Prisoner’s Dilemmas: XIII- Taxation (General)

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The fiscal policy of taxation fosters the institutional incentives for a Prisoner’s Dilemma. It is probable that most tax policies and discourses regarding the instrument for collecting public revenue devolve into a myriad of uncooperative games. Fundamentally, it is in the state’s interest to tax its citizens to accumulate funds to finance public goods and services. In contrast, it is the best interest of individual constituents and business organizations to avoid or minimize the number of taxes they are obligated to pay. This dynamic creates the institutional friction between the government and taxpayers; both coalitions generally have few incentives to compromise. Sure, purported conservatives give a tax break here and there, like liberals, they have a litany of public projects that they have a desire to fund, making taxation a necessity for their objectives. The only distinction between the two American political factions is what they prefer to squander money on and whether they provide lip service to the virtue of low taxes. 

The tension between the citizenry and the state on the issue of taxation is paradoxical. Why? Because voters demand more public goods from the government (infrastructure, social programs, defense, regulation, etc.) but simultaneously do not want to pay for it. Adding another dimension to the vast series of Prisoner Dilemmas taxation policy engenders. The state’s need to collect more taxes is propelled by the public’s demand for more public services. Public schools, courts, administrative agencies, a standing army, regulators, entitlement programs, and infrastructure are not free! There is no greater fallacy than when a naïve constituent refers to public education as free. If an individual participates in the workforce and owns any property they are paying for this service. This elementary confusion validates the logic behind the concept of dispersed costs and concentrated benefits; if there is a disconnect between taxation and spending (Fiscal Illusion) voters do not tend to consider the cost. Therefore, many people are okay will the government providing goods and services; but irrationally have a distaste for taxation. The negative perception of direct tax collection has led to the development of backdoor taxation. Manifesting in the form of helicopter money, quantitative easing, and deficit spending. Policies that only further obscure the link between government spending and the cost to the voter. 

Whether the government provides services due to voter preferences or other ulterior motives is immaterial. At the core of this conflict is contentious incompatible interests. This century-long conflict has resulted in suboptimal results for society as a whole. These consequences extend far beyond the scope of a Fortune 500 CEO’s bank account. After all, a Prisoner’s Dilemma is not complete without adverse ramifications that are avoidable through cooperative behavior. Taxation is the same as another policy prescription implementation will have a nonneutral impact on the decisions made by participants. Altering the rate of taxation does not put the game on pause but influences how various economic agents will adjust their behavior. Raising taxes has myriad adverse outcomes for the citizens of a country or dependent lower level jurisdiction (municipal or state/provincial level).

Tax policy proposals, such as Elizabeth Warren’s wealth tax, may sound reasonable for a nanosecond; but are they effective? Why not require Americans with deeper pockets to pay more taxes and take some of the stress off of the little guy? On a superficial level, this policy may appear to be equitable and even tenable; in the words of Bastiat, such a policy does not account for what is “unseen”. A feature of taxation fleshed out by Bastiat’s most proficient interpreter Henry Hazlitt:

“…This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. A particular group of bridge workers may indeed receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge, a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them that they would otherwise have spent on the things they needed most. Therefore for every public job created by the bridge project a private job has been destroyed somewhere else..” (Page 19).

Ultimately, Warren’s vision does not consider how taxation could realign the incentives of affluent Americans to invest their money elsewhere. The phenomenon of capital flight occurs when onerous taxes in one jurisdiction drives investors to invest their money in economies with less stringent taxation. Here is where Bastiat’s “unseen’ comes into focus, as what we do not see is all the new jobs firms failed due to the high taxes. The relationship between taxation and job growth is inverse, implying that high corporate taxes have a trickle-down effect that negatively impacts the average hourly employee. Beyond the consequences of employment and overall business growth, inordinately high taxes can rob government programs currently implemented. The logic of the Laffer Curve perfectly embodies the Prisoner’s Dilemma between state officials and the taxed citizens. The fallout from taxation going from an acceptable level to an oppressive one will permeate from the top-down.

Bootleggers and Baptist:L- Addendum: The Axiom of Monetary and Bank Regulation; The Fed Always Wins.

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The enduring axiom of fintech and digital asset regulations and taxes; barriers to entry benefit the legacy banking system. Because legal restrictions and taxes reduce incentives to participate in the financial services markets. There may be other parties that benefit from placing limitations on cryptocurrencies. Ultimately, the banking establishment enjoys diminution in competition. Many factions within the pro-regulation coalition, advocate for the regulation of cryptocurrencies in fintech services, often under the veil of consumer protection. For example, Elizabeth Warren likened Bitcoin to the 2008 Housing Bubble. Whether Warren stands to gain or not from regulating cryptocurrencies is immaterial; such behavior is merely doing all the dirty work for the Federal Reserve and the large banks with Fed fund accounts. That is to help mold public opinion to be receptive to crypto regulation. Ironically, she is unwittingly aiding and abetting the same banking system she purportedly to wants to reform. Most consumer protection measures pick winners and losers. Regulating crypto arguably picks the wrong set of winners that would not stand a chance of victory in the face of natural market pressures.

Degree Transfer Markets

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In most cases, college degrees act as a mechanism for credentialing; rather than necessary for obtaining occupational knowledge, why not establish degree transfer markets? Under our current institutional regimes, this suggestion may have some legal hurdles to clear, but this is nevertheless an intriguing proposal. Most degrees serve no other function than a sorting mechanism. Their utility in acquiring job skills is low. Coupled with the fact that ownership of credentials; implies that the individual holding this documentation has the right to transfer it to another person. It appears as if there may be some superficial veracity to this suggestion. The individual selling the rights to their degree would effectively be surrendering all rights and claims to it; they would not be able to list it on their resume. If a former student holding the degree is getting little use from it on the job market, they might be better off selling it to someone who would yield more benefit from the credentials. 

A hypothetical example of such a scenario would be, that Joe holds a bachelor’s degree in economics. Joe currently works as a customer service representative (a vocation that does not require a college degree). He is happy with his job; there is no advantage for him continuing to hold a degree in an unrelated field. Cindy is friends with Joe; she has a four-year degree in Sociology, but she has her eye on pursuing a graduate degree in economics. The degree may not necessarily be required depending upon the program Cindy is looking to enroll in, but it could give her an edge in the admissions process. Joe needed some extra cash and sold the rights and claims to his degree to Cindy for a mutually agreed upon price. Effectively, both Joe and Cindy are better at making the exchange. 

