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My brother and I have a game we play from time to time. He calls me with a can't miss investment opportunity, and my job is to figure out what's wrong with it. There is always something wrong with it. In fact, the better it looks on the outside,
the worse it looks on the inside when you take a closer look. That doesn't
necessarily make it a bad investment. But it's never the bargain it appears
to be at first.
Such is the economist's burden and blessing. There is no free lunch. The bigger the bargain, the more likely it is that something worrisome lurks beneath the surface that needs to be examined. There's always a catch. Usually it's easy to discover: the
bargain is of questionable quality; the bargain has a hidden payment that
comes later; the bargain involves an unforeseen risk. But every once in a
while a bargain comes along that looks so good, you wonder if it might
actually be a genuine bargain. This should make you especially nervous. For
that means the catch is especially hard to see. So look carefully before you
leap, then look some more.
State Lotteries
So it is with the "free" education that is being offered in some states with lotteries. In Georgia, for example, any student with a sufficiently high
grade point average gets "free" education at any public Georgia
college. The funds come from sales of lottery tickets. It sounds like the
ultimate bargain. Who can quarrel with free education?
Let's take a closer look. There are many senses in which a University of Georgia education is not free. Resources get used up to provide it. Those resources could have provided something else of value.
But who provides those resources? If the education is not really free, someone must be paying. It would seem to be the losers in the lottery. And that's why the education seems free. We know there have to be losers in the lottery. They help pay for
education. Sounds great. And besides, no one forces anyone to play the lottery,
so the whole thing is more like a voluntary contribution than a tax.
To see the flaw, suppose the government decided to fund free education by opening a chain of dry-cleaning stores. Profits from the store are used to pay for
"free" education. To make sure he stores are sufficiently
profitable, the government decides to charge a dollar more per shirt than dry
cleaners currently in operation. And to keep those privately run stores from
attracting customers at the lower prices, the government decides to ban all
private competition and enjoy a monopoly.
We would all understand that in this world the "free" education is being paid for by people who enjoy pressed and clean clothes. Such people would be paying in two senses. The first sense is literal: they fund the education with their excess
payments above the competitive prices that would prevail without a government
monopoly. They also pay in the sense of having their clothes cleaned less
often than they would under a private system. Given the higher prices, some
people are going to do less dry-cleaning and some are going to do none at all. Under such a system, it would ludicrous to claim that the education is free.
It's clearly being paid for by the users of dry cleaning services. Funding
education from the pockets of dry-cleaning customers also raises a question
of morality. Why should the burden of funding education fall arbitrarily on
those who like clean clothes?
Government Monopoly
Now let's return to the state lotteries. About 55% of the receipts go to prizes, 10% to expenses, and 35% to education or some similar unimpeachable cause. Because 35% goes to neither winners nor losers, the real cost of the lottery is that you win less
often and the prizes are smaller than would be the case without a government
monopoly. If government allowed competition or made gambling legal, people
who like to gamble would have a higher chance of winning and there would be
more money distributed to winners.
So lottery funded education is not free after all. Subsidizing education out of lottery proceeds punishes people who like to gamble. Those turn out on average to be
people who are relatively poor with less education. Can you think of a more
immoral solution for funding education than to take the money from those with
the least education?
People like to defend the lottery by saying it's voluntary. After all, you don't have to play. It's also true you can avoid the income tax by not working. So I guess that's voluntary, too. But it's hard to argue that the lottery is a voluntary tax
when the government has a monopoly. Can you imagine how many people would
play state lotteries if there were competing private lotteries that paid 90%
of the proceeds in prizes instead of the typical 55%?
Under a private, competitive lottery system, the prizes would be bigger and the odds of winning would be higher. It would be a better world than the one we now live
in, where people in search of hope are forced to pay a 35% tax to finance the
college education of mostly upper class children. That’s why I like my
dry-cleaning proposal. Sure it's unfair. But it' better than using the money
from a government lottery.
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