No on Issue 6: opportunity cost, multiplier effect

We study and try to understand economics because we do not live in a utopia.  Resources are finite, scarce, not unlimited.  We have to make decisions about where we will invest scarce resources because we cannot have it all.  We use many mechanisms to determine how to allocate resources.  We consider returns-on-investment, cost/benefit analyses, supply and demand curves, marginal revenue curves, lists of priorities, etc.  When we look at individual participants in an economy, we speak in terms of micro-economics, and when we look at aggregations of participants, including entire economies, then we speak in terms of macro-economics.  Sometimes, to understand what is happening on the macro level, we need to take a peek at what’s happening at the micro level.  Those analysts trying to get a handle on the housing crisis are doing just that.

So let me turn my attention to Issue 6, which would allow a casino to operate in Ohio.  On the macro level, I have often asserted that casino gambling siphons dollars out of the economy.  Siphoning dollars out of the economy would be a shrinkage risk to the economy, taking a toll on commerce, wealth, and employment, among other things.

Gambling is an industry that cannot sustain itself.  It is parasitic.  It sucks the economic life blood out of its victims, and must continually find new hosts to feed upon, or it eventually peters out.  Even  (perhaps, especially) proponents of casinos understand this, for, on the one hand, they try to limit competition (just one casino for all of Ohio, according to Issue 6), because they know that casinos on every street corner would be unsustainable, yet on the other hand, casinos can’t stand pat and stay where they are without expanding their scope, because they would fold for lack of new hosts to bleed dry.  In the state of Nevada, revenues from resort casinos that cater to tourists had leveled off.  To further boost gambling revenues, casinos with less frills that catered to Nevada residents spread across the Nevada landscape.  Despite all the gambling revenues across Nevada, quality of life hasn’t been on the rise.  In terms of public education of school children, Nevada is among the bottom 3 states, with Louisiana and Mississippi.  Nevada’s gambling revenue totals for the last 7 straight months have been down, and the trend shows every sign of continuing.  The housing market in Nevada is in crisis.  The foreclosure rate is skyrocketing.  The construction industry in Nevada is in the process of shutting down because of overbuild, just like Florida.  In an attempt to make ends meet in a sour economy, there are Nevada businesses that try to lower labor costs by hiring illegal immigrants.

Revenues at long-established casinos in Detroit and in the state of Indiana have also leveled off.  Demand for casinos isn’t rising, it’s dropping.  Casinos in Detroit haven’t prevented the city from being the most poverty-stricken in the nation, nor have tax revenues from casinos helped improve Detroit’s public schools.  As backers of Issue 6 have noted in their commercials, their proposal for a casino within a short drive from Cincinnati has sparked a turf war with Argosy, who operates in Indiana.  With declining revenues, the last thing Argosy wants is someone competing in their market area, and if expansion into Ohio were permitted, it would be Argosy seeking to expand into Ohio in order to fend off falling revenues.  Backers of Issue 6 are also running ads trying to make Ohio covet the casino industries that have set up shop in neighboring states.  We, Ohioans, shouldn’t covet the casinos of other states, as they really haven’t been helpful to the economies of those states.  Michigan’s economy is worse than Ohio’s.  West Virginia and Pennsylvania have limped along for decades now, and gambling isn’t doing anything to turn that around.  Indiana used to have a growing economy, but it’s become sour.  There’s nothing about a casino that will cure Ohio’s economic ills.

In fact, it’s the opposite.  Casinos will exacerbate Ohio’s economic ills.  Let’s figure out why.

You do not have an unlimited income.  There are limits to what you can do with your money, because you don’t have much.  So, when you spend money on a new sofa, that’s money that can’t be used for something else.  When you go out to dinner, that’s money that can’t be used for something else.  When you money on a day at Cedar Point, that’s money that can’t be used for something else.  When you gamble money at a casino, that money you lost can’t be used for something else.  That’s called opportunity cost.  When you spend money on something, it eliminates the opportunity to do something else with that money.

Our economy has hinged on consumption to keep it vibrant.  There is a multiplier effect that causes the money you spend to ripple through the rest of the economy.  We can thank the supply chain for that ripple effect.

