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Regulations and Politics

The U.K. Gambling White Paper, regulatory capture and rent-seeking behavior

Regulations and Politics

“Ninety percent of the politicians give the other 10 percent a bad reputation.”

—Henry Kissinger

In 1971, University of Chicago economist George Stigler published his famous article “The Economic Theory of Regulation.” This article is best known for the following quote: “As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”

What is fascinating about the thought underlying this quote, now over 50 years old, is its widespread respect and acceptance received from wide swaths of the world’s economists. Economists are notorious for seldom agreeing on anything—yet even today, many economists treat Stigler’s pronouncement with great respect.

I came across Stigler’s work in the mid-to-late 1970s while working on a study of the development of Nevada’s gaming regulatory system. I was an instant fan. Since then, I have spent over 40 years collecting regulatory capture quotes. My favorite is by John Kenneth Galbraith, mainly because Galbraith was one of those rare economists who could actually communicate with words. It was his gift. I also like his presentation because it is a life-cycle model. Galbraith argues:

“Regulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age after a matter of 10 or 15 years, they become, with some exceptions, either an arm of the industry they are regulating or senile.”

I have embraced the notion of regulatory capture over the many years I have been involved in gaming. It just makes sense of so much of what I see and experience. And just when I thought I had it all figured out, there it goes and changes. Worse yet, I wasn’t sharp enough to catch it.

The good news is that I have sharp and observant friends, many of whom live in the United Kingdom. One in particular, whom I shall call my friend Bruce (to protect his identity from being shamed by having me as a fanboy), mentioned recently how captured the industry was on his side of the pond.

However, as he went on with his rant, I discovered he was not talking about the garden variety of regulatory capture I was first introduced to over 40 years ago. That is where the industry captures the regulatory agency—instead, he was talking about the effort to capture the industry by members of the government.

My goodness, this made absolute sense to me with respect to so much that is going on now.

Pharma Model

To provide a model of regulation in simple terms, the goal is to have the jurisdictional government establish the public policy goals for the industry. Then, the government is supposed to establish a mechanism to ensure that people of character, honesty and integrity populate a body that oversees this industry. Not only does this regulatory body need to possess strong ethical standards, but they also need to have a high level of expertise in how the industry works and an understanding of the goods or services it provides.

This was basically the model relevant to the pharmaceutical industry in the U.S.

The U.S. wanted a viable, safe drug industry to support the jurisdiction’s health goals. The government established this as a public policy goal. It then worked to establish a regulatory entity staffed by qualified professionals who understood the industry and could design methods to ensure the efficacy and safety of the industry’s output—that is, pharmaceuticals. And while there have been some dramatic misses along this path, most would conclude that it is a better system than laissez-faire.

The Financial Times chronicles in an article by Jamie Smyth, published on May 1, 2023, how this system is potentially breaking down in the U.S. The story describes a shift in the U.S., where a judge may feel more qualified today than the Food & Drug Administration to determine which drugs should be allowed on the market (apparently, law school curricula have expanded).

Moreover, the article suggests that the pharmaceutical industry feels that the scientists and staff of the Centers for Disease Control and Prevention and other related institutions are better equipped to assess public health threats than Washington, D.C. politicians.

I don’t intend to upset anyone here. I am just telling you what the pharmaceutical industry is saying. They are saying that they have much more confidence in their science than they have in politicians.

What I found so terribly interesting about the FT article is that the industry wants science and evidence to rule the day, not some politician’s ideology. I would like to believe that what the industry is doing here is picking the option that it believes is the most sustainable, for it seems that the pharmaceutical industry believes that if we rely on politicians to control these processes, the markets for pharmaceuticals may eventually all end up dead.

To repeat the desired model: Politicians establish public policy goals, establish a competent regulatory entity to execute those goals, establish ethical guideposts, and then stay out of the way.

