Politics and Law

After the votes were tallied on Election Day four years ago, the big winners turned out to be the betting Web sites that predicted George W. Bush's re-election.

U.K.-based Betfair correctly predicted that Bush would stay in office and gave him 2-to-1 odds of beating his Democratic rival, Sen. John Kerry. The odds at Dublin-based Tradesports.com were similarly accurate, giving Bush a 58 percent chance to win and Kerry a 42 percent chance.

This year, the predictions are far more dramatic. Betfair's national election chart puts the probability of a President Barack Obama at 94 percent and the probability of John McCain winning at just 7 percent. Obama's odds are up from below 90 percent last week.

What a change a few months make. In May, Obama and McCain were at rough parity. In mid-September, they were almost at parity--in other words, even odds--after Sarah Palin was nominated as the Republican vice presidential candidate. Then the odds of an Obama presidency broke sharply upward, roughly at the same time the financial crisis hit and the bailout bill was approved.

Similarly, Intrade puts Obama at about 92 percent, and McCain at about 9 percent. Other relevant odds: a 36 percent chance Obama will win 370 or more electoral college votes; an 80.7 chance of a U.S. recession in 2008; and a 79 percent chance of substantial income-tax hikes next year.

In general, betting exchanges tend to be surprisingly accurate in their predictions. One explanation is that it's easy enough to offer predictions when being wrong means only potential embarrassment for a blogger or would-be pundit. But when there's a financial penalty for making a mistake, results tend to line up far more closely with reality.

Well, most of the time. Sometimes betting markets--also called prediction markets--do a better job of reflecting conventional wisdom than offering a glimpse of the future.

During the 2008 New Hampshire primary, Obama attracted more enthusiastic crowds than rival Hillary Clinton. Intrade put his odds of winning at a remarkable 54 percent, while a traditional pollster said Obama would get only 28 percent of the vote.

We know how that turned out: Clinton won the state. (Perhaps more to the point, as recently as winter 2007, Intrade had Obama at something like a 10 percent of winning and Rudy Giuliani at 20 percent.)

While Internet-based betting may be novel, political odds-making enjoys a venerable tradition. Two economics professors, Paul Rhode and Koleman Strumpf, once calculated that betting markets predicted the popular-vote winner in every presidential race but one between 1884 and 1940. (In that 1916 race, gamblers were offering even odds between Woodrow Wilson and Charles Hughes.)

Rhode and Strumpf are working on a paper--a publicly available version (PDF) is dated August 2008--that looks at the international history of betting markets. It says election betting was popular in Italian city-states as far back as 1500. And in the United States during the 1830s, politicians including Martin van Buren either bet on themselves or encouraged others to do so.

"While it is sometimes claimed that political betting markets are a recent invention, they clearly are not," Rhode and Strumpf write. "Rather, it is the absence of such markets during the mid- and late-20th century which is the exception."

The Midnight Regulation Rush is On!
By Dick Armey

While most of us are distracted watching the presidential election, the U.S. Treasury Department is quietly pushing through new rules that potentially will have devastating consequences for privacy and e-commerce.

It's an understatement to say the Internet has done more to shape society over the last 10 years than any other technological innovation, transforming communications, business, and entertainment. The benefits generated by the technological revolution easily parallel those of the earlier industrial revolution. What's important is that this explosion in growth occurred in an era relatively free of government interference. Unfortunately, that may not remain the case.

Dick Armey, who says that the Treasury Department should be cautious in its Internet gambling rules

(Credit: FreedomWorks)

Regulatory incursions onto the Internet are becoming more frequent, threatening the open dynamic that has generated so much for consumers. Without vigilance, we face the prospect of turning the Internet into something akin to an electronic version of the Post Office rather than the engine of growth it has become.

This can be seen in Congress' attempt to eliminate unlawful Internet gambling. Not only does the Unlawful Internet Gambling Enforcement Act of 2006 raise serious questions about privacy, but its vague definitions and poorly defined goals force banks and payment centers into a tight position.

They're now required to serve as an arm of the government, monitoring private Internet transactions, and blocking those that are "illegal." The problem is that the legislation never defined "unlawful Internet gambling," leaving banks and payment centers to sort out that thorny issue for themselves. This generates a great deal of confusion, leaving consumers and Internet users facing the real prospect of perfectly legal activities being blocked simply due to uncertainty and caution on the part of banks and payment centers. For those processing these transactions, the ambiguity is compounded by compliance costs and the paperwork burden.

