Privatizing the Lottery - and other Things

Assume state run lotteries. (We do have them after all, so it is not as if we need always start from first principles. If there were a good reason to prefer the privatization of Illinois's or another state's lottery, then of course we should proceed even if the first-best world had been one with no state-sponsored lottery. Besides, there are some good arguments for a lottery, and indeed for one that does not have a thin profit margin. Even a good libertarian could say that inasmuch as the government is not coercing persons to play the lottery, and there are many private alternatives for gamblers, a state lottery is not the worst of all evils. Some people might actually like playing it, and that must count for something, just as some small investors seem to like paying for stock market advice.)

Still, I have an objection to the proposed sale of the Illinois lottery. The objection carries over to other privatizations, though not to all. The concern is with locking in a public policy in a way that binds future electorates and generations. Such lock-ins seem ill-advised when there is low net gain and when it is likely that different generations have disparate preferences. A government that sells the future income stream from a lottery will likely maximize the current sales price or revenue by promising not to devalue the asset it sells after the privatization takes place. Illinois will look for more upfront cash, and therefore it will promise not to make the lottery illegal (or to compensate if it does so). It can be counted on to keep these promises for reputational or legal reasons. In this way, a sale of the lottery limits the ability of future, elected governmnts to do away with the lottery. The objection, then, is that revenue maximizing privatization locks in policies more than might be optimal.

The lock-in would be modest if Illinois could be as reliable in leaving the appropriate share of the sale proceeds for future governments to spend. This is not simply because of intergenerational equity (don't spend it all on those lucky enough to be around when the one-time sale takes place). It is because the saving of proceeds leaves money to compensate the private buyer in the event that future electorates decide they would prefer to do away with the lottery, or a monopoly lottery.

Even if we have no single theory as to when the government should own an asset, create a monopoly, or enter an industry, and even if we do not agree on optimal rules for legal transitions (which is to say retroactivity rules and the like), it seems unlikely that we want a government to lock in future governments to one particular answer to these questions. Strange as it sounds, privatization should probably be reversible, especially when there is grave doubt as to whether the government should have been in the business in the first place. 

Comments

[DWAnderson]

I'm not quite sure if trackbacks are working properly, so here's a link to my response:

http://thunor.spaces.live.com/blog/cns!71C238B5E0E3724D!181.entry

[Jim Leitzel]

The suggestion here accords with my comment on the earlier post that there might be something to be said for the British approach of awarding 5-year leases for running lottery operations. But I want to mention another issue that arises with "reversible" privatizations, one that I think has played out to some degree in Russia. If when you sell an asset it is recognized that the sale might later be reversed, then bidders are willing to pay less for it. But when the political winds change, the very fact that a state-owned asset was sold "for a song" will then be used as the justification for reversing the privatization. In other words, making it clear that privatizations are reversible will render them, in practice, very likely to be reversed.

[Frederick Hamilton]

Tough to be a Jeffersonian when governments run lotteries. Legalized stealing, flim flam and a con game by politicians. Where is the outrage? Only politicians have the power to make a law selling something with the provision that the sale can be reversed at their whim.

Do you still wonder why the public distrusts politicians (yes even your beloved Obama) more than used car dealers? Pathetic.

Altruism and unethical shams do not play well together. Only a politician can proffer both with a straight face. The people realize the hypocrisy. If the government can steal why not you and I? Simply not being the "worst of all evils" says it all about government sponsored gambling with odds that are truly evil. But, like I said, steal from the poor to give to the rich. A lottery is a tax on the poor only a politician could love. Play on the sucker. What fun it must be for politicians to do it. P.T. Barnum is somewhere with a huge smile on his face.

[Keith Sharfman]

Interesting post, Saul. A few comments:

Even if Illinois promises now not to devalue in the future the purchaser's exclusive entitlement to operate the lottery, wouldn't it still always have the option break its promise and pay "just compensation" for the "taking"? If so, then it would seem that both the initial pricing at the privatization auction, and the government's policy incentives down the road, would seem to be optimized.

Another issue to consider is whether there should be exclusivity in the first place. Why not allow multiple private lotteries compete with each other? Are there any economic justifications for having a single provider of the service? None of the classic "naturaly monopoly" justifications (such as high fixed costs and declining average costs) seem to be present.

Assuming exclusivity makes sense (which to me is not obvious), then presumably it ought to be accompanied by some form of price regulation--and this may be a ground for not privatizing, since the government may well be better at operating the lottery itself rather than regulating a private provider.

A final point to consider is that the apparent popularity of public lotteries may be a consequence of the many restrictions that states impose on other forms of gambling. If so, they are less efficient than their popularity may indicate.

If all of this is right, then paternalism rather than efficiency would seem to provide the best arguments in favor of restrictions on private lotteries and other forms of gambling.

