Inequality

I can’t think of any single act of government that creates more inequality than the lottery—at least per dollar raised and spent. Think about it. Thousands of (mostly below-average income) people buy tickets and, after the drawing, one of them becomes immensely wealthy. As far as I can tell, the single largest winner in the United States at $315 million was Jack Whittaker, a West Virginia businessman who was already well off when he won!

I can’t think of anything in the private sector that even begins to compare to this reverse Robin Hood redistribution from the poor to the rich and the nouveau riche. And remember, in order to pull it off, government first has to establish a monopoly, keeping private competitors (who would at least raise the poor bettor’s expected return) out of the market.

If you really care about the ethics of income distribution (more on that in a future Alert), a lottery has wonderful heuristic value. For example, if you’re the kind of person who thinks that rich people don’t deserve their riches, that their wealth is the result of good fortune and chance, or that income is somehow collectively rather than individually generated—that is, if you are inclined to believe that life itself is one big lottery—then in your search for genuine unfairness, a real live lottery winner is hard to beat.

After all, the lottery winner didn’t do anything special. He did what everybody else did: he bought a ticket. His immense winnings are by definition the result of good luck and random chance. He surely did nothing to warrant, merit or deserve his wealth. Unlike in the economy, the winner’s winnings really are made possible by the losers’ losses. The lottery’s rich get rich precisely because the lottery’s poor become poorer.

So here’s the question of the day: When is the last time a liberal friend or acquaintance of yours complained about the lottery? When’s the last time The New York Times complained? Or The New Republic? Or Mother Jones?


Luck Be a Lady Tonight

I first became aware of this sociological (or is it psychological?) anomaly a few years back when the National Center for Policy Analysis produced the study, Taxing the Poor. In addition to lotteries we had such other hard-to-defend policies such as excessive taxes on tobacco, alcohol, and other excise taxes. (By “excessive” I mean beyond what could be justified based on external costs the consumer creates for others.)

We released our study at the National Press Club in Washington and as part of the effort we invited a few liberal think tanks and activist groups to join us. Surely, I thought, we’ll all agree on this. But to my surprise the liberal groups all turned us down.

I then discovered this was not an isolated event. Democratic governors are more likely to favor lotteries and other forms of legalized gaming than Republican governors. Jacob Hacker and Paul Pierson wrote a whole book about how awful rising inequality is, and about all the ways that government encourages it. Yet I couldn’t find the word “lottery” in the index. Ditto for legalized “gambling.” I couldn’t find “excise taxes” either. I was too cheap to spring for Robert Reich’s book in the same genre, figuring that it would be mostly gibberish. Still, a Google search of “Reich + lottery” turned up nothing.

That leads me to three observations.

First, I believe that the vast majority of people in the world do not care about inequality. People who buy lottery tickets are among them. When is the last time you heard of lottery ticket buyers supporting a tax on lottery winners with the proceeds given to the losers?

I also believe that most middle income folks do not care about it either and do not support blatant redistribution. I know that requires an explanation, so I will be brief.

Middle class voters support social insurance — with the government providing the types of insurance that the market provides imperfectly. That includes Social Security, Medicare, unemployment insurance, workers’ compensation, etc. They also support temporary (but not long-term) relief for the able-bodied poor. Medicaid, food stamps, cash welfare, etc., are viewed as social insurance against bad luck. They also support other interventions (such as tariffs and quotas) that they justify in various ways.

What the middle class does not support, however, is the blatant taking from Peter and giving to Paul for no other reason than the fact that Peter has more and Paul has less. In other words, there is almost no support among ordinary people for equality for equality’s sake. Put differently, the vast majority of people do not support legalized theft.

Second, there is one group that does favor equality for equality’s sake. This is the intellectual class. They not only favor equality, they are obsessed by it. Jim Gwartney pointed out to me the other day that in the advanced placement economics guide for high school students, making the income distribution more equal is listed as one of the important social functions of government. Really? Can you point to any state constitution or any city charter or anywhere in the U.S. Constitution or Federalist Papers or any other document where founding statesmen said that is a reason for establishing government?

Moving to the current day, is there any city, county or state government that has passed a resolution committing government to the goal of income equality? Don’t most of these entities do the opposite — using tax abatements and other lures to attract high-income individuals and high-income job creators to their communities — thereby exacerbating the distribution of income.

