrade … isn’t just an entertaining Web site. It is the latest iteration of one of the most important economic developments of modern times.” David Leonhardt, Economics Reporter, The New York Times, February 14, 2007

2. Costs of regulation are high in the U.S., “that’s a key reason the leading commercial prediction market, Intrade, is based in Ireland” Prof Paul Tetlock, Wall Street Journal, May 11th 2007

3. “On Dec. 11, 2003, Intrade’s contract on Saddam Hussein’s capture suddenly began to move. … Two days later, Saddam was in custody.” Bill Saporito, Time Magazine, October 24, 2005

4. “At FORTUNE we often write about the latest hot company, but it’s rare that we get a chance to introduce you to an entirely new market… Intrade is the only efficient market system around for investing in, well, almost anything” Andy Serwer, Managing Editor, Fortune, August 8, 2005

5. 78% of traffic to Intrade.com in the period 1 January to 30 June was from the U.S.

6. “Intrade futures market ~ the greatest time-saving invention of this century.” John Tierney The New York Times

7. The Uncertainty Stress Scale: its development and psychometric properties. Can J Nurs Res. 1994 Fall;26(3):15-30, PMID: 7889446

8. As of June 30 2008

9. For many people, Intrade is the king of the prediction markets.” Stephen Dubner, Freakonomics, The New York Times July 5 2007

10. http://www.whitehouse.gov/homeland/book/sect5.pdf.

11. http://feedroom.businessweek.com/?fr_story=5a3aa8086dbd52b35ae21c7f5abe94f85fa0a8ab&rf=sitemap.

12. http://www.energy.gov/news/5920.htm

13. “Want straight answers on what will happen in politics and current events? Answers without partisan bias or wishful thinking? You can’t do much better than the prices at Intrade.” Professor Robin Hanson, Professor of Economics, George Mason University

14. “My forecast? Prediction markets will become ever more important to business and public policy. And Intrade are running the most interesting markets around.” Professor Justin Wolfers

15. http://www.whitehouse.gov/news/releases/2001/06/20010611-2.html

16. “Analysts can debate about a recession as much as they want, but talk is cheap. It’s great to have [Intrade] futures trade where people put money behind their beliefs!” Professor Mark J. Perry, University of Michigan-Flint

17. http://www.international-economy.com/TIE_Sp07_Baker.pdf and http://knowledge.emory.edu/article.cfm?articleid=1015

18. “Regulatory Underkill,” Arthur Levitt Jr., Wall Street Journal, March 21, 2008

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NEXT: More from John Delaney about regulations

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This new bill from our good friends Reps. Paul and Frank, the one that simply makes the UIGEA go away, is the greatest piece of legislation yet on the subject. Sadly, very few poker players are jumping up and down about this. This new bill would save us from burdensome regulation and taxes and bring online poker back to the “good ole days”. Why aren’t more people screaming for this version to pass.

Consistently, when I see an article about the new bill (that fixes all the government intrusion of the old bill), they lump it together with bills that would tax the poker player out of business. We should all be pushing as hard as we can for this new bill and throw the rest in the trash.

The last thing any poker player with an understanding of economics would ever want is a bill that taxes and regulates online gaming. The power to regulate is the power to destroy. It always has been. If we are to save the industry, there is only one answer to the UIGEA –eradicate it completely. The last thing any of us want is a precedent out there that the U. S. government has the right to tax, oversee and regulate internet sites. They are trying to get a foothold on the entire Internet and we must stop it in all forms.

Any organization that supports any other bills (such as the ones that tax and regulate online gaming) is no friend to the online gambler. Instead, they are clearly in the pocket of big Nevada gaming outlets that wish to clear the field of competition and take over the entire industry for themselves. With billions of dollars at stake, one can hardly blame them for trying, but we certainly do not have to hand them the bullets to shoot us with.

