by
Let's state the obvious: $195 million is an awful lot of money. Let's also
state what may not be so obvious: The risk-to-reward ratio for anyone
participating in last night's Powerball drawing was, even with the massive
potential payoff, so rotten that it was the very definition of a sucker's
bet. As a result, the frenzy that seemed to seize the country once the size
of the Powerball pool became apparent was emblematic of two things: First,
most people still don't have any real conception of how to manage their money;
and second, the U.S. has done far too good a job selling its citizens on
the idea that "all you need is a dollar and a dream."
The spectacle of that frenzy was pretty remarkable, even though we should
be all thoroughly jaded by decades of lottery mania. The jackpot was on the
front page of New York's Daily News two days in a row, while Interstate 95
was jammed with cars trying to get from New York -- where you couldn't buy
Powerball tickets -- to Connecticut, where you could. One man walked into
a Greenwich store and purchased 4,000 tickets, and some law-enforcement officials
suggested that it was possible that people would be scalping Powerball tickets
in the hours before the drawing. When President Clinton's press secretary,
Mike McCurry, showed up 25 minutes late to his daily press briefing he offered
the excuse that he had been standing in line at a crowded 7-Eleven in order
to buy lottery tickets. By Wednesday evening, 80% of all possible Powerball
combinations had been sold and the jackpot soared to $195 million, where
previous projections had estimated that it would be closer to $150 million.
It's difficult to imagine, in other words, a less productive use of American
resources and American time than we've seen over the past few days. People
standing in line to buy lottery tickets aren't creating value of any kind
for society, and neither are the people selling the tickets. All a lottery
is, in essence, is a giant regressive tax scheme, in which a huge chunk of
money is taken from one group of people -- the ticket buyers -- and distributed
among the winners, the lottery operators, and the state governments. And
this most recent Powerball extravaganza was the most egregious such scheme
ever implemented.
Attacking the lottery is a difficult thing to do, because essentially you're
attacking the way people freely decide to spend their money. Just as any
rational person should feel uncomfortable telling other adults that they
shouldn't eat potato chips or go see Godzilla, so that same person should
feel uncomfortable telling other adults that they shouldn't play the lottery.
While one can argue that lottery advertising unduly influences people's attitude
toward the game, one could very well say the same about people's attitudes
toward alcohol, tobacco, automobiles, or whatever. Unless you want to ban
advertising of all kinds, it's hard to see what makes lottery advertising
special. And, in any case, lotteries were popular long before there was
mass-media advertising. As lottery supporters are fond of pointing out, one
was used to help set up Harvard University in the 17th century.
What's wrong with Powerball, then, is not that the people caught in lottery
traffic jams -- probably the first such traffic jams in history -- are somehow
mindless zombies, duped by those clever ad slogans. It's rather that the
case against lotteries, and in favor of investments, has still -- even in
the midst of a bull market -- not been sufficiently made. In one sense, the
Powerball frenzy is just the most extreme example of a general American bias
against savings. In another sense, it's an excellent expression of the
increasingly dramatic divide between rich and poor in the country, a divide
that manifests itself most strikingly not in terms of income but in terms
of wealth.
Wealth, after all, is something that is generally the product of accumulation
over time, which means that it is generally the product of successful savings
and investment. The richest Americans tend not to be those who make the most
money on an annual basis, but rather those who have invested the most wisely
(in Bill Gates' case, by founding Microsoft) and saved the most rigorously.
But one of the basic truths of the U.S. economy is that the more you make,
the more you tend to save, not merely in absolute terms, but in relative
terms as well.
Now, in one sense, this is completely obvious. If you're making $15,000 a
year, you're not going to have much left over to save, while if you're making
$150,000 a year, you can save 10-15% of your income and still live very well.
But, in another sense, the fact that the rich save relatively more is not
obvious at all. And the lottery is an excellent expression of just how curious,
and frustrating, this phenomenon is.