Sorry to say that yours truly has succumbed to the pervasive pressure in the academic world to treat income equality as a noble goal. In my book with Ed Dolan, Economics of Public Policy, we evaluated public policies by three value standards: liberty, efficiency and equality. But why equality? I can’t remember a student ever asking what effect a public policy was going to have on the distribution of income. Our equality measure was there to pacify the professors so they would buy our book.

[The academic obsession with income equality is especially strange when you consider that most of them are not materialists. The reason many of them become academics is, in part, because they are willing to sacrifice income for leisure. Given this preference, wouldn't it make more sense to aim for equal leisure time, rather than equal incomes? I'll leave as an exercise for the reader to figure out how that might work.]

The third observation brings us back to where we began. The ability to gamble is the antithesis of the effort to equalize incomes. If you really thought that equality of income was so important, why would you be so callously indifferent to the inequalities generated every time the roulette wheel spins, every time the dice are thrown or every time the horses leave the gate?

I don’t know the answer to that last question. Let me have your thoughts.

Comments (30)

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  1. Jeff says:

    Excellent analysis.

  2. Bruce says:

    Either the left wingers are hypocrits or they don’t really care about inequality in the first place.

  3. Lester says:

    Hate to say this, but I don’t think that liberals care about people who get rich by shear luck — gambling, inheritance, etc. I think the people they hate are people who make money and get rich thru their own efforts.

  4. Devon Herrick says:

    I’ve heard critics describe the lottery as a voluntary tax on the poor. I assume people are buying a little bit of hope and excitement when they buy a lottery ticket. But they’d have more hope if they merely saved the money for retirement.

  5. Harry Cain says:

    John, enjoyable piece, but I encourage you to return to healthcare and offer a critique of Bill Hsiao’s paper in the current issue of the New England Journal of Medicine. Hsiao and his team at Harvard were hired by Vermont to figure a way out of the healthcare mess, and they concluded with scholarly care that single payer was the only way to go. So that’s what Vermont wants to do. Given the public’s desires (for all possible care as long as someone pays for it), and the financial mess we’re all in, and the stances of the employer community and all the other interest groups, Hsiao may be right. The one possible benefit of a move in that direction would be mostly getting the employers out of the game (except financially), but the rest of it would be frigtening, the ultimate politization of healthcare. Maybe the country would be well served by letting Vermont try it. Like Canada, Vermont would have safety valves all around it, so no one would get hurt too badly.

  6. Vicki says:

    Good stuff, for sure.

  7. Greg says:

    My Dad always called the government run lottery the “stupid tax”

  8. Karen Yancura says:

    But doesn’t the present tax structure “take away” a gambler’s winnings — right off the top for the very reason of income redistribution?

  9. Tom says:

    The lottery/fortune has little, if anything, to do with progressive ideals – no one cares about inequalities caused by fortune because they can’t be praised or blamed.

    A drinker/smoker is blamed. But hey, they get the benefits of being buzzed, which must be worth the tax since they don’t quit.

  10. Simon says:

    In public administration equity is a major issue. However, equity is discussed in context of treating people the same or who bears the burden; not so much to the distribution of income. In regards to income there is horizontal equity of treating people of similar economic circumstances the same, and vertical equity refers to how a policy treats people across income levels. In competition to equity is neutrality, which is how the policy affects the market forces of the particular good or service.

    To address your question:

    From my studies I have leavened that too much equity is not a good thing. It is costly, complicated, and greatly interjects into the market causing more issues. Also I argue that the ability to gamble is a “preference” in regards its ones choice to play or not. According to scholars, if a burden is shifted to a preference, then it decreases horizontal equity. Entering the lottery is the antithesis of income equality for the individual. However, you can look at lottery systems as benefits received, such as Pennsylvania and their senior citizen programs. In this light one may justify the “sin taxes” as the funds are redistributive under the benefits received principle. This might be the reason “why people who think that equality of income is so important would be so callously indifferent to the inequalities.”

  11. Al says:

    In 1986 a Florida Constitutional amendment was passed permitting a lottery to exist. Prior to that time lotteries were illegal because gambling was considered socially unacceptable and abusive. At that time Florida was a more conservative state than it is today and the amendment passed with a 2:1 majority meaning a lot of conservatives voted for its passage. I was not one of them. The carrot that government offered was that it would help fund education.

    It did help fund some educational needs, but it also caused a transfer of funds from education to the general fund.

    I find it amazing that something unacceptable to society suddenly becomes acceptable when the government sponsors it. I find it naive that many conservatives did not realize that eventually much of that money would be funneled to government increasing government’s ability to spend OPM. I found it nuts that those on the left supported a get rich scheme for the poor making them even poorer especially since I believe it is the lower income groups that spend the most on the lottery.

