Yesterday (10/30), the Amazing Tyler Cowen linked to this 10/27 report in the Financial Times (FT): Gambling on democracy: US regulators weigh election futures market — calling it “the best article I’ve seen on prediction market issues in DC.” (He also linked to this 10/28 ungated article in Politico.) Given my previous two blog posts on the overall theme of gambling and democracy (see here and here), and given Professor Cowen’s high praise of the FT article, I want to say a few words about that item before I press on.
In summary, both the FT report that Cowen liked so much as well as the ungated Politico article note that the Commodity Futures Trading Commission (CFTC) is scheduled to decide by this Friday, November 4, if the prediction market Kalshi can allow investors to place bets on U.S. election results. (Among other things, the CFTC regulates futures exchanges and prediction markets that operate inside the U.S.) This is (potentially) big news because real-money political prediction markets have thus far not been allowed to do business in the United States.
By way of background, although one special exchange–the Iowa Electronic Market, which somehow received a exemption from the CFTC in the early 1990s in the form of two no-action letters–allows users to place bets on specific election races, individuals and business firms are not allowed to bet on the overall results of nationwide elections, e.g. will Republicans win back control of the Senate in 2022? In 2012, for example, the CFTC rejected a proposal from a company called Nadex for “political event” futures (see here), arguing it was against the public interest. (Aside: I call bullshit! See below.)
For its part, the FT article mentioned above surveys two flimsy arguments against political prediction markets. One is that PACs (political action committees) and other large donors would be able to place bets on elections; the other is that such markets would lead to the “gamification” of politics. My reply to both concerns is, SO WHAT? Ultimately, the main argument against political prediction markets boils down to this two-part objection: (i) such markets are the same as legalized gambling, and (ii) gambling would be bad for democracy. While I readily concede part (i) of the argument, since all trades are gambles, I am skeptical about part (ii). Why exactly is gambling bad for democracy?