Despite the confusion surrounding the legislation, the Treasury Department is drafting a final rule it hopes to release in November to put the program in motion. But some in Congress are well aware of the burdens and complexities associated with this vague rule. Just last month, the House Financial Services Committee passed legislation introduced by Rep. Barney Frank (D-Mass.) that offers a simple solution.

The Payments System Protection Act makes clear that the law can be enforced against sports betting, which the courts already have said is illegal. But it also requires regulators to define exactly what "unlawful Internet gambling" is prior to issuing broader regulations. This would substantially reduce the uncertainty and compliance costs for banks and payment centers. The Senate recently followed suit with its own attempt to clarify the ambiguities in the 2006 Act.

Beyond correcting the economic burdens of the law, however, Americans ought to be concerned about the larger questions of the law's impact on privacy and Internet freedom for the future. Once the federal government begins implementing guidelines for various types of online transactions, what is to prevent it from becoming more involved in every activity on the Internet? The Founding Fathers took great care constructing a government that would protect our endowed rights and liberties, not restrict and monitor them. Americans don't want the government monitoring their private transactions, online or offline.

The Internet has proved to be a powerful and valuable force in our economy. Annual e-commerce retail sales in the United States reached $107 billion in 2006, a 22 percent jump over the previous year. Restrictive government mandates would only restrain such growth, not encourage it. Each new mandate also brings further government encroachment upon the rights and liberties guaranteed by the Constitution. It is precisely because it developed relatively free from government oversight that the Internet has become such a dynamic part of our economy.

Congress has acknowledged the potential downside of its foray onto the Internet with the 2006 Unlawful Internet Gambling Enforcement Act, and is working to correct its overreach. The Treasury Department should follow this lead, and not rush forward with sweeping government mandates that threaten the future growth and innovation on the Internet.

Dick Armey is the chairman of FreedomWorks, a national grassroots organization dedicated to lower taxes, less government, and more freedom.

Gaming industry and Internet commerce groups are balking at the state of Kentucky's attempts to seize 141 Internet domain names for online gambling sites.

Lawyers will descend upon a Frankfort courtroom on Friday for the next phase of the Kentucky takeover, which began with a lawsuit from the state's Justice and Public Safety Cabinet, seeking to force the gambling sites to block access to Kentucky users, or relinquish control of their domains. A district judge on September 18 ordered (PDF) the domain names be transferred to the state after Friday's hearing. Representatives for the sites will have an opportunity at the hearing to object to the transfers.

The state initiated the lawsuit in an effort to stop illegal online gaming. Kentucky is the first state to bring an action against Internet gambling operators resulting in the seizure of domain names, according to a press release from Kentucky Gov. Steve Beshear's office.

"The owners and operators of these illegal sites prey on Kentucky citizens, including our youth, and deprive the Commonwealth of millions of dollars in revenue," Beshear said. "It's an underworld wrought with scams and schemes."

Among other things, the state says online gambling drains the state of money by undermining horse racing, a key tourism industry for the state.

The list of sites affected includes AbsolutePoker.com, Bodoglife.com, and PokerStars.com. A large number of the sites have already been transferred to the state or are now locked from being transferred to anyone else, according to Jennifer Brislin, communications director for the Justice Cabinet. Some sites, such as GoldenCasino.com, have already notified users based in Kentucky they will no longer have access to the site.

"There's a recognition among the industry that this is an action that has been occurring illegally," Brislin said. "Registrars in the United States and foreign countries have been following the court order."

Groups like the Internet Commerce Association have voiced their concern over the state's actions and are skeptical the seizure would stand up to legal scrutiny.

"It appears that there may be no statutory basis for this unprecedented action, that Kentucky may lack sufficient jurisdictional grounds and that it also may violate the Commerce Clause of the U.S. Constitution," ICA President Jeremiah Johnston said in a statement.

The ICA, along with other groups like the Interactive Media Entertainment and Gaming Association, are actively opposed to the court order.

However, Brislin said it is clear the state has jurisdiction to act because the sites it is attempting to take over agreed under the Internet Corporation for Assigned Names and Numbers to refrain from using their respective domain names for illegal purposes.

"Our laws are very specific about what constitutes illegal gaming, and anything that promotes or supports illegal gaming in Kentucky is illegal," she said.