    Thanks for a wonderful posting that points out so many fallacies in our thought processes. We should be teaching each other that dreams of riches are almost always dreams and that one should depend upon hard work rather than luck or a government handout to provide for our needs.

  12. LarryG says:

    Gambling of any form is entertainment. A dollar buys you a ticket, as an investment you might as well throw the dollar away, but as entertainment, that ticket may buy you more excitement than a dollar can get you anywhere else.

    The lottery and other legalize gambling, govt subsidizing sports arenas, etc. It’s the modern day equivalent of the ancient Roman gladiatorial games, distract the masses from realizing how much worse off they are than the privileged class.

  13. Linda Gorman says:

    My observation is that the academic class favors notional regulatory/legal “down-on-paper” equality above all else. It appears unconcerned when equal treatment on paper translates into unequal treatment in practice, sometimes going so far as to ignore plain evidence as is the case in health care, affirmative action, taxation, and education.

    When faced with unequal practical outcomes from its pet projects the academic class tends to blame waste, fraud, abuse, and conspiracies. Practitioners tend to redouble their efforts to build legal structures that penalize and control “deviant” behavior.

    It follows that monopoly public lotteries are ok because they are only unequal in practice. Plus, they raise money for ends favored by the equality project (generally public schools and health care). Private lotteries are not ok because their proceeds would benefit private citizens and might not be used to further the aims of the equality project.

    Regressive taxes on alcohol, tobacco, and snack foods are perfectly justifiable because they will lead to equal health outcomes. Any resulting income differentials can be dealt with by income transfers.

    Furthermore, this pesky focus on income is unwarranted. It is well known that people can get what they need–health care, food, housing, education, and transportation–from government programs. Therefore, anything beyond a small amount of disposable income is really unnecessary. It can even be dangerous when people with disposable incomes spend their money in ways that are bad and disagreeable.

    For example, some people may donate a portion of their disposable income to NCPA. Others might spend it on trucks, beer, ammo, McDonald’s hamburgers, and Wal-Mart shopping. People must be protected from themselves, so any project that absorbs disposable income for higher purposes is good.

    Public monopoly lotteries take disposable income that would be spent on bad things and transmute it to spending on higher purposes. What’s not to like?

    The occasional winner does not trouble the academic mind. He has become “rich” and legislating a sufficiently progressive tax system will rapidly redirect his winnings towards the higher and better ends specified by the equality project.

  14. Jim Morrison says:

    And why are you complaining, John? The state-run lotteries have put the illegal numbers racket (and the associated criminal activities) out of business, while raising revenue for services.

  15. Floccina says:

    I’ve the lottery described as a tax on stupidity.

    My state Florida has something called a homestead exemption that seems progressive at first glance but is not in fact and was done for other reasons.

  16. Janice Michaud says:

    John,

    Thanks for this piece.
    Good jog of bringing to our attention the moral hazard of in this government scheme and exposing the government sales team and their shennanigans.

    The lottery is a perfect example of the circular returns of government financial schemes. Schemes that are becoming broader and more centralized. This type of formula furthers disparity in economic classes.

    Higher asset owners have money generating income and protecting risk, while lower asset owners have the fruits of their labor caught in a whirlpool of government induced currents (promises and punishments).

    Buying lottery tickets is voluntary, but lines of poor people buying lottery tickets when their entitlement checks come brings thoughtful pause in using the word “voluntary.” It’s evident that desparation brings value to government financial schemes.

    It makes sense that government would financially support furthering desperation while claiming to be alleviating it.

    Thanks for the real-world education.

    Janice

  17. Jean says:

    Lester hit the nail on the head. Great analysis. It seems that working in industry is where the liberals focus their anger. A state run monopoly that makes people rich at the expense of the poor is entirely ignored. Excellent analysis John.

  18. Amanda M. says:

    Great evaluation, and the YouTube video is a nice touch.

  19. Jennie Fiedler says:

    Lotteries are rackets. Government is corrupt. Why is it okay that even though I can’t afford health insurance I pay for a Cadillac plan for each member of our federal government, that while they make from $125k to $250k a year I risked my life in war for about $30k a year? Why is it if I want to go to school and I use student loans I will spend years paying them back, while the children of government representatives don’t have to pay back their loans? Why is it I lost my retirement money thanks to Wall Street but if I was a senator or congressman I would have my pay for life, on the American taxpayer’s dime? I think if you work hard and you earn your wealth HONESTLY, and you pay your share of taxes instead of hiring lawyers to exempt you, you deserve your wealth. The inequality lies in the fact that the same rules and laws don’t apply to everyone, not that rich people’s money should be given to poor people who’ve done nothing to deserve it.

