Overview of the Social Costs of Gambling

1. Overview of the Social Costs of Gambling ECON 360, Economics of GamblingCollege of CharlestonMay Evening 2013, Dr. Walker

2. Cost-benefit studies • Studies are written by academic researchers and consultants, and accounting/consulting firms. • Studies are funded by government agencies, the casino industry, and other advocacy groups. • Cost-benefit studies - especially related to casino gambling - are cited by the media and used by lobbyists and policymakers.

3. Economic benefits of casinos • The benefits of legalized casino gambling may include… • casino tax revenues (avoidable by consumers) • potential for economic growth • labor market effects (higher employment and wages) • benefits for consumers who like gambling • This is probably the most important and neglected benefit. • There have been relatively few academic studies of the benefits of gambling.

4. Social costs of gambling • The social/economic costs associated with casino gambling are controversial • in terms of definition • and measurement • Most of the costs are caused by pathological gamblers. • Three perspectives on cost were represented at Whistler (2000) and Banff (2006) • Cost of Illness (COI) • Economic • Public Health

5. Why focus on costs? • Costs are typically the focus by media, politicians, and researchers. • This may be a result of the existing illegal status of casinos: • “Are the benefits of legalization/expansion worth the costs?” • Estimates of expected tax revenues, employment increases, and changes in average wages can be easily produced. • The social/economic costs are more elusive, both in defining them and in measuring them. • Costs are closely related to prevalence of pathological gambling. • For simplicity I’ll ignore different severities of problem gambling as well as controversies over diagnosis and prevalence estimation.

6. Calculating social costs • Most of cost studies use this formula: estimated annual cost per pathological gamblerX prevalence estimate (%)X population estimate =estimated annual social cost of gambling

7. Variation in cost estimates • Although no one who estimates monetary values of “social costs” defines the term, estimates have ranged from… • $9,000 to over $50,000 per pathological gambler per year. • These estimates often include wealth transfers and costs that are “internalized” by the actor. • What is the motivation to produce monetary estimates? • Politicians want number on which to base decisions.

8. Grinols (2004) • Grinols estimates the social costs of casinos in the U.S. (p. 171) • Estimates the annual cost to society of one pathological gambler at $10,330. • Cost per problem gambler is estimated at $2,945. • Grinols argues this is an underestimate of the true cost. • On a “per adult” basis, the average cost is estimated to be $219. (p. 175)

9. Grinols (2004) • Grinols explains that his cost estimates were “derived by averaging over the available [“original”] studies for each category of social cost, adjusting to 2003 dollars, and summing over cost types” (p. 176). • The studies used by Grinols to derive his cost estimates include… • 9 studies, none peer-reviewed.

10. Studies used by Grinols • Politzer et al. (1981) • later published in Journal of Gambling Behavior (1985) • introduced the term, “abused dollars” • Thompson et al. (1996) • later published in Gaming Law Review (1997) • Thompson and Quinn (1999/2000) • unpublished • Thompson and Schwer (2003) • later published in Journal of Public Budgeting, Accounting and Financial Management (2005)

11. Problems with Grinols’ Estimate • Grinols’ estimate is careless and unreliable – as policymakers may take it seriously. • Most of the studies from which it is derived are seriously flawed. • Thompson et al. (1996, 1997), Politzer (1981), and elements of Thompson and Schwer (2003) were examined by Walker and Barnett (1999) • Other criticisms of the methodologies of these studies have been made by the National Research Council (1999) and Federal Reserve Bank of Minneapolis (2003).

12. Problems with Grinols’ Estimate • Grinols ignores the controversy over how to define and estimate social costs. • His presentation gives the impression that because the cited research is “original” it is legitimate. • He does not explain differences in the studies or their potential flaws. • Examples of some of the problems in the studies…

13. Politzer et al. (1985, p. 133) define “abused dollars”: [the] amount [of money] obtained legally and/or illegally by the pathological gambler which otherwise would have been used by the pathological gambler, his family, or his victims for other essential purposes. These abused dollars include earned income put at risk in gambling, borrowed, and/or illegally obtained dollars spent on basic needs and/or provided to the family which otherwise would have been “covered” by that fraction of earned income which was used for gambling, and borrowed and/or illegally obtained dollars for the partial payment of gambling related debts. This concept is too vague to be useful. What is an “essential purpose”? Is it defined the same for Bill Gates and Joe Sikzpak? It could be interpreted to mean that the total amount of bets placed (handle) represents abused dollars. This amount would often be much larger than the actual losses by a gambler. Any money borrowed to gambler is considered “abused dollars.” Use of this concept allows one to arrive at a very high social cost estimate, because the concept is so vague. Politzer et al. (1985)

14. Thompson et al. (1997) • Estimated social cost per compulsive gambler is $9,469 (p. 87), but… • they do not define “social cost,” and simply include whatever negative effects they can measure with their survey on Gamblers Anonymous (GA) members. • Blaszczynski et al. (2006) indicate that survey respondents may have difficulty in estimating their losses. • Using GA members in Las Vegas to estimate general cost per pathological is inappropriate.