There are certainly some instances where the sales of credentials could be potentially problematic. Occupations requiring large amounts of prerequisite knowledge such as a doctor, buying your degree versus earning one can present some issues. Ideally, legally sanctioned occupational requirements would be eliminated, resulting in a stratified service market. Where the option of soliciting the services of uncredentialed service providers is feasible, consumers can still pay top dollar for the services of credentialed experts. In such a model, the ability to purchase your credentials could distort the value of paying more for a credentialed healthcare professional. This is a valid concern, although the market does punish businesses for providing a poor product or service. There is a potential for the market mechanism of consumer sovereignty to flesh out the truly unqualified professionals.  

Other considerations possess issues in a degree transfer market. Some people have likened a college degree to receipt, implying that the value of the degree comes from the knowledge and skills procured in the process of pursuing the degree. The facts are most college graduates are milking the signaling function of their diplomas. In effect, making the skills and information in college somewhat inconsequential, as most of their true learning occurs on the job. The lectures of a sociology professor may be engaging but bring little to the table in the realm of usable job skills. For most participants in the labor market, the receipt is what matters, not the skills or knowledge obtained from a college education. The old saying that was once a tired platitude has now become a guiding axiom of all beer-guzzling and frat house-dwelling students: “C’s get degrees”.It may be wise to adjust this informal rule to reflect current academic standards as “D’s get degrees”.

Beyond where a college degree derives its value from, there is a potential that selling degrees could further erode their purchasing power on the job market. It would not do so quantitively, compromising the value from a qualitative standpoint. Why? Because the one trusty sorting mechanism utilized by most corporate employers will be compromised. Hiring managers will dedicate much time and effort to determining whether the candidate earned or bought their education. 

Prisoner’s Dilemmas- XII: Juno, Proposition 16, and A Community Sanctioned Asset Seizure

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The decentralized governance on many cryptocurrency networks can be advantageous. Especially, when compared to the centralized authority of the legacy banking and monetary systems. There is a caveat; blockchains have well-touted advantages outside of crypto circles, but what about the design of the consensus mechanism? How transactions are validated can have a litany of ramifications rippling outside of the bounds of the DAO (Decentralized Autonomous Organization). For example, the environmental impact of proof-of-work validation, the consensus protocol used most notably by Bitcoin. Because this consensus mechanism requires several crypto miners to utilize large amounts of electricity as they race to validate the transaction on the blockchain and create a new block in the chain, Bitcoin has naturally become a target environmentalist.

One solution to the energy consumption conundrum is to shift the consensus protocol from proof-of-work mining to proof-of-stake validation. Several sources have noted that proof-of-stake consensus reduces energy consumption. In proof-of-stake blockchain operations, validating the new block by the machines of token holders, their holdings function as collateral for the ability to confirm the transaction. The validator is randomly selected based, avoiding the competition to finalize the new block. Even the popular cryptocurrency Ethereum is looking to transition to a proof-of-stake protocol. Are there any potential drawbacks to this governance model? One major issue that can arise from the proof-of-stake method of transaction consensus; is highlighted in the Juno Network’s Proposition 16 controversy.

The incident occurred back in October 2021, when the Cosmos Network launched the new token Juno. Cosmos initiated a stakedrop, similar to a cryptocurrency airdrop where coins of a new digital currency are sent to “.. wallet addresses to promote awareness of the new..” digital assets. Except, a stakedrop entails awarding individuals a sum of new tokens for holding an existing cryptocurrency on the blockchain network. At the time, Cosmos had an original coin offering, ATOM; the network matched an individual’s ATOM holdings with Juno with a ceiling of 50,000 tokens. One of the “whales” or entities that hold a large amount of ATOM on the blockchain contrived a crafty remedy to game the asset drop limitations. The “Whale” portrayed itself as but an investment group, acting as multiple individuals, and divided wallet addresses across several users and funneled it back to a single coin wallet.

The network community passed the resolution Proposition 16 purposed:

By voting yes on this proposal, you agree to reduce the gamed whale address to 50k (Whalecap set per entity before genesis).

Note: The facts are that the Juno genesis stakedrop was gamed by a single entity. Willingly or unwillingly is not relevant to this matter. The whale gamer poses a growing risk to the network and the stakedrop error may be corrected. Gamed funds were consolidated into 1 address right after genesis which proves that 1 entity had custody over all addresses (linked below). This considerably broke the stakedrop rules of having a max 50k ATOM: 50k JUNO per entity. At the time of the genesis stakedrop, there was no way for Core-1 to pro-actively counteract this behavior. If this information would have been known before launch, 51/52 of those addresses would have been removed entirely.

https://www.mintscan.io/juno/proposals/16

 Effectively, the resolution aimed to confiscate all but 50,000 tokens of the Whale’s Juno tokens. The Whale’s holding exceeding the cap has three consequences: a concentration of on-chain voting power (proof-of-stake consensus mechanism the more you hold the decision-making authority you possess), the Whale can bribe other validators on the blockchain, and this entity can wipe out all the liquidity in the exchange. This has resulted in a Prisoner’s Dilemma. Instead of negotiating a compromise, both parties acted in their interests by defecting.

 The Whale initially defected by attempting to violate the terms of the drop. The network defected by seizing the purported collectives’ coins. The results have been lackluster; this policy transgresses against one of the core pillars of blockchain currencies, the “immutability” of the blockchain. Some pundits have expressed that this move could shake the confidence of prospective investors. There is some fear that other networks adopting similar policies without any impartial due process. Madison’s “tyranny of the majority” problem assumes its most modern incarnation, perhaps? Aside from this issue, what if Whale acted as middleman holding assets for other investors? Is it just for innocent third parties to suffer? If this entity was a consortium or an investment firm, the commandeered funds did not even truly belong to the Whale.

Bootleggers and Baptist:L- CBDC

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One of the hot topics in global discourse aside from the Ukraine conflict is research into CBDC (Central Bank Digital Currency). Several countries are researching deploying a CBDC and some have even implemented trial run experiments with centralized digital monies. Back in January, the US Federal Reserve published its CBDC white paper Money and Payments: The U.S. Dollar in the Age of Digital Transformation (2022). Hypothetically, if initiated, the Fed would distribute retail CBDC through private intermediaries (primary dealers). Per George Selgin: “Those private intermediaries would then be responsible for managing customers’ central bank digital currency (CBDC) holdings and payments…”. Allowing the Fed to avoid managing the front-end customer service concerns (something government entities typically handle very poorly) and reallocate this function to private firms.

