The Lottery Racket

There's a giant billboard facing the southbound side of I-95, just north of the exit for my home. It posts the current jackpot tallies for Mega Millions and Powerball, the two big multistate lotteries that dominate headlines whenever someone hasn't won in a while and the top price balloons to some absurd figure.

So it goes - the Mega Millions prize sits north of $1.1B as I type these words (final jackpot, $1.28B).

Or so they advertise.

The reality is not quite that. The specified billion-plus figure is based on taking the prize as a 30 year annuity, not as an actual payout. Opting to take the lump-sum payment instead, at the current estimate, grosses a single winner $648.2M. From this, the Feds immediately withhold 24%, and unless the winner gives most of it away, the real federal tax bite on the winnings will be 37% or quite close to it. That takes your winnings down to $408.4M, and that's before the state (and in some places, local) tax man comes a-knockin'. In New York, where I live, that'd be a $120M bite.

Still, $300M, give or take, is an absurd amount of money, enough to make you one of the 5000 richest people in the world, and no sane person would do anything less than roar in excitement over winning even this lesser amount.

The joke of all this is how little those massive government lotteries actually return to their players (RTP). When the prizes get to the "everyone notices" levels, the RTP is 60% for Mega and 55% for Powerball. When the prizes are "merely" in the low tens of millions, RTPs start below 25%.

By comparison, the RTP for "one-armed bandits," aka casino slot machines, runs 75-90+%. For on-line slots, it's over 90%. For American roulette (wheels with 0 and 00), it's 94.7%. For European roulette (with only a 0) it's 97.3%. Playing blackjack with perfect Basic Strategy (i.e. following that little card they sell in the Vegas airport kiosks) gets you an RTP of 99.6%, but even good-but-imperfect Basic Strategy can get you 98 cents on the dollar. Playing Pass Line craps offers an RTP of 98.6%. Horse racing shows a house edge of about 20%, meaning a RTP of 80%. Sports betting costs losers 10%, which makes the RTP 95% on basic bets. Casinos don’t mind if you win. In fact, they are happy if you do, because you and those who see you win are encouraged to play more, and the math is inexorable. The more time people play, the more money the casinos make.

All 'chance' gambling is a losing proposition. Games like poker, and "informed" gambling such as sports betting and horse racing, are a bit different in that regard - skill becomes a factor. Even with a rake or vig, some can manage to be consistent net winners, but there is no skill in lotteries.

Nevertheless, people do play these money-losing games, because there's a "payoff" other than money. That's the thrill, the excitement of the win and the anticipation of the moment. I know someone who, many years back (well before sports gaming extended outside Nevada), bet heavily on football games. As in five-figure wagers, and occasionally a six-figure bet. He once explained that there's no way to describe the intensity of feeling watching a game knowing you had $30,000 riding on the outcome. That is what gambling buys.

That thrill, even with small wagers, is what most of us buy when gambling. A small percentage, perhaps 1.5%, of gamblers are "pathological," i.e. they're addicted (having known a few, I can say it's a sad and tragic way to live) and some are heavy players who nevertheless don't reach the 'degenerate' state.

Then there are the dream-chasers, people of low economic rank who see lotteries as their only way out of their workaday or subsistence lives.

Here's where the lotteries prove they're evil. A long-running motto:

All you need is a dollar and a dream.

isn't a pitch to the wealthy or those with the disposable income to burn on the entertainment of fantasizing about that giant win (which is what such gambling really is), and the data proves it. Lotteries are fed by lower-income households that spend a greater percentage of their income on games than any other income bracket, and the "lottery tax," i.e. the amount of money a household pays into the state-run lottery systems, is the biggest bite taken out of low-income households.

Lotteries are a regressive tax, disproportionately and substantially impacting the poor, and they return less per dollar played than any other form of gambling. Excepting perhaps bingo, but no one plays bingo to "strike it rich."

No casino would survive such a grossly low payout. Competition would empty its floor in short order, and that's before the gaming commission came after it. Lotteries, however, are government-protected monopolies, and no private enterprise could even try to legally challenge those money vacuums for market share.

The old-school illegal "numbers games" run by organized crime weren't as usurious, subject as they were to competition from other gangs and from a need for someone to actually win from time to time, since people aren't that stupid. But the siren song of truly astronomical amounts of money is its own draw. Winning six hundred bucks on a dollar bet is a nice feeling, but winning a billion is a fantasy that totally overloads the pleasure centers.

Politicians have long been quick to decry the evils of gambling, to ban private gaming or (more recently) heavily regulate it, but scratch just below that veneer of moral outrage and you find the rapacious truth. Their objection lies solely in the money being made by someone else. Sports betting and casino gaming are being allowed not because of any newfound respect for individual liberty but out of a lust for more OPM and the envy of private bookmaker’s earnings. New York State just legalized sports betting, and imposed a 51% tax on the bookies' profits. That’s the new government way - participate in the profit, but leave the down-side risk in the private sector. Mussolini would be proud.

That sports and casino gambling has found its way outside the borders of Nevada has nothing to do with eroding moralities or a wider acceptance of the "sin" of gambling. It's about government's endless greed for taxpayers' money, and all the pieties about helping the poor or funding education or protecting the public are just a smokescreen. Lotteries are proof. They soak the poor and working classes, i.e. the very people government claims to protect by banning gambling and, via their monopoly status, offer a lower return than any of those games they'd prohibit or strangle-regulate.

There is no bigger racket than government, and the mobsters of old would be absolutely green with envy at what it gets away with.

As for the Mega Millions? I’m among those suckered into throwing ten bucks in the garbage for the cheap thrill of checking my numbers the next morning when the prizes get big. I might do this 3x a year, and I can afford it. I’m neither the target nor the victim, though. The poor are, in both cases.

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Yours in liberty,

Peter.