When you buy that sofa, you receive a tangible asset in exchange for your money.  A sofa can be quite useful in your home.  Meanwhile, the money you spent becomes useful to the merchant.  The furniture store uses the cash to pay for expenses, including the salaries of workers.  Those workers now have the wherewithal to do some spending, too.  But the benefit doesn’t stop there.  It continues up the supply chain.  Your purchase reduced the store’s inventory.  The store places an order from a distributor to replenish the inventory.  Dollars go to the distribution center.  The distribution center pays its expenses, including the salary of workers.  Those workers now have the wherewithal to do some spending, too.  But the benefit doesn’t stop there.  The distribution center places an order with the sofa manufacturer to replenish its inventory.  Dollars go to the manufacturer.  The manufacturer pays its expenses, including the salaries of workers.  It doesn’t stop there.  The manufacturer places orders with suppliers for lumber, fabric, nails, screws, etc.  Dollars go to the suppliers.  It doesn’t stop there.  The suppliers place orders for raw materials to make components out of.  That’s the multiplier effect.

When you spend money at a restaurant, the restaurant pays its expenses, including the salaries of workers.  You received a tangible benefit–food.  You ate it.  You get to survive to see another day because you didn’t starve.  The money you spent in the restaurant doesn’t stay there.  The restaurant orders more food from a warehouse.  The warehouse pays its expenses, including salaries for workers, but it doesn’t stop there.  The warehouse places orders with companies that process foods, like cheesemakers, and bakeries. The benefits don’t stop there.  Eventually, the dollars reach all the way back to the farmers.

When you spend money at Cedar Point, you are also probably spending money on gasoline, maybe even a hotel, restaurant, or retail store.  I should know.  I live in Sandusky.  Again, those expenses for gasoline, hotel, restaurant, and retail store send dollars rippling up those respective supply chains, creating multiplier effects on the dollars you spent, expanding the economy.  At Cedar Point, they pay their expenses including salaries of workers, and they reinvest some of their profits during the winter on R&D, and construction to build the newest, fastest, tallest, steepest, longest roller coaster in order to keep ahead of the competition.  Thus engineering and construction firms are at work every year even when the park is closed for the winter.  The perpetual construction means that more dollars are spent for lumber, structural steel, masonry, fiberglass, etc.  The dollars keep rippling through the economy.

Then there are casinos.  You spend your money.  You lose your money.  You get nothing in return.  The casino pays its expenses, including the salaries of workers, and the rest of the money goes to the casino owners.  And that’s as far as your money goes.  No inventory needs to be replenished.  There is no supply chain.  You might have bought gasoline to get to the casino, but you might not have enough money to buy gasoline to get home.  You lost so much money, you feel sick.  You can’t eat.  You want to sleep it off, the casino comps you a room upstairs for the night, for the casino is selfish.  Once you enter, the casino doesn’t want you to spend a dime at other restaurants or hotels.  They want every dime to be spent on their property.  That’s what restaurants and hotels in downtown Detroit found out.  The casinos don’t share the wealth.  There’s been no uptick in the amount of business the restaurants and hotels do in Detroit since the casinos opened.  The casinos are selfish.  Your gambling losses line the pockets of some shady fat-cat casino owners.  What do they do with the wealth?  Greedy as they are, they probably try to shelter it, by off-shoring the money in some Swiss bank account, or in the Cayman Islands.  That money has left the economy for good.  You got nothing in return.  You go home, you still have to pay for the mortgage.  Can’t pay it?  You’ll end up in foreclosure.  You’ve got bills to pay.  Can’t pay them?  You might file for bankruptcy.  Forget the credit cards, you’ll have to cut them up when you file for bankruptcy.  Want to go shopping?  Forget about it.  You lost the money at the casino.  Opportunity cost.  The money you lost at the casino is lost to you forever.  You can’t get it back.  You can’t put that money to better use.  That money is not rippling through the economy.

The economy contracts.  As the economy contracts, there is less exchange of goods and services.  Businesses fold.  Workers lose their jobs.  The cycle embarks on a downward spiral.

