« Freakonomics Radio

13. The "No-Lose Lottery," Part 2

2010-12-01 | 🔗
It’s the banking tool that got millions of people around the world to stop wasting money on the lottery. So why won't state and federal officials in the U.S. give it a chance?
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
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gambling. Two and three american adults report gambling and its fifty percent savings. play lottery, the next closest casino which, as you know about one in five adults, the lottery, love it for a couple of bucks you by the chance to change your life. This asymmetry is called skinnes and generate hope, irrational hoped to be sure and too much of it for that life changing pale, we feed that hope by buying lots and lots of lottery tickets about sixty billion dollars worth a year, most of which is essentially poured down a big hole and the people for the most are the ones who can least afford it. The people who don't make much to start with and Hu Jia,
we don't managed to save any money. So what? If you could attached the thrill of schooners the boring old prospect of saving money instead pouring it down that this is already happening in twenty countries around the world. It's called a prize linked savings account Repealless. Some people think the ideas ripe for transplanting to the. U S, just one problem: it's illegal! Why well, because legally appeal: s plan is a lottery and the only lotteries allowed in the? U S or the lotteries run by this. Its themselves, but there's a chink in that monopolistic armor in Michigan, a small group of credit unions has taken advantage of a loophole in state law to set up appear less programme. They call save two way. Here is its first big winner, eighty seven year old, Billy June Psmith, so you paint you put. Seventy five
Because of your own money into a credit union savings account As a result, you weren't into a lottery for which you want a hundred thousand dollars right. Lessons like a pretty good tell me when you think well, it is, help me alive. No tell me what you ve done the money Billy well. I've had to replace the furnace just a month ago, and I've heard in our waters. after and I have put my money aside for the Tec, And I do, however, another savings that I don't touch for, just so along alike. Add to it then,
from american public media and w and Y see. This is Reaganomics radio. Today parts the no lose lottery. Why state lotteries and lighting? U S, Treasury Department, don't want you to put your money into a savings account. Here's roast Stephen Dampener Pro, is linked savings or peel s accounts have a long history. In the UK, the government premium bond programme has been around for decades. Every month it pays a top lottery prize of one million pounds. A few years ago, a bank in South Africa started appeal as programme that was hugely zestful so much so that the National Lotteries Board of South Africa sued tab. It shut down it's hard for any but the government to run a lottery when the government since the only lotteries should be run by the government itself and that's the biggest obstacle to bringing peel s plans to the. U S.
The biggest lottery in this country is run by New York, state, Gordon Madonna. and the state lottery Director says it said the five percent of new Yorkers play, which generates billion dollars in annual sales, but in order to get their New York like most states that have a lottery had to rewrite its existing laws. That prohibit Any kind of gambling Newark first began in nineteen sixty seven, and it was the second state after New Hampshire to come in what was the origin, impetus was it a budget shortfall essentially did the state feel we need money we can. We can avoid this ban on gambling in the state and and come up with a way to do it. I think it was so both a desire to raise money, and also, I think it was a recognition that term What's going on anyway, It was an attempt to and regulate an activity that they knew was very common among citizens
And you know whether you go back to the other, that the numbers games that existed in urban areas and quite frank still exist or rub those the activities. And even sports betting today, which of course technically is illegal, but we all know is a huge business. I think there was a recognition on the part of law makers that much like prohibition better too. x and regulate them to you, know, ostensibly call something illegal and pretended doesn't go on state governments do more than tax and regulate their lotteries. They take a big cut themselves. Now in gambling circles the commission's taken by whoever operates the game is known as the rake state lotteries, the rake can be as high as sixty percent that means it is little is forty percent of the money taken in from ticket sales ends up in the pool the pays, the winner?
the rest of the money usually goes to education and to cover overhead marketing and sales commissions compare the lotteries wreak to the slow, machines in a casino they pay. more than ninety per capita. Oh yeah, it's a lot of money. They take out years, Melissa, Carney, an economist of youth. The city of Maryland, who studies lottery gambling states? as Democrats, we run the lottery you dont, Sir, at least. Initially it was while, let's, let's provide an alternative legal lottery product or numbers product writing to the illegal groups. It'll be transparent and it won't be corrupt, but then they declare themselves.
