Selling the Illinois Lottery

Apparently the government has a new strategy for raising revenues: first declare that only the government can provide a service and then, after deciding that the private sector might actually do a better job of it, auction off the right to the highest bidder. Voila! The government gets a bunch of money and doesn’t have to raise taxes. I hate to sound like what everyone thinks that we sound like at Chicago but am I the only one offended—deeply offended actually—by the suggestion that Illinois is going to sell its lottery to private parties? My ire isn’t about private lotteries; rather it is about fake government monopolies and the hidden taxation that they represent.

I am not offended at the idea of having private parties running a lottery. I confess to a general libertarian instinct on these matters, but could be persuaded that we should have a little extra friction in this sort of market to protect consumers from themselves. No, my complaint is precisely that the government has introduced a monopoly where none is required and now wants to sell that monopoly right to a private entity. We obviously could have substantial competition in lotteries, competition which would drive payout rates—the government lotteries have notoriously low payouts compared to illegal “numbers” games—and game variety (though not being a lottery player I can’t assess well how the Illinois offerings stack up).

If a government imposes entry controls when competition would otherwise flourish, the government will almost certainly reduce overall welfare. It may boost the governmental fisc, as it might if it auctioned off a franchise to the highest bidder, but the resulting monopoly will exercise market power to the detriment of the citizens of the jurisdiction. Exactly how much harm will result depends on some assumptions about what happens to the franchise fee—the entry tax—collected by the government and how much the citizens value the resulting governmental expenditures. A franchise process of this sort can also transfer value from one group of citizens to a second. If you wouldn’t consume the services produced under competition, the switch to monopoly doesn’t harm you, and you might benefit from expenditures made possible by the franchise fee.

For a competitive product, the franchising regime is a disaster as it introduces monopoly where none would otherwise exist. That brings with it standard deadweight losses, plus the government gets a franchise fee that may be less visible to taxpayers—the incidence of the tax is more indirect—and thus less subject to being held politically accountable. And we should be especially suspicious of franchise schemes where there are likely to be differences in consumption levels across the citizens of the jurisdiction, as some citizens may benefit from the franchise scheme even if the average citizen is much worse off.

Comments

[James]

The harm from monopoly is that it raises price and lowers output. If we prefer lower output for some reason, then couldn't monopolization be a reasonable policy? Is there a reason to think that it would be better to allow competition and then impose taxes? Graphically it seems to look the same, so long as the government is able to sell the monopoly for its full value. I suppose a monopoly won't be as innovative or as concerned with customer service, but those seem relatively unimportant.

[Dan Levine]

The competitiveness of the auction for the lottery monopoly makes this a nice illustration of the difference between a monopolistic return on assets (here, the monopoly service) and a monopolistic return on equity. (Cf. Becker, right?, about 40 years ago.) My money's on somebody confusing the two and coming to the defense of the state in the coming weeks.

[DWAnderson]

Unless I'm missing something, the problem the post identifies is one inhernet to state lotteries. Whether they are run by the state or the right is sold to a private party isn't the issue. The main problem has existed since the inception of the state lottery; selling the lottery probably lessens the effect of the problem rather than exacerbates it.

[Mark H]

What I do not understand is how the state and the investment bankers intend to circumvent the federal antitrust laws. It is illegal, both civilly (subjecting the actors to triple damages) and criminally to intentionally create a monopoly. I do not believe there would be an exception in these circumstances, although I could be wrong.

[Frederick Hamilton]

Prof Picker,

The sad part of the Illinois lottery is that Illinois has a lottery. Selling it to a private party and giving them a monopoly is simply insult to injury.

Illinois already decided it was a wonderful way to have a hidden tax. People of Illinois give us $500 million and we will give $100 million back to you. Waht a great hoax. When the private sector tries to do that, the Illinois government arrests them and puts them in jail for a numbers racket.

It is a great reverse Robin Hood. Take from the ignorant poor and give to the rich. It is a sick joke on the citizenry. So to sell it to a private concern makes sense in a real not a peverse way.

The media wonders why the public treats governemnt and politicians with great disrespect. Because they deserve it and have earned it.

Same with "great thinking law schools", the media elite and most "power brokers" in the country. None give a rats ass for the people.

Who gives a crap what the State of Illinois does with its awful "legal" numbers game? You ought to care about the poor suckers who think a one in seven million odds on the powerball makes for a decent bet.

The real gambling entities that actually give the consumers a break are the casinos throughout the nation where your odds might be 2 to 1 or 3 to 1, not 7,000,000 to 1. Please, go to bat for the citizens on the whole issue of hidden taxation and robbing the public of hard earned money with "lotteries". Yeah it is a lottery. Just a sick example of a decent Catholic Church lottery where you stand a small chance of winning a new TV.

[LAK]

Well Frederick,

I'm with you, but let's dig deeper. Why is it that politicians feel it necessary to utilize a lottery to raise revenue in the first place.

1. They need the money
2. If they tax the rich directly, they get voted out of office.

Who is responsible for the irrational hatred of taxes by the general public? Which group makes increased or new or diferent taxes sound like the devil? Which group has convinced middle class Americans that tax cuts significantly benefit them, and raised taxes would harm them, like getting rid of the estate... oh, my apologies the "death" tax, or cutting that capital gains rate.