Vote NO on Issue 6.  Casinos siphon money out of the economy.  That’s not going to help Ohio.

24 Responses to “No on Issue 6: opportunity cost, multiplier effect”

  1. Tony Orlando Says:

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

  2. Brian Says:

    Hey, I won a free pepsi when I twisted off the cap. Must be my lucky day!

    I think I’ll just go blow the rest of my paycheck on lottery tickets! I’ll be RICH!!!!

    Great article DJW

  3. buckeyerino Says:

    Brian, glad to hear about your lucky day. LOL!!!

  4. James Says:

    Good article but just one thing I would correct. Gambling losses are not opportunity costs they are real losses. Opportunity cost is income that you don’t receive because of your circumstances (i.e. you go to college instead of working). Opportunity costs are more theoretical than real. Real losses are much worse. When you gamble you don’t lose an opportunity to make money you actually lose money you already have.

    One thing I would add is that the money pumped into gambling feeds social ills putting more strain on government to combat things like drug abuse and prostitution. If you don’t believe me go to Vegas sometime and wander off the strip at night. I’ve worked there (doing construction). It’s not a pretty place.

  5. buckeyerino Says:

    But there is an opportunity cost. When you lose the money at gambling, you lose the opportunity to do something better with that same money that would have expanded the economy.

  6. Ben K Says:

    Dont worry. It wont pass. It never does…not even in 2006.

  7. buckeyerino Says:

    I do worry, because the gambling industry has spent hundreds of thousands of dollars lobbying to get casinos, not to mention millions to advertise ballot issues, and they have to be convinced that they’ll eventually succeed if they are willing to continue to funnel such resources. The casino industry isn’t giving up, so I’m not either.

  8. James Says:

    I agree. As soon as we all fall asleep it will somehow get through. Unfortunately constant vigilance is the only way to combat this stuff. Keep up the fight!

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  18. will Says:

    Wow!
    Well reasoned article. Really built the argument from the ground up. I went from just a little reading, which had me leaning towards voting yes, to come around to your side completely.
    I have only one question. Could you argue that other business industries operate in this fashion? I am thinking of professional sports teams among others. In other words, in addition to voting no on issue 6 is there a formula to identify these types of industries and help citizens on how they should spend their money wisely to stimulate the economy just through choice?

    If that was convoluted I apologize, but if you can make sense of it I would appreciate your thoughts?

  19. buckeyerino Says:

    I’m happy to share my thoughts.

    How does a professional sports team differ from a casino?

    First, there’s the issue of transparency. The sports team claims to offer entertainment, and so does the casino.

    The sports team tells you the price of a ticket right up front. You, the consumer, get to decide whether the entertainment value you receive is worth the ticket price. The ticket lets you into a specific game in a specific place at a specific time, and you know the approximate duration of the game in advance, because it’s either 9 innings of baseball or its a timed sport complete with a game clock. You even have an idea what kind of view you will have of the game, because the ticket you purchase is for an assigned seat, and it’s easy to find a diagram of the seating arrangements of the arenas and stadiums. This is a totally transparent transaction.

    Let’s assume a ticket to a game sells for 40 dollars. True, when the game is over, you walk home empty handed, with nothing but a ticket stub as a memento, so you are 40 dollars poorer, but at least you received the entertainment that you expected to receive.

    Then there’s the casino. How much “entertainment” will you receive for 40 dollars? Will 40 dollars last you all day at the casino? Or will it vanish in a matter of seconds? Where’s the transparency? You end up empty handed, but, unlike going to the stadium to watch a game, you don’t really know whether you received 40 dollars of “entertainment” or not. It’s impossible to quantify how much “entertainment” you’ll receive at a casino for each dollar you spend. So, do casinos really provide entertainment? Or do they merely provide distraction while they rip you off and rob you blind? I think the whole point of their existence is to defraud, to plunder wealth created by others so they can redistribute it to themselves.

    Second, let’s consider the multiplier effect of each.

    Much of what happens at a casino is automated, and much of the equipment is durable, so once the monstrosity is constructed, there’s really not much of a supply chain at all, as I’ve discussed in this blog entry.

