Gambling's Dicey Benefits

Gaming Grows, as Do Fears About Its Social Costs

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NEW YORK, JUNE 18, 2005 ( Gambling in all forms is enjoying ever-increasing revenues. Wagering over the Internet is particularly strong in recent times. On June 27 PartyGaming, the company that runs the world’s leading online poker site, is expected to make its initial public offering, offering some 23% of its shares on the London Stock Exchange.

Estimates of how much the company will be worth have fluctuated, but according to a report Wednesday by Reuters, the share sales should raise around $2.1 billion. That amount is less than originally thought, due to worries about the legality of online gambling in the United States.

Reuters reckoned that PartyGaming, founded in 1997, has up to 70,000 people connected to the site at peak times. The company declared revenues of $222 million in the first quarter of this year, with an operating profit of $128 million, up by 81% on the previous year.

An editorial Jan. 6 in the Christian Science Monitor gave some data on the rise of online gambling. In 1996 some 30 sites took in just over $30 million in bets. By last year this had grown to 1,600 sites, collecting around $7 billion in wagers. This is forecast to increase to $9.8 billion this year.

The law governing such sites is not clearly defined in the United States, and in any case the companies can operate offshore. So far, proposals put to the U.S. Senate Banking Committee to impose stricter regulations have not come to anything. This is perhaps, in part, noted the Christian Science Monitor editorial, due to the more than $9 million in contributions made last year to the party funds of both Democrats and Republicans.

Gambling in general, and not just over the Internet, is enjoying a boom. In Britain, the annual turnover of the gambling industry last year rose to 78 billion pounds ($141 billion), according to a June 4 editorial in the Guardian newspaper. Losses suffered by gamblers also rose sharply, up to 8.7 billion pounds ($15.8 billion) last year, or an average of 400 pounds ($727) per working person.

Italians are also increasingly keen on betting. The daily La Stampa last Dec. 3 reported that by the end of 2004, Italians were expected to have wagered 23.1 billion euros ($27.9 billion) in the games run by the government. These games include lotteries and betting on soccer and horse racing. The amount is equivalent to 2% of the country’s gross national product. The amount has risen sharply in recent years. In 2000 the amount wagered was 14.3 billion euros ($17.3 billion at today’s exchange rates).

Cash cow

Governments are one of the biggest beneficiaries of the explosion in gambling. In Canada, for example, an article Jan. 6 in the Globe and Mail newspaper noted that revenues from government-run gambling exceeded $11.8 billion Canadian ($9.5 billion US) in 2003, a fourfold increase in the last decade.

But the health and social costs of gambling have been heavy. The newspaper said that some estimate that 200 to 400 suicides in Canada have been related to gambling problems. And while government revenues from other potentially harmful activities, such as smoking and drinking alcohol, are mitigated by restrictions on advertising, the state itself in Canada spends heavily on promoting gambling.

In Britain, revenue from lottery ticket sales is increasingly being used for normal government expenditure, instead of going to “good causes” and cultural projects, as was promised when the lottery was set up just over 10 years ago. Last year a third of the government lottery revenues, more than 430 million pounds ($782 million), went to normal spending on health, education and the environment, the London Telegraph reported Wednesday.

In the United States, a number of state governments are increasingly dependent on gambling revenues, the New York Times noted March 31. In Rhode Island, South Dakota, Louisiana, Oregon and Nevada, taxes on the diverse forms of gambling account for more than 10% of total government revenue. Other states, such as Delaware, West Virginia, Indiana, Iowa and Mississippi, are close to reaching the 10% mark.

In South Dakota, where gambling revenue currently gives the state 13.2% of its income, state legislators defeated proposals to limit gambling due to the resulting social problems created. The lawmakers worried about where to find alternative income sources.

David Knudson, a Republican state senator from Sioux Falls, told the New York Times that gambling opponents often talk about the dangers of problem gamblers. “But the biggest addict turns out to be the state government that becomes dependent on it,” he said.

Social costs

Increasing attention is being paid to the costs associated with gambling. On April 8 the Christian Science Monitor reported on a study carried out by Edward Morse, a law professor at Creighton University School of Law in Omaha, Nebraska, and his colleague, Ernest Goss.

They found that the arrival of a casino in a town can increase local incomes due to the jobs created, leading to a slight decrease in personal bankruptcies. However, after the casino has been operating for some years personal bankruptcies increase about 2% a year, compared with towns without casinos. The study, which looked at data from 1990 to 2002, concluded that as the casinos mature and other localities open up competing facilities, tourist numbers drop and, at the same time, the number of problem gamblers increases.

A detailed analysis of the economic impact of gambling in the United States was also published last year in the book “Gambling in America: Costs and Benefits” (Cambridge University Press). The author, Earl Grinols, an economics professor at the University of Illinois, has closely followed the gambling industry over many years.

For a start, he noted that the approval process for gambling by government commissions or legislative committees is often flawed, with a lack of detailed analysis regarding the projected costs and benefits of allowing new facilities. And those who have a lot of money at stake in making the proposals have a strong motivation to present a partial vision of gambling’s benefits.

The approval process can also be distorted due to the massive lobbying efforts by the gambling industry. Grinols cites, among other examples, how one time in Texas 74 lobbyists were hired to pressure legislators in favor of a proposal to extend gambling. Between 1991 and 1996 the gambling industry paid more than $100 million in donations to state legislators and in lobbying fees.

On the question of the economic benefits created by casinos, Grinols observes that it is not sufficient just to count the numbers of jobs created. Jobs are just one factor in economic development, he says. In fact, the new jobs at a casino are often offset by losses in nearby businesses that are hurt, such as restaurants.

Further, Grinols argues that we need to add in the social costs of gambling. These include crimes, such as fraud and embezzlement; bankruptcy; suicide; and family costs such as child neglect. Often the communities where casinos are located are obliged to increase taxes to pay for the costs associated with these factors, while it is the state government that receives the revenues.

Grinols concludes that even though there is a need for additional research, casino gambling “fails a cost-benefit test by a wide margin.” Something to keep in mind when cash-hungry governments propose extending gambling.

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