Baptists:

The overall rhetoric surrounding CBDC has been cautiously optimistic. Especially, when squared against the comparisons made between CBDCs and stablecoins. Federal Reserve Chair, Jerome Powell, has backtracked on his anti-stablecoin stance. Presumably, he still is championing a central bank currency over. Despite the institutional tensions between stablecoins and CBDC, the Fed; could be considered a Dual-Role Actor in the Bootleggers and Baptists (1983); if it is not categorically correct to deem them Baptists. There is a strong possibility that the Federal Reserve and all affiliated employees stand to gain from curbing the success of privately issued digital currencies but also sincerely believe in the virtues of the United States issuing its own. There are several arguments in favor of a government-backed digital currency supported by Fed economists and academics alike. For example, it would make assessing taxes on purchases made with digital currencies easier to determine (p.156). Also, many experts claim that a CBDC would achieve price stability, an attractive feature when you consider the historical volatility of various well-established private cryptocurrencies. It would be easier to combat money laundering and financing for terrorist activities(p.11). Probably one of the more laudable arguments for a CBDC is the argument of financial inclusion for the unbanked (p.157). All of these claims have a moralistic tone, making the Fed and CBDC friendly economists potential Baptists.

Bootleggers:

Labeling Fed officials as the Bootleggers is analogous to shooting-fish-in-a-barrel and makes for linear analysis. Plus, yes, the United States central bank and all of its economists have much to gain through promoting a CBDC; however, it is not entirely evident that they are disinterested in the moral arguments for protecting the public from the purported dangers of a private digital currency and the cause of financial inclusion. But there is a group of beneficiaries that are much less obvious to the superficial observer; hackers. A CBDC would be highly centralized, making it more likely that there could be a single point of failure in a security breach (p.17). Even though the public and permissionless blockchains are only quasi-anonymous on distributed ledgers of cryptocurrencies such as Bitcoin, they are trusted, specifically for these validation channels in the consensus protocol are decentralized. In contrast, a CBDC would need to comply with KYC and AML requirements making it necessary to “…store personal data..” on specific nodes; “… highly likely to be exposed to a single point of failure, which can result in the indirect leakage of personal data..” (p.18). Due to the legal provisions outlined in financial monitoring laws, turns CBDCs into an aggregated database for financial and personal information if improperly designed.

Bootleggers and Baptists: XLIX- Keynesianism, Stimulus, and Political Manipulation

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Frequently in economics, the views of a specific theorist are exploited for the interests of various political factions. The most salient examples are economic theorists are labeled as “free market” economists. Conservatives generally celebrate Adam Smith as a defender of unfettered commerce but conveniently ignore his concern for the blight of the poor. Smith was too multidimensional to be distilled to a simplistic bumper sticker slogan. The great F.A, Hayek suffered from a similar syndrome as many Conservative and Libertarian pundits disregard the nuances of his work and paint him as radical. However, there are also instances of the intellectual advances of various theorists being embellished by their opponents for partisan purposes. For example, the moderate and subtle rationalizations of James M. Buchanan are characterized as extreme libertarianism. Nancy Maclean is unacquainted[1] with the work of Murray Rothbard!

The inaccurate framing of economic theory for political interests is not limited to right-of-center economists. Many left-wingers exaggerate the beliefs and postulations of their favored economists, the most conspicuous example being the abuse of John Maynard Keynes [2]. Yes, in the eyes of most Conservatives and Libertarians, Keynes had a flawed perception of market processes. Although, he was not communist. Keynes still had some semblance of a pragmatic filter, which placed constraints on his sanguine view of consumption. Keynes did believe that after the end of an economic downturn, deficits should be eliminated. Therefore, Keynes did not advocate for a policy of perpetual deficit spending, most likely would take issue with the massive debts amassed by the United States over the past couple of decades.

It wouldn’t be outlandish to examine the embellishment of Keynesian economics for political gain from the precepts of Bruce Yandle’s Bootleggers and Baptists (1983) coalition paradigm. A political relationship between various factions of policy advocates where some supports sincerely believe in the normative intention of the policy (the Baptists). In contrast, the tacit beneficiaries (the Bootleggers) merely ride the coattails of the moralistic advocates (either silently or vocally alongside the Baptists). The support for various stimulus policies would have its share of Bootleggers and Baptists to defend “stimulus spending”. The most recent examples are the Obama-era stimulus programs (American Recovery and Reinvestment Act of 2009) and multiple rounds of COVID stimulus allocations. Often, Keynesianism is justified when it becomes politically suitable to do so. The most recent examples of economic stimulus initiatives exemplify this point quite well. This observation becomes more striking when you consider that the convergence of our monetary and fiscal policy has amounted to a hand-selected bastard-breed mutation [3] of Keynesian economics and Monetarism. The conception of this flawed system is being spurred by policymakers trying to select the most politically advantageous characteristics of both economic philosophies.

We could consider the founder of Keynesian economics the Baptist of stimulus spending policies. As Keynes envisioned stimulus spending as being a temporary remedy amid an economic downturn. Despite his good intentions, Keynes failed to recognize the political incentives to politicians, bureaucrats, technocrats, activists, and even ordinary voters; factors that only serve to reinforce one of Milton Friedman’s most enduring dictums “There is nothing more permanent than a government program”. While stimulus initiatives come and go, policymakers still keep implementing them as a remedy to soothe economic turmoil. Stimulus policies were adopted with little regard for the implied discipline advocated for by Keynes. After all, he was still an economist and was not ignorant of the discipline’s conceptual pillars. Stimulus spending is an unsound policy, but he never intended for it to be at the regular disposal of politicians and lawmakers. Dating back to the observations of Niccolò Machiavelli, politics is a game of perception, not one of technical proficiency. Conversely, economics is ideally a positive social science unconcerned with popular opinion.

Moral values always enter the equation whenever we enter the realm of actual decision-making, even in economic decision-making. Unfortunately, the line between economic science and public perception is often blurred, especially by the adroit manipulation of politically savvy elected officials, activists, lawmakers, and activists. Promising ever-larger transfer of “free” goods and services to the voting public. Applying the principles of concentrated benefits and dispersed costs, voters believe they have made out like bandits. Thereby, forming a mutually beneficial feedback loop of voters believing they have won and political actors presented in a positive light; as being defenders of the common man. Elected officials portrayed as advocates for the “little guy” helps establish social currency with the voting public. Social currency dovetails nicely with a politician’s incentive to remain in their position of political power.