    Games of professional sports teams are not automated. Much maintenance is required, and much of the equipment is not durable. For football, baseball, and soccer, you need to pay groundskeeping crews, you need topsoil, and grass seed, and rakes, and tarps, etc., and on up those supply chains. For basketball, you have to maintain the condition of the court, and for hockey, you have to run the Zamboni. The athletes need maintenance, too, so you have to have trainers and workout equipment. Hockey sticks get broken and so do baseball bats. Balls of all types are replaced frequently (at a baseball game, you might get a foul ball to take home with your ticket stub). There are home uniforms, away uniforms, and commemorative uniforms for special occasions. Do you see the supply chains? That’s a lot of multiplier effect. On top of that, there’s sports team spinoffs, merchandise with logos. When you use dollars for that, you definitely get to take home something tangible in return, and there’s definitely a supply chain to ripple those dollars and send them multiplying throughout the economy. Does anyone televise casino action? Are casino winners and losers reported on by journalists? No. But sports teams get television coverage and radio coverage and newspaper coverage and internet coverage, so dollars to sports teams ripple through the media in ways that casinos don’t.

    Third, with casinos, the house always wins. A sports team wins and loses. A sports team owner might lose money, might make money, might break even. With casino owners, the fix is in. Even when casinos go bankrupt, the fix is in . . . and the casino operators made out like bandits even if minority stockholders got shafted. Sports team owners, as I mentioned, have to funnel money up a lot of different supply chains, so they aren’t hording whatever money they might make. Casino operators don’t have to worry about supply chains. They can just offshore the money to shelter it from taxes, removing it from the domestic economy altogether.

    Fourth, how much do professional sports teams share the wealth with neighboring business enterprises compared to casinos? Restaurants near stadiums can fill to capacity on game day. Where did those customers come from? They were spectators at the game. How about restaurants near casinos? Do they fill to capacity with gamblers? No. The casino doesn’t want to share its patrons with any other merchant.

    Fifth, if you want to become an owner of a professional sports team, you just need to cough up the money to buy it. The process is very transparent. If you want to become an owner and operator of a casino, you have to know and bribe the right people, and maybe even slit the right throats. The process is very secretive and shadowy.

    Sixth, casinos are purposely addictive so they can drain as much cash from a gambler as possible. Gamblers usually come from the low end of the economic scale. On the flip side, those who attend a lot of sports games usually come from the upper end of the economic scale. You can’t lose all your money at a sporting event. If you get addicted to sports, you can’t keep attending the sporting event 24/7, because you’ll have to wait until the next scheduled game before you can purchase tickets again.

    Seventh, and this follows from the sixth point, when someone from the low end of the economic scale loses a significant chunk of their assets to gambling, they’ve lost the opportunity to use that money on purchases that would’ve stimulated the economy more. They don’t get to shop for clothing. They don’t get to invest in home improvements. They aren’t going to be replacing their old car with a new one. They aren’t going to be in a position to pay for college tuition. They’ll have a small Christmas, not a big one. They might even be unable to pay their bills and might even struggle to put food on the table. If they have a job, they might have to keep working because they can’t afford to retire. If they don’t have a job, they might be receiving government assistance, which means that the taxpayer is funneling money to the casino via the gambler. The sports fan at the upper end of the economic scale finds it easy to budget the 40 dollars for the ticket to the game, and hasn’t sacrificed much opportunity cost, as they still have plenty of money to allocate to other projects and purchases, especially since the sports team doesn’t attempt to drain the sports fan’s wallet on a 24/7 basis like a casino does to its patrons.

    • will Says:

      Three points I have if you would be willing to address them.
      First, how do you take into accoutn the initial building of the casino? Does that money multiply well?, or does the government subsidize so much that it is almost as though we are paying ourselves via tax dollars only to have the casino owner (as you previously stated) take most of the money?

      Second, I asked in passing if there are industries that are particularly good about multiplying every dollar that goes in? If I wanted to be a responsible consumer and spend my money on things that would most benefit my regional economy what would I purchase?

      This may be reaching here, but you have been so knowledