State lotteries: using state power to fleece the poor.

Author:Wisman, Jon D.
Position:Survey
 
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"A Lottery is Taxation, Upon all the Fools in Creation; And Heav'n be prais'd, It is easily rais'd, Credulity's always in Fashion; For, Folly's a Fund, Will never lose Ground; While Fools are so rife in the Nation." (Henry Fielding 1732; cited in Clotfelter and Cook 1989, 215)

"Peasants are like sesame seeds: the harder you squeeze, the more they render" (Feudal Japanese maxim).

"Under the Darwinian norm it must be held that men's reasoning is largely controlled by other than logical, intellectual forces" (Veblen 1919, 441)

Imagine a gathering of rich folks, unburdened by moral scruples, dedicated to devising a scheme for transferring yet more of society's wealth from the least privileged to themselves, with, no less, the eager participation of the losers. What might they dream up?

How about state lotteries? What makes state lotteries so perfect for accomplishing this end is that the poor have limited recreation options; they have little means or potential for escaping their status; state lotteries can be promoted as generating revenues to be spent on public goods that benefit the less well-off; they are monopolies that can command monopoly returns; and the product offered by lotteries is an inferior good taxed at an exorbitant rate.

This paper surveys the political economy of this beguiling recreational means to distribute income from the have-nots to the haves. As will be seen, it is an ideal instrument for a kleptocratic plutocracy. State lotteries .are not, of course, a consciously formulated conspiracy of the rich to fleece the poor. However, the consequence is conveniently the same. It just happens that way.

A Brief Historical Backdrop

Gambling has existed throughout human history. (1) Today, some form of legalized gambling exists in about 140 countries, and lotteries exist in 100 of these (Clotfelter and Cook 1989, 21). Gambling provides excitement, it is an adventure. Most gambling activity throughout history has likely been a zero-sum game among acquaintances with all money played fully distributed among participants. However, the temptation was always there for someone to organize a game from which the organizer would profit at others' expense. However, if entry were free, such that anyone could organize a gambling scheme, competition might be expected to act as a curb on such profits.

During certain periods, traditional cultural values, especially religious ones provided a degree of protection for the poor against the establishment of lotteries, (2) although the Catholic Church in Europe made use of the lottery itself from time to time, and local churches in America often used lotteries to raise capital or to fund poverty relief efforts. Indeed, during the eighteenth and nineteenth centuries, lotteries were fairly common in the American colonies and then republic. These lotteries were typically local, organized by towns, churches, or schools to gain revenues for local capital projects and ended with the completion of the projects they funded.

By the mid-nineteenth century, a number of state-franchised private lotteries became embroiled in scandals. Social reformers began to campaign against lotteries, and gambling in general, on the grounds they bred criminality, exploited the poor, and corrupted moral values. The majority of states adopted constitutional prohibitions on lotteries, (3) and lotteries of any substantial size disappeared from the American landscape, (4) especially after Congress banned all lottery materials from interstate commerce in 1890 and prohibited all mail related to lotteries in 1895.

Beginning in the mid-1960s, after a 70-year prohibition, state lotteries began returning in force. (5) Financially-pinched states, always on the lookout for new sources of revenue and unwilling to raise taxes, can easily camouflage the fact that state lotteries are in essence just another excise tax. Further, traditional religious objections to lotteries had weakened. Nevertheless, most governors and legislators were still reluctant to pass the necessary legislation to create such lotteries, and most came into being via referendum. (6)

Given the long tradition of opposition, it is somewhat ironic that lottery gambling would return as state enterprises. The overt reason was that gambling's illegality had forced it into an underground of criminality. (7) Since evidence suggested people would gamble regardless of its legality, why not have the benefits accrue to the people through their state rather than be channeled into the realm of criminality? The state, it was argued, could better insure the games would be kept honest.

However, the most powerful argument was that by funneling these gambling monies to the state, more services could be provided to benefit society's least privileged. This built upon the long tradition of socially acceptable small-scale local gambling, usually in the form of bingo games or raffles run by fire departments or churches. The returns were always portrayed as benefiting the community generally, if not especially the least well-off. State lotteries have generally used the same sort of ploy, pretending that the receipts are to be used for good social causes, most frequently education. This is itself a shell game. (8) Nothing prevents state funds previously earmarked for education from being reduced by the amount made available from lotteries. Indeed, in some instances as lottery revenues rose, total state spending on education actually fell (Strahahan and Borg 1998, 81-82); and the earmarked funds have not always been used for the intended purposes (Hansen 2004, 2), although there can be no way of knowing how much would have been spent on the intended services in the absence of lottery revenues.

In any event, the arguments in favor of state lotteries appear to have been persuasive. (9) Since 1964, 40 states and the District of Columbia have adopted state lotteries. (10) In any given year, about one-half of Americans play lotteries, making them the most popular form of gambling. Total spending on lotteries in 2003 was almost $45 billion, or over $155 per capita--more than was spent on all reading materials or movie attendance. States with lotteries received, on average, 2.26 percent of the total self-generated revenue from their lottery operations. (11) Total lottery expenditures amount to about 0.5 percent of national income (Hansen 2004, 1, 5, 17). The amount spent on state lotteries has been growing more rapidly than that spent on other forms of gambling, increasing at an annual growth rate of 11.3 percent between 1990 and 1998 (Mikesell 2001, 87).

However, the latent reason for state lotteries is that they stealthily reallocate income from the relatively poor to the relatively rich. The intricacies of how this occurs are addressed below.

Gambling: Consumption or Investment?

Gambling is a form of recreation, and thus a form of consumption. Not unexpectedly, mainstream economists tend to view playing the lottery as merely consumption, and their adherence to the doctrine of consumer sovereignty requires that it be viewed as not essentially different from other forms of consumption. As Charles Clotfelter has put it:

"Most people who play lottery games do not win, but that does not make the activity of playing any more 'wasteful' or irrational than, say, playing video games, eating candy bars, or attending a hockey game. They play because they evidently get something out of it ... economists are inclined to look at people's own behavior and assume that those who play the most will get the most enjoyment out of it" (1999, 4).

As a form of consumption,...

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