Foot Notes:

  1. Maclean is aware of Rothbard’s work to a superficial extent, but if she sincerely understood his work, she would not be portraying Buchanan as a radical.
  2. The author is not an exponent of Keynesian economics.
  3. Despite the intense debate between Keynesians and Monetarists, both have their commonalities.

Bootleggers & Baptists: XLVIII-Change Rounding Donations

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Frequently brick-and-mortar asks if patrons would like to round up the change on their purchase to a dollar and donate it to various charities and humanitarian initiatives. Organizations dedicated to cancer research are a perennial favorite of retailers Currently, the money is going to organizations providing humanitarian relief to Ukraine. It is easy for the casual observer to perceive this as an altruistic gesture. When we examine this example of charity a little more closely, it becomes apparent that the firm requesting patrons to donate pocket change to the human effort does indeed benefit from the transaction. It is reasonable to analyze this scenario from the lens of the Bootleggers and Baptist (1983) framework. The executive management of the company may very much agree with the prospect of helping raise money to assist Ukraine, this moralistic concern makes them a Baptist. Concurrently, the corporation also stands to gain from this method of funding raising. The most salient benefit is fostering the image of a socially conscious business. An attribute that carries weight in an era where ESG criterion is rapidly becoming an expectation among investors and consumers. The second way the firm will benefit is that it gets the recognition of being socially conscious with little to no out-of-pocket expense. They aren’t digging into their coffers to allocate revenue for donations; the firm is requesting their customers do so, which takes some audacity!

Bootleggers & Baptists: XLVII- China’s Commentary on Western Foreign Policy

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The tactics of deflection are commonplace interpersonal and group repudiations of heinous deportment. This enduring maximum; is reflected in the muddied politics of Sino-Russian relations. Who genuinely wants to take responsibility for their examples of moral imparity? It is always easier to redirect the scrutiny towards another party than confront the allegations head-on.  The Atlantic article: What China’s Social Media Is Saying About Ukraine provides an account of how China weaponizes the missteps of western foreign policy as a tool for circumventing critiques of their human rights violations. Repnikova and Zhou’s article describes how Chinese social media portrays the conflict between Ukraine as being spurred by the intervention of western nations:

 “…In response to an illustration of NATO’s geographical expansion posted on the Chinese microblogging platform Weibo by Foreign Ministry Spokesperson Zhao Lijian, commenters were quick to attack NATO: “NATO will pay for its blood debt,” “NATO has no limits, and its aggressive ambition will trigger pushbacks,” “No one can endure the eastward expansion on such a scale.” Another popular Weibo post that has generated more than 4,600 shares argued that wars are necessary for long-term peace and that the U.S. has to abandon its pursuit of hegemonic power. These comments grant little to no agency to Ukraine, blaming or ridiculing it for aspiring to join the wrong great-power alliance…”

The Chinese public and government do have a point regarding the aggressive nature of NATO’s domination. A large multinational governing institution. The national representatives are unelected by the voters and influence foreign affairs. The expression of such concerns would count as a normative or moralistic argument against the transgression of western nations. However, when squared against Bruce Yandle’s Bootleggers and Baptists (1983) framework, does China come out as a Baptist? If we consider Repnikova and Zhou’s commentary China is not a true Baptist in pointing out the hypocrisy of western countries placing sanctions against Russia, China would be an example of a Covert Baptist (p.190). It would appear as if China uses these to justifications detract from their indiscretions:

“..The double-standards framing, for instance, is a common technique in criticizing the U.S. and rebuking accusations against China’s human-rights record. Following the January 6 insurrection in the U.S., Chinese state media accounts actively documented the flaws of American democracy, depicting it as fragile, and compared it with China’s ostensibly more robust and accountable governance…”.

The charitable veneer of China repudiating the evils of world government rapidly withers away when confronted with their incentives for doing so. Once exposed that their intentions to do so are most likely in the vein of saving their hide, then advocating for national sovereignty.

Bootleggers & Baptists-XLVI- Chinese Humanitarian Aid to Ukraine

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China has become a focal point in public discourse in recent years. In the years of the Trump administration, tensions escalated (during the tariff wars), as president forty-five took China to task for economic policies that undermined American interests. Internationally, China has garnered negative press for a laundry list of human rights violations, one particularly egregious example being the genocidal policies targeting the Chinese Uyghur. On the world stage, China’s reputation, sullied by ghastly optics. What can the manufacturing giant and Asian Tiger do about the mounting number of public relations quagmires?

Despite the superficial impression of a Sino-Russian alliance; officials in Beijing refuted that the nations were allies in the wake of Putin invading Ukraine. China even opts to provide humanitarian aid to Ukraine; it would be spurious to claim that this diplomatic gesture is purely altruistic reasons. When Chinese Foreign Minister Wang YI repudiates prior claims of a broken alliance by stating that Sino-Russian relations were “rock solid”. What variety of four-dimensional chess are Chinese officials attempting to play regarding the Ukraine situation? Certainly, some form of non-monetary rent-seeking on the part of China. It is reasonable to examine whether Bootleggers and Baptists (1983) coalition dynamics are applicable.

The prospect of China concurrently acting as a moralizing agent and a beneficiary (Dual-Role Actor) is mildly tenable but unlikely. It is more probable that China does not have any genuine compassion for the Ukrainian people and sees them as a strategic pawn for fostering a positive public image. If this is the case, China would not be a Dual-Role Actor, but a Covert Baptist (p.190). The nation acts in a moral capacity purely for its own ends. Potentially, doing so to smooth over the bad press engendered by their extensive list of human rights violations. This possibility seems unlikely. For years the international perception has carried much weight with Chinese officials. It is more likely that China is attempting to distance itself from Russia for the sake of self-preservation. China is trying to navigate the murky waters of retaining its diplomatic relationship with Russia without being placed in the cross-hairs. This is a precarious position to be in, especially when your prominent trading partners are the western nations placing sanctions against one of your strategic allies.

Bootleggers & Baptists: XLV- Baptists, Economists, Careers, & QE

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What is Quantitative Easing?

