Every day I read reports of how the jackpot for the Powerball lottery, one of the many lotteries run by states in the US, keeps increasing in size. Under the system, if a drawing does not produce a winner, the jackpot rolls over with the value of the new bets added to the old. Currently the prize is about 1.2 billion dollars.
In an interesting article, Kathryn Schulz discusses the history of how the lottery became a ubiquitous presence in American life.
How this came to be is the subject of an excellent new book, “For a Dollar and a Dream: State Lotteries in Modern America,” by the historian Jonathan D. Cohen. At the heart of Cohen’s book is a peculiar contradiction: on the one hand, the lottery is vastly less profitable than its proponents make it out to be, a deception that has come at the expense of public coffers and public services. On the other hand, it is so popular that it is both extremely lucrative for the private companies that make and sell tickets and financially crippling for its most dedicated players.
The fact that the chances of winning the lottery are designed to be so infinitesimally small is, paradoxically, what makes the lottery so appealing, because the jackpots can rise to such large values because any given drawing rarely produces a winner.
The New York Lotto, for instance, requires six numbers between one and fifty-nine; the North Carolina lotto, five numbers between one and forty-three. The odds of getting all the numbers right are absurdly low—which, paradoxically, is why lotto revolutionized the industry.
[L]otto was a rollover game: if a drawing was held and nobody won—a common occurrence, given the odds—players could keep buying tickets. For those profiting from the lottery, this created a virtuous cycle. Every time the pot got bigger, more people were tempted to buy a ticket, and the more people bought tickets, the bigger the pot became.
The whole thing was hugely counterintuitive—the worse the odds of winning became, the more people wanted to play. Alexander Hamilton was right: to the average person, the difference between one-in-three-million odds and one-in-three-hundred-million odds didn’t matter, but the difference between a three-million-dollar jackpot and a three-hundred-million-dollar jackpot mattered enormously. Recognizing this, lottery commissioners began lifting prize caps and adding more numbers—say, six out of fifty instead of five out of thirty—thus making the likelihood of winning even smaller. The New York Lotto launched, in 1978, with one-in-3.8-million odds; today, the odds are one in forty-five million.
The lottery industry gathers legislative and public support by promoting the false idea that playing the lottery helps fund important government functions like education.
Evidence from the first legalized lotteries quickly put paid to the fantasy that they would provide sufficient income to fund much of the business of running a state. In New Jersey, where proponents had imagined proceeds on the order of hundreds of millions of dollars, the lottery brought in thirty-three million dollars in its first year—about two per cent of the state’s revenue.
In California, where an S.G.I.-backed lottery initiative passed after a high-profile campaign touted it as a boon for schoolchildren, the resulting revenue covered, in the lottery’s first year, about five per cent of the state education budget. As of this year, according to the California Department of Education, lottery income accounts for roughly one per cent of all K-12 funding.
But that was not the worst of it. Again and again, education and other line items that served to persuade people to pass lottery proposals did not actually get any additional funding; instead, the revenue went into the state’s general fund. After this happened in California, other states mandated that lottery money flow directly into specified programs, but, as is so often the case, when one loophole closes, another one opens. In Illinois, Florida, and Virginia, among other states, the lottery revenue did indeed go to a designated education fund—whereupon legislators offset those gains by reducing the money coming in from general appropriations. In the end, Cohen writes, “the lottery supplanted, rather than supplemented, state spending on education.”
The article points to the great negatives associated with the lottery, especially by making tickets so easy to buy. You can buy tickets almost anywhere.
One in two American adults buys a lottery ticket at least once a year, one in four buys one at least once a month, and the most avid players buy them at rates that might shock you. At my local store, some customers snap up entire rolls—at a minimum, three hundred dollars’ worth of tickets—and others show up in the morning, play until they win something, then come back in the evening and do it again.
The first is that lotteries have made it harder than ever to pass much needed tax increases, because, thanks to years of noisy campaigning followed by decades of heavy promotion, the public wrongly believes that schools and other vital services are lavishly supported by gambling funds. The second is that the money raised by lotteries comes largely from the people who can least afford to part with it. Every state lottery is regressive, meaning that it takes a disproportionate toll on low-income citizens. Rich people do play the lottery, of course; one of the largest-ever Powerball jackpots, a quarter of a billion dollars, was won by three asset managers from Greenwich, Connecticut. But the wealthy buy fewer tickets than the poor (except when jackpots approach ten figures); because of that and because their purchases constitute a much smaller percentage of their income, playing the lottery has a far smaller impact on their pocketbooks. The difference can be drastic: according to the consumer financial company Bankrate, players making more than fifty thousand dollars per year spend, on average, one per cent of their annual income on lottery tickets; those making less than thirty thousand dollars spend thirteen per cent. That means someone making twenty-seven thousand dollars loses some thirty-five hundred dollars to the lottery every year. [My italics-MS]
Because of the overwhelming odds against winning, people sometimes dismiss lotteries as a tax on stupid people. But that is unfair. It is really a tax on desperate people, who see no future where they achieve a reasonable amount of financial security. They know that losing a few dollars more will make their lives a little bit worse by having to forego some other purchase but presumably they think they can deal with it. But the benefit of winning is huge and this can make the risk-reward calculation swing in favor of buying tickets. These people are not stupid. They know the odds are very small. But they are buying hope, to have something positive to look forward to the next day.