monopolies and they take take a big cuts, which is, we can think. That's really high price. Consumers are paying a very high price to buy this type of product. They can't get it from anywhere else legally and dumb, and then they they have. The lottery commissions, have the mandate to increase revenue, so they they innovate. They advertise the market, they they serve behave like monopolised. What do we know about people who play the lottery? What's, for instance, the Socio economic breakdown? Okay, so this prize is a lot of people, but people throughout the Socio economic distribution place the state lotteries, and so it's? U dont roughly fifty to sixty percent of man, roughly fifty sixty percent of women, roughly fifty to sixty percent of people across the education spectrum, so people with your high school dropout, Highschool Degree College graduates and it's when you look at the absolute dollars reported spending it it's it's not that
for an across the income distribution. Sir sort of lower income households spend about as much and our terms as higher income households. The flip side of that, of course, is that it means it being a larger share of lower income. Households, total spending, so states have a monopoly on lotteries and the people who can we afford to play by just as many tickets the people who make a lot more money. That's. My scholars like Carney and Peter, to follow at Harvard Business School think that price linked savings plans could help America's pathetic savings rate, So why hasn't the idea gain more traction here according to follow? The main culprit is history. I think the reason that this product exist elsewhere and not here is because in the end, was the accidents of history, but the path that history has taken in America over a long period of time. I'm not a banking expert. Nor am I a lawyer, but it's been explained to me that the prohibitions on banks,
aging and lottery activities goes back to the nineteen thirty's when for whatever reason, the activities that some banks pursued me- regulators very nervous about them, having anything to do with lottery, which is why you can't work into a bank and by a lottery ticket, and so that may have been a really smart legislation back then may still be smart legislation now, but it seemed We have, in this instance throne Not only lotteries but also savings programmes that have chance elements to it. So that's half the equation. The other half of the equation is there as a public finance matter, american states
qualities have relied on lotteries as a way to close public finance deficits. There are other ways to close their deficits and unfortunately, there going to be quite large, I suppose, looking in the future, but when public entities were given the right to use this vehicle to raise funds, other parties were prohibited from using the same vehicle and therefore there are prohibitions against private parties running lotteries in virtually every state, so the combination of laws to try to protect, I suppose the safety and soundness of banks and laws to permit states and local governments to have a kind of preferential access to this form of funding has led to the statute. Where I think this product, which no one ever meant outlaw, has become outlet. outlawed coming up. We run the Rising savings idea passed a couple of state lottery commissions. They are not.
Susie Aspect and we bring it to the. U S Treasury department, they don't like it, much either. Economics radios brought to you by square. If you run business. You know how important it is to have a healthy cash flow Why would you take payments with square either in person or online? You get your money fast does it instantly vs, where card a free business debit card transfer it to your bank account on your schedule. All the ways square can help at square dot. Com flash go slash, freak, oh nonsense! Instead, Pennsylvania lottery, scratch offs, pennsylvanians or scratching their way to fund, and we new games every month, big top rises
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state run. Lottery might see a prize linked savings plan as a natural rival, but the New York state lottery for little. Why the least actually considered teaming up with Harvard Peter to follow on appeal S planned a we hear is Gordon Magenta. Again from the New York State ladder environment. We called it a no lose lottery ticket and basically what the cost This is that you buy a ticket in and it would be an expensive ticket lets a hundred dollars, but never lose the the base of it. And Then we pool those funds, invest them just like a mutual fonder. Anything else like that and then the investment gains become the prize. and then every month, or so. Instead of earning Most zero percent on savings account. there's a lottery and different account holders win prizes. Just lucky would with the lottery game, so we Through a lot of this research and we presented to the F b I see- and this was an empty. I see committee on
trying to encourage higher savings rate among low income people. Also to embrace what, but they refer to as the unbalanced and end to get low income p To use banking facilities of financial services. Better Magenta says couldn't make the math work for the New York State lottery, but for the Florida lottery is not about the math about the law. I asked LEO deepening YO the Florida lottery secretary. What he thought about a prize link savings plan from from a purely lottery perspective, I think the floor, the lotteries, the only entity in Florida that can operate a lottery game, so what you described is legally a lottery game. Then I've got to say that it probably sounds illegal under current floored, along
states protect their lotteries because a lotteries bring in lots of money for the states. Some money goes to education and other worthy seeming causes, but Wendy Benigno admits that's not what motivates people to play. I think people Radiance in general are players. They like the idea that there that that the money they spend on the lottery that a portion of it in this case is a significant portion- does go fun education, but am the first to say that they don't play the lottery by and large, to help fund education in Florida, people play the lottery to win. They like the prizes. They like the excitement. They like the fund,
possibility of winning know sometimes ten twenty fifty dollars, and sometimes many multi multi millions of dollars. I think the funding to education is ancillary. It's it's an extra bonus that the public views the lottery as a as a different and unique in and fun way to be able to fund. At least some of the things that are education system needs, the lottery is mostly been called a tax on the stupid. You get terrible odds and the state reeks off a huge amount. Converting your harder and cash into an addition schools tax. Now you understand why a state lottery, commissioner, like LEO De Benigno Florida lakes, things just the way they are, but what The other government officials who work on things like consumer protection. What about some? Unlike the assistant secretary for financial institutions, at the? U S, Treasury Department, his name is Michael BAR
we talked him a few weeks ago. He since step down, I got a headache do with our interview and I asked bar if he ever played the lottery I haven't really played the lottery probably if I went back over over my forty five years, I may have bought at school ticket or too in my twenties. Now. Why do you not play the lottery it's a fool's errand. As you undoubtedly know, there are a handful of people who will make some money out of the lottery, but most people, most of the time will lose money it's not nodded a great way of spending one scarce resources. I dont know If you are aware of the pilot programme has been happening up in Michigan with the eight credit unions, where a priceless savings programme is actually under way. The first lottery tight, pay out of a hundred thousand dollars was this year- do are you familiar with other called the save to win programme?