  20. John Goodman says:

    @ Harry Cain

    Will try to get to single payer in Vermont one of these days.

    @ Karen Yancura

    Even after the highest tax rate, the lottery winner still gets to keep 65% of the haul.

    @ Simon

    Agree that funds may be used to help poor people. But we can tax other poor people to help poor people directly. We don’t have to create multimillionaires in the process.

    @ AI

    The education shell game is common: Legislators use the lottery money for schools and then reduce education spending by an equal amount to fund other programs.

    @ LarryG

    Yes, gambling is entertainment, but in this case the casino is a government monopoly.

    @ Linda Gorman

    “the academic class … appears unconcerned when equal treatment on paper translates into unequal treatment in practice.”

    We’re talking about people who basically judge themselves and each other based on intentions, not on results.

    @ Jim Morrison

    “lines of poor people buying lottery tickets”

    You noticed who buys them. Good.

    @ Amanda

    On the Youtube video, I had help.

    @ Jennie Fielder

    Agree that the political class often plays by different rules.

  21. Ray says:

    It seems to me there are two likely answers to your question:

    1. Liberals don’t hate inequality, they hate inequality that results from merit and individual effort (Lester’s point above)
    2. Liberals don’t hate inequality, they hate the spontaneous order. Inequality that results from deliberate government action is ok (Basically Linda Gorman’s point above)

  22. mark says:

    Outstanding post, thanks to David Henderson for the link

  23. Shirley Svorny says:

    I like Linda’s take on it. The article reminded me that my mom, who grew up in Cuba, voted against the California lottery because in Cuba very poor families bet their last pesos on the lottery.

  24. As noted above, gambling is entertainment. Liberals would say that it’s worth it so long as it doesn’t become addictive. If that happens, then there is therapy in Obamacare. A government monopoly is important because the profits go to the state and not an entrepreneur, who anyway would create too appealing a lottery resulting in too many addicts.

    Does this make sense? What’s the right way to handle the desire to gamble? I don’t know.

  25. Al says:

    Bob, you write that (liberals believe) “A government monopoly is important because the profits go to the state and not an entrepreneur, who anyway would create too appealing a lottery resulting in too many addicts.”

    What makes liberals think that simply licensing gambling stops the gambling addict from finding an underground place to gamble?

  26. Ron Bachman says:

    You seem to equate taxes (government forced) with the lottery (individual choice)to draw a moral judgement related to income redistribution (or at least a directional redistribution parallel). The lottery is more like a reverse redistribution of wealth from rich to poor found in charity giving. Both charity and lottery are voluntary – much better from a conservative view than is redistribution in any direction by the force of a government gun. Taxing is more akin to legalized robbery than to redistributions through a voluntary lottery.

  27. gwern says:

    > So here’s the question of the day: When is the last time a liberal friend or acquaintance of yours complained about the lottery? When’s the last time The New York Times complained? Or The New Republic? Or Mother Jones?

    Mine complain all the time when the topic comes up.

    But hey, don’t take this liberal’s word for it. Let’s see what the New York Times says!

    And to load the dice in favor of your position, I’ll only search for the somewhat technical adjective ‘regressive’:

    http://query.nytimes.com/search/sitesearch?query=lottery+regressive&more=date_all

    304 results; from the very first hit:

    > The most common criticism of the lottery is that it amounts to a regressive tax.

    Hm. *common*, she writes? What an anomaly.

    (You also missed one obvious explanation: the funds generated by a lottery and spent on things like education are too tempting to pass up, as they generally go uncontested & uncriticized by Republicans as taxation.)

  28. Owen McShane says:

    Ah yes – the mysteries surrounding equity.

    During one of my lectures to an MBA class I raised the topic of analytical frameworks by putting two words on the blackboard – equity and efficiency.

    When I stepped back I lost my original train of thought because I asked myself “What on earth does equity have to do with horses?” (Latin root – equus.)

    It took me a bit of homework to find out but it was a useful theme for a couple of columns etc.

    I leave the puzzle with you.

  29. Clunking Fist says:

    I collect great quotes and add them to a file. I’ve just added:
    “We’re talking about people [liberals] who basically judge themselves and each other based on intentions, not on results.”
    John Goodman

    That is a great quote and neatly captures how I feel about genuine liberals (as opposed to the merely tribal liberals).