Gambling: where the money goes

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When Melissa Kearney was studying for a doctorate in economics at the Massachusetts Institute of Technology in Cambridge, she'd occasionally stop at a nearby convenience store for orange juice or something else. Inside, she was fascinated to see mostly working people buying state lottery and scratch tickets.

Since then, Ms. Kearney has become an expert on the economics of gambling, writing scholarly studies at the Brookings Institution, a Washington think tank.

It's a worthy subject. In the past three decades, gambling has exploded in the United States. "Legalized gambling has grown from a limited activity to one that is extremely commonplace," notes Kearney.

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Government decisions – state, local, or federal – have largely determined the size and form of legalized gambling, she points out. A current question in Washington: Should there be any effort to restrain the rapid growth of Internet gambling?

The industry bookkeeper, Christiansen Capital Advisors, estimates the "gross annual wager" in US casinos, lotteries, pari-mutuals, legal bookmaking, charitable bingo and games, Indian reservations, and on the Internet at $73 billion in 2003. That's the revenue of the "gaming" industry after deducting gamblers' winnings.

Industry trends suggest that today's "annual wager" is close to $100 billion. Internet gambling alone has jumped from almost $6 billion in 2003 to perhaps $12 billion this year. By comparison, the Iraq war is expected to cost the US $120 billion this year.

Over time, those arguing that gambling is a moral issue have lost political clout. Today, the public debate on gambling is primarily over its costs and benefits. Gambling is seen largely as a legitimate form of entertainment. But it does have negative societal effects.

Two to 3 percent of gamblers become addicted to it, says Kearney. Their gambling habit can cause financial havoc at home, if they use food, rent, or mortgage money. Gambling raises crime rates (8 percent near new casinos) as some feed their gambling addiction by theft, robbery, or other crimes. Gambling adds to bankruptcies.

In 1999, a National Gambling Impact Study Commission estimated that more than 5 million Americans are pathological or problem gamblers, with an additional 15 million at risk.

Surveys find that about half of American adults have bought a lottery ticket in the past 12 months. One-third report visiting a casino in that time frame.

Lottery and scratch-ticket buyers on average spend about $500 a year, with blacks spending twice as much as whites and men significantly more than women.

Economists regard state lotteries as a voluntary, implicit regressive tax. That's because the poor pay a larger proportion of their incomes on lottery or scratch tickets than more prosperous gamblers do. A study by Kearney finds that for the one-third of total households she ranks as poor, lottery spending comes out of spending on household goods. For instance, purchases of food for the home drops 6 percent. Utility, rent, and mortgage payments are delayed or trimmed. (The statistics weren't detailed enough to sort out where middle- and higher-income families cut back after buying lottery tickets.)

Lotteries, now offered in 43 states, worsen the growing inequality in incomes because of the regressive nature of that gambling, says a complex study by Irwin Morris, a political scientist at the University of Maryland, College Park, and doctoral student Elizabeth Freund, published in Social Science Quarterly.

Dr. Morris estimates that the creation of a lottery in a state adds about 10 percent to overall growth in average income inequality in the state. That's equivalent to a state losing 2 percent of its manufacturing, a sector that tends to pay more than service jobs.

A more recent paper by the pair calculates that new casinos had no effect on income inequality. This reflects the fact that the poor are less likely to indulge in gambling at casinos. They can buy lottery tickets with ease at gas stations or convenience stores. Getting to a casino can involve a long drive or an expensive flight and hotel stay.

States generally dish out about half of lottery revenues in prizes. A Census Bureau report notes that in 2004, after commissions and administrative expenses, states had $15 billion left of proceeds to use for state programs. Twenty-four states earmark at least a portion of lottery proceeds for education.

But that benefit can be deceptive, says Morris. A state could cut back on other educational spending from general revenues, offsetting the lottery profits.

In Washington, Rep. Bob Goodlatte (R) of Virginia has been pushing a bill to crack down on "a growing problem" of illegal offshore gambling and illegal gambling that crosses state lines over phone lines and the Internet. It passed the House Judiciary Committee 25 to 11 in May. It has yet to be put on the calendar for action by the House as a whole.

These activities "suck billions per year out of the US economy," Goodlatte charges on his website.

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