A License to Steal

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2006 promises to be the year of living dangerously for associates of Jack Abramoff, the lobbyist turned felon turned witness for the prosecution. We will hear much in the coming year about bribery and lobbying reform but the real scandal behind Abramoff’s shenanigans is likely to be ignored.

Abramoff and a business partner, Michael Scanlon, induced Indian tribes to pay them $80 million over the past decade for lobbying and public relations. Not much may be said for their ethics or respect for the law. Abramoff directed the tribes to Scanlon’s public relations firm, and Scanlon would kick half the profits from his operation back to Abramoff – all the while keeping their clients in the dark about this cozy arrangement. Abramoff also accepted money from two different tribes to simultaneously lobby for and against allowing casinos in Texas.

That’s the scandal in the media. The real scandal lies elsewhere.

Indian gambling has become big business. In 2004 over 200 tribes in 28 states grossed an estimated $18.5 billion from more than 400 bingo halls and casinos. The tribes have captured a healthy slice of an expanding market; the Bureau of Economic Analysis reports Americans spent about 1 percent of their total after tax income in 2003 on gambling.

However successful, gambling in America is not a normal business. In a free market, entrepreneurs with ideas and capital can start a business. This freedom to enter a market spurs competition and prosperity while keeping both profits and prices low. In contrast, markets with entry barriers lead to abnormal profits and inflated prices.

In most states, you cannot go out and simply open your own casino even if you have the capital and skills needed to succeed. Once forbidden, entry to the gaming business is now strictly controlled by government licensing and regulation. Under a 1988 federal law, Native American tribes must enter compacts with a state government to start a casino. This licensing itself hobbles entry into the market, thereby reducing competition and boosting profits.

The compacts also require tribes to give some of their revenues to their partner, the state government. Indian gambling is thus a private‐​public partnership in which state governments have an interest in maximizing their profits. States like California and Connecticut have done this by giving tribes monopoly rights to run casinos. State governments have done well, garnering $760 million in revenues in 2003, according to economist Alan Meister.

However, what the state gives, it can also take away, and here is where Jack Abramoff enters our story. Native Americans who own a casino may reasonably worry that government officials will demand a higher cut of the take, or revoke their license and give it to another tribe, or permit other tribes to enter the business in their region. Any of these actions would eliminate or greatly reduce the windfall profits that accompany limited entry into the business.

To keep those fears from being realized, the owners of Indian casinos needed some juice. Jack Abramoff, until recently one of the top lobbyists in Washington, was the perfect candidate. The tribes’ willingness to pay so much for his services indicates how excessive the profits are in an industry controlled by government fiat.

Such government‐​created returns are corrupt by nature. By raising barriers to market entry, government fleeces its citizens. The resulting monopolies also induce people to take risks with ethics and the law, in the interest of preserving their unjustified status. The government‐​created monopoly of Indian gaming and Abramoff’s shenanigans are two sides of the same coin. That’s the real scandal we are in danger of missing in the Abramoff affair.

What can be done? If the government simply permitted free entry into gambling, monopoly profits would soon be washed away by competition, reducing the incentive for wrongdoing. Should this prove politically untenable, a possible second‐​best solution would be auctioning off the right to enter the gambling business. Investors would pay sums for that right consistent with reasonable (not abnormal) profits.

Either a free market or a fair auction would go some way toward reducing the corruption connected to Indian gaming. If we stay with the status quo of government licensing and monopolies, we will have more Abramoffs by other names in the future.