Lottery sales weaken: Good!

The Wall Street Journalreports (subscription required) that the soft economy is taking its toll on a business that had been thought to be part of the holy trinity of recession-proof vices: alcohol, tobacco and gambling.

California has reported that its lottery ticket sales are down about 10% over the past few months, along with a drop of 4% in Texas. Nationally, lottery ticket sales are down a little under 2% from July through September versus the same period in 2007. Of course, many retailers would kill to have their sales down just 2% so the lottery is still outperforming. It may not be recession-proof but it certainly qualifies as recession-resistant.

With state budgets across the country looking like something out of a 1950s horror movie and tax revenues set to decline with the broader economy, states were hoping that the Lottery would pick up slack. State Lotteries raise billions of dollars for education: In New York, the State Lottery generates $2.2 billion in net income each year, with all of it going to K-12 education. The support the Lottery provides to education is one of the main arguments in favor of the Lottery. But is it good enough?

When assessing the morality of the Lottery, I think it's completely beside the point: Just as Bernard Madoff's $6 million donation to lymphona research does nothing to mitigate the evils of the Ponzi scheme he perpetrated, the fact that the Lottery raises money for education has nothing to do with whether it's ethical.

It isn't: The Lottery is the most regressive tax on the planet -- and it's not a small one either. In my home state of Massachusetts, the average resident spends $699 per year on Lottery tickets. There are reams of research demonstrating that the lottery is the most regressive tax that could ever be created. When the University of Georgia investigated that state's lottery, here's what they found:
  • Blacks are three times more likely than non-blacks to be active lottery players.
  • Males are almost four times as likely as females to be active lottery players.
  • An individual without a high school degree or GED is more than four times as likely to be an active lottery player as an individual who has an education above the high school level.
  • A high school graduate is two and a half times more likely than someone who has an education above the high school level to be an active lottery player.
  • According to the model, less educated black males are more than 30 times more likely like than educated non-black females to play the lottery.
Economically, the lottery just doesn't make sense: No wealth is created. A collection of money is taken up from the most underprivileged people in the state, and then a bunch of it is dumped into the lap of one of those people -- a significant number of whom end up broke again. Then another big chunk is spent on administrative and marketing costs, with the balance going to the state government.

Meanwhile, additional state funds are devoted to law enforcement efforts to crack down on illegal gambling: protecting that state's monopoly. While making the lottery a way to raise money for education might seem to mitigate the evils of it, in some ways it does just the opposite: Because state lotteries are not competing with other gambling outfits, the payout ratios are lower than they would be in a free market with entrepreneurs competing for gamblers' money with enticing offers.

If you don't believe the academics, try listening to one of the smartest and most ethical financial minds in the history of the world, Warren Buffett. He's so passionate about the issue of the Lottery that he went before Nebraska lawmakers to make the case for doing away with it: "I think it's cynical on the part of the state to raise money from people who basically can't afford it by promising them a dream that is not going to come true for any but the tiniest tiniest fraction of the people who participate, and that causes people to get into the kind of trouble I hear about every day. . . You're teaching your citizenry all the time by the actions you take as legislators and as administrators of a state like this. Essentially to teach you that the state is on the other side of the transaction from you--they're trying to get you to do something dumb--I just think the state ought to be doing things for its citizens, not do something to its citizens."

If Warren Buffett can see it, why can't lawmakers and voters? The debate over the the lottery is at its core a debate about the role of government: Either you think that marketing a wealth-destroying product that disproportionately appeals to society's most vulnerable people is a legitimate function of the government, or your don't. 43 states currently operate lotteries, with the money in most cases being used to support education. But don't school children deserve something better than textbooks purchased with the blood of the underprivileged?
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