[saul levmore]

I have assumed that the monopoly os a given, which is to say that the original political deal which brings on the legal lottery is made possible in part by there not being "too much" lottery. Some voters dislike lotteries on moral grounds, other on aesthetic grounds, others because they "prefer" the success of laternative forms of gambling, and others because they expect to be the provider of lottery services to the state, perhaps. So the question tackled here is: assuming a lottery, how should we feel about privatization of the sort proposed.

Somewhat similarly, there is the possibility or even probability that a government that would sell the lottery and mis-spend the revenues could just as well substitute debt, and borrow in a way that causes future taxpayers to pay for current citizens' pleasure. I might just assume that there are constraints to debt, or perhaps reasons to be just as fearful as debt. But none of these (fair and important) associated topics gets in the way of the central point about sales of a long term right.

[Jim Leitzel]

Lotteries basically are natural monopolies. The driving force towards monopoly is unusual but strong. It consists of the fact that lottery players prefer higher payouts with smaller probabilities to lower payouts with higher probabilities. (Adam Smith noted that a lottery with a payout of 20 pounds, even if it were closer to "fair" than standard lotteries, would not be very attractive.) Two small lotteries can do better by combining and offering a higher payout. See "The Peculiar Scale Economies of Lotto," by Philip J. Cook and Charles T. Clotfelter, American Economic Review 83(3): 634-643, June, 1993.

[Garth]

Would such a clause be enforceable in perpetuity against later State effort to restrict or even end the license?

If so, would it be a taking's issue if they outlawed it? i imagine it would have to specify damages for bad faith on the part of future congresscritters.

[Steve Bereit]

"...[J]ust as some small investors seem to like paying for stock market advice."

Everyone is paying for "advice" on stock market -- small investor to wealthy institutions. Being advised in the stock market is hardly comparable to buying a lottery ticket. An investor (small or large) making an uninformed stock pick is relying on luck akin to buying a lottery ticket.

[Joan A. Conway]

The Illinois Student Aid Commission was trying to sell off its student loans, so that Governor Blagojevich could keep campaign promises to make available student loans to the middle-class, but after the sale of a block of the student loans, it was mentioned no one bothered to make sure their was compliance to the Commission's rules.

Another example of the adage that Rules are made to be broken, especially by politicans selling state assets for special interests in order to get reelected or receive campaign contributions for his potential supporters.

Since these loans usually didn't come with a school contract, state of choice clause nor other important clauses deemed essential to a contract, like school defenses, it is likely that the buyer has bought the Brooklyn Bridge.

[Eric Truett '04]

This objection parallels criticism of consent decrees that are used by a present administration to substantially increase the costs to future administrations of changing public policy, which has led federal courts to relax the standard for revisiting or lifing consent decrees.

[Joan A. Conway]

Lisa Madigan said something about being in compliance with the amount of student loans that could be sold in a multi-billion dollar portfolio of such loans, because it needs the state legislature's approval.

But still there is a holder in due course attached to the void debt without a student contract, school defenses, and choice of law clauses with some promissory notes and disclosure statements in previous years for a defaulted student borrower, of which I am currently seeking a Loan Discharge based on a disqualifying status with the U. S. Department of Education, in San Francisco, that bounced around my item with a delivery confirmation to a particular zip code number and forwarded to another zip code number and then to another zip code number.

You get the point!

The U.S. Postal Services delivers articles to where the box holder tells it to deliver the article and it can go through the huge bureaucracy of the United States government in the process to eventually arrive at the desk of some loan analyst that more than likely will probably rubber stamp the article and send it back to the sender with the advice that the Loan Application Discharge should be for Total or Permanent Disability, in spite of hospital reports concerning a hostile environment in a school of higher learning, based on sex and age discrimination, and legislative statutes requiring certain requirements for entry into the profession that have barred the student from employment in the field of her endeavor for decades.

It was very dangerous to try to enter a career after 40 years of age in the early 1980's, but today the AICPA's trys to save Mommy Track females from abandoning their careers.

The irony does not escape me!

The association with a lottery, like the sale of $650 million in state-owned student loans to fund Gov. Blagojevich's MAP Plus program, projected to cost $34.4 million for 70,000 students from families with income under $200,000, cannot be said to whether it was in compliance, where any assets from such sale had to "further the purposes of the commission."

Political considerations aside there is the concept of a huge government without an oversight or ordinary care associated with accountability for the actions of State Executive Officer, as well as the Executive Branch of the U.S. and our President. Big government suffers from its monopoly power.

Any lack of reinvestment will doom the State either way, because monopoly power does not have to invest in technology when its existing technology works fine, like a private enty would to stay competitive.

[Ruca Martin]

Lotterys and lotto, should never be private. Since the funds earned are used to help people who need help, like homeless, and poor people, the private sector would never be able to substitute the state or the government in this precious mission