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Are Casinos Good Public Policy?

ECON 400, Senior SeminarFebruary 20/27, 2012

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Gambling in the U.S. Gambling has been increasingly controversial,

especially during the past 20 years as casinos spread beyond Nevada and Atlantic City, NJ. Commercial casinos are legal in at least 13 states

Annual revenues over $30 billion Tribal casinos exist in 29 states

Annual revenues over $25 billion 42 states have lotteries Greyhound/horse racing in about 40 states

Gambling can even be found…

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Religion on Gambling Weekly World News* is certainly reputable, but

what does religion have to say about gambling? A variety of religious perspectives…

“There are no biblical or theological grounds for any absolute prohibition of gambling…”

But many religions warn about gambling Catholics warn against spending too much money. Methodists and Southern Baptists are strongly opposed to all

forms of gambling.

What are the reasons to oppose gambling?

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Gambling as a Vice

“Vice” can mean different things Religious connotation: the opposite of “virtue”

Immoral or sinful Legal: Police “vice squad”

Drugs, alcohol, gambling, prostitution Just a bad habit or bad behavior Economists may treat “vices” as negative

“merit goods” There may also be “externality” aspects to it

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Why Gambling is “Bad”

There are convincing arguments used against gambling Morality Availability of gambling might discourage hard

work Taxes on gambling tend to be regressive “Social costs” associated with pathological

gambling behavior This is a major focus of gambling research

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Pathological Gambling

Researchers estimate that around 1% of the population suffers from “pathological gambling” Diagnosed by affirmative response to 5 of 10

screen questions in the DSM-IV-TR Pathological gamblers often ruin their

finances, and personal and professional lives Diagnosis and treatment dominates the

gambling literature

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Social Costs of Gambling Researchers in economists, sociology,

public administration, and other fields, have produced monetary estimates of the social costs of pathological gambling Estimates range from $8,000-$52,000 per

year, per pathological gambler Most estimates are almost completely

arbitrary Policymakers and voters are probably better

informed without this research

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Social Costs of Gambling, cont. The types of social costs included in published studies…

Incarceration and legal expenses Treatment costs “Bailout costs” and bad debts Costs of crime (e.g., theft) Lost work productivity Suicide, divorce, family problems

Some social costs—but not all—can be considered to be negative externalities

Many of the alleged costs are wealth transfers or are borne by the problem gambler

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Gambling Researchers Academics perform most of the research on

problem gambling behavior and the economic effects of gambling Psychologists and medical researchers Sociologists and anthropologists Economists and political scientists

Industry performs some studies, but these are typically ignored.

Governments fund many studies, particularly in Canada, Australia, and the U.K.—not so much in the U.S.

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Researchers, cont.

Among those who study the economic effects of gambling… Many seem to have a bias against gambling Gambling is not treated like other forms of

“entertainment” There is a pervasive view that casinos and lotteries

“take advantage” of customers The games are not statistically fair Taxes on lotteries and casinos may be seen as

regressive

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Researchers, cont. Some researchers are obviously biased

against gambling Never cite research which disagrees with an

anti-gambling perspective Fail to criticize obviously flawed research…if it

agrees with their anti-gambling views Misrepresent the literature and empirical

findings Misuse economic concepts

externalities, DUP activities

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Researchers, cont. Many “anti-gambling advocates” were the

first to publish early 1990s prior to any empirical evidence

Examples One researcher has written that “Christian

economists should approach economics differently…”

Another researcher claims that criminalizing gambling would cure us of economic woes and promote national security

Good consulting opportunities for all

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Costs…

Overall, “economic effects of gambling” research is very poor quality

Extremely high social cost estimates have been published, but they’re not reliable

Politicians do pay attention to this research; they like data

There is an active anti-gambling interest in every casino legalization debate

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Can Gambling be Beneficial? Gambling must have spread for some reason

State lotteries are very popular sources of tax revenues Began with New Hampshire, 1964 Lotteries often tied to “good” programs

“The South Carolina Education Lottery” Casinos are promoted as engines for economic

growth, employment and tax revenues Began to spread outside NV and NJ after a 1988 law that

opened the door for tribal casinos Casinos become more attractive as state fiscal crises worsen

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Economic Effects Tax revenues

Gambling contributes a small portion states’ revenue Usually less than 5% of total revenues Does not necessarily lead to increased spending on

earmarked projects

Employment Casinos are labor-intensive

Create an inflow of labor, or Workers choose jobs at the casinos—better jobs

Critics argue that other entertainment industries may be “cannibalized”

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Economic Effects, cont. Industry complementarities

Other forms of entertainment may benefit Evidence from Detroit indicates casinos have

a positive effect on commercial property values

Economic growth 3 separate studies (1991-96; 1991-2005; and

1991-2010) show conflicting evidence 2 of the 3 studies suggest a positive impact of

casinos on state per capita income

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Economic Effects, cont.

Overall, the empirical evidence on the economic benefits of gambling is probably stronger than the empirical evidence on the costs

Politicians probably do not care too much They want easy sources of tax revenue Voters don’t demand real evidence of benefits

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Consumer Benefits Arguably the most important reason to legalize

gambling Consumer’s surplus is likely greater than any other

benefits from allowing gambling Consumer sovereignty Variety benefits “Distance” benefits

Freedom of choice Mutually beneficial voluntary transactions

Just like every other market transaction In policy analysis, these issues are irrelevant

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Important Considerations

For: Economic growth, tax revenues, employment

Against: Social costs, pathological gambling, “Vice” or negative merit good

More important, but typically ignored: Proper role of government individual freedom Consumer benefits

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Conclusion There is still much controversy over gambling,

especially regarding the spread of casinos Some voters still see gambling as a “vice” but in

a recent AGA survey, 49% say gambling is “perfectly acceptable for

anyone” 35%, “acceptable for others but not you personally” 14%, “not acceptable for anyone” 2%, “don’t know/refused”

Researchers’ views may be more skewed against gambling, as they do not treat gambling like other forms of entertainment