We now have a brilliant and safe bill to support. One without controversy. One without nasty side effects. Please call your congressmen and ask them to support the newest bill by [Ron] Paul and [Barney] Frank:

http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.5767:

While you are at it, demand that the poker player’s alliance support this and only this bill to protect us all from the ravages of government. Also, demand that they stop supporting the IGREA – the earlier attempt by Frank that was plagued with licensing requirements and draconian taxation methods. For those of you that wish to pay additional taxes to the Federal Government –feel free.

I was thinking about the constitutionality of prediction markets when reading Gary McDowell’s “The War For the Constitution”:

Warren Burger summed it up for many when he described Mr. Bork as simply the best qualified nominee in the former chief justice’s own professional lifetime — a span of years that included the appointments of such judicial luminaries as Benjamin Cardozo, Hugo Black and Felix Frankfurter. Such praise was no empty exaggeration.

A former Yale law professor and U.S. Solicitor General, Mr. Bork was, at the time of his nomination, a judge on the United States Court of Appeals for the District of Columbia Circuit. When he was a circuit court judge, Mr. Bork’s opinions not only were never overruled on appeal, but on several occasions his dissents were adopted by the Supreme Court as its majority view.

In an earlier day such an appointment would have been celebrated as adding breadth, depth and luster to the highest bench. Instead, the nominee faced a mauling by those who set out not only to destroy him personally but to discredit all that he stood for as a jurist.

It was immediately clear that the unprecedented vote of 58-42 against his confirmation reflected something far more historic and fundamental than an ordinary partisan standoff. The confrontation in fact had been one of the most cataclysmic and divisive events in American domestic politics during the second half of the 20th century. The reason was that Mr. Bork’s opponents succeeded in making the fight over his nomination into a contest over the future of the Constitution.

* * *

Time has shown that Mr. Bork’s theory of constitutional interpretation remains very much alive; he was defeated but his central idea was never discredited. That theory of interpretation and its implicit belief in restrained judging should continue to guide anyone who believes that the inherent arbitrariness of government by judiciary is not the same thing as the rule of law.

One thing that is more scary than irrational voters is whimsical judges. And I know a few, personally.

*Off the top of my head, free speech and peaceful assembly seem to enable our rights to prediction markets.

UPDATE: Chris Masse linked prediction markets to the right to privacy here last year. I’m not sure that is as relevant as speech and assembly–the whole point being prices from prediction markets is a public good (even as I concede that the anonymity of traders improves prices). But what do I know–I’m not an attorney or judge, just someone who knows a lot of them.

UPDATE: Tom Bell, on the Constitution’s call for progress in science and arts.

UPDATE: Alvin Roth, on the repugnance of markets (including prediction markets in terror). This reframes my point–constitutional repugnance is good, fleeting cultural repugnance is irrelevant. Just as slavery markets were not repugnant yesterday (but unconstitutional), so prediction markets are repugnant today (but constitutional)!

Cross posted from Caveat Bettor.

[...] The complicated state of US law

The always fascinating subject of American state and federal law as applied to online gambling was next on the agenda, with US gaming lawyer and respected author Martin Owens and the more recent personality arrival Edward Leyden of iMEGA in the hot seats.

Owens ran over the ‘curious’ nature of state vs. federal law in the United States, detailing the complexities and inconsistencies and the apparent predilection of the enforcement authorities to harass and intimidate vulnerable targets rather than focusing on issues of US law that remain unresolved.

He predicted increased demand by individual states for some involvement in Internet gambling and the revenues it can raise. “Internet gambling is not dead in America,” he asserted.

Trade association iMEGA’s president Edward Leyden said that his organisation represented the wide interests of entertainment that included online gambling, insisting on the fundamental right for adults to engage in entertainment that may include online gambling.

He went on to give an impassioned summary of his organisation’s activities to date, primarily in taking the federal government to court on the UIGEA.

He praised Judge Mary L Cooper who is currently hearing the case and will make a ruling on iMEGA’s application for a restraining order on the UIGEA within the next 30 days as an erudite, fair and technology oriented official with conscientious attention to detail.