Unfortuneately, when the ruling class has been so successful in making average people think their interests are aligned with theirs, the equilibrium that results is one that requires having bakesales and expoliting ignorant poor people to raise the money we need for education. It is politically viable because yopublicans have done such a great job at gutting government funds for the wealthy intrests you represent.

I'm all for a progressive corporate income tax in the alternative. How 'bout you?

[FrankMCook]

This is yet another example of the mistaken belief that the magic word that causes efficiency is "private." The magic word should be "competition." Substituting a private monopoly for a government one does not guarantee efficiency. In fact, intuitively the government monopoly should operate at less cost since it does not have to add in a profit.

[Frederick Hamilton]

LAK,
I don't represent wealthy interests. In fact I feel I represent more of the the average fellow. A la Friedman. (Milton that is not Thomas).

I would like to see at the state and national level an economic transactional tax. More expansive than a sales or consumption tax. Every economic transaction is taxed. The rate would be low. The rich would pay by a factor of hundreds more than the poor. All people would get to keep whatever they earn. No personal or corporate income taxes. No property taxes. You can actually own your own property and not be renting it from the state. An American would become free again. I suspect the rate would be about 4% for the feds and state.

Citizens would have their economic freedom and liberty. No dreading any tax consequences of any kind. No large accounting bills. No deductions. No April 15.

The only way for the feds or states to raise revenues would be with the economic transactional taxes. Every economic transaction. Stock trades. Buy a car. Buy a house. Pay a doctor. Pay a lawyer. School distric buys 100 buses. Corporation buys steel. Corporations give bonuses. Corporation pays a salary. Dividend on a stock. Every economic transaction of any kind has a 4% tax associated with it. Paid at the time. Out of your paycheck since it is an economic transaction goes 4% to the feds and 4% to the state. Et al. In todays world easy to do. No capital gains. When you buy or sell that stock you'll pay 4% of the economic transaction to the state and the feds.

The average person you think is fooled is actually bright enough to understand he/she is getting screwed. Why should the state be screwing them with a hideous numbers racket that even the Mafia wouldn't try to emulate. The numbers runners would get killed if they ran their numbers racket like the state lottery runs theirs. No it is politicians stealing from the poor to give to the rich. Despicable. But then we know the character of pols don't we. Except of course Obama, he of U of Chicago fame. He wouldn't take from the poor with a Illinois state lottery. Oh sorry, he did.

So you see, the government can't help themselves. Economic freedom and liberty. Not for governments. Hey if you don't think you are simply renting your property from the state, stop paying your rent to the state (property taxes) and see how long before the state comes to take their property back. Who does that hurt? Rich or poor. Easy. The poor can't pay their property taxes and the rich pick up the property at bargain prices (the unpaid rent/tax). Great shell game for the government and the rich. No, don't tar me with the represent the rich epithet, it is off the mark.

[Joan A. Conway]

And we thought the Greenbacks were a thing of the past! Think Food Stamps and Medicaid as well.

[Jim Leitzel]

Lotteries have a significant 'natural monopoly' element. Players prefer lotteries with large prizes, so bigger (richer) lotteries tend to drive out smaller ones -- hence the incentive for multi-state lotteries. As for the sale, well, I think leasing to a private operator for a fixed term, a' la the British National Lottery, is a better way to go. And as for making the lottery a legal monopoly in the first place, I do not have a principled objection -- see this Vice Squad post from December 3, 2006, for a hint as to why: http://vicesquad.blogspot.com/2006_12_01_vicesquad_archive.html#116518927554066885

[LAK]

Sorry, Frederick. Perhaps not you but those less idealistic and theoretical politicians in the Republican party that I'm sure you vote for from time to time. Yes, Obama is a politician and a pragmatist. All politicians are unfortunate pragmatists or they don't last long as politicians. Obama just less so than almost anyone else. He also supports Ethanol as an energy alternative. Benefitting his constituents alwaons of the laws of thermodynamics.

[Joan A. Conway]

Dan Levine's post of January 23, 2007, described a confusion situation about monopolistic return on assets or The relation between corporate asset size and reate of return, which earns persistently higher profit rates than other competitive sectors and has a positive relation between size and profitability, while the larger firms less risky, and Monopolistic return on equity or The relation between Monopoly Power and Rate of Return, the less competitors the more sales and higher profits, particularly high where "barriers to entry" prevent others from entering the market, which as a correlation between concentration and higher profits that exists only for larger firms. Thus Size and Market power characteristic of Monopoly Sector firms insures higher profit. I am aware that a private investor buying the Lottery will be concerned if there be sufficient demand over the years and that boom conditions exist. But as a citizen of Illinois I am concerned about the private investor's ability to reinvest income which becomes crucial to the state, such as science research on broadband, alternative fuel, and chemistry and physics.

