Monday, February 20, 2006

Price Transparency: The Lotto

As long as we are on the topic of price transparency, the Lotto seems a worthy subject. All the morning news programs are salivating over the prospect of the new winner, which purchased the winning ticket in Lincoln, Nebraska. It has been interesting to hear people comment on the preferred identity of the winner: typical answers have included a "lower middle class person" , "a person in a shelter down on their luck", or "a college student".

Though I can understand how one roots for the underdog, the fact is that lotteries tend to depend on this sentiment for their success. Few upper income people spend any money on lotteries. I doubt many budding entrepreneurs - who aspire to be upper income earners -- do so either. Unfortunately, by preying on these hopes, government induces people to play and to rely on winning as a way to get rich. The slow, steady progress of working, saving, and investing -- which is awfully close to a sure thing -- gets traded in for the ephemeral riches of a quick win.

Obviously, I do not favor this type of public finance. For some, it may be harmless fun - a way to throw a dollar into the public coffers. But for others it is not so harmless. I've personally witnessed folks who appear to be of limited means plunking down $20-40 at a time for a big jackpot - enough to go a long way toward providing a nest egg for retirement.

Compounding the problem is the way that the government advertises these results. We are told that we will win $360 million in this lottery. But that is only true if you aggregate the payments over a twenty-year period. And those payments are all taxable. The present value after taxes is really closer to $120 million, or about a third of the total in this case.

On every other sweepstakes or purchase involving time payments, the chances of winning and/or the payment terms are advertised broadly, at the least by fast-talking legal disclosure types. Maybe regular lotto "investors"know this stuff instinctively, and the rest of us who don't play don't need to be warned. But it still troubles me that government gets away with taking money from the public without seeming to play by the same rules as business does.


No comments: