Thursday, January 21, 2016

Powerball: Your Patriotic Duty!

I’ve always detested the lottery.  So after last week's national frenzy over the $1.4 billion Powerball drawing, I decided to write a scathing exposé of the lottery system: how it's a hidden tax on the poor, an incredibly inefficient way of funding important social programs and a source of false hope to millions.  I expected this blog post to write itself.  After all, I'm "that guy", the person that never joins office lottery pools.  I always decline saying, "No thanks. When you guys win, I'll be that guy, the guy featured in the news who could have been a millionaire but refused to join the office pool".  Sometimes I’d explain why I thought the lottery was a national disgrace but, for the most part, I let them have their fun.  I ended up getting a T-shirt in the bargain.

After a week of trying to write this post, though, it was clear that I was getting nowhere.  Try as I might, I couldn't put together a convincing argument for why the lottery is a national disgrace.  

It’s Gambling!
"Ya got trouble ... right here in River City! 
With a capital 'T' that rhymes with 'G' that stands for Gambling!"

I've known for some time that I was born with a less than full complement of the male genetic code.  I rarely spit, try not to swear, can't grow a decent beard, don't smoke cigars, enjoy reading "Pride and Prejudice", and hate every movie written or directed by Seth Rogan.  I also dislike gambling, but I'm hardly an anti-gambling crusader.  In fact, I've done a bit of social gambling myself; things like “50-50” raffles,  Super Bowl pools, the March Madness bracket, and duck-racing on Cranbury Day.  I always admired my brother's skill at taking other people’s money (legally) while playing poker, and my own mother used to play bingo at the church on Friday nights!  The fact that the lottery is a form of gambling hardly qualifies it as a national disgrace.
It's a sucker's bet!

The odds of winning the Powerball jackpot are approximately 1 in 292 million, which translates into 0.0000003%. You can improve your odds by buying more tickets, but even if you bought 3 million tickets your chances of winning would still be under 1%.

At a casino, the odds are with the house regardless of the game.  Craps, a game played by simply rolling a pair of dice, gives you one of the best chances to win.  One way to win is to roll a natural (a 7 or an 11) on your first roll.  The odds of doing that are 8 out of 36 (22%).  The odds of doing that twice in a row are (8/36 x 8/36) or about 5%.  The odds of doing that ten times in a row is equal to about 0.00003%, or about 1 chance out of 3.4 million.  Probably no one in the history of casino gambling has ever done this, but it is still almost 100 times easier to do than win the Powerball jackpot.

For Powerball to be a sucker's bet, though, the astronomical odds against winning would have to be hidden (or at least non-evident), and that's not the case.  Last October the lottery system openly publicized the fact that they were making the Powerball jackpot even harder to win by increasing the number of balls from 59 to 69, thereby decreasing the odds of winning the jackpot from 1 in 175,223,510 to 1 in 292,201,338. As expected, the media had a field day with this, announcing that it is more likely to be struck by lightning twice while drowning than to win the Powerball jackpot.  It should be clear to everyone that the odds of winning the Powerball jackpot are pretty stupendous.

It’s an inefficient way to raise money!

It’s difficult if not impossible to defend lotteries as an efficient way of raising funds.  As shown in the chart below, the U.S. Census Bureau reported that, in 2011, state lotteries generated over $18 billion in profits.  That sounds pretty good until you realize that it required $54 billion of ticket sales to do it.

Source: U.S. Census Bureau

Here’s how NBC News broke down state lottery sales in 2012: 
"About 72 cents of every state lottery dollar goes somewhere else. About 60 cents goes to the winner. Some goes to run the lottery. A piece of it goes to a private, Italian-based conglomerate that operates lotteries and slot machines in 50 countries around the world.  Depending on what state you live in, that leaves as little as 11 cents left to pay for the government services these games were created to help."  
And in September of 2015, recently reported the following statistics regarding New Jersey lottery ticket sales: 
Ticket sales have topped $3 billion for the first time, but New Jersey’s lottery expects to send only $930 million back to the state to help fund social service programs — the lowest rate of return in nearly four decades.”
While these statistics are true, they don't pack that big of a punch.  The lotteries may be an inefficient method of raising money but, without them, important social programs throughout the nation would have had $18 billion less funding in 2011.

It's a tax on the poor!

