Acton Commentary

A Lottery Sell-Off is a Sell-Out


A new lottery sensation is sweeping the nation; no, it's not a novel kind of scratch-off ticket or the latest idea for adding new lotto machines to a new set of locations. Instead, it's beginning to dawn on lottery officials that state governments are ill-equipped to run gambling ventures.

John Filan, the chief operating officer of the state of Illinois, said recently of lotteries, “This is fundamentally a retail business, and governments are not equipped to manage retail businesses. Gaming is getting so competitive around the world that we're worried our revenues could go down unless there is retail expertise.” After years of declining income, Illinois is now considering privatizing their state lottery, essentially selling-off the business to a private company who would take over operations for a massive one-time purchase.

Now a host of other states, including Michigan and Indiana, are increasingly open to the idea. A spokesperson for Michigan Governor Jennifer Granholm confirmed last week that selling the Michigan lottery might be a viable option for fixing a state budget that faces an $820 million deficit.

Criticism of privatizing lotteries has come from a number of sources, including economists and other citizens concerned that states would be forfeiting a long-term source of income for an upfront payoff. But few have pointed out that the sale of a lottery to a private firm would do little to address the fundamental problem now faced by the state-run ventures.

“This is a very risky business because of all the new competition over the last seven or eight years. And we'd just as soon pass that risk on to those that are in the risk-taking business,” says John Filan. The truth of Filan's observation is that governments are particularly unsuited to manage industries that are characterized by risk, competition, and profit motivation. Lottery executives are right to think that these kinds of endeavors are best undertaken by private enterprise.

But a move that would sell off a lottery system to a single private firm does nothing to make the lottery business more competitive. No company would be willing to shell out billions to run a lottery that wouldn't have the same major benefit of the current system: the protection of a government-enforced monopoly. The only difference between the proposed privatization and the situation now would be the entity responsible for day-to-day operations. A government-run monopoly would merely be replaced by a government-enforced monopoly.

Lotteries were largely banned a century ago because of concerns about the propriety and morality of gambling. Religious opinion on gambling varies and the general consensus is that games of chance fall in the realm of permissible activity, although there are some principled objectors. And to be sure even those who view gambling as morally permissible find serious problems with at least some concrete manifestations of the practice.

But the re-legalization of lotteries began in the 1960s out of far less meritorious concern than recognizing the moral permissibility of gambling and the attendant liberties. Governments were increasingly faced with tight budgets and needed quick fixes. The socialization of lotteries into government-run monopolies - now more than 40 of them — allowed states to open up previously unavailable sources of revenue. But in doing so, states had sown lotteries with a cursed seed that is finally coming to fruition. Lotteries that had previously enjoyed government protection have increasingly been undermined by competition from other, more liberalized forms of gambling.

By insulating lotteries from the competition of a true market setting, governments set the industry up for failure. And now that officials are realizing their folly, they are looking to cash in on the remaining value that lotteries still possess. But turning lotteries from government-run monopolies into government-protected monopolies amounts to window dressing.

Generally speaking no private firm deserves the benefit of a government-protected monopoly. And in the case of lotteries, such government favor ends up undermining the competitive viability of the enterprise itself, absent much greater restrictions on other kinds of gambling. The logic of the situation finally occurring to lottery officials, that risky and profit-driven businesses are best run under the auspices of private enterprise, entails that lotteries be opened up to true competition--not only from other forms of gambling but also from other lotteries.