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Foxwoods Casino and its Portents

March 15, 2012

Harrah's might be in our future, 'cause that's some jobs, baby!

Casinos, like convention centers, over-expand, cannibalize each others’ customers, and eventually end up in the hole. Let exhibit A be Foxwoods, in Ledyard, CT. The New York Times Sunday mag chronicles its troubles this week.

With $2.3 billion in debt (and a probable $600 million haircut for investors), Foxwoods, which is the largest casino in the Western Hemisphere, is a perfect laboratory in which to observe the casino life cycle. Opened in 1992, it quickly became fabulously profitable, in part by busing in Chinese-American gamblers from New York City’s five boroughs. (I was there for that and remember well the scene.)

Inevitably competition bloomed, beginning with the Mohegan Sun and now, 20 years out, with casinos and slots parlors up and down the East Coast. Massachusetts is on the verge of legalizing them too, and Maryland is (fitfully, alas) beginning its own casino boomlet.

How we arrived here is a story seldom told. Gambling has always been vice. The public policy question was always about the degree to which prohibition kept it in check. Then came the idea that governments would be better off regulating and facilitating it than trying to stamp it out. As the piece in the Times puts it:

A kind of self-perpetuating momentum fuels gambling’s growth: the more states that legalize it, the more politicians in states that haven’t done so argue that if their citizens are going to throw money into slot machines, they might as well do it at home. “Those people would lose that money anyway,” Ed Rendell, the voluble former governor of Pennsylvania, said in a tense appearance on “60 Minutes” last year. Teeth clenched, he continued, “You’re simpletons, you’re idiots if you don’t get that.”

The Times’ account leaves out the state lottery boom of the early ‘70s, which truly touched off the legalization fad. Just about every lottery state (Connecticut included) promised lottery revenue to public education. And every state then reneged on its promise by slowly withdrawing the general revenue funds from education, leaving school funding pretty much where it was before the lottery riches arrived. It’s one of those grand scams (like “commercial-free” cable TV) that a few people remember.

But I digress. The Times piece surveys the cost-benefit landscape admirably:

Most people probably would not guess which state reaps the most revenue from its casinos. It is Pennsylvania, which in 2010 collected $1.3 billion from slots and table-game revenues. The state had just 10 casinos, but Rendell negotiated an agreement that requires them to turn over 55 percent of the hold from their slots to the state — an advantageous deal for the public and one that showed other states what casino owners will tolerate to gain entry into a market.

(Maryland is 67 percent of slots; Connecticut’s rake is a mere 25 percent).

The industry itself has grown powerful, deploying economists and lobbyists to D.C. and across the land to tout the economic benefits of gambling.

An economic impact study commissioned by the [American Gaming Association] last year counted $34.6 billion in nationwide gambling revenues in 2010. That represents money that individuals bet, lost and left behind in casinos. According to the study, casinos supported 820,000 jobs, created $125 billion in spending and accounted for close to 1 percent of the U.S. gross-domestic product.

This notion that gambling “creates jobs” is both central to the industry’s argument and frankly specious. Yes, building rich mahogany suites for high rollers is a productive enterprise, and someone has to put together the slot machines and roulette wheels upon which the enterprise turns. But to count overall “gaming revenue” as productive income discounts the opportunity cost of substituting entertainment of any kind (let alone entertainment that principally consists of taking peoples’ money away by mechanical means) with the creation of durable goods or the provision of socially useful services. Economically speaking, a dollar spent repairing a bridge or outfitting a children’s hospital returns more to society than a dollar flushed down a slot machine.

Economists used to understand this concept. No longer, it seems.

While gambling lobbyists swarm all over every state capital, there are no comparable legions of slick lawyers and consultants touting the benefits of, say, functioning sewer works or water billing systems.

The money that might otherwise be invested in these things (yes, creating jobs, etc.) is spent instead on subsidies to ever-expanding convention center developers, casino builders, stadiums and the like.

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