Monday, October 15, 2007

Leasing the Lottery?

Yesterday’s online New York Times contained an article discussing a proposal by California governor Schwarzenegger proposing to lease the California lottery to a private party in exchange for a large upfront payment – perhaps $37 billion. See Schwartz and Nixon, “Some States Consider Leasing Their Lotteries”, October 14, 2007, available here: . (Thanks to my colleagues Mike and Bruce for pointing this one out to me.)

This was not an original idea, as it was pitched to Schwarzenegger by an investment banking firm, who stands to make big money from brokering this deal. I have no objection to an intermediary earning its fees. Moreover, I believe that there may well be appropriate uses of leasing of public property, such as turnpikes and tollways, which provides a means to finance the improvements of infrastructure in an alternative approach to raising money through bonds and having the government run the concession. However, this proposal is a terrible idea.

Lotteries are problematic for many reasons. (We discuss some of them in our book, Governing Fortune). States with lotteries are selling dreams of riches without working for them. Do you want the state to be telling its citizens, “Hey, don’t work for your truck, or don’t borrow and pay off the loan to buy the truck, just play Trucks and Bucks to win your truck, [Sucker!]” OK, the “Sucker” part is not really in the pitch, but it is implicit. Adam Smith once said that if you wanted to be sure you would lose, buy every ticket. As we all should know, lotteries are terrible bets. If you must play, buy one ticket and treat it as entertainment. Don’t treat it like an “investment.” If you do, you will be sorely disappointed. (Unless, of course, you are lucky, and that is the problem -- everyone feels lucky, but sadly, they are really not lucky.)

As things stand, governments already overpromise and underpay when it comes to lotteries. Their jackpots are advertised in gross, but they must be paid out in after-tax dollars, causing significant reductions in the jackpot. Moreover, they are often paid out over time, causing a further reduction for the time value of money. Other money-handlers are required to disclose the real terms of the deal – but the lottery seems to skate by with only hype.

If the government “leased” the lottery, what conditions would it put on advertising? What conditions would it put on selling tickets to compulsive gamblers? What restrictions would it impose on video lottery terminals, which are a close approximation to a slot machine and have been removed by at least two states, Iowa and South Carolina, which had previously approved them based on the perceived danger they presented to vulnerable citizens.

At least one other problem looms like a large pink elephant in the room: how can we trust the politicians not to spend the largess they get from the up-front payments negotiated in the lease on something wasteful? Chances are, by the time we figure out that they have stiffed the people, they are either in the U.S. House (where “it’s not my problem, man”) or they are in a home somewhere (“dude, where’s my aide – hearing aid, that is”). Either way, this is not good.

My advice to Californians: "Don't do it." Ditto that for my answer as to whether to play the lottery. Be assured, however, that this idea will not go away. As Arnold might say, "I'll be back."

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