15. Thompson and Quinn (2000) • Count as costs money that leaves South Carolina for the purchase of video poker machines (millions of $ leave the state). • If this was a legitimate conception of social cost, then anytime anyone made any purchase it would represent a social cost. • “Cost” defined as money spent is not “bad” - it’s good. • Consider a transaction at the grocery store.

16. Thompson and Schwer (2003) • They estimate the annual social cost of per pathological gambler in Las Vegas at $19,085. • Accounting for estimated prevalence and population, the total annual cost estimate is between $301 and 470 million!

17. Studies cited by Grinols (2004) • Among the studies cited by Grinols, there is… • Disagreement about the types of costs to include • Sometimes costs are excluded because of measurement difficulties. • Disagreements on the estimated values of the individual cost categories • For example…

18. Definition of social costs • This must be defined before it’s measured • There are two definitions that appear most commonly in the literature • Walker and Barnett (1999); Walker (2007, p. 88) • “A reduction in social real wealth. • Implies that when benefits offset harms, there is no ‘social cost’ • Kaldor-Hicks criterion, that if the beneficiaries could compensate the losers, and still have a net gain, then there’s no social cost • Using PPF-IC, it would mean moving under the PPF

19. Other definitions • Grinols, Kindt, Thompson, etc., do not define social costs, but rather, simply discuss “externalities” in general • The distinction between technological and pecuniary externalities is important • Markandya and Pearce (1989) appears to be the most common definition chosen, when ‘social cost’ is defined in a study

20. Markandya and Pearce (1989) • For a cost to be “private” the actor must have full knowledge about the potential costs of consuming the good. • For smoking (the subject of their paper), it implies that if the consumer is not “fully informed” about the harm of smoking, he underestimates the harms and chooses to smoke too much. • The result is a social cost, even if the cost is borne by the smoker himself.

21. Markandya and Pearce (cont.) “To the extent that the costs are knowingly and freely borne by the consumer or producer himself, they are referred to as PRIVATE COSTS but to the extent that they are not so borne but fall on the rest of society, they are referred to as SOCIAL COSTS. Hence, the total cost of any activity is the sum of the private and social costs.” (p. 1139)

22. Markandya and Pearce (cont.) • “If his actions are determined by a perceived cost that is in fact less than his actual cost, then the difference between the two can be viewed as a social cost.” (p. 1140) • Some costs have been ignored, and the smoker over-consumes • This definition of social cost, whether applied to smoking or gambling, may be biased toward overestimating costs • Viscusi and Hakes (2008) find that people tend to overestimate potential risks from smoking • This suggests that they smoke less than is socially optimal • The Markandya and Pearce (1989) framework assumes that people will only under-estimate, and not over-estimate risks • All decisions are uncertain, to an extent • No one perfectly estimates costs and benefits of an action

23. Specific “cost” categories and estimates • Again, there’s typically no discussion as to whether a particular “cost” should be qualified as such. • See Walker (2013, p. 175), Table 13.4, which categorizes alleged “social costs” of gambling • Next, let’s consider a particular type of cost and see one example of how the estimate is derived. • Again, these are used by Grinols (2004)

24. Adjudication (Criminal and Civil Justice) Costs • The monetary estimates for these costs among the Grinols-cited studies are: • $3,619 (Maryland, Politzer et al. 1981) • $733 (Wisconsin, Thompson et al. 1996) • $568 (Conn., Thompson et al. 1998) • $31 (S. Dakota, 1999) • $420 (Louisiana, Ryan et al. 1999) • $266 (S. Carolina, Thompson and Quinn 2000) • $51 (Nevada, Thompson and Schwer 2003) • It is difficult to believe that there could be such variation in costs across states. • This is an indication that the definition or measurement of costs varies across studies.

