From "Idiot Tax" to Subsidized Lotteries

Majikthise and 3 Quarks Daily both have posts up revisiting the "idiot tax" argument against government-sponsored lotteries. In essence, the argument says that if you look at lotteries as an investment, it's irrational to play -- only a fraction of the money going in (though ticket sales) gets paid out to the winner, with the rest going to administrative costs and whatever project the lottery proceeds are meant to fund. Thus the lottery exploits people's inability to understand probabilities. This is especially odious given that the people who are taken advantage of in this way are disproportionately poor and black.

In response, Rants for the Invisible People has a pair of posts explaining how, from the perspective of poor people, playing the lottery isn't really so irrational. The key thing is that looking at lottery tickets as an investment is the wrong way to see them. The prospects for the poor pulling themselves up by their bootstraps are mighty slim. It's easy for a small chance event -- losing your bus pass, an unexpected illness, etc. -- to wipe away years of progress. Thus the careful husbanding of money advised by anti-gambling moralizers is an unwise strategy. It makes sense to trade a spread-out dollar here and dollar there for a chance at a big lump sum that could give you access to some of the nice things in life makes sense, even if the mathematical expected value of the lump sum is less.

From the RftIP perspective, then, the lottery sounds a bit like the rotating credit association that's common in the Third World. Rotating credit associations are a practice in which a group of people all put a small amount of money into a pot, and then draw straws to see who gets the pot. The average participant breaks even over the course of many rounds, but the access it grants to a lump sum can be crucial in helping a poor person make an investment, such as buying a goat, that can't be done with the fleeting bits of money that one person puts into the pot each round. Charity raffles in small towns work on something of the same principle, shifting money around into lumps that are useful for the community groups who sponsor them as well as for the winners.

When considered against the model of the rotating credit association (where the expected value breaks even in monetary terms), then, we can see that there's still something to the "idiot tax" argument. While the lottery is still a good enough deal that it makes sense for poor people to play, it's clear how much better a deal it could be if part of the income wasn't siphoned off to pay for other programs. Poor people are still being exploited, but it's their need for lump sums and inability to save that's being exploited, not their inability to understand probabilities.

So what if, instead of lotteries being a sliver of hope extended to the poor on the condition that they pay for some government project, they were turned into a break-even proposition, thus turning more of their benefits back to the poor? Or more daringly, what if the government got in the habit of "sweetening the pot," making it a winning proposition to buy a ticket? In either case, there would be advantages to thinking of lotteries as services provided to their players and potential winners, rather than a means of raising money.