Bohanon: Isn’t the State Supposed to Limit Gambling?

February 25, 2013

by Cecil Bohanon, Ph.D.

Apple stockholders have had a hard time in the last few months. The price of a share of Apple stock has declined from $700 in September to around $450 today. This is a 36 percent hit. It is not that Apple has become unprofitable — in fact, Apple’s profits are strong. It is just that the meteoric growth in Apple’s sales and profits are slowing down.

In 2010, Indiana collected more than $872 million in gaming taxes. This declined in nominal dollars by 5 percent to just around $829 million in 2012. It is not that Hoosier casinos have provided bad services — it is just that traffic is down.

It ends up that both of these phenomena are attributable to a fundamental economic proposition: gains dissipation. If any entity is making extraordinary returns on its activity, this inevitably attracts competitors that tend to erode those returns. We can be certain competition is inevitable, although the consequences of this competition may be good, bad or indifferent.

Over the last decade, Apple has introduced a string of successful products that have provided consumers with services that were the stuff of science fiction of a generation ago. A share of Apple stock that cost $5 a share in 1997 has increased in value 90 fold. This represents an incredible 32 percent average annual rate of return, even in light of the recent 36 percent drop.

However, such innovative moxie will never be the exclusive domain of a single firm. The Korean competitor Samsung is giving Apple a run for the money with its line of products. Although this is bad for Apple shareholders, it is good for Samsung shareholders. Most important, it is good for customers of electronic products; this kind of competition is the source of economic progress and the bedrock of our free-market system.

The same principle is in operation with Hoosier casino revenues. More than half of casino patrons in Indiana are from out-of-state and, according to the New York Times,  “Indiana is the third largest commercial gambling market” after Las Vegas and Atlantic City.  It was only a matter of time before the surrounding states got in the game. This, of course, undermines Indiana’s tax haul, while simultaneously increasing the tax revenues of adjoining states. One presumes casino gamblers are made better off by this competition — casino payouts are likely to be more lucrative, casino amenities more attractive.

But there is a fly in the ointment: State governments are presumed to be taxing and regulating casinos in order to limit gambling. Yet, such interstate competition is bound to expand gambling — to the chagrin of gambling foes.

The social byproducts of this kind of competition are nothing, however, compared with the evils that emerge from competition in wholly illegal markets. Violence in Mexico is estimated to have taken as many as 40,000 lives as criminal gangs compete for excess returns in the illegal drug market. I will leave the merits and demerits of drug legalization (do we really want brand-name marijuana cigarettes next to the Pall Malls?) for another day.

Suffice it to note that competition-for-gain is inevitable in all economic and political systems. The consequences of this competition, however, depend crucially on the specific rules of the game.

Cecil Bohanon, Ph.D., a columnist for the Indiana Policy Review Foundation, is a professor of economics at Ball State University.



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