Banks, credit card companies, and some Democratic members of Congress are predicting that forthcoming restrictions on Internet gambling will ensnare innocent customers and threaten the viability of e-commerce.

The criticism came at a congressional hearing on Wednesday devoted to the Unlawful Internet Gambling Enforcement Act, enacted in 2006 by a Republican Congress after pressure from social conservatives. The Federal Reserve and the Treasury Department published draft regulations last fall--which financial institutions say will disrupt perfectly legal transactions unless dramatic changes are made before the rules take effect.

Rep. Ron Paul, the libertarian-minded Republican presidential candidate, criticizes Net-gambling restrictions on Wednesday, saying 'people should make their own decisions.'

(Credit: U.S. House of Representatives)

"Consumers will be placed at risk of having lawful transactions blocked," said Rep. Luis Gutierrez, D-Ill., chairman of the House monetary policy and technology subcommittee. "It is easy to see how these regulations, if implemented in their current form, could wreak havoc on electronic commerce in the U.S."

The 2006 law forces banks and other financial intermediaries to police money flows that could be related to Internet gambling. It never received a formal up or down vote in the entire Congress; instead, Republican congressional leaders simply glued it on to an unrelated port security bill that was approved nearly unanimously.

No consensus
The difficulty with the law's approach is that, while banks cooperate internationally to identify terrorist-related funds and drug-related money laundering, there's zero consensus on Internet gambling transactions.

Online betting is perfectly legal and government-regulated in many areas of the world: PokerStars is licensed by the U.K.'s Island of Man; Bodog Entertainment is a betting company headquartered in Antigua; so is the World Sports Exchange. Other European Union nations also license Net-gambling firms.

Given that financial institutions process nearly 100 billion payments a year, according to Federal Reserve data, and given that other governments won't necessarily be cooperating, identifying which payments are gambling-related is no trivial task.

The U.S. government's "decision not to fully define unlawful Internet gambling places our members in a very difficult position," said Leigh Williams on behalf of the Financial Services Roundtable, which counts Visa, Mastercard, Bank of America, Wells Fargo, and other banks as members. "They cannot know if a transaction is restricted unless they have in hand specifics of the transaction that in almost all instances they will not have."

At the very least, Williams said, the U.S. government should provide a list of names of Internet gambling businesses that can be identified and blocked--something that regulators are unwilling to do. (One model that's been suggested is the Treasury Department's list of "specially designated" people and organizations subject to economic sanctions.)

Federal regulators have said it would be too expensive for them to create a list themselves, arguing that "the government must engage in an extensive legal analysis to determine whether the gambling Web site is used, at least in part, to place, receive or otherwise knowingly transmit unlawful bets or wagers" and that due process safeguards "would result in considerable added costs."

Adding to the complexity is that horse racing was explicitly exempted from monitoring in the 2006 bill, although it's unclear whether betting itself is legal. The Justice Department thinks it can be prosecuted under the the Wire Communications Act, but the Fifth Circuit has indicated that the statute doesn't apply to a game of chance.

Another unusual aspect is that the draft regulations from the Federal Reserve and the Treasury Department require "monitoring of Web sites" related to gambling--based on the premise that credit card companies and banks can identify if their payment systems are being used.

Rep. Ron Paul, the libertarian-minded Republican candidate for president, said that could lead to more Internet regulation: "Though I do not endorse gambling per se, people should make their own decisions. It's a personal choice. I've always been concerned about this type of regulation and legislation--it's likely to open the door (to control and regulation) of the Internet itself."

"There is a risk that financial institutions would misclassify a payment as illegal and thus be exposed to liability," said Williams, from the Financial Services Roundtable. "We also believe that 'monitoring of websites'...is inappropriate to include in a financial institution's monitoring activity."

Rep. Barney Frank, the Democratic chairman of the full House Financial Services Committee, used the chance to talk up his bill that would effectively legalize--but closely regulate, including with criminal background checks and financial disclosure--the online gambling industry. (Here's our audio interview with him last year.")

In the Treasury Department and Federal Reserve's 52-page draft regulations, the word "identify" appears 61 times and "monitor" appears 18 times. "Privacy" appears not once.

Frank was one of the few people to raise that point on Wednesday, telling the financial representatives on the panel that there was "a conflict between the obligation imposed on you by the act...and the privacy expectations of your customers."