A Powerball lottery form is filled out in San Antonio. The Powerball jackpot was at least $330m last night.“Don’t they know how idiotic buying lotto tickets is? Don’t they know they are just throwing their money away? It is a stupidity tax.” That quote was from a banker sitting near me at work a decade ago. He was upset that his hometown of Greenwich, Connecticut was overrun with people from New York City (especially the poorer areas of the Bronx) coming to buy Powerball tickets.
It was the early 2000’s and the Powerball jackpot had reached over $50m. At the time, that was considered a pretty decent amount. New York had yet to join Powerball (they did so in 2010), so the closest place Bronx residents, and other New Yorkers, could purchase tickets was Greenwich, just over the state border.
The Powerball mania is in the news again this week as Saturday’s drawing topped $330m.
Many Wall Street employees, like my colleague, live in Greenwich because of that proximity. It also helps that Connecticut has lower taxes than New York. Both reasons are why it is also home to some of the worlds largest hedge funds. Consequently, it is one the wealthiest cities in the US with a median family income of $168,000.
Greenwich was being overrun with people coming to buy tickets. Lines snaked for blocks around the town’s few convenience stores. The commuter rail station was jammed. Traffic, mostly cars with New York license plates, clogged the roads. Greenwich residents were not happy with the influx. Some even argued it should be illegal to sell the tickets in their town.
My colleague had a point: spending money on lotto tickets is rarely mathematically rational. The odds of winning the lotto are so badly weighted against purchasing a ticket it can be thought as throwing money away. The real value of a $1 purchase is often as low as 32 cents, with the rest of the cost going straight into the profits of the ticket sellers. Those huge profit margins are why governments have increasingly turned to lotteries to raise funds, rather than through direct tax increases.
Calling the lotto a “stupidity tax” resonated on Wall Street. That so many residents of the Bronx, where the average family income is $32,000, would willingly throw money away fits a common narrative: the poor make the wrong choices. It’s a fancier way of saying, “the poor are stupid.”
But I have a different take. The Bronx residents buying lotto tickets weren’t any stupider than those sneering at their decisions. They were playing the lotto because it is one of the only legal opportunities available to them to become rich. When you are poor, you make what others view as irrational decisions not because of “stupidity” but because of limited options. Rationality has to be viewed in the context of the situation.
The wealthy have many routes to legally make money without having to play the lotto. They can get an education from high-priced and high-profile schools and emerge debt-free with a resume made for Silicon Valley or Wall Street. They can invest their savings, often in opportunities brought to them. They have far greater access to small business loans.
When you grow up poor, you can’t easily borrow money, certainly not from family. You can go to college, but in most instances you come out burdened with huge student loans that limit your next options. So you play the lotto, which is one of the few times anyone will give you a chance to become rich. It’s a tiny sliver of hope that at just a few dollars still costs way more than it should.
I don’t play the Powerball. At the time I was a proprietary trader at a major Wall Street bank. That year I had invested $350m inside Brazil and Argentina. That money was lent to me by the bank I worked for. The bank itself borrowed that money from depositors and investors. The size of the bet I was making was pretty standard on Wall Street at the time. The result being that many banks were loaded with debt that was reaching dangerously high levels by historic standards.
I thought the bet was smart, a rational choice. I thought the odds were good that I would make money for the bank, and that they would pay me well for that. Even if I was wrong though, I was going to be OK. Losing money on Wall Street rarely comes at a personal loss. I would feel bad. I could face losing my job, but finding another one wouldn’t be that tough.
That year my bet on Brazil and Argentina worked out. I got paid a good deal of money. Nothing like the Powerball payoff, but something any resident of the Bronx or any normal person would have been very happy with.
A few years later Wall Street imploded. Our collective bets made with borrowed money soured, collapsing banks and collapsing the economy. The bank I worked for only stayed solvent because of a government bailout. We were allowed to keep our money and jobs. The cost of the financial collapse to the US economy however was huge, trillions of dollars huge. By one estimate it has cost the average US family between $50,000 to $120,000 (pdf).
That financial crisis hasn’t changed Wall Street much. A few rules have worked their way through the system, but extensive lobbying by the financial community is watering them down. The perverse compensation structure that encourages excessive risk taking is still in place. Banks are still too large to fail.
When the next crisis happens, and by the nature of markets, it will happen again, the government will do the only rational thing it can, and once again step in and save the institutions with taxpayer money. The economy will again be wrecked and the average family will again pay the costs.
The bankers won’t suffer much, not personally. That’s the real stupidity tax, and we are all paying.
source : www.theguardian.com