I have not actually study that so the folks who are trying to make this happen come up against a v, three simple reality, which is that its typically illegal that a private institution like a banker credit union is not allowed to run a lottery according to state law that state law typically forbids gambling, and in order to allow a state, let's say to run a lottery itself, there is a loophole that must be written in those loopholes have been written. states do have their own lotteries, but for someone else I didn't do it, it would be illegal if you looked at the landscape and thought, in my role as in Treasury here, I would like to encourage people to save more I'd like to make it worthwhile for them to save me, and I'd like to remove barriers that prevent them from participating in projects it that let them save more, would you be in full
rob sponsoring or trying to trying to get rolling. Some legislation that would allow for a widespread deployment of prices savings. Do you think that something that Treasury should get its get its momentum behind one of the things it I've learned in my role as Treasury is that picking fights that one doesn't have to pick is not not the wisest course of action unless it something it's absolutely essential and take on, and I wouldn't have put that in the category of of high priorities TED to wage into a discussion of state gaming. But if your job is to help american families save more be better financial stewards generally, and we know that Tens of billions of dollars are being spent on lottery tickets every year, which you call the fools game and one turned active is to offer bank savings accounts whereby customer can put in a hundred dollars.
Enter a lottery, maybe win, probably not, but maybe, and keep the hundred dollars Why isn't that? Something? That's worth considering, even in a politically fractious environment when the potential, but but getting people to save more seems to be much larger, then potential downside of angering some state lottery. Commissioners at say I think lots of different ways of encouraging greater savings on long all, american families- and I think we should continue to an innovative and to try new approaches. I think that the question that you posed is based Actually one aspect of one way to do that, I dont think Yet no enough from the research to save the kind of thing that we think needs stood to happen on a wide scale in order to be effective and I think that we have a number of potential strategies to help.
the needs of american families to save that we haven't really fully explored, and that done that. We raised? Somewhat lowers set of issues and barriers are so the Treasury department doesn't like pricing savings accounts lottery commissioners. They don't like the idea either, but up and mission the one state words now legal- they like it fine the safe wind programme has taken in eighteen million dollars and deposits this year and to others Things Rhode, island and mean have just passed legislation to give people s try. Now. Maybe you think this is a terribly It made me think people ought to save money on their own, but you know what we don T respond to incentives and for a lot of us inside to save for a time
meant for emergencies, for whatever is weak. Why? Well, because the pay off is abstract and it's too far in the future, is the opposite of skinnes this dilemma doesn't just apply to saving money thing of a school kid third or fourth grade You want me to do what tab bust my button school for ten more years and then go to college just to get some job am, I probably won't even like, were thing about crime and punishment. If you look at the data, it turns out that the death penalty does not work as a crime deterrent. Why? Because as its currently practised with the punishment waiting so far out in the future. Through me, delays and appeals incentive. Simply. strong enough to stop me from pulling the trigger right now. Sometimes you need stronger incentives.
Maybe just some good smoke and mirrors that's cool what a priceless savings plan could offer in a country where it's easy to borrow your way to bankruptcy. We can buy lottery tickets anytime, you buy loaf of bread. P, alas, is like a big neon billboard. It turns out bring old savings account into an exam, Duration of itself sticks money in here it says and you just might hit a big payday and even if you don't want your money still belongs to you. good I'll, buy that for a dollar when you the friggin comics radios, a co production of W and Y see american public media and debonair productions. This episode was paid. library lamb, whose lucky lottery number, is eight
Herman is our engineering. He never seems to get lucky. Our executive produced is calling Campbell subscribe to this podcast on Itunes and you'll get the next episode in your sleep? You can find more audio it for economics, radio, dot com and, as always, if you want to read more about the inside of everything, go to the frequent comics blog it and why times dot, com. If you thought you had to travel far to say that the patio bankers to taste the pastries and parents,
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