Happy Thanksgiving from GGB; Newsletter Returns December 4

Regulatory Capture: Don’t Bite the Hand that Feeds You

The first tenet of regulation is to perform your duties in the “public interest.” But what happens when that public interest intersects with a more private concern like an employment opportunity? And how would that work when health restrictions on casinos are relaxed. Richard Schuetz (l.) has his ideas.

Regulatory Capture: Don’t Bite the Hand that Feeds You

“…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.”—John Kenneth Galbraith

Many years ago, while at the University of Utah pursuing a doctorate in economics, I opted to develop a dissertation topic exploring the evolution of the Nevada gaming regulatory model during the1945-1966 period. In one of the first conversations I had with my dissertation committee members, I was instructed to develop a survey chapter on the economic theories of regulation, and this led me into an area that continues to captivate my interest today.

The whole topic of theories of regulation has grown at an incredible pace since I first became interested and the theories have been embraced and developed in many fields outside of economics. I would suggest, however, that there are two basic pillars in this conversation that remain totally relevant today, and these two theories are the public interest theory of regulation and the capture theory of regulation.

The public interest theory of regulation essentially dates back to the case of Munn v. Illinois, decided by the US Supreme Court in 1877. This case allowed for state regulatory intervention into private businesses in cases where it benefited the “common good,” a concept that later was more commonly associated with the term public interest.

An interesting insight noted by the late Harvard economist Thomas McGraw regarding the public interest theories is that whenever legislative draft-persons wrote bills imposing regulation on a private business, they would stick the term “public interest” into the bill numerous times as if to legitimize it, and in some instances this totaled more than 25 insertions. I suspect if one mentions the term public interest in a bill 25 times, that will work to convince some unsuspecting people that the bill just might be in the public interest.

The second of the two pillars of theories of regulation is that of the capture theory. The capture theory is interesting for it is embraced by economists at both ends of the political spectrum, be it the liberal economist John Kenneth Galbraith, who is quoted above, or the conservative George Stigler, of fame from the University of Chicago school of economics. In essence it suggests that the main entity benefitting from the existence of the regulatory entity is the industry itself. This can include helping the industry by creating barriers to entry, assisting it in price fixing, and a variety of other techniques and efforts that make the agency a tool of and for the industry.

Capture does not happen by accident and results from purposeful action on the part of the industry. A common technique is for the industry to make material political contributions to the political leaders who make the appointments to the boards and commissions. This can prove effective because the politician will want to appoint people who will not bite the hand that is feeding the politician. Regulators also want the politicians to like them for they may want to be reappointed, or appointed to another position in government when the current appointment terms out.

The industry will also offer employment opportunities for a regulators as they leave regulatory positions, generally subject to some cooling off period. The regulator is therefore incented to not annoy the industry as he or she approaches the end of his or her tenure with the agency, so they may see if in fact the grass is greener on the other side of the fence.

Some regulatory heads also use the regulatory platform as a launching pad for political careers, and there are numerous examples of this, especially in Nevada, where many politicians have as an entry on their resumes having served on either the Board or the Commission. If the regulator does want to pursue a future career in politics, it is important that he or she are able to tap into the significant ways the gaming industry can assist the candidate in reaching higher office. While in a regulatory role, these individuals are careful to show that they are an ally of the industry.

I offer this introduction to theories of regulation because I believe we are now living through a situation where many gaming regulators are clearly demonstrating characteristics that are consistent with capture and this has to do with the failure of agency after agency to require casino operators to release the meaningful and actionable statistics relating to the testing of employees for COVID-19.

An important thing to understand when discussing COVID-19 is the term community spread. What this means is the disease is being readily transmitted within a common area where people are in proximity to one another, and this is argued to be the primary form of spread for this virus. Well, a casino workplace is heaven on earth to a virus that thrives on proximity, and those of you who understand the reality of the employee-only areas of a casino complex understand what a challenge to social distancing these areas present. If there is an area of the casino that demands close monitoring for health and safety compliance now, it is more in the heart of the house than the front of the house, but my guess is most regulators are focusing on the front.

Many forms of regulation have developed in the US that address issues of health and safety. When one drives across a bridge, there is a high degree of public confidence that the bridge will not fall down and this is in part because of the regulatory framework that addresses the building and testing of bridges. So too when people get on an airplane, the regulators have helped assure the public that flying is one of the safest modes of transportation available. These efforts to protect the health and safety of people clearly fall within the public interest.

Before a great many people are going to want to return to casinos, they are going to want some level of assurance that the casinos are safe. This is a hard sell for the casino industry to make when many participants are not providing any insight as to the presence of the virus within the employee populations, generated on a timely basis, and relevant to individual operators. Moreover, the regulators are complicit in allowing this information to remain out of the public domain. Also, please do not suggest that the disclosure of grossly aggregated data is in anyway meaningful. I was born at night, but it was not last night.

When one looks at who benefits from this lack of transparency, it is probably not the employees of the casinos, and it seems they should have a right to know. An employee should have an ability to assess the risks to themselves, their families, and other people within the community and this is not possible if relevant information about their working community is being withheld. Clearly the regulator does not seem overly concerned with helping the employees understand the health and safety conditions of the working environment.

If one looks at who benefits from this lack of transparency, it is probably also not the casino guests, and it seems they should have a right to know. A casino guest should have an ability to assess the risks to themselves, their families, and other people within the community and this is not possible if relevant information is being withheld. Clearly the regulator does not seem overly concerned with helping the casino guest understand the health and safety conditions of the casino environment.

Moreover, if this information were public, this would provide a great incentive to each operator to work to keep infections down, meaning they would be hypervigilant in working to ensure they were providing a safe environment for their employees and guests for they would not want contrary statistics to surface. Without a public accounting, one would think that this incentive is weakened.

Well, if the employees of the casinos are not benefitting from this absence of transparency, and the guests are not benefiting from this lack of transparency, then who is benefitting?

Please understand, this is not about the casinos being open. I am cool with that. What this is about is the regulators not creating an avenue of understanding for the public as to the conditions within individual casinos. For those of you who believe the regulators are serving the public interest by not telling the public what is happening health-wise in casinos, welcome to La La Land. For the rest of you, welcome to the world of regulatory capture.

Articles by Author: Richard Schuetz

Richard Schuetz started dealing blackjack for Bill Harrah 47 years ago, and has traveled the world as a casino executive, educator and regulator. He is sincerely appreciative of the help he received from his friends and colleagues throughout the gaming world in developing this article, understanding that any and all errors are his own.