“Following the hearing last week, and without presuming to prejudge the issue, we came away feeling very confident in a fair and knowledgeable result from Judge Cooper,” he said before going on to discuss the just-published UIGEA regulatory proposals on which the government has invited comment by December 12 (see previous Online-Casinos.com/InfoPowa report)

Of the 52 pages published, only 16 deal with the actual regulations – the remainder was explanatory and indicated an attempt by the drafters to produce a fair and balanced document under difficult circumstances.

Leyden reminded the audience that many of the Congressmen voting on a security bill to which the UIGEA was attached at 2.30 am on the cusp of a Congressional recess late last year had not known what the attachment comprised.

More

[...] In essence, if the United States was going to say that “remote” gambling was so bad that it was necessary to prohibit it across the board, then it indeed needed to be consistent about that, and not use the claim as a way to discriminate against foreign trade. Although the discussion of this issue in the earlier rulings is somewhat impenetrable to the non-WTO literate (and was even so to many of them as well), the most recent ruling that came out in March of this year made it crystal clear. The United States has a wide variety of legal, domestic-only remote gambling operating currently. Further, something that so many people have not realised but this last panel finally got right, and that is that federal law doesn’t prohibit remote gambling at all – just remote gambling that crosses a state or international border. By leaving states free to have as much intrastate remote gambling as they want, but prohibiting services that cross a border, the federal government cannot possibly say that it prohibits all remote gambling. And, of course, the crossing of a border is, by itself, not a logical basis for discriminating against services. At least not under international law. [...]

Read the whole stuff. It’s good material. Insights.

Australians have a reputation as an easy going lot not overly concerned with the moral ambiguities of gambling. State regulated Totalizator Agency Boards (TAB) have offered off site wagering for forty years in every state in Australia, providing state guaranteed accuracy of the results posted. Casinos are legal, and online gambling giants like Sportingbet PLC are fully licensed. So what’s the big deal about Betfair?

The Australian horse racing industry, much like its American counterpart, had a fit at the idea of its cozy state monopolies being challenged by outsiders like Betfair. The argument before the High Court has some awkward similarities to the ones that have the US Government squirming in front of the WTO in its fight with Antigua.

Just as the American horse racing industry received an enormous “carve out” from Congress to allow it to continue wagering remotely while prohibiting foreign competition from doing the same, so the racing industry in Western Australia has fought tooth and hoof to protect its local industry. The claim is that Betfair will freeload off the local racing industry, not paying taxes and failing to support the racing facilities themselves. They also claim that betting exchanges provide an incentive to throw a race, since punters are able to bet on losers, rather than just winners.

However, Betfair has already addressed these concerns in a separate deal with the government of Victoria, and it’s hard to see how Western Australia is a special case.

Australia, like the United States, has a federal system of government, with state governments traditionally free to craft their own legislation on issues that impact local morality, such as gambling, and the federal government empowered to harmonize trade between the states or support national defense.

However, fair trade arguments aside, a recent decision by the Australian High Court has greatly expanded the jurisdiction of the federal government over corporate activity, even at a very local level, and will likely put a rude stop to Western Australian unilateralism.

The so–called Work Choices legislation passed by John Howard’s government in late 2005 gave almost plenary power to the federal government to regulate corporate activity, even at a very local level. This radical revision of Australian labor law was upheld by the High Court on November 14, 2006, and it’s highly unlikely that Western Australia has jurisdiction any longer over the activities of Betfair, even within its own borders.

Under the business friendly Howard government, regulatory harmonization between the states is the name of the game. When Betfair received its license in Tasmania, it walked away with a little more than it bargained for.

Meanwhile, back at the economy, you may have noticed that 2006 ended without a recession. This follows the recessions of 2003, 2004 and 2005, all of which also never occurred, though they were widely warned about in the press and even forecast by many economists at some point during each of those years.

