Saving Ourselves From Gambling

The FBI's unfounded obsession with the horrors of gambling.

Morgan Housel
Morgan Housel
Apr 20, 2011 at 12:00AM
Other

You've probably heard that the FBI swung its fist last week, shutting down a handful of online poker websites. "The sites have been operating in a legal gray area for years," says my colleague Travis Hoium. Others (particularly the FBI) disagree, billing this as outright crime.

At any rate, the raids highlight an issue we've been having for years: Should online gambling be outlawed, or legalized and taxed?

The argument against gambling is that it is addictive, bad for your financial health, and inflicts harm on society. This is undoubtedly true to some extent, but I pulled a few statistics to put the criticism in perspective:

  • A Harvard Medical School study found that 1.3% of Americans have a gambling disorder. Meanwhile, about 3% of the population is classified as morbidly obese; 21% smoke cigarettes; 7.4% meet the clinical standards for alcohol abuse or alcoholism.
  • A 1999 study by the Treasury Department analyzing more than 30 years of data found "no measurable effect of gambling on personal bankruptcy rates." Most of those who went bankrupt because of gambling debt likely would have eventually done so without casinos. They're just bad at handling money. Meanwhile, nearly 1 million bankruptcies directly related to medical bills occur every year, 78% of which happened to people with health insurance.
  • Estimates vary, but most studies conclude that Americans lose a net $50 billion a year from legal gambling. AIG (NYSE: AIG) alone lost about that much in 2008.The dot-com crash last decade erased 100 times as much wealth; the recent financial crisis destroyed 300 times as much ($15 trillion) in a matter of months.

The argument doesn't have to be that gambling is safe. It's not. But compared with other perfectly legal ills we put up with, it isn't half bad.

Then there are the fringe benefits of gambling. The casino industry employs 375,000 people nationwide. The American Gaming Association notes that this is "more direct employees than the U.S. automobile industry, software manufacturers or wireless phone carriers." For more perspective, Apple's (Nasdaq: AAPL) iPod, "a nearly ubiquitous device, has created 13,920 jobs in the United States, including engineering and retail," according to economist Tyler Cowen.

And don't forget taxes. Nevada has no state income tax, in part thanks to revenue it collects from gaming tax. Pennsylvania uses gaming tax revenue to reduce state property taxes. It's telling that Prohibition was overturned in 1933 largely thanks to a pamphlet issued by the Association Against the Prohibition Amendment titled, "The Need of a New Source of Government Revenue."

But the debate over online gambling is more a moral discussion about when something should be outlawed. Blowing wads of cash on stupid stuff is an American pastime. To each his or her own. Something only needs to be banned when it causes collateral damage to those who don't want to be involved. The financial crisis is a good example. You may have never even heard of a naked credit default swap, but you may have lost your job -- and your stock portfolio almost certainly took a hit -- because of them. The actions of a relatively small number of bankers inflicted hell on every inch of the global financial system. That's when you need strong regulation.

Adam Smith, the godfather of free-market capitalism, agrees:

"[E]xertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed."


Related Articles

Gambling is different. No one can play an online poker hand so large that its failure will double the unemployment rate, add $5 trillion to the national debt, or send the stock market down 60% -- as the financial crisis did. Mistakes are contained to those who voluntarily step up to the plate. There's an argument to make that gambling addictions do harm innocent family members, but the same is true for dozens of other legal activities. It all comes down to widespread collateral damage. Compare the 2009 chaos caused by the near-meltdowns of Bank of America (NYSE: BAC) or Citigroup (NYSE: C) with that of MGM (NYSE: MGM). It's night and day, which makes it hard for me to justify the rationale for banning online gambling.

What do you think? Share your thoughts in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. You can follow him on Twitter @TMFHousel. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple and Bank of America. Through a separate Rising Star portfolio, the Fool is short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.