Election 2010: Measures 73 & 76

It may seem strange to write a single post about Measures 73 and 76 as they are so different, but they do have one common aspect that I dislike: they reduce the flexibility and responsiveness of government to deal with changing economic circumstances.

My wife is passionate about environmental and education issues and she considered a 'yes' vote on Measure 76 a no-brainer.  Who doesn't like funding for parks and beaches and wildlife?  So I posed a question: "at this moment, if there was one thing you had to cut for a couple of years until the economy improves, which of the two things, education and parks, do you think can best weather a temporary cut?"  My answer is clear: parks and wildlife.  There is convincing evidence that temporary disruptions like shorter school years, larger class sizes, etc. create long-term consequences for kids.  Thus if I have to make a difficult choice, I would protect schools above just about anything else.

I also don't like the idea of telling the criminal justice system how to do their jobs, having virtually no knowledge of the actual tradeoffs between spending more money on education, early childhood intervention and other things that will spur economic growth and thus provide non-criminal opportunities, versus spending more money on incarceration.  Measure 73 not only ties up money that might be better spent elsewhere, but it also reduces the ability of the justice system to deal on a case-by-case basis with recidivists.

Which is why I am weary of Measures like 73 and 76 which essentially tie-up state resources.  I believe that the state government needs more flexibility, not less, to deal with serious downturns like the one we are in.  I have faith that the good folks who make up our state legislature take their jobs seriously and try and do their best with the evidence they have (though I am always advocating for better evidence for them to work with).  In short, I believe in representative democracy.  Normally the trade-offs would not be so stark, but this recession is, and will continue to be, very severe and the cuts are going to have to be deep.
 
That said, there are arguments for both that essentially come from the same principle: there has been a failure of government (or the criminal justice system) to properly deal with to things that have substantial externalities.  Parks, beaches and wildlife have substantial positive externalities and as such are chronically underfunded.  Sex offenders and drunk drivers cause substantial negative externalities to society and as such there we have a system that allows too much of them.  I don't necessarily disagree with either statement.  But public education may have the biggest external benefit of all and to address the aforementioned two at the expense of education is the real trade-off.

In the end, things that look good in isolation start to become less clear when the trade-offs are explicit - which is a big point of economics in general.  Will schools benefit if these two do not pass?  I don't know, but given that K-12 is THE massive chunk of the state's general fund and a major part of the lottery fund account, it is hard to see how they won't.

Hard choices.

Election 2010: The Wood Village Casino Proposal

A curious economic analysis come out regarding the proposed casino in Wood Village suggesting that the casino would cause a net reduction in state revenues.  You might wonder how that could be and the answer is that it all comes down to monopoly rents.

You see the state is (with the exception of the tribal casinos that are generally more remote) a monopolist in the gambling industry in Oregon.  The Oregon lottery and all of the many games of chance that they administer is essentially the only routine gambling option for most Oregonians.  Now we can argue the ethics of the state being the provider of games of chance for money, but the reality is that they are a monopolist.

Like any good monopolist the Oregon Lottery tries to maximize total profit and as economic theory tells us, monopolists do so by restraining output and keeping the price high (or the odds low).  Since the good people of the state of Oregon have decided that the state should rightly be the monopolist in this endeavor so that the state can raise revenue, this monopoly behavior is good as it should yield the maximum revenue possible for the state.  Over the years as state revenues have dwindled from other sources such as property taxes, lottery revenues have become an important source of state funding for programs.

And the monopoly structure of the state has another benefit: as it in effect restricts the amount of gambling available to state residents it constrains the social cost of gambling.  The social cost of gambling are all of the costs born by society related to problems caused by compulsive gambling.  How serious is this problem?  The best study I could find that provided a careful economics-based meta analysis of gambiling costs and benefits found:

This literature shows that the extreme upper bound on annual total social benefits is $75 per adult. The lower bound for social costs, based on the estimates of costs associated with prevalence of problem and pathological gamblers, was between $140–$221 per adult. Consequently, the available research indicates that when using the highest estimates of benefits and the lowest estimates of costs, casino gambling fails a cost – benefit test by a ratio of 1.9 to one or greater.

So social costs are significant and important. Unfortunately these are costs that are not immediately visible ot society and, most importantly, not born by the private operators of casinos.  Note that even at the proposed 25% tax rate the casino would still fall far short of the true social cost of operating the casino.  In other words, 25% is not an optimal Pigovian tax.  

The state bears much, but not all, of the social cost of negative externalities associated with the lottery so in that case the incentives might be closer in alignment. However I doubt the other social service agencies have a lot of power to control what the lottery does.  But the mere fact that they are a monopolist is actually a good thing as it serves to restrict the supply of games of chance.

As always, we economists (especially the ones not being paid to make a case) should be humble about how much we can accurately predict the true future impact, but as a voter I have to take the best information I can and make a yea or nay judgement on the ballot.  I am choosing nay, but you should make up your own mind and I hope this helps a little in the understanding of some of the issues.

[As an aside, I miss the occasional lazy summer evening out at the old MKC (above) betting on the dogs.  Though I had to suppress the uneasiness I felt with the knowledge of how the dogs were treated, and I do not lament the closing of the place, I still have fond memories of those evenings]