The U.K. Gaming Model

I believe that the U.K.’s Gambling White Paper, released last month, demonstrated that this is not happening. It is obvious by the very existence of the document that the U.K. government is moving in a direction to exert greater participation and control over the gaming industry. And if one chronicles the long and arduous journey that the white paper followed to become a reality, it is clear that politicians are terrible at project management.

I apologize to those readers who were hoping for a brilliant discussion by a Yank living thousands of miles away to expound on the minutiae of the white paper. My position is that the most important reality of the white paper is that the process by which it came into being is all wrong. Moreover, there will probably be three or four more governments before that thing ever escapes from bureaucratic hell.

What is more damning about this process is that not only did the government have little, if any, insight into the operation of the industry, but there were politicians who were willing to accept things of value from people who had a vested interest in the outcome of the process. This is generally not a good thing for the public.

Regulated gaming operates in imperfect markets, for regulation creates market imperfections. This often allows for what economists call excess profits. These imperfections, in effect, create a surplus pool of value, and the fight over this pool of value characterizes the dynamics of the industry.

The industry wants a big chunk of this surplus because it wants to make a lot of money for itself and its investors. The government wants a grab at this surplus to improve schools, roads, and all that.

What seems to be dramatically changing is that the politicians seem to be clamoring for their piece, and their piece comes in campaign contributions, gifts, future jobs, special invitations, consultancies and the like. One worries that this comes at the expense of better schools, roads, and other social and public projects. Much of this behavior can be addressed under the heading of rent-seeking behavior.

What has been happening in the U.K. is that the politicians have been increasingly demonstrating rent-seeking behavior. They want attention, money, favors, tickets, jobs, and essentially anything of value that can be acquired from the industry. The concern is that they will trade this for favorable rulings, laws, and administrative acts.

Being a friend of the industry can be a good thing. Other players in this drama include universities, researchers, charities, etc. And the industry is to fund it all, with the ultimate threat of being punished if it does not participate. This becomes a very complex ecosystem and may not be sustainable.

 

The Dance

So, I would argue that our new gaming model comprises politicians and the industry engaged in a rent-seeking dance, with many inexperienced regulators in the middle trying to figure out what is happening. And nobody seems overly engaged in representing the public interest.

To be clear, I am suggesting that politicians have realized they can personally benefit from gaming, and for this reason, more and more, they are sticking their noses into it—not for public policy reasons but for their own pecuniary reasons.

This rent-seeking behavior is also taking place on the U.S. side of the pond. The difference here is that it is on steroids. In the U.S., we have an industry growing at breakneck speed. Moreover, the industry is awash in cash.

There is nothing like huge piles of cash to stimulate rent-seeking behavior from people in the political milieu, as was best demonstrated in California. The industry could have cured hunger in many developing nations, but they opted to burn huge piles of cash in an effort to secure a gigantic playground on the West Coast to sell their wares. This did not work out too well. The industry somewhat gave the impression that it had more cash than sense.

One thing California did accomplish was to notify every politician in the country that a huge amount of cash was available to them to assist firms in the gaming space. These firms are in a breakneck race with one another to gain markets and have few guardrails on their spending. And that message has been heard clearly.

Anticipate seeing a continuation of the trend of more politicians becoming gaming advocates, lobbyists and advisors. Politicians will write more letters on behalf of this or that. Moreover, anticipate seeing rent-seeking behavior in a great many other institutions that these massive amounts of cash seem to attract.

If the gaming industry is going to get itself on a sustainable trajectory, we need to figure out a way to move the personal goals of politicians away from it. Their center of gravity has moved well away from the goal of public service and is far too aligned with their personal interests. This cannot end well, for the public will tire of this act and eventually punish both groups.

Maybe I can get the industry to hire me to do a white paper to explain this. It would be nice if you all provided some letters supporting this effort.

 

Richard Schuetz entered the gaming industry working nights as a blackjack and dice dealer while attending college, and has since served in many capacities within the industry, including operations, finance, and marketing. He has held senior executive positions up to and including CEO in jurisdictions across the United States, and served as a member of the California Gambling Control Commission and as executive director of the Bermuda Casino Gaming Commission.

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