[Toby Bridges]

Well, let me tell you all about a county run extortion ring down in good ol' Greene County, Illinois. They have a great scam going on where the Tax Assesor's Office establishes a false high value for property (3 or more times its real value)...then the county levies outrageous taxes on the property, based on a value that is three times its true value. And when the property owner cannot pay those FRAUDULENTLY claimed taxes, the county Treasurer/Tax Collector (Kirby Ballard) sells the property.

It's happening. And when efforts are made to get county officials to justify the FALSE value assessed...you can't even get a response from them. And you sure won't ever get them to meet you at the property to see how they arrived at their FALSE valuation.

It should be the responsibility of a county government to PROVE the assessed value of the property...NOT the repsonsibility of the property owner to PROVE THAT THE PROPERTY ISN'T WORTH THE ASSESSED VALUE.

It's nothing short of a legalized extortion ring.

Since 1980 the population in the county is down about 2,000. Shoot, I wonder why?

[Joan A. Conway]

Death Taxes on Farmer(s), who are only rich in land is also executive tyranny and confiscation of property, under the Fifth Amendment, and made to jump through more hoops than necessary, procedural due process and equal protection of the laws, under the Fourteenth Amendment, unreasonable restraint, under the Fourth Amendment, U. S. Constitution.

Like the above constitutional violation for death taxes on deceased farmers' beneficiaries and survivors, fraudulent evaluation on county property is also an abuse of discretion by some executive in charge of the county, and the county assessor, and the county treasurer, for some hidden purpose, such as planned development in the area or just plain greed to be enriched.

What ever the motivation, remember Arlington Heights vs. Metropolitan, to prove discriminatory conduct look at recent publications concerning these evaluations, the politicians, and the Illinois legislature, etc.

If you can find evidentiary indica that makes out a claim of discrimination, you have a class action for Greene County.

[Joan A. Conway]

A decision of the Arlington Heights Village Board to reject a rezoning request in 1971 was appealed to the U.S. Supreme Court, in Village of Arlington Heights v. Metropolitan Housing Development Corp., 429 U.S. 252 (1977). A religious order, the Clerics of St. Viator, had sought to rezone their land that was classified for single-family housing so that low and moderate income multi-family developments could be built. After the request was denied, the developer and three black individuals filed suit in federal court, claiming that the decision was racially motivated in violation of the equal protection clause of the Fourteenth Amendment. The Supreme Court rejected the challenge, because although racial minorities were disproportionately harmed by the decision, the record did not show any discriminatory intent on the part of the village.

[Joan A. Conway]

The overlooked violation is of course discriminatory impact!

[Joan A. Conway]

See, Ugo Collelo, University of Tulene, in his "Trust the Tale and not the Author" legal article concerning the State of California legislature's discriminatory intent, and how to prove it, with evidentiary indicia or public statements.

[Joan A. Conway]

Something is rotten in Denmark!

Or Happy St. Patrick's Day and St. Joseph's Day.

And Hail to the Ides of March.

Be Happy Blogjevich has created a Common Tort of Negligence for Defaulted Student Loan Borrowers with his public statements concerning the transfer of a bulk of ISAC debt to a private purchaser, perhaps a contributor and friend.

There appears to be an Executive breach of trust, loyalty, and lack of oversight when the parceling of the ISAC's authority is conveniently removed from the State Legislature, as Governor Rod Blogjevich has done recently.

This also appears to have a discriminatory impact on out of state students under the commerce clause to Illinois scholarship, under Article IV section 2, and Article VI.
42 U.S.C. Section 1981 and Section 1983, State Action, as well as Fair Debt Practices Act, in case of student default, with the non-legal transfer of student loans to a private holder from a state agency, under Section 504 of the Rehabilitations Act, for retaliatory conduct by individuals, and Spoilation of Evidence, a Common Tort of Negligence - material evidence is curtailed with State Legislative approval of transfer of a bulk of student debt to private holder, under quid pro quo policies with the Governor, the Office of the Governorship, and the Illinois Student Aid Commission, whose chief is under a cloud of improprieties of wrong doing in bankruptcy proceedings, which taint his authority to shepard the transfer of such debt from ISAC to the private purchaser.

Double-dealing and duplicity, and Fifth and Fourteenth Amendment violations of due process, substantive due process, equal protection of the laws, and executive confiscation of property in school-related defenses, choice of law clause for out-of-state students, and a lack of school contracts in Illinois' promissory notes and disclosure statements.

It will take decades before there is any insight into the shinnangans are known, and Blogjevich isn't Irish that I known of either.

Funny Student Loans are waiting to be taken to justice if someone gets a fair deal by the governments.

More Greenbacks, please.

[Joan A. Conway]

I must say something about Cruel and Unusual Punishment and The Meaning of Due Process with the Criminal procedures here.

When arguing about rights under the Incorporation of the Fourteenth Amendment, for equal protection of the law, and procedural due process by the state, remember to include the Bill of Rights under the U.S. Constitution and the State's Constitution, separately, or 13th, 1st, 4th, 5th, 8th, 9th, 10th, and 14th Amendments, U. S. Constitution.

Because the Courts might want you to jump throw many hoops to prove you rights were curtailed or violated, as Cruel and Unusual Punishment, under another claim(s) for Intentional Emotional Distress, and Fraudulent Inducement into an Economic Advantage