Quantitative easing (QE) is the controversial and unconventional monetary policy tool first introduced in the United States in 2008 [1]; as a countermeasure to the Great Recession. The practice of Quantitative easing (QE) is where a central bank purchases long-term government securities, corporate bonds, mortgage-backed securities, and other assets from banking institutions with newly created money. The ultimate goal is to boost the money supply encouraging lending in a sluggish economy by lowering interest rates. The Federal Reserve’s strategies for managing interest rates are divided into pre and post-financial crisis eras. Before 2008 how the Federal Reserve maintained interest rates were different (operating under a corridor system). Per the New York Federal Reserve:

Before October 2008, the Federal Open Market Committee (FOMC) communicated the stance of monetary policy by announcing a target for the federal funds rate. The Fed would then use open market operations to make small adjustments to the supply of reserves so that the effective federal funds rate (EFFR) would print close to the target set by the FOMC. This type of implementation regime that relies on reserve scarcity is often referred to as a corridor system (as explained in this article). Under this framework, depository institutions, or banks, were incentivized to hold as few reserves as possible since they did not earn interest on their Fed account balances. Reserve balances that banks held in their Fed accounts added up to a very small amount, as can be seen in the next chart. The banking system operated with aggregate reserve scarcity and relied on the redistribution of reserves in an active interbank market.

Amid a phase of quantitative easing, the Federal Reserve injects massive quantities of money into the economy through large-scale asset purchases on the open market, increasing the risk of interest rates becoming too low. In the post-crisis, the Fed has opted to implement a Floor System, where the central bank pays interest on excess reserves (IOER) for funds held by member banks at the Feder Reserve beyond the mandate reserve requirements. Procedurally assists with stabilizing the interest rate (Fed funds rate) even when the Fed pumps vast amounts of liquidity into the economy. The excess money held by Fed-associated financial institutions acts like an interest rate floor; through paying on IOERs the opportunity cost of holding money is eliminated. Effectively, maintaining the target interest rate. The Fed’s convoluted attempt to skirt the Law of Supply and Demand, the Federal Reserve, nothing more than an attempt to have its cake-and-it-too (avoiding a liquidity trap and concurrently stimulating the loans market).

The Baptists and Economists of QE:

The monetary establishment expresses that QE is a necessary and effective policy instrument. The promoting of this interventionist policy has created fertile ground for Bootlegger and Baptists (1983) coalition dynamics. Much of this pro-QE sentiment is perpetuated by the research of Federal Reserve economists. It is hard to pinpoint clear Baptists in the pro-QE coalition, several parties that benefit from defending the practice.

In some instances, politicians who champion QE could be viewed as Baptists, arguing for it as means of stabilizing the economy. However, politicians stand to benefit from the unorthodox monetary policy in the form of Fiscal QE (coined by George Selgin), directing the money created through QE to non-macro-economic objectives (e.g. funding the Green New Deal through QE). There is the potential of politicians assuming the role of “pure” Bootleggers and Dual Role Actors. But while QE could be used to “achieve” macro stability (full employment, etc.) and other extraneous policy goals, it operates as a double-edged sword. It is important to note that the inflation rate is a metric that matters to the voting public. Inflation has become a focal point in political discourse and is politicized (p.129-163[2]. The next logical possibility for  Baptists would-be journalists. However their position on QE is “mixed”. Some outlets like to diagram the pros and cons, others are outright hostile, and some echo the positive sentiments acting as a mouthpiece for the Fed.

There is one faction in the QE advocacy coalition that unquestionably fits the definition of Bootleggers, the economists employed by the Federal Reserve. In the book Money and the Rule of Law (2021) Boettke, Salter, and Smith detail the numerous incentive problems facing Federal Reserve officials armed with “constrained digression” (CH 3; p.58-94). Pollical pressures asides; there are other reasons why favoring QE would be appealing (p.67-70), but also substantial internal pressures as well. The authors expound upon the impact of “bureaucratic inertia” on the central banks; like any other center of governance, there is a bias towards maintaining the status quo (p.64). After approximately fourteen years and four rounds of QE, the policy has become normalized. Initially, QE was an aberration in American monetary policy [3]. Favoring QE in 2022 is an example of institutional inertia, but not during QE1 (2008).

However, the obtuse and obstinate inflexibility of the sluggish nature of the Fed is far from the most troubling rationale for unwaveringly defending QE. That would manifest itself in the form of promotion opportunities. We need to consider that the Federal Reserve is one of the largest employers of economists in the United States (p.64), urging researchers to conform to internal norms of the Fed. (p.65). One paper that beautifully describes the incentives of the career concerns of Federal Reserve economists was Fifty Shades of QE: Comparing Findings of Central Bankers and Academics (2020; revised 2021). In their NBER paper, Fabo, Oková, Kempf, & Pástor found that central bankers are more likely to describe QE in sanguine terms in their research when compared to unaffiliated academics (p.15). Fabo et al. found that there was some evidence that:

“…One possible mechanism is career concerns. In principle, bank management could make promotion decisions in a way that encourages bank employees to assess the bank’s policies favorably… (p.18).

“… We find that the interaction between the effect on output and Seniority is positive and significant. A one standard deviation increase in Seniority raises the sensitivity of career outcomes to the estimated effect on output by about 50%… (p.21).

“..These could involve concerns about the bank’s reputation and, for very senior researchers, concerns about their reputation. Like career concerns, reputation concerns reflect researchers’ incentives because in both cases, a researcher derives a private benefit from reaching a particular research outcome. We have no evidence on the potential contribution of reputation concerns to our results…” (p.25).

We must not interpret this correlation between the promotion of senior economists and research validating the “positive” effects of QE as these actors intentionally manipulate the results. In the absence of sufficient evidence; making such an assessment is made in bad faith, but there is most likely a third variable connecting these outcomes. For example, Fabo et al. describe the potential of economics who end up working for the Fed having priors that make them more apt to favor interventionist monetary policy (p.4 & 25). They even explore the possibility of researchers inadvertently selecting modeling techniques that would make QE appear to be more effective (p.2 & 17).

Footnotes:

  1. The initial introduction of quantitative easing in the US in 2008 was dubbed QE1. In March 2020, the US Federal Reserve initiated its fourth round of QE (QE4).
  2. In Boom-and-Bust Banking (2012) (ed. David Beckworth), Scott Sumner argues for adjusting monetary policy to  NGDP targeting versus inflation targeting. A stance also advocated by David Beckworth. Sumner explains how inflation targeting is more politically appealing than a Nominal GDP target. After all, inflation is very salient, especially if you are old enough to remember stagflation. Side note, the author of this blog post was born in the late-1980s but is an avid fan of economic history.
  3. The policy of Quantitative easing developed in Japan in the early-2000’s and was subsequently implemented in the United States nearly a decade later.

