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The DOJ “Liberated” Poker from the Market’s Tyranny

April 25, 2011

The first response of many folks to the Justice Department’s recent crackdown on online poker was, “Doesn’t the government have anything better to do?” I find this reaction puzzling. What could be a more essential function of the state than to undermine public confidence in the market?

I’m not being facetious. The axiom of all state intervention is that nothing can exist without government. In antitrust, for example, there is a famous quote, attributed to Thurgood Marshall, that the Sherman Act is the “Magna Carta of free enterprise.” If there’s no antitrust, how can there be competition? Ignoring the fact that markets functions long before the Sherman Act’s invention in 1890, the insidious implication is that no individual can have any confidence in a market that is not directly or indirectly controlled by antitrust officials.

The DOJ’s crackdown on poker, likewise, sends an important message to the general population that this was a dysfunctional market that can only be made functional by the benevolent hand of the state. Indeed, after the initial “don’t you have anything better to do” reaction, the secondary response of many poker professionals was to blame inadequate lobbying for the present situation. If only poker players were more politically savvy and organized, the theory goes, then they’d be in a better position to assert their “special” interests. And that plays right into the hands of the DOJ and the larger government it serves. After all, the feds don’t want to eliminate online poker; they simply want to ensure there is no free market for online poker.

The state’s counter-reaction, of course, is that “free” markets are inherently deceptive and harmful to consumer welfare. A key element of the poker crackdown is the notion that banks committed “fraud” by mislabeling transactions between customers and online poker providers. Banks did, in fact, do just that — because they were trying to help their customers get around the US government’s ban on online gambling. Absent the state’s intervention, there would have been no need to conceal the true nature of what were entirely voluntary exchanges. Yet now the DOJ has used these acts of concealment to further undermine public confidence in the market by stating, falsely, that there was massive “fraud.”

It’s the oldest trick in the book. One intervention undercuts public confidence in the market, so a second intervention is necessary to prevent further erosion. The gambling industry in particular is rife with this. To cite one of my favorite examples: In 2004 the Federal Trade Commission intervened in a merger between two casino operators. The FTC forced the newly combined firm to sell one of its riverboat casinos in Baton Rogue. Why? Because they were the only two such casinos in Baton Rogue, which would create a “monopoly.” Actually, at the time there were 16 casinos operating in Louisiana at the time (this was pre-Katrina), but of course, the FTC counted the two Baton Rogue casinos a distinct market.

Anyhow, the FTC completely ignored the fact that the market for “casino services” in Baton Rogue was not free at all, but rather a product of state cartelization. Louisiana’s Gaming Control Board held a monopoly on casino “licenses,” and it decided how many casinos could compete in Baton Rogue. That the merger of the two casino operators produced a hyper-local “monopoly” was incidental to the state’s decision to ban all outside competition — a move the state deemed necessary to ensure public confidence in the gambling market:

[T]he development of a controlled gaming industry to promote economic development of the state requires thorough and careful exercise of legislative power to protect the general welfare of the state’s people by keeping the state free from criminal and corrupt elements.

In other words, a free market for gambling would inevitably fail because “criminal and corrupt elements” would overwhelm the process. Hence there must be a state-run market that the public can express true confidence in. The FTC’s actions, in turn, strengthen that public confidence by ensuring “private” actors don’t conspire to undermine the carefully constructed “competitive” regime employed by the state.

The biggest threat to government control is not individual firms that “break” the law; it’s the firms that successfully operate outside of it. That is why the DOJ had to, in its mind, shut down the online poker operators. It sends a message to customers that they cannot trust shady, non-government-based gambling outfits and must seek refuge in the “free” market of federal regulation and taxes. From the DOJ’s standpoint, therefore, it simply liberated poker players oppressed by the market — and now they can seek liberty in the Providence of lobbyists and lawyers.

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