Whenever I have railed against the lottery, this has been my go-to argument: 
"Rather than raise everyone’s taxes to pay for needed social and infrastructure projects, the federal and state governments have opted instead for lotteries in which participation by the poor is much higher than the rich.  This has the effect of making the lottery a de facto tax on the poor."
For years, that was the conclusion by almost every study on lotteries.  Below are three representative examples:

While these analyses were undeniably true at the time, a landmark study in 2004 by Emily Oster of Harvard University examined the "regressivity" of the lotteries; that is, whether they place a heavier tax burden on the poor than on the wealthy. Her conclusion [with a phrase emphasized by me] indicated that, while lotteries were definitely regressive, the situation could change:
"The regressivity of lotteries has become an increasingly important issue in the U.S. as the number of state-run lotteries has increased. Despite this, we still know relatively little about the nature of lottery regressivity.  I use a new dataset on Powerball lotto sales to analyze how regressivity varies with jackpot size within a single lotto game.  I find that these large-stakes games are significantly less regressive at higher jackpot sizes.  An out-of-sample extrapolation of these results suggests that the lottery becomes progressive at a jackpot around $806 million. This suggests that concerns about regressivity might be allayed by concentrating lotto games to produce higher average jackpots."
At the time of this study, a jackpot of $806 million was almost unthinkable.  But thanks to the Multi-State Lottery Association (MUSL), jackpots of this size or larger will almost certainly become the new norm.  MUSL was created to manage national lottery games like Powerball and Mega Millions.  It was MUSL that, probably unwittingly, followed Emily Oster’s advice by decreasing the odds of winning the Powerball jackpot, thereby causing jackpot sizes to increase.  Make no mistake about it: MUSL was not motivated by concern for the poor!  They were motivated by pure capitalism, as reported in the USA Today on July 6, 2015:   
"Robert Williams, executive director of the [New York] state Gaming Commission, said the new odds are scheduled to launch nationwide on Oct. 4 for the Oct. 7 Powerball drawing.  "The proposed rule is intended to increase the odds of winning any prize while decreasing the odds to win the jackpot," Williams said.  The move is aimed at boosting jackpots as sales have slumped since 2013, the last huge payout.  Powerball sales declined nationally by 19% last year because there was no huge jackpot."
The impact of this change was everything that MUSL could have hoped for, and then some.  The chart below shows Powerball ticket sales going through the roof as the recent Powerball jackpot grew in size, culminating in record ticket purchases immediately prior to the drawing on January 13. 
With this many tickets being sold it is clear that an incredibly high percentage of Americans are now buying Powerball tickets.  If Emily Oster's model is correct, Powerball is no longer a regressive tax on the poor.  It could even be progressive.   

So what does this all mean?
I still dislike gambling and I still think lotteries are an incredibly inefficient way of raising money for social programs. The state and federal governments should be using their taxation power rather than the lottery system to raise any money needed to support their programs.  All that being said, I have to recognize the following truths:
  1. People love the lotteries.  Actually, most people simply love to gamble.  For some, it's the thrill of taking a risk; for others, it's a social event like Friday night poker or playing fantasy football; for still others it's the desire to escape poverty.  Whatever the reason, lotteries are ingrained in our society and won't be going away in my lifetime.
  2. Lotteries are simply another form of taxation.  Since our elected officials are deathly afraid of raising taxes, the lottery system is a godsend for them.  It allows federal and state governments to generate the necessary funding for social programs by simply convincing their constituents to play a game, albeit a losing one.  
  3. Without lotteries, billions of dollars needed for social programs would be lost. The federal and state governments currently depend upon the lottery to fund programs for parks, education,  elderly care, emergency responders, veterans and more.  If the lottery system was shut down, these programs would have to be cut back (probably) or taxes raised (not bloody likely).
  4.  Everyone must play the lottery!  If only the poor play and lose, the lottery is nothing more than a regressive tax.  For it to be a fair method of taxation, everyone must play and lose.  
Based on the graph below created by CNN Money, Americans spent $70.15 billion on lottery tickets in 2014, more than they spent on music, movies, books, video games and sports tickets combined! Based on the estimated population of the U.S. in 2014 (320 million), that comes to about $220 per person.  

Graphic:  CNN Money
So, in order to perform my civic and patriotic duty as a tax-paying citizen of the United States of America, I must buy $220 worth of Powerball tickets each year. That equates to approximately one $2 ticket for each of the twice-weekly drawings.  I cannot fulfill my patriotic duty by simply donating an extra $220 each year to my favorite charity. Until it becomes outlawed, I must support Powerball so that it remains a non-regressive tax.  

Yes, black has become white and up has become down.

"We’re all mad here. I’m mad. You’re mad."