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Gambling on the Growth of the State

Mises Daily: Friday, October 15, 1999 by

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Alabama voters seem to have temporarily derailed the nationwide gambling express with their rejection of a state-run lottery in that state. In November, voters in South Carolina will decide whether or not to continue to allow gambling in the form of payouts for video poker. Both cases are portrayed by the media as the Baptists (and other religious groups) versus those who believe in freedom of choice, and, not surprisingly, the Baptists are shown to be the bad guys. The truth is more complicated.

Those who believe the state should have only a very limited role in our lives naturally recoil at prohibition of anything, be it gambling or sale and consumption of alcohol and drugs. Libertarians rightly point to the horrors of enforcing such prohibitions, as they can lead to growth of the leviathan state. There is no need to repeat the law enforcement horror stories, especially those regarding with the "war on drugs."

What has been ignored, however, is that the current gambling regimes both promote the growth of the state . The results foster wealth transfers , a swollen public sector, and government promotion of the false belief that people can have "something for nothing."

We look first at the video poker controversy in South Carolina.Voters in that state will determine in November whether or not to allow owners of video poker machines to increase the dollar amounts of payouts to winners. However, the referendum does not end there.

In order to sweeten the deal for the voters, the tax take from video poker is supposed to rise dramatically, something the promoters of video poker have been emphasizing ad nauseam. Radio and television spots have reminded listeners that public education stands to greatly benefit from the increased cash in state coffers. "Education can't wait in South Carolina" has been the machine owners' slogan, who hope to convince people that video poker losers will be making worthwhile contributions to the education of children in that state.

Such claims need to be further scrutinized. First, even if one assumes that poker players will help fill the state's public school coffers, one must remember that it does not necessarily mean better education. Examination after examination has demonstrated that increases in government school budgets does not translate into better learning for students. In fact, the opposite has been true in state after state.

Second, the concern of machine owners for better education is suspect. The average video poker player is at best a high school graduate and many are high school dropouts. If video poker taxes were to actually improve learning conditions for South Carolina's students, then the industry would be actively undermining its own customer base. One should be skeptical of the claim that the industry is so concerned about the welfare of South Carolinians that it will pay to put itself out of business.

In November 2000, voters in this state will also decide whether or not to change South Carolina's constitution to allow the government to run a lottery, ostensibly for education. Like the proposal which voters defeated in Alabama (modeled after Georgia's lottery), the lottery would fund early childhood education and provide tuition scholarships for the state's high-school graduates to attend in-state colleges and universities, provided those students have a "B" average.

Let us first examine the tuition "scholarships." There is no doubt that the availability of these so-called HOPE scholarships has changed the incentive structure in Georgia for attending college. Admission standards to the University of Georgia have increased as many of the state's best students opt for a lower-cost college education in-state as opposed to attending college elsewhere. Likewise, other in-state public and private colleges have benefited from the infusion of tuition cash.

Before one assumes that these tuition grants are simply manna from Heaven, one must remember how this scheme works. Despite the claim by lottery proponents that the grants allow students to attend college who might not have been able to do so otherwise, the facts speak otherwise. The most common predictor of grades for students is their socio-economic status. On average, children from wealthier families earn higher grades than children from poorer families.

Thus, the "scholarship" program is really a massive wealth transfer from the poor to the relatively wealthy. Statistics have shown that most lottery players are in lower-income groups, but the main recipients of lottery benefits are children from upper-income families. Thus, the claim that the HOPE scholarships provide the only means for Georgia's students to attend college is not only hollow; it is downright dishonest.

Finally, one must examine the lottery itself. Before states initiated lotteries, especially in the North, organized crime had run "numbers rackets" which were, in effect, privately run lotteries. If they had the low percentage of payouts that state-run lotteries feature, they never would have survived the market test.

Georgia's lottery, for example, pays 50 percent of its take back to players, keeps 30 percent for overhead, with the remaining 20 percent actually funding education ventures. If one were to attempt to set up a private lottery in Georgia which offered a larger take to players, that person would be arrested and charged with fraud, racketeering, and other crimes. In other words, if one provides a superior alternative to a state-run gambling venture, he is a criminal.

In many ways, the lottery is more insidious than video poker. For one, video poker "casinos" are often located in seedy, unattractive buildings with dark, oppressive interiors. Lottery tickets, however, are sold in clean, well-lighted convenience stores which are visited by people of all social groups, making it much more attractive to people who otherwise would not be tempted to gamble.

The prospect of government officials, who already have an insatiable appetite for the earnings of other people, encouraging people to gamble away their income so the state coffers can grab even more money. The same states which sued tobacco companies, claiming they sold a fraudulent product which promotes addiction, run lotteries which are actually fraudulent and, for some, just as "addictive." Yes, playing the lottery or engaging in other forms of gambling is voluntary, as apologists for the lottery and video gambling remind us, but then so is the use of tobacco products.

One can make a case against prohibition of gambling just like one can make the case against prohibition of alcohol and recreational drug use. However, one cannot make the case for gambling as a tool to increase the power of the state. To do so is inconsistent at best and patently dishonest at worst.

William L. Anderson teaches economics at North Greenville College.