Bootleggers & Baptists: XLIV- Russian Vodka Boycotts

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Protests often tend to be more figurative forms of political expression than effectual forms of collective action. The process of organizing a demonstration incurs a myriad of monetary and nonmonetary costs including, but not limited to: costs of communication, coordination, transportation, creation of signs, and other varieties of picketing paraphernalia. The one exception to this rule is boycotting goods. Sure, the costs of communication and finding substitute goods can be high; but on the margin are substantially lower than traveling across the country to participate in a protest. The other economic difference between boycotts and live demonstrations is the ability to measure the direct impact. The influence of live demonstrations on public opinion can easily be conflated with other factors to quantify. In contrast, with boycotts, the effect is easily measured by a company or section of business experiencing a slump in sales. Money frequently outweighs principles, making it a persuasive mechanism for facilitating change. In other words, boycotts would be a more rational and economically superior form of protest.

However, this is not to say that every boycott is rational. Boycotts are often subject to the same fallacies that impact other spheres of political behavior. It is easy to perceive an inefficient or mistargeted boycott as a symbolic message analogous to a demonstration, but it could be a misallocation of time and communication costs, as boycotts can exert their influence more quickly and definitively. The romanticism of protest may capture the more visceral and polemical aspects of political participation but yield no results. Certainly, a cost analysis, overlooked by the droves of wide-eyed and quixotic-minded college-aged activists. All too often, boycotts latch on to the most salient products rather than what would drive an economic agent to behave differently. If a salient luxury product is only a drop-in-the-buck compared to a country’s annual exports. Often boycotts are directed towards commodities that would bear no economic impact, being more of a symbolic gesture. Case and point the absurdity of the Russian Vodka boycott [1].

Vodka must be the most ubiquitous Russian export, but Vodka doesn’t even make the top-five commodities that Russia exports to the United States. Per the Office of the United States Trade Representative, the top Russian imports for the United States included:

“….The top import categories (2-digit HS) in 2019 were: mineral fuels ($13 billion), precious metal and stone (platinum) ($2.2billion), iron and steel ($1.4 billion), fertilizers ($963 million), and inorganic chemicals ($763 million)...”

Socially conscious activists should be calling for a boycott of Russian mineral fuels since it is the largest export to the US. Arguably, validating South Carolina Senator Lindsey Graham’s assertion that to crush Putin, you need to hit their “..oil and gas sector..”. Where does Russian Vodka rank in overall imports into the United States? It doesn’t even account for a sizeable amount of the Vodka consumed in the United States. As of 2017, Russian Vodka only accounted for 1.4% of all Vodka imported into the US. None of the top five vodkas sold in the United States were of Russian origin: Tito’s (produced in the US), Smirnoff (UK, US, Ireland, Italy, Brazil, and Latvia), New Amsterdam (US), Svedka (Sweden), and Absolute (Sweden).

https://www.statista.com/statistics/463960/us-leading-brands-of-vodka-volume-sales/

Even the perennial favorites among the “vodka snobs” are produced outside of Russia: Grey Goose (France, Cognac region), Ketel One (Netherlands), and Belvedere (Poland). Some brands ( Stolichnaya) are being mistaken for being Russian by ill-informed consumers. Overall, a symbolic gesture, the Vodka boycott is a hollow gesture as they are plenty of viable substitutes for Russian vodka. Arguably, Americans weren’t drinking much in the way of Russian Vodka, to begin with. It is safe to say that the financial sanctions placed on Russia be more effective than the feeble effort among the lay public banning Vodka. Mirroring the fallacy of voting; your vote has little probability of influencing election results. Likewise, opting to drink a Grey Goose martini versus a cocktail using a Russian brand will have no sizeable impact on Russia’s economy.

Regardless of the impact of the boycotts, it is still a form of collective political behavior that picks winners and losers. It is ultimately susceptible to the formation of Bootlegger and Baptist (1983) coalitions. After examining the Vodka boycott, the prima facie impression of most observers would be the protesters would be the Baptists, and non-Russian Vodka producers would be the Bootleggers. There is some truth to this interpretation of the boycott, but it does not capture the whole story.

Invariably, there will be Dual-Role Actors lurking within the Baptist faction of the coalition. Political activism has its incentives structure for rational actors hopping on the self-righteous bandwagon. Participants in a protest can forge careers, earn social currency, network, gain more business, earn the right to virtue signal, and even gain a sense of moral superiority. Despite their sincere belief in the moral justification for not economically supporting Russia, they still obtain personal benefits.

Foot Notes:

1. I was planning on writing this blog post on Saturday, February 22; however, due to a busy work schedule and other obligations, I am writing this essay a week later. Damn you, Forbes, you beat me to the punch!

Bootleggers and Baptists: XLIII- Family Dollar, Rodents, Contamination, and Voluntary Recalls

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For a firm, a product recall can be a publicity nightmare. Aside from the loss in revenue and the money spent on corrective measures. A business faces the issue of losing consumer confidence in its products. The recent recall of Family Dollar merchandise due to a rodent infestation in their corporate warehouse in six states is no exception. How does a firm even begin salvaging its sullied public image after such an egregious oversight? Perhaps, their image wasn’t so great, as they were known as a bottom-shelf discount retailer. However, this does not absolve them from taking corrective actions to remedy the situation. Family Dollar has opted to issue a voluntary recall after the FDA issued an alert detailing the squalid conditions of their storage facilities in Alabama, Arkansas, Louisiana, Mississippi, Missouri, and Tennessee.

The superficial observer may perceive this scenario as the least they can do. After all, Family Dollar did risk getting many of their customers sick due to selling contaminated goods. Such an observation fails to acknowledge how the firm stands to benefit from issuing a voluntary recall. At this point, Family Dollar is in the damage control stage of managing this debacle. The firm is seeking to revive its image to mitigate the loss of future business. This scenario has features of a Bootleggers and Baptists (1983) coalition. One side of the faction; provides the normative or moralistic argument for a specific policy position or course of action. The other subset goes along with the moral policy as they would benefit from such a policy position. 

The question becomes, the event of Family Dollar’s voluntary recall, who are the Bootleggers and the Baptists? The Baptists are most likely the FDA[1]. In this scenario, the FDA provides the consumer advisory; and inspection of Family Dollar’s warehouses, done in the name of consumer safety. Even though such measures do validate the salaries of the FDA inspectors (remember Richard B. McKenzie’s concept of “joblism”), this action is still done to promote “consumer welfare”.Regardless of how we feel about the nature of a government agency acting in the purported interest of public safety, it is a moral position.

