Is it in the Public Interest for Governments to Promote a Vice?

Lottery has long been a popular way for governments to raise money. Almost every state has one, and while it is far from the only source of gambling in the modern world—there are numerous casinos, sports books, horse races, financial markets and so on—it remains among the most prominent. Its importance has led many to wonder whether it is in the public interest for governments to promote a vice, especially when they do so only for a tiny fraction of their overall budgets.

The drawing of lots to determine property distribution has a long history, including dozens of references in the Bible and the practice among Roman emperors of giving away property and slaves by lottery. The first publicly organized lotteries to distribute prizes of money date back to the 15th century in the Low Countries, where records in Bruges and other towns indicate that they were used to raise funds for town fortifications, the poor and other purposes.

In colonial America, private lotteries were common to finance a variety of projects, and Benjamin Franklin held a lottery to fund the construction of cannons for Philadelphia’s defense in the American Revolution. During the 18th century, lotteries helped build buildings at Harvard and Yale, while Thomas Jefferson sponsored a lottery in hopes of alleviating his crushing debts.

While the history of lotteries is complex, it is clear that, by and large, they are successful in raising significant revenue for states. They are also remarkably popular with the general public, which makes it all the more puzzling that they have not been abolished.

To explain this success, one can point to several factors: The fact that the games are based on chance rather than skill and thus appeal to everyone; the comparatively large prize money (which has the added benefit of getting lotteries significant free publicity); and the existence of other state-sponsored forms of gambling, such as horse racing and casinos, which have similar public appeal. But more importantly, the underlying dynamics of public policy are at play.

When state legislatures authorize a lottery, they are typically doing so because voters want the state to spend more, while politicians look at the lottery as a source of “painless” revenue—the idea being that people will voluntarily choose to spend their money on tickets, and that this will allow the state to increase spending without increasing taxes. But there is a major flaw in this argument. As lotteries expand, the number of players tends to grow faster than state revenues do, and they become reliant on certain specific groups of people for their revenue: convenience store owners, who are the primary distributors; suppliers, who make heavy contributions to state political campaigns; teachers, in those states that earmark lottery revenues for education; and middle- and upper-income neighborhoods, which have disproportionately high levels of participation. In addition, the size of the jackpots tends to get bigger and more newsworthy, which further stimulates ticket sales. This dynamic is an example of a basic principle in public policy called the law of diminishing returns.