25. Thompson and Schwer (2003) • Use a survey of 99 Gamblers Anonymous (GA) members in Las Vegas • Ask demographic data and about: • Volume of gambling activity • Total lifetime gambling losses • Sources of money used to gamble • Gambling debt accrued • Bankruptcy and other court proceedings to deal with creditors • Theft or other illegal activities committed • Convictions and jail time served • Gambling’s effects on the job • Government aid received • Professional treatment received • However, the paper does not provide a copy of the survey questions. • Blaszczynski et al. (2006) findings that survey respondents may not accurately estimate gambling losses. • Budgets are fungible, so it is difficult – if not impossible – to identify specific sources of money used to gamble.

26. One cost component of Thompson and Schwer (2003) • To illustrate the arbitrary nature of social cost estimates, in almost all of the studies cited in this presentation, • let’s consider the calculation of one component of the Thompson and Schwer (2003) cost estimate. • I choose this study because the authors explain in detail their calculation process.

27. Thompson and Schwer (2003) estimate for “lost work time” cost • 50 of 89 respondents (56%) indicated they had missed work because of gambling. • These reported an average of 17.22 hours missed during each month due to gambling. • The average loss is 9.67 hours/month allocated over the 89 respondents. • This amounts to 116.1 hours per year. • Calculated [(50 x 17.22)/89] x 12 • 116.1 hours is multiplied by $15/hr, the hourly rate based on Thompson et al.’s (1996) use of an average annual pay rate of $23,610. • This results in an estimated cost of $1,742 for lost work time.

28. Thompson and Schwer (2003), cont. • The total estimated cost is $19,085 • They multiply this cost by 43% because Politzer et al. (1985) estimated the costs of gamblers not in treatment is only 43% as high as those in treatment. • The result is an estimated cost of $8,207 per pathological gambler. • Eliminating transfers and internalized costs reduces the $19,085 estimate to $2,049.

29. Thompson and Schwer, cont. • The cost estimate ($8,207) is then multiplied by the population estimate and pathological prevalence rate range. • Low pathological est. 1.8%, high est. 3.5% of population • $162.8 - $316.6 million • Cost estimate for problem gambler is $4,350 • low prevalence rate est. 2.9%, high rate 3.2% • $139.0 – 153.4 million • Total cost estimate: $301.8 – 470.0 million • In 2004, Nevada casino taxes were $775 million

30. Summary • I’ve argued that most of the social cost studies are methodologically flawed. • They do not define “social cost” or what they are trying to measure. • They do not defend (or explain) their measurement methodology. • The result is a wide range of social cost estimates, from $9,000-13,000 up to $53,000. • With such a wide range of estimates, should we really be basing policy on these cost estimates?

31. Research and Public Policy • Policymakers, the media, and voters rely on research to inform their opinions on gambling policy. • Cost-benefit analysis appear to be the most influential evidence used in policy deliberations.

32. More General Problems • Regardless of the definition of “cost” chosen, or of the measurement process, there are other problems that may nullify cost-benefit analyses of gambling. • This does not mean these studies cannot provide useful information. • The motivation for research is interesting • “Policy entrepreneurs” want to influence policy (Krugman 1996). • Politicians rarely begin consideration with no opinion.

33. Counterfactual scenario • For policy purposes, the economic and social effects of legalized gambling must be compared with the case in which gambling is not legal. • This may be difficult to know in terms of employment, economic growth, etc. • unless the counterfactual is what already was happening. • In some stagnant economies, one could argue, no other industry would have come (Mississippi Gulf Coast?)

34. Counterfactual scenario (cont) • In terms of problem/pathological gambling… • If casinos were not legal in the state, would people just go to other venues? • If casinos were not available, would the pathological gamblers with coexisting disorders have more serious alcohol or drug problems? • If yes, then it is possible that the gambling legalization would lead to lower social costs even if more people become pathological gamblers. • (I don’t know the extent to which this issue has been addressed in the literature.)

35. Comorbidity • This may be the biggest problem in cost-benefit analysis. • Studies have found that many pathological gamblers have other disorders. • Petry, Stinson, and Grant (2005, p. 569) find: • 74.2% have alcohol use disorders • 38.1% have drug use disorders • 41.3% have anxiety disorders • 28.5% have obsessive-compulsive personality disorder • How do you allocate the “social costs” to the different problems when many pathological gamblers have other disorders? • Most of the published studies ignore this, resulting in overestimates of the social costs attributable to gambling.