If the FDA is the Baptist, making Family Dollar the clear Bootlegger in this scenario. It is important to note that under Food Safety Modernization Act (FSMA), per section 206, the FDA has been conferred the authority to mandate recalls for contaminated food products. The rodent infestation impacted food and non-consumable products sold by the retailer. Family Dollar can take control of their image by choosing to recall these items before the FDA has an opportunity to force them to withdraw the contaminated merchandise. The nature of the recall would take on a different tone if done at the request of a government agency. 

Footnotes:

  1. As much as it pains the author to admit that a government agency has the high ground in this situation, that might be the case. However, if this controversy is the demise of Family Dollar, it would be purely the byproduct of market forces, making their market failure legitimate. 

Bootleggers and Baptists- XLII: The Procedural Rules of Baptismisal Rites

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Constitutional economics is the “.. research program in economics and constitutionalism by applying tools of economics to constitutional matters. It studies the compatibility of effective economic decisions with the existing constitutional framework and the limitations or the favorable conditions created by that framework”. The canonical definition; can be simplified as studying the rule formulation process for group decision-making through an economic lens. Most people may find the term constitutional confusing and assume that this school of the political economy only explores the decision-making processes of government institutions. This inference is false. The principles of Constitutional economics apply to a wide range of informal governance structures, for example, homeowners’ associations, biker gangs, prison gangs, and even the “codes of piracy” (p.601). This validates the famous quote from Aristotle identifying people as a “political animal”. This quote is open to interpretation; civilization requires cooperation and coordination. The Calculus of Consent (1962), addresses the conflict of cooperation and coordination by defining constitutional decision-making. Constitutional rule promulgation entails any system where a set of rules (two or more) govern the decision-making process. Structurally chartered bylaws are not limited to formally codified laws; such guidelines can be only be applied to a single person [1] to be constitutional. 

Given the findings of Public choice and Constitutional economics, it is not outlandish to apply the concept of political decision-making to the rule promulgation process within the Catholic church. This is salient in the sphere of regulating the validation of religious rites. Some shrewd observers may point out that the Catholic Church has similar features to formal government. There is some veracity to this claim. The Vatican does operate like a city-state. However, to what extent does papal authority have much impact have on Americans outside of the church? Virtually none. For the context of this brief essay, the Catholic church is a non-governmental institution. 

The author views the rules of religious rites and ceremonies within Catholicism as being stringent. For example, the Catholic church does not recognize divorce. The conservatism of Catholicism is a matter of individual perception. Catholicism is far from being the strictest religious tradition on Earth. Like any other variant organized religion, the Catholic church has several ornate and intricate procedures guiding the officiation of religious rites (often referred to as sacraments). The complex array of rules governing the process of validating sacraments leaves open a large margin for error. This is true of individuals in leadership who opt to inflexible enforce Church directives. The most salient example in the headlines of this problem is the controversy that has emerged in the Catholic Diocese of Phoenix. 

For many years, Fr. Andres Arango has officiated many religious rite ceremonies that have now been deemed invalid. The reasoning? Fr. Arango did not use the precise wording required by the Vatican to validate a Baptism. He utilized the phrasing “…we baptize you in the Name of the Father and the Son and of the Holy Spirit..” instead of “… I baptize you..”. Purportedly, he has used this incorrect wording since he has entered the priesthood in 1995. Purists and the most devout Catholics may perceive uttering “we” instead of “I” as being a matter worthy of splitting hairs, but it also could be possible for the pope to pardon this minor transgression. The magnitude of this error in judgment is minuscule after being compared to some of the darker and more pervasive scandals, whose ugly specter has been haunting the church for decades (molestation scandals).

Unfortunately, due to this scandal Fr. Arango has since resigned, leaving one to speculate why the church could not forgive such a small mistake. However, in terms of these governance decisions, it is clear that the potential of Bootleggers and Baptists’ (1983) dynamics are present in the Baptism scandal. The undeniable dynamic of strict rule enforcement and the need to obscure more egregious scandals creates opportunity coalitions. In this case, this coalition where sub-factions are distinguished membership to various tiers within the Catholic organization. We must consider the principles of methodological individualism. Because some members of the Catholic Church are acting as Baptists while others are the Bootleggers. The prima facie impression of the careless observer would be that such a coalition would be a paradox, as they are all members of the same organization. Such an erroneous observation treats the church as a solitary unit, ignoring the preferences and incentives of various actors within the organization.  

The individuals advocating for strict adherence to procedural requirements would be Baptists. The majority of the moralistic arguments are somewhat tautological, but a rule is a rule. Regardless of whether the enforceable edict is irrational or even unjust, there are consequences for violating formal decrees of institutional fiat. There is relatively little to gain from rigidly adhering to tradition for its own sake, feasibly making this a moral purity argument. From an administrative standpoint, if all priests follow standard procedures, it is easier to validate the ceremonies. The author is not well versed in the logic behind the specific wording requirement for Baptisms; any further commentary would merely be armchair speculation. 

“It is not the community that baptizes a person and incorporates them into the Church of Christ; rather, it is Christ, and Christ alone, who presides at all sacraments; therefore, it is Christ who baptizes,” it said. “If you were baptized using the wrong words, that means your baptism is invalid, and you are not baptized.”

https://www.npr.org/2022/02/15/1080829813/priest-resigns-baptisms

The Bootleggers in this scenario are not quite as evident as the Baptists. In terms of determining the Bootleggers; it is imperative to consider the individuals that stand to benefit from the “Baptism Scandal”. Several sub-factions comprise the beneficiary coalition, which silently allows this minor controversy to hit the headlines. Temporarily feels the relief of being out of the spotlight. It is common knowledge that the Catholic church attempted to cover up incidences of sexual abuse around the globe. High-ranking administrators at the Vatican; would welcome any distraction from this hideous fact. Although, it must be a legal and publicity nightmare navigating such treacherous waters, especially when the optics are not in your favor. A more insidious subset of this coalition, callously gaining from the inadvertent distraction campaign, priests guilty of sexual misconduct, hoping that the current controversy will delay further investigations into new allegations. 

Footnotes:

  1. Elucidated in James Buchanan’s Limits of Liberty (1975), as mentioned by Horwitz (RIP) & Skwire(2021) (p. 350).

Prisoner’s Dilemmas: XI- Uber’s Two-Way Rating System

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One of the more intriguing features of the Uber rideshare service is that the customers and drivers can rate one another. Between websites such as YelpRate My Professor, and Angie’s List we are accustomed to seeing platforms for customers to review service providers. However, the idea of service providers reviewing patrons is novel. Surely, some companies predated Uber that enabled employees and contractors to assess their business relationships with specific clients, but Uber has made this practice much more salient.

