Gambling with Our Future? the Costs and Benefits of Legalized Gambling

Fraser Institute Digital Publication Gambling with Our Future? The Costs and Benefits of Legalized Gambling Patrick Basham and Karen White The Fraser Institute Vancouver, British Columbia, Canada 2002 Gambling with Our Future? 2 Contents Executive summary / 3 Introduction / 14 How prevalent is problem gambling? / 28 Social benefits and costs of gambling / 55 Economic benefits and costs of gambling / 68 Gambling on Indian reservations / 99 Regulation of internet gambling / 107 The case for privatizing gambling / 114 Individual freedom versus government paternalism / 122 Glossary / 126 References / 130 About the authors / 148 About this publication / 149 About The Fraser Institute / 150 Fraser Institute Digital Publication February 2002 Gambling with Our Future? 3 Executive summary Heightened public awareness of, and participation in, gambling has sparked consid- erable debate about its economic viability and its overall effect on society. The fun- damental policy question addressed in this report is whether or not the benefits of legalized gambling outweigh the costs? In addition to a socioeconomic analysis, this report discusses what the appropriate role of government should be in regard to gambling. Currently, municipal, provincial, state, and federal governments in North America perform a number of roles, including prohibitor, provider (sometimes mo- nopolistically), regulator, and educator. Finally, this report concludes by addressing the important, yet commonly unspoken, issue of individual freedom, that is, the right to choose whether or not to gamble and on what terms, in the face of government’s increasingly paternalistic attitude. In this report, we explicitly take a wide view, literally and figuratively, of the ramifi- cations of legalized gambling. We investigate legalized gambling in four countries: Canada, the United States, Australia, and the United Kingdom. The principal find- ings are the following. Problem gambling is not very prevalent Within the adult Canadian population, “life time” pathological gambling is estimated at 1.6 percent and problem gambling at 3.85 percent. Past-year prevalence was estimated at 0.2 percent and 0.6 percent, respectively. In Canada, there is a higher percentage of social non-problem gamblers than social non-problem drinkers and there is a far greater percentage of the population with a drinking problem than with a gambling problem. In Australia, approximately 0.5 percent of the adult population has a severe gambling problem, while another 0.6 percent is described as “at risk” for gambling prob- lems. The recent American presidential commission report into the effects of legalized gambling put to rest many of the myths propagated about gambling. For example, it is estimated that approximately 2.5 million adults (0.8 percent) are pathological gamblers and 3 million adults (1.3 percent) are problem gamblers. Fraser Institute Digital Publication February 2002 Gambling with Our Future? 4 The number of compulsive gamblers in the United Kingdom is estimated at approximately one percent of the adult population. This is consistent with the estimated prevalence of pathological gamblers in Canada, the United States, and Australia. The social benefits of gambling are underappreciated Gambling may be considered a recreational outlet, similar to other entertainment and leisure products and services. Those who participate in gambling activities do so voluntarily and, in return, receive intrinsic benefits from their consumption. If consumers are gambling for entertainment purposes, they are purchasing gambling just as they would purchase cinema or symphony tickets. This may be considered a relatively harmless form of entertainment that provides a recreational outlet for participants. Gambling may be exciting and socially engaging. For those who enjoy taking risks, the propensity for risk associated with gambling may be both stimulating and chal- lenging. For others, gambling is stimulating due to the challenge of estimating po- tential wins and losses, especially with sports betting and horse racing. Overall, people gamble for a variety of reasons, whether for a break from their daily lives, the thrill of the chase, or the challenge of beating the odds. Every individual gambles for different reasons and will derive pleasure from the activity according to his or her own individual utility yardstick. While most people tend to be risk-averse, there are those who are risk-preferring over certain income ranges, that is, they are willing to take a risk—to gamble—to increase their wealth. In other words, for those who choose to gamble, the small sum risked for the expected return of a large sum of money is justified by the opportunity of financial gain that a person would not have otherwise had the opportunity to ob- tain. Unfortunately, most gambling critics discount the enjoyment derived from games of chance and, instead, consider the anticipated monetary returns from gambling to be the most important outcome. Within the gambling arena, there are opportunities for gamblers to gain esteem both in their own eyes and in the eyes of others, although they may be losing money. Through gambling, participants gain an opportunity to test their skill in games of chance, and derive intrinsic pleasure from the thrill of the activity itself. One of gambling’s main attractions appears to be the entertainment value of the activity involved. Fraser Institute Digital Publication February 2002 Gambling with Our Future? 5 The social costs of gambling are overstated Despite the relatively small number of cases of pathological gambling, there are social costs attributable to those people who are unable to control their gambling be- haviours. The social costs of gambling may be defined more precisely within specific cultural contexts. In countries such as Australia, for example, a more tolerant attitude toward gambling may be reflected in a lower estimate of the social costs of gambling. In Canada, meanwhile, there has been comparatively little empirical research conducted into the social costs of gambling and, as a result, most of the evidence from Canada is anecdotal in nature. In the United States, increased public awareness about the effects of gambling has resulted in a number of studies that attempt to quantify its social cost. Despite these efforts, research from the United States also tends to be disproportionately qualitative in nature. A social cost commonly attributed to gambling is that problem gamblers tend to have higher levels of debt and declare bankruptcy at higher rates than non-problem gamblers and non-gamblers. However, claims by gambling opponents that bankruptcy is a by-product of gaming activities are unfounded. A rise in the number of bankruptcy filings and increased gambling rates prompted the US Congress to investigate the link between gambling and bankruptcy. The Treasury Department, charged with reporting on the issue, found a statistically insignificant relationship between gambling and bankruptcy. Australia tends to be at the forefront of gambling developments and gambling research. A 1995 study estimated the social costs of gambling (and pathological gambling in particular) to be considerably lower than the estimated social benefits produced by gambling. The economic benefits of gambling outweigh the economic costs The most recent and comprehensive analysis of the economic costs and benefits of legalized gambling in Canada found that the net economic benefit was equivalent to $3.044 billion in 1995, up from $526 million in 1990. Government revenue derived from government-run lotteries, casinos, and VLTs increased from less than $100 million in 1970 to $1.3 billion by 1985, and reached a total of $6.8 billion in 1997. Between 1992 and 1997 (table 35), total gambling revenues for provincial governments grew from $1.7 billion to $3.8 billion. Overall, the portion of revenue derived from gaming activities also increased during this period. Fraser Institute Digital Publication February 2002 Gambling with Our Future? 6 It is estimated that the Australian gambling industry generates an annual producers’ surplus of approximately AUS$5 billion and contributes approximately $5.5 billion annual to the nation’s GDP. A recent American study demonstrates that gambling improves the overall socioeconomic health of the community in which the gambling occurs. The study concluded that the “casino effect” does not significantly increase either crime or bankruptcy. Casino proximity does, however, significantly increase per capita casino spending, income, and employment. Additionally, the study showed a decrease in the percentage of the labour force unemployed, the number of taxpayer dollars spent on welfare payments, and government transfer payments as a result of casino proximity. Furthermore, local economies with legalized gambling experienced growth in the construction trades, the hotel and hospitality industries, and the recreation and amusement sector. A common misconception about gambling is the perceived association between gambling facilities and the incidence of crime. In Canada, both the actual number of felonies committed in this area and the rate of such crime have historically been very low but, in the early 1990s, the rate sank further, to record low levels. The sharp de- cline is related, at least in part, to the wider availability of legal gambling venues throughout the country. One detailed analysis of the relationship between casinos and crime focused on ten American jurisdictions

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