36. Surveys and fungible budgets • Diagnostic instruments and cost estimate surveys ask various questions about potential problem gamblers’ behavior. • Blaszczynski et al. (2006) explain that without explicit instructions, respondents use different strategies in estimating their gambling losses. • The result may be serious biases in gambling losses reported in the literature (p. 128). • Walker (2007) discusses the inability to attribute specific expenditures to specific revenue sources. • Budgets are fungible.

37. DSM-IV and SOGS criteria • DSM-IV items • 8. “…has committed illegal acts such as forgery, fraud, theft, or embezzlement to finance gambling.” • If a person cannot estimate gambling losses, can they correctly attribute their crimes to its cause? • 10. “…relies on others to provide money to relieve a desperate financial situation caused by gambling.” • What if the person bought an expensive car, or is otherwise financially irresponsible? • How do clinicians deal with this possibility?

38. DSM-IV and SOGS criteria (cont.) • SOGS items • 14. “Have you ever borrowed from someone and not paid them back as a result of your gambling?” • What if you dine out at fine restaurants too often? Will you attribute your financial problems to the proper cause? • 16a-k. “If you borrowed money to gamble or pay gambling debts, who or where did you borrow from?” (many possible responses) • How can a person attribute specific spending to specific sources of income, unless there is only one source of income?

39. Caveat • As an economist, I know nothing about how diagnostic tools are used in practice. • Clinicians may argue that it does not matter whether or not it is possible to identify sources of spending. • Perhaps what matters is if the person thinks he/she has a problem.

40. Caveat (cont.) • However, the Blaszczynski (2006) paper would suggest that the fungible budget issue might be a real one. • Even if these issues are problematic, it does not mean that the instruments do not serve their purpose effectively.

41. Relevance of Diagnostic Tools to Cost Estimates • The reason these types of questions are relevant to policy is that the questions about total losses and sources of money used to gamble are used in cost estimation studies. • “Abused dollars” • “Bad debts” • “Bailout costs” • “Bankruptcy costs”

42. “Fiscal externalities” • Browning (1999) discusses how to handle costs of government policies. • His application is to health care costs associated with smoking. • Walker (2007) discusses this in the context of treatment for pathological gambling.

43. “Fiscal externalities” (cont.) • The issue is how to classify costs of government for pathological gambling behavior. • Is the monetary cost incurred by government a cost of pathological gambling, or a cost of our philosophy on government and policy? • Suppose one country has very generous treatment reimbursement (150%), while another country’s government pays only 50% of the costs. • The “social cost” of the first country would be triple that of the second. • A better way to deal with these costs must be developed.

44. “Fiscal externalities” (cont.) • If government expenditures are “social costs,” then we can eliminate costs by eliminating spending. • Obviously this isn’t the correct way to think about social costs.

45. Critiques of C-B Analyses • There have been a variety of critiques of C-B studies in the substance/alcohol abuse literature. • Reuter (1999) and Kleiman (1999) are enlightening. • They argue that research effort would be better spent on the effects of policy changes. • Applied to gambling, since gambling is already widely available, what can we do to minimize the costs. • This is similar to what public health perspectives advocate – harm minimization.

46. Critiques (cont.) • Reuter (1999, p. 638) suggests that a C-B study may represent an… • “enormously helpful compendium of a wide range of estimates of various components of something that might be called cost, [it] is an unsatisfactory answer to a question of dubious importance.”

47. Should We Try to Measure Costs and Benefits of Legalized Gambling? • Do cost-benefit studies provide important information? (And are they important?) • Politicians, media, and voters are often influenced by them. • Peter Collins’ book, Gambling and the public interest (2003) has an excellent discussion on this issue.

48. Should We Try to Measure Costs and Benefits of Legalized Gambling? (cont.) • Policy discussions neglect the fundamental issues… • Property rights • Freedom of choice/consumer sovereignty • The role of government in a free society • We instead focus on expected tax benefits compared to a murky understanding of “social costs.”

49. Research and Policy • Research does have a place informing policy decisions. • Collins (2003, p. 27) explains, “Whether gambling should be legal is a question …the answer to which requires a combination of normative and empirical judgments. This means that the answer we give will depend in part on the political principles and social ideals to which we subscribe, as well as on what we think as a matter of fact will be the likely consequences of adopting one policy rather than another.

50. Research and policy (cont.) • Unfortunately, researchers have not developed valid or practical methods for estimating costs (and benefits). • Given that some researchers seem intent on influencing policy (Eadington 2004), perhaps we should focus on the more basic issues of property rights, freedom of choice, and the proper role of government.