There are benefits and drawbacks to having a two-way rating system. A customer could give a driver a poor review based upon prejudices unrelated to the services provided. The same could also hold for the Uber drivers rating their clients. For example, if both the customer and the driver know each other outside of the rideshare business and have prior bad blood. In effect, both parties use the rating system as a passive-aggressive form of retaliation.

The context of this hypothetical scenario is a clear example of Prisoner’s Dilemma; since both individuals are too stubborn to cooperate. Both individuals insist on retaliating against each other. Even though these transgressions only hurt both the customer and the driver. Aside from both “players” having their reputations sullied, there are other practical concerns. The driver may stand to lose business over the bad reviews he has received and the customer being denied opportunities to use the service because of his bad reviews from the previous driver. Granted, this model is simplified and does not contain all necessary variables to reflect this example in real life. No one should ever underestimate the public forms for rating products and services. This is evident in the Google reviews of the Stamford branch of Merrill Lynch, the former employer of James Iannazzo.

Bootleggers and Baptists: XLI- Polymarket vs CFTC

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One of the latest innovators in Predictions Markets blockchain-based Polymarket has stirred the ire of the CFTC. Polymarket is:

 “… is a decentralized information markets platform that lets people trade real-money markets on the outcomes of the most highly debated current events and follow the odds to garner accurate insights about the future. Users buy or sell Outcome Shares, which can be redeemed for $1 if the outcome is resolved as correct, and become worthless if it’s incorrect. Owners of outcome shares are never locked in and can sell their position at any time…”.

Why would CFTC regulators place this innovative consensus aggregating mechanism in their crosshairs? 

Since the interpretation of the incentives structure of Prediction Markets are contingent on the regulatory framework, such activities are analogous to gambling or a form of derivates trading. The legal scholar Tom W. Bell suggests that public Prediction Markets run a high risk, while private PMs run a lower risk of being subject to the scrutiny of the CFTC (p.6). Bell states that:

“…As the CFTC has observed, prediction markets often offer binary options contracts akin to those over which the Commission has claimed exclusive jurisdiction. Any public prediction market that offered real-money trading on such contracts, and that does so within the reach of U.S. law, would thus arguably fall within the CFTC’s regulatory purview—especially if the market offered significant hedging functions…”.

Purely based upon the above description, it becomes clear that Polymarket may qualitatively fulfill the CFTC requirements for the regulatory authority. However, placing such exchanges under the regulatory scope of the CFTC does present several barriers to entry. After the enactment of the  Dodd-Frank amendment to the   U.S. Commodity Exchange Act (the CEA), as a consumer protection measure, “…swaps generally can only be offered on a bilateral basis among eligible contract participants, or over a platform that is registered as a DCM (Designated Contract Market) or SEF (Swap Execution Facility)…”. Section 5h of the Commodity Exchange Act details the arduous requirements to obtain and retain operable status as a swap facility. These stringent requirements make compliance difficult for up-and-coming exchanges.

This situation mirrors a multitude of scenarios where regulations create barriers to entry. These obstacles are erected in the name of consumer protection, but their actual effects are contestable. Certainly, most laws select winners and losers, creating discrepancies that would not otherwise exist. Even if a regulation does make the average citizen better off, there is still a distant party in the background that stands to benefit. In effect, regulatory crusades forged in the name of consumer protection are frequently subject to Bootleggers and Baptists (1983) coalition dynamics. One faction of the advocacy coalition provides the moral reasoning for the new policy, the proverbial “Baptists”. Then lurking around the corner are our beneficiaries of the new regulation, the “Bootleggers”. The Bootleggers do not necessarily have to be vocal exponents of the causes; their role in the coalition can be diverse. Ranging from providing vocal support for the Baptists, providing financial resources for political campaigning, to even being a silent and distant beneficiary. In other words, there are certainly are moralistic arguments for erecting barriers to establishing Prediction Markets, but it would be inaccurate to assume that no one stands to benefit.

Beyond the intended financial protection measures (e.g. accountability and transparency) implied in Dodd-Frank, the moralistic arguments for regulating binary contract markets such as Prediction markets extends to other areas of public wellbeing. More opportunities exist for other parties to join the Baptists side of the coalition. Other exchanges similar to Polymarket, are denied the ability to register or shut down over the varieties of wagers placed. This mirroring the concerns that arose over the DARPA PMs established in the early-2000s. A more recent example was when CFTC denied the ability to host a political events contract market under CEA: 5c(c)(5)(C)(i), Section 5c(c)(5)(C)(ii), Section 1(a)(19); the agency citing

“..Section 1(a)(19), that “involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law”; WHEREAS, several state statutes, on their face, link the terms gaming or gambling (which are used interchangeably in common usage, dictionary definitions and several state statutes) to betting on elections, and state gambling definitions of “wager” and “bet” are analogous to the act of taking a position in the Political Event Contracts..”.

In the case against Poly Market, it seems as if the exchange is under fire from the CFTC for not following the registration process. Directly linking the CFTC’s argument for pursuing legal action against Polymarket to the CEA requirements.

“..Because the betting contracts were deemed swaps, the CFTC found that Polymarket violated Section 5h(a)(1) of the Commodity Exchange Act and Regulation 37.3(a) thereunder which prohibit the operation of a facility that offers a trading system or platform in which more than one other market participant can execute or trade swaps with more than one other market participant unless such facility is registered as a SEF or a DCM. Under the order, Polymarket is required to cease offering access to trading in noncompliant markets and to wind down those markets unless the offering, solicitation, or trading in those markets complies with CFTC regulations. Polymarket was also ordered to pay a $1.4 million civil penalty. While Polymarket did not admit or deny the findings in the order, it is required to cooperate with the CFTC on an ongoing basis and is prohibited from making statements denying the findings or conclusions of the order and from giving the impression that the order is without factual basis…”.

The question remains, who benefits from CFTC taking action against Polymarket and the stringent regulation of binary option derivative markets? Existing exchanges that have either registered or have been granted exemptions (e.g. a no-action letter), one example being the Iowa Electronic Markets (IEM). If the barriers to entry remain high, exchanges like the IEM remain one of the few domestic options Americans have for wagering on predictions contracts.