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Debt + Lotteries = Social Decline

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When asked how he planned to finance his retirement, a wag once responded he would rely on three sources – Social Security, law suits and the lottery. His answer was an expression of hope over experience. While it was bittersweet, his answer also reflected a cultural shift – a growing dependency and a belief that riches can come with no effort.

Social Security, unless changes are made, will be technically defunct in 2033. Frivolous lawsuits are a growing problem. In 2013, about 15 million such suits were filed in the United States, an increase on a population-adjusted basis of 150 times from 1967. Americans spent $78 billion playing lotteries last year, a form of tax that did not exist before New Hampshire introduced the first lottery in 1964.

Frivolous lawsuits cost American taxpayers about $275 billion a year in legal and court fees. The suits tie up courts. The lawyers who encourage them send false promises of million to millions of people. The Institute for Legal Reform estimated that in 2008 the average American spent an additional $3,500 on goods and services because of frivolous lawsuits.

By debt, in this instance I refer to entitlements that have been promised by elected officials, but exist only on paper. They are Ponzi-like in that the authors did not provide proper funding. Promises are the bait that gets politicians elected. Responsibility is left to the next generation. My home state of Connecticut ranks fourth in terms of household income; yet it is first in terms of state debt per capita. Future retirement and healthcare obligations represent the bulk of the obligations. It is a sad commentary on a state that has so much to offer – its people and their skills, its educational institutions and its proximity to major cities – that 12.5% of its population is on food stamps Connecticut’s poorly managed government, with its burdensome regulation and heavy taxation, has driven out businesses and many productive citizens.

Residents of Connecticut spend about $1.3 billion on state-run lottery tickets. Of those dollars, all of which could have been expended in more productive ways, about $315 million go to state coffers and $63 million to the store owners that sell the tickets. The concept of lotteries was originally sold to the public as a means of raising money for purposes of doing social good, which generally meant the money would be earmarked for education. As states’ finances worsened, the money has gone to general budget items, which meant supporting pension and healthcare plans for retired state employees. Advocates for the lottery are legion, beginning with the politicians who see this as “free” money, the merchants who collect 5% of the sale, and the gullible consumer who is told that untold wealth is but a $2 ticket away.

Additionally, the state of Connecticut receives roughly $300 million from the state’s two Indian-run casinos, which combined had revenues of about $2.0 billion in 2014. While that $300 million represents a small fraction of what the State takes in each year, politicians love it, because it is painless. Nevertheless, there is a social cost, which is long-tailed, again something politicians prefer. But it is that social cost – the habits that get formed and the personal tragedies that ensue – that should concern us. In general, it is the poorest among us who sit endlessly before slot machines and who get suckered into paying for the false promises of lotteries. And it is the trial lawyers, not the victims, who get rich at the expense of the people for frivolous lawsuits. Earlier this year, in response to plans to expand casino gambling, former Governor Lowell Weicker who, in 1991, cut the deal that introduced casinos into the state said, “We need other kinds of jobs. I think we need to adjust our priorities, so they don’t include more gambling.” In this regard, he is right; we do. The state is already seeing the effects of competition on in-state gambling. Revenues in 2014 at the two casinos were about $1 billion below where they had been in 2013. Casino employment, which peaked in 2006, has declined from 22,300 to 14,750. Is the state better off encouraging more gambling – and the inevitable personal losses such activities promote – or should the state encourage new businesses and re-build its defense and insurance industries, businesses that made Connecticut rich in the post-War years?

I am not a fan of any tax, but I recognize that government is necessary and must be funded. National defense cannot be farmed out; neither can local police forces. Disputes between different interests must be arbitrated. Public schools and universities play a vital role in our well-being. The elderly, the sick and the indigent must be cared for. Transportation has a public aspect that must be funded, be it roads, bridges, rail systems or airports. Museums, parks and such add to the quality of life. Since we live under the rule of law, rather than the rule of men, we need legislators, judges and administrators to ensure that laws are constructed and enforced fairly so that no single individual is treated wrongly or that any position becomes too powerful.

But bureaucracies become bloated. Administrators see growth in expansion, rather than in better service. When the majority of the people have a financial interest in the perpetuation of government, the natural braking system of checks and balances becomes compromised. I understand the value of taxing luxury goods, cigarettes, liquor, etc. But in general, I favor a progressive income tax system to the regressive use of broad-based sales taxes, VATs and hidden fees. We need a system that encourages investment and the individual creation of wealth, especially with Social Security at risk. We need to encourage aspiration, skills and hard work. (As an aVATs, side, the automatic withholding of federal, state and local taxes by businesses has been an insidious conspiracy between government and business to mitigate the pain of paying taxes. The self-employed and many retirees must write quarterly checks to the IRS. If everyone had to do so, government would be smaller.)

Perhaps there is no direct relationship between the advent of frivolous law suits, lotteries and the growing dependency of Americans on government, but the timing is suspicious. At the time lawsuits began to explode and lotteries came into being, the sense of community in America began to break down. It was an event chronicled by Robert Putnam in his book, Bowling Alone. He described the decline of social intercourse and the collapse of civic groups that did so much to hold communities together. In part, this was due to the simultaneous rise of government programs designed to help the needy, the sick and the elderly. But the result is we have become alienated from many upon whom we once relied.

As government programs expanded, people became increasingly dependent. That dependency replaced the concept of self-reliance and personal responsibility. When we add in an addiction to promises made but likely never to be realized, the consequence is a people who look to lawsuits and the lottery to sustain them in old age. It is an equation that foretells a social decline.

 

The Opinions expressed above are mine alone, and do not represent those of the firm Monness, Crespi, Hardt & Co., Inc., or of any of its partners or employees.

 


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