A lottery for smart people

November 20, 2010

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A lottery for smart people

State-run lotteries are often referred to as a tax on the stupid because they offer such abysmal returns that only the ignorant or desperate would bother playing. With slot machines, more than 90 percent of every dollar is paid out in prizes. By comparison, up to 50 cents of every lottery ticket is kept by the house, i.e., the government.

Lottery proponents note that no one forces players to buy tickets, and that proceeds go toward funding worthwhile endeavors. In Texas, the lottery contributes about $1 billion a year to public education. (Read my stories here about how that number has become less meaningful over the years.) Yet study after study has shown that such public good is mitigated by the fact that the poor buy a disproportionate number of lottery tickets.

But what if there were a lottery that combined a game of chance with a clear social benefit?

Social critics of lotteries complain that the games hurt the larger economy by acting as “anti-thrifts.” Rather than encouraging those who would most benefit from saving, heavily advertised state lotteries — along with payday lenders and other institutions that cater to poorer citizens — persuade people to spend their scarce dollars on a lousy bet.

“These institutions now constitute a large and aggressively expanding anti-thrift sector that is dragging hundreds of thousands of American consumers into profligacy and over-indebtedness,” wrote Barbara Dafoe Whitehead, director of the John Templeton Center for Thrift and Generosity, in 2008. “America now has a two-tier financial institutional system—one catering to the ‘investor class’, the other to the ‘lottery class.’”

Because of the games’ regressive nature, she continues, “lottery players at the lower-income range suffer a larger anti-thrift effect: They give up the opportunity to save the proportionately larger share of dollars spent on the lottery. Presumably, if a low-income household can spend $645 on the lottery, it can save and invest that same $645. The Tax Foundation estimates that if that household were to invest the same amount in stocks every year for forty years, it could expect to have $87,191 (in 2006 dollars).”

But in this post, the authors of “Freakonomics” draw attention to Prized-Linked Savings accounts, which enthusiasts say combine the buzz players get from playing the lottery with an incentive to save their money. They explain the concept:

“In a nutshell, PLS is a kind of savings account that pools some of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account. It’s sometimes called a “no-lose lottery,” since a depositor is automatically entered into the lottery but can’t lose the original money she deposits.”

Citing this study of the set-up, they note that such plans have worked well in at least one state, Michigan (read more here).

Most states ban lotteries that compete with their own. Luke Capizzo, a spokesman for the Michigan Credit Union League, which initiated the state program there, explained that Michigan has a loophole for “Savings Promotion Raffles” — which are explicitly exempt from the ban on competing lotteries. Two other states (Arizona and Georgia) make similar exceptions, he said. He said in 2010 $19 million has been put in Save to Win accounts; $106,000 has been given away to monthly winners. In January, a single winner will collect a $100,000 grand prize.

Nearly 60 percent of the people who used the program had spent money on the state lottery in previous months.

Some other countries have tried the strategy, as well. But one PLS was recently shut down in South Africa. The reason? The law in that country — as in Texas — bans all lotteries except the one run by the state.

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November 19, 2010 12:36 PM | Link to this

Something good out of something bad.Refreshing.

You can bet your Tony Lamas that Perry and his henchmen will keep this outta Texas.

Gotta keep the masses poor and stupid…

November 19, 2010 1:14 PM | Link to this

Thats not true. The Demographic Survey of Texas Lottery Players performed by the University of Houston differs from your opinion. You previously mentioned this survey in an article but didnt provide a link to it.

According to the U.S. census 15.8% of Texans live below the poverty line (approximately $20,000 depending on family size). According to the University of Houston survey only 8.58% of Texas making less than $20,000 plays the lottery. Also, according to the U.S. census, the median income for Texans is $50,049. The UH survey states that 55.37% of people making over $50,000 play the lottery. This includes 18.52% of people making over $100,000 who play the lottery.

Thus, your claim that the lottery targets poor people is not supported by any facts.

November 19, 2010 1:29 PM | Link to this

Zachary Zaminski —its not only playing, but how much do they play and how much do they spend, and how much do they spend proportionally to their income.

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<a href="http://www.statesman.com/blogs/content/shared-gen/blogs/austin/investigative/entries/2010/11/19/a_lottery_for_smart_people.html?cxntfid=blogs_focal_pointtag:news.google.com,2005:cluster=http://www.statesman.com/blogs/content/shared-gen/blogs/austin/investigative/entries/2010/11/19/a_lottery_for_smart_people.html?cxntfid=blogs_focal_pointFri, 19 Nov 2010 13:32:49 GMT 00:00″>A lottery for smart people

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