Government Is The Referee (2010 Feb)

by Barry A. Liebling

In basketball, if the referee engages in activities that prevent him from doing his job properly the game is ruined. Similarly in business, if the government engages in activities that are at odds with its proper job the business environment is tainted. If one transgression makes you angry, both of them should.

Recently Valerie Smaldone and Jack Garcia interviewed Tim Donaghy – a disgraced former referee for the National Basketball Association – in their interactive video show (Smaldone & Falcone, Crossing the Line at Donaghy confessed to gambling on basketball games and served time in prison.

You might think that gambling is not so bad. But it turns out that Mr Donaghy wagered on games that he refereed. And that is not good.

Consider carefully exactly what is wrong with betting on games you referee. It comes down to a fundamental conflict of interest. The mission of a referee is to assure that both teams follow the rules and make fair judgements when there is a discrepancy about any particular play. If the referee is betting that one team will win he has a stake in that team’s success. He is incentivized to go easy on the team he is betting on and hard on its opponent. If there is a close call the referee will stand to gain by ruling in favor of the team he is betting on.

The corruption inherent in a referee deciding to bet on his own games is obvious to everyone who follows sports. Referees who engage in such mischief always do it secretly. It was only during a criminal investigation that Mr Donaghy’s bad behavior was revealed.

During the interview Mr Donaghy asserted that although he bet on some games he refereed, he never affected the outcome. The team that won would have emerged the winner even if he had not placed a bet. Is it possible to bet on a team and be a scrupulously honest referee at the same time? Certainly some referees could pull it off. Still, there is the problem of the appearance of conflict of interest. Even if the betting referee promises to be really fair, the members of the unfavored team – and observers of the game – will always prefer to have a referee who is not invested in the outcome.

Is there any way that Mr Donaghy could have bet on games and preserved his integrity? Of course, but it would entail leaving the referee profession. He could have been a coach, a trainer, or an enthusiastic fan and wagered to his heart’s content. But taking on the referee role means you are supposed to be neutral regarding which team wins the game.

Now let’s consider the world of business. The proper role of government is to be the referee – to assure that the players – those engaged in doing business – do not engage in force or fraud. Ideally, it is the job of government to enforce fair, objective laws and make dispassionate judgements through the courts when there are conflicts between citizens. If the government is going to perform this function it must not take on activities that directly conflict with it.

And when the government participates in Public Private Partnerships it destroys its ability to be a referee. It is guilty of the same transgression that a basketball referee makes if he bets on his own games.

Note that Public Private Partnerships are touted by interventionists as an ideal arrangement. Let government and business, they say, work together for the common good. But there is no common good, there is only advantages and favors that are showered on companies “in partnership” with the government at the expense of everyone else.

Once the government took on an ownership stake in General Motors you can bet it will do what it can to prevent it from failing – and its actions will certainly impair businesses outside of General Motors. The government-owned car company will continue to get special publicly-financed deals designed to help it, such as the infamous Cash For Clunkers. Ironically, it turns out the car rebate program was more beneficial to General Motor’s competitors than to GM. This says a lot about the competence of government planners.

The government has a cozy Public Private Partnership relationship with several of the largest financial institutions – including Citigroup, Fannie Mae, and Freddie Mac. Can you doubt that these companies are being treated differently from companies not so intimate with the government.

Is it possible for the government to be a partner in a business and be scrupulously fair to other businesses at the same time? Probably not, since partial government ownership automatically puts a company in a special category. And all of that company’s counter parties will act accordingly. The company in bed with the government may be treated better or may even be treated worse. But it will not be treated the same.

Is there any way that the government could participate in Public Private Partnerships and preserve its integrity? No, because the government is required to be the official referee and cannot give up this function. Therefore, it must not invest in or wager on the success of any particular business.

Are you angry when you learn that a basketball referee is betting on games he is supposed to judge? How do you feel when the government does the same thing?

*** See other entries at in “Monthly Columns.” ***

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