Consider these numbers, which are taken from a scathing piece by Kim Phillips
called "Lotteryville, U.S.A.": In one Chicago suburb where the average income
is $117,000 a year, the average household spends $4.48 a month on the lottery,
while in another Chicago suburb where the average income is $33,000, the
monthly average is $91.82. That is a stunning discrepancy, and that goes
a little way toward explaining why wealth in this country has been concentrated
in fewer and fewer hands over the past two decades. Ninety dollars a month
is not a huge sum, but over the span of a year it's the beginning of a fairly
meaningful investment fund and, when the miracle of compounding is taken
into account, it's the potential roots of a tolerable retirement. But the
people in the lower-middle-class suburb toss that money away every month.
Why?
Phillips suggests that it's because lotteries are actually a rational investment
for poor or working-class people. "Poor people's money doesn't work right,"
she writes. "It doesn't save, doesn't accumulate, it doesn't invest.... It
gets traded in, given away, stolen, lost." Phillips believes she's describing
something that's always true about the difference between poor people and
rich people. But what she's actually describing is what will be true as long
as people who don't have much money believe that saving is a hopeless endeavor.
In other words, as long as you think that you can't invest, you won't.
Money, after all, really is just money. It doesn't care about its origins
or about its eventual destination. A dollar put into an index fund will grow
at the same rate regardless of whether it's one of forty-nine other dollars
or whether it's one of forty-nine thousand other dollars. In that very basic
sense, a working-class person's dollar is worth just as much as a rich person's
dollar, and it has the same investment potential.
The problem is that this potential will be difficult to realize until making
an investment -- whether it be in stocks or in bonds or in other securities
-- is as easy as buying a lottery ticket. It's not hard to understand, after
all, why people play the lottery. If I have $10 in my pocket, I can't go
down to the corner store and buy an eighth of a share of Microsoft or even
add that $10 to my mutual fund. But I can go down to my corner store, buy
10 Powerball tickets, and for a little while dream of a life without work.
Making the process of investing much easier than it is even today is, therefore,
a crucial part of steering people away from the lottery.
Just as important will be driving home the fact that small amounts of money
piled up over a period of time eventually can become a large amount of money,
and that no matter how small the sum, you should think about how valuable
the money you spend today would be twenty years from now if it were invested.
That is especially true with the lottery, because unlike buying a car or
a nice suit, where the value you derive from the product may outweigh even
the long-term value of the money, a lottery ticket has practically no value
at all outside of its potential payoff. Unlike gambling, for instance, a
lottery is not enjoyable in any real sense. What's strange about lotteries,
in fact, is that they're not so much examples of Americans' tendency to overspend
as they are examples of Americans' tendency to discount the importance of
patience.
Statistically speaking, of course, no one ever wins a lottery. The odds against
winning the Powerball drawing, for instance, were 80 million to 1, which
means that it's impossible to justify buying a lottery ticket in any rational
terms. (The continued popularity of lotteries, in fact, is a refutation of
the idea that humans are always rational economic beings.) The only way to
justify it is to assume that you have no other options. Here I'm referring
not so much to the person who buys one Powerball ticket on a lark as I am
to those people who play the lottery every week and shell out hundreds of
dollars a year in pursuit of a chimera. If these people believed that their
money could "save, accumulate, invest," then the lottery would become less
attractive. Stopping the state sponsorship of Powerball, then, is less important
than changing the popular attitudes toward investing that make something
like Powerball a roaring success.
In his biography of Warren Buffett, Roger Lowenstein tells a story of Buffett
on a golf trip with three other buddies, all of them preposterously rich.
One of the four said that if the other three invested $10 apiece, he would
pay $10,000 to anyone who got in a hole-in-one that weekend. Buffett, predictably
enough, refused to invest the $10, even though he got a lot of ribbing for
his stinginess. The point is that he believed the odds were seriously against
him, and he preferred to keep the $10 rather than simply toss it away. The
odds for the Powerball players were even worse, yet 195 million times someone
decided that it was worth investing a dollar even if the chances of winning
were non-existent. When it comes to the lottery, then, what America really
needs is nothing more complicated than a simple dose of Buffett-ism. As the
saying goes, somebody has to win. But as the saying also goes, somebody has
to win, and it won't be you.