The big economic story going into this New Year is that growth is accelerating. Jobless claims have dipped, as the labor market stays tight amid a low 4.5% unemployment rate and rapidly rising real wages. Corporate profits continue to defy gravity, growing at nearly double-digit rates some five years into this expansion. Economist Ed Hyman’s ISI Group reports that as of last Friday some 57% of companies had beat profit expectations for the fourth quarter.

Then there’s the “trade deficit,” which was supposed to have produced a crisis any day now but is instead contributing to faster growth as American exports soar. Peppier growth abroad is helping, especially in Europe, assuming Germany’s big increase in value-added taxes this month doesn’t get in the way. Oil prices have come down, and even the housing slump seems to have stabilized in some parts of the country.

UPDATE: Apparently, our government revenues are off the charts t00, in light of the capital gains tax cuts. Dan Clifton writes:

The debate about the capital gains tax cut is over. When Congress passed the 15 percent reduction on capital gains all we heard from the naysayers is this will produce massive deficits. When Congress extended the 15 percent rate in 2006 we heard the same tired rhetoric – only louder. Now the new leadership want to repeal this tax cut to generate revenue to the federal government. Based on the new data they may want to reconsider whether repealing this tax cut will generate any revenue to the federal government.Today’s CBO report puts the debate to bed. We were told by the Joint Committee on Taxation (JCT) the capital gains tax cut would “cost” the Federal Treasury $5.4 billion in fiscal years 2003-2006. Thus, the initial CBO forecast (January 2004) forecasted capital gains revenue to be $42 billion in 2003, $46 billion in 2004, $52 billion in 2005, and $57 billion in 2006.Well in what could now be considered the worst forecast in modern times we find out today capital gains tax collections were actually $51 billion in 2003, $72 billion in 2004, $97 billion in 2005, and $110 billion in 2006. For 2005 and 2006 collections nearly doubled the initial forecast.

Translation = total capital gains tax collections over this period were 68 percent higher than forecasted. But even more important, a loss of $5.4 billion is actually a gain of $133 billion. That is a swing of $138 billion in in just short years since the January 2004 forecast. Oops.

Hat tip to Don Luskin. I conclude with the following:

1) Properly structured taxes (and tax cuts) reduce poverty and distribute wealth.

2) Congressional entitlement programs reduce wealth and distribute poverty.

Please remember this when you vote in 2008. Unfortunately, neither Dems nor GOPs understand these principles yet.

I have an idea of which I’m proud (does not happen often): legislators should take a economics and law policy test before they can candidate. The test results will not prevent them from being voted into office–the voters have the final say. But the test results will be listed on the ballots. Think of it as American Legislator: American Idol for congress, without the ratings starved judges skewing the phone-in votes.

Cross-posted from CaveatBettor.

by Koleman Strumpf

(Emphasis added by editor – Republished on Midas Oracle)

With the steady rise of commercial activity on the Internet, Washington has been steadily moving toward a formal prohibition of online gambling. Recently, a series of bills sponsored by Sen. Jon Kyl (R-AZ) and Rep. James Leach (R-IA) have sought to achieve this goal by restricting the flow of funds into Internet gambling operations. While such policies might spring from a certain moral viewpoint, they are unlikely to succeed in limiting online betting. Because Internet gaming operations are often located outside of the U.S., there is little Washington can do to restrict their actions.

Moreover, a prohibition policy has perverse effects and encourages the very behavior it seeks to curtail. This is illustrated by a close examination of one of the most popular forms of gambling; sports betting. There is a large demand for sports betting, and a large illegal sector has arisen to provide this activity despite a long-standing policy of prohibition. A similar ban on all Internet-based sports betting also is likely to fail. A legalized regime is a better way to mitigate the potential dangers of Internet betting. This argument is straightforward and it applies whether one regards gambling as a moral evil or a fundamental expression of individual freedom. Even if one takes the principled stand that gambling is fundamentally wrong, a policy of prohibition is unlikely to advance the goal of eliminating gambling altogether.

