“The black market was a way of getting around government controls. It was a way of enabling the free market to work. It was a way of opening up, enabling people.” —Milton Friedman, Nobel laureate, University of Chicago
One of the more brilliant things the sports betting industry did back in the day was to create the black market for sports betting by supporting a law to basically eliminate most legal sports betting. By creating the black market with a bad law, it could later be argued that the bad law then needed to be overturned in order to stop the black market.
With the black market under attack, it could then be advanced that the new legal market could not be taxed too heavily for that would drive people back to the black market and, after all, we needed to legalized sports betting to stop the black market. This new legal market also could not be too heavily regulated for too much regulation would drive people back to the black market, and… well, I am sure you are starting to see how this all works.
I should warn the readers that I think of myself as an economist and I have studied economics sufficiently long in my life to understand that to claim I am an economist is not a form of bragging, humble or otherwise. In fact, one of my favorite parts about economics are the jokes about economists. I find jokes about economists to be hilarious and much of this hilarity comes about because the jokes are so true. So back to this black market thing…
In short, it seems the U.S. government made sports betting basically illegal in the US and this facilitated the expansion of a black market. Then, because of the presence of the black market, the government had to figure out how to legalize sports betting in order to eliminate the black market it created. This should help people clearly understand the evolution of sports betting policy in the U.S. as well as the general waste of time that can be our government.
One thing that is obvious to anyone who has been following the U.S. sports betting scene since 2018 is that the black market must be a really bad thing, for seldom a day goes by where someone involved in the sports betting ecosystem is not twisted sideways talking about the black market on social media.
In 1992, led by a former National Basketball Association player who became a U.S. senator from the state of New Jersey, the black market was guaranteed by a law known as the Professional and Amateur Sports Protection Act. This act worked to launch the black market by limiting potential legal markets that could serve the demand for betting. Then, because there was basically no legal market in most areas to serve the demands of bettors, the black market grew. Anyone with an I.Q. of 67 or above could have predicted PASPA as the perfect precursor to a black market. In the United States, however, we are still apparently waiting for a politician who has an I.Q equal to or above 67 to be elected to something.
PASPA has been around for a sufficiently long time so that the delivery system for sports betting products has gone through a technological transformation. Initially the sports betting black market was supplied by people in the community who would take and pay sports bets. These were generally people who would deal on credit, but who were careful not to get the customer too far in debt. The reason for this is they found that when a customer got too far in debt, the customer tended to call the police and rat-out the dude for being a bookie so as to eliminate the person to whom the debt was owed. This then tended to make the bookie mad and he would then threaten to shoot the customer’s dog or wife of the person that dropped the dime on him.
The bookie not only took and paid bets, but also was responsible for collections, and this often created an additional demand for orthopedic surgeons who were needed to fix broken knees. A well trained economist like myself clearly understands this must have been the goal of the 1992 act—for this should have been seen as exactly what would happen when a strongly demanded market is fundamentally undersupplied by government intervention.
But back to the technological transformation. Things really changed when the black market was not just being served by dudes in the ‘hood, but became global with the arrival of the internet. This gave us the offshore books.
These offshore books generally did not take credit, thus resulting in bettors having much fewer instances of having to narc on their bookie, fewer dogs and wives being involved in some unfortunate collection effort, and fewer orthopedic surgeons being needed to fix knee joints. More importantly, what this meant to we economists is that all of a sudden we were engaged in international trade. That is, the U.S. was not only importing cars and clothing, but it was also importing sports bets.
We in the U.S. are very dependent on international trade and buy many products from overseas. We generally do this for reasons of price, that is, we can secure the product if we import it cheaper than it can be made here. In fact, one need only look at the labels of most of what we own to see that we import a great many goods. The point is, we do not have a problem consuming a product that is not made in this country, so it appears that betting with an offshore betting operator is not bad, per se. It is just importing one more consumer good.
It is also the case that we seem to believe as markets expand, we have more choices. That is, we can look to both buy from American and foreign shoemakers, and this gives us a greater array of quality, style, and price options for shoes. So this is not a reason to be against foreign betting markets, albeit it is a reason for domestic shoemakers to want to stop the importation of shoes because, well, domestic shoemakers are apparently pinko-commies who hate competition.
Our country does, from time to time, place an import ban, limit, or tariff on a foreign good. This is often done if the good is seen to be competing on an unfair basis with a domestic good by way of foreign government subsidies or actions like dumping. There are a number of forms of dumping that have been identified in foreign trade, but suffice it to say that it occurs when a good is placed in the U.S. market with what is considered an unfair price advantage, at least in the eyes of the domestic producer. This can sometimes result because the foreign country can pay slave-like wages, reduce production costs by pouring waste into the air or streams, not worry about worker safety, or other factors that lower the costs of production (you can look this up on your iPhone). The foreign good can also have a cost advantage because it is produced more efficiently or is qualitatively better, but Americans do not like to talk about such things, especially with respect to betting.
It also needs to be understood that U.S. politicians are ready, willing, and able to interfere with these foreign schemes of unfair trade if the domestic producers have been providing campaign contributions to the politicians. Actually, if the politicians are receiving political contributions, they will gladly interfere with trade relationships that may even benefit American consumers because of what is known in economics as the Law of Unbridled Politician Self-interest. One only needs to understand the pharmaceutical industry to see this borne out continually.
So why does the fact that we import bets into the United States annoy so many people? It is my sense that many of the people aligned with condemning the sports betting offshore markets were probably the same people who, back in the day, either were, or would have been active users of Napster. They also probably smoked a lot of dope. The point being, they really are only against some black or gray markets.
While these folks are against betting with black markets, this is not to suggest that they are for free markets. No, in the sports betting scene, it appears that legislatures in many states have been convinced by the black/gray market opponents that they need to limit the entry of sports betting companies by creating barriers to entry when the legalize sports betting within the state. You see, it appears we believe that those politicians who are apparently yet to break-through the 67 IQ ceiling have better insight as to the appropriate market size than, well… the market. In economics, this artificial restriction of supply means higher prices and poorer service levels, and this leads to… wait for it… black markets.
Many people believe the US government should do something about eliminating the sports betting black market. I suspect we could have followed the lead of George W. Bush and declared the offshore books to be hiding weapons of mass destruction and blown them into smithereens, but then that may have just started another of the endless wars that the US military-industrial complex seems to so thoroughly enjoy.
One of the real issues sports book operators always discuss with their buddies in the legislatures around the country is the fact that the offshore books do not pay taxes. And this is a terrible thing. Well, excuse me while I again put on my economist hat, but it seems we could then solve this national crisis by placing a tariff on offshore sports bets. This would solve that whole tax issue quite nicely, it seems. This, however, would probably result in higher prices that would result in… now you are getting it… a new black market.
The way the United States has deemed it best to deal with all of this is to allow each state to randomly determine whether it wants to involve itself in a program of what we economists call import substitution. That is, each state can allow for an effort to eliminate a product that is being imported by allowing the item to be efficiently produced within the state. In essence, this is where the state tries to replace a very efficient import market with a market that limits entry, imposes taxes, and mandates a regulatory scheme that is executed by people who sometimes have little idea what they are regulating. Moreover, the operators will burn through billions of other people’s money trying to make this all work.
My guess about who wins this battle is… the black market—which is almost as funny as most jokes about economists.