Nothing’s Free: How Lotteries Work

From Ideas on Liberty, at FEE.org

My brother and I have a game we play from time to time. He calls me with a can’t-miss investment opportunity and my job is to figure out what’s wrong with it. There is always something wrong with it. In fact, the better it looks on the outside, the worse it looks on the inside when you take a closer look. That doesn’t necessarily make it a bad investment. But it’s never the bargain in appears to be at first.

Such is the economist’s burden and blessing. There is no free lunch. The bigger the bargain, the more likely it is that something worrisome lurks beneath the surface that needs to be examined. There’s always a catch. Usually it’s easy to discover: the bargain is of questionable quality; the bargain has a hidden payment that comes later; the bargain involves an unforeseen risk. But every once a while a bargain comes along that looks so good, you wonder if it might actually be a genuine bargain. This should make you especially nervous. For that means the catch is especially hard to see. So look carefully before you leap, then look some more.

So it is with the “free” education that is being offered in some states with lotteries. In Georgia, for example, any student with a sufficiently high grade point average gets “free” education at any public Georgia college. The funds come from sales of lottery tickets. It sounds like the ultimate bargain. Who can quarrel with free education?

Let’s take a closer look. There are many senses in which that University of Georgia education is not free. Resources get used up to provide that education. Those resources could have provided something else of value.

But who provides those resources? If the education is not really free, someone must be paying. Who is it? It would seem to be the losers in the lottery. And that’s why it seems free. We know that there have to be losers in the lottery. So now they help pay for education. Sounds great. And besides, no one forces you to play the lottery, so the whole thing is more like a voluntary contribution, not a tax.

To see the flaw, suppose the government decided to fund free education by opening a chain of dry cleaning stores. Profits from the store will be used to pay for “free” education. To make sure the stores are sufficiently profitable, the government decides to charge $1 more per shirt than the dry cleaners who are currently in operation. And to keep those privately-run stores from attracting customers at lower prices, the government decides to ban all private competition and enjoy a monopoly.

We would all understand that in this world, the “free” education is being paid for by people who enjoy pressed and clean clothes. Such people would be paying in two senses. The first sense is literal: their excess payments above and beyond the competitive prices that would prevail without a government monopoly are what fund the education. They also pay in the sense of having their clothes cleaned less often than they would under a private system. Given the higher prices, some people are going to do less dry cleaning and some are going to do none at all. Under such a system, it would be ludicrous to claim that the education is free. It’s clearly being paid for by the users of dry cleaning services. Funding education from the pockets of dry cleaning customers also raises a question of morality. Why should the burden of funding education fall arbitrarily on those who like clean clothes?

Now, let’s return to the state lotteries. About 55% of the receipts go to prizes, 10% to expenses and 35% of the receipts go to education or some similar unimpeachable cause. Because 35% goes to neither winners or losers, the real cost of the lottery is that you win less often and there are smaller prizes than there would be in a world without a government monopoly. If government allowed competition or made gambling legal, people who like to gamble would have a higher chance of winning and there would be more money distributed to winners.

So it’s not free after all. Subsidizing education out of lottery proceeds punishes people who like to gamble. Those turn out on average to be people who are relatively poor with less education. Can you think of a more immoral solution for funding education than to put it on the backs of the people with the least education?

People like to defend the lottery by saying it’s voluntary. After all, you don’t have to play. It’s also true you can avoid the income tax by not working. So I guess that’s voluntary, too. But it’s hard to argue that the lottery is a voluntary tax when the government has a monopoly on lotteries. Can you imagine how many people would play the state lotteries if there were competing private lotteries with 90% of the money going to prizes instead of the 55% the states typically allot?

Under a private, competitive lottery system, the prizes would be bigger and the odds of winning would be higher. It would be a better world than the one we live in now, where people in search of hope are forced to pay a 35% tax to finance the education of college education of the mostly upper class. That’s why I like my dry cleaning proposal. Sure it’s unfair. But it’s better than using the money from a government lottery.