To begin, let’s take a closer look at betting on major sports, which is currently illegal in all states besides Nevada regardless of whether it involves the Internet. While these bans are primarily enforced by states, the federal government does get involved if wagers cross state lines or there is an alleged involvement of organized crime. So how successful has this regime of prohibition been at eliminating sports betting? By almost any measure it is a failure. A recently completed report from the National Gambling Impact Study Commission estimates that individuals wager between $80 and $380 billion dollars with illegal bookmakers. This is nearly one hundred times the amount bet on professional sports with legal bookmakers in Nevada.

The sheer size of the illegal sports betting markets only tells part of the story. I recently completed an analysis of illegal bookmakers in New York city using actual records seized in series of arrests by the Kings County (Brooklyn) District Attorney office. I found that illegal bookmakers utilize policies which exacerbate the potential harm of gambling. First, they offer short-term credit, and allow bettors to wager for a week or longer without fronting any money. Credit might allow individuals to gamble beyond their financial means and leads some bettors to wager intensively in an attempt to “catch-up” before their debt is due. In fact most of the bettors in my records would be considered compulsive gamblers, wagering almost every day and laying hundreds of dollars at a time.

Second, illegal bookmakers take advantage of people’s mistakes. They know that many bettors are fans of certain teams. In the case of the bookmakers I have records for, about a quarter of the bettors appear to be New York Yankees fans who wager consistently on their team. The bookmakers understand this tendency and “price discriminate” against such bettors: they charge them a significantly higher price for their Yankees bets. While price discrimination does have an important role to play in free markets, it is likely that consistent use of it would be precluded if sports betting was legalized and above-board, much as they are in Nevada sports books or with off-track horse betting parlors.

There is little evidence from the U.S. experience with sports betting to believe a prohibition policy limits the activity or prevents individual excesses. When an activity is widely demanded and socially accepted (at least in some circles), markets will find a way to deliver it whatever the legality. Our initial experiences with Internet gambling bear this out. Despite the current attempts at prohibition and even the arrest of one Internet bookmaker, the sector is proliferating. Internet operations catering to U.S. citizens operate from bases in countries as diverse as Antigua, Costa Rica and Australia. Given that such countries view Internet gaming as a legitimate activity, there is little possibility these companies will disappear anytime soon.

Presuming the current attempts at prohibiting Internet sports betting persist, what might we expect to see? First, there will be a growing alliance between Internet bookmakers and the more traditional illegal bookmaker. The on-street bookmakers have experience in providing and servicing financial credit, which would be difficult for the Internet books to provide given the difficulty of enforcing a debt contract from afar. There is already evidence that Internet operations have started to pay their illegal on-shore cousins to run their credit business. Such interaction will help reinforce the influence of the illegal sector and will exacerbate the perceived problems of sports betting, such as facilitating money laundering.

Second, prohibition will drive the Internet operators further from the U.S. An important feature of the Internet is that it makes physical distance largely irrelevant, and from a bettor’s perspective it is just as convenient to wager on-line with an Antigua bookmaker as with one down the street. As bookmakers move further from U.S. soil to escape its influence, it will become harder and harder to legalize Internet gaming in the future as the bookmakers get ensconced in their offshore locations. This possibility was an important rationale behind the recent move in the U.K. to encourage the repatriation of online betting operations. And finally a prohibition policy will fail in its most fundamental goal, limiting the availability of gambling to vulnerable populations. Internet bookmakers have little incentive to keep out underage or addicted gamblers.

A far more sensible policy would be to legalize Internet bookmakers. This would allow policies to be put in place which could limit the potential excesses of gambling and minimize the role of the criminal element. As side benefits, a legalized regime would likely displace the widespread illegal operations. It is perhaps understandable that such an option is rarely considered. Gambling is a subject which many feel passionately about. But the argument for legalization and regulation should have appeal for opponents and supporters of gambling alike.

Koleman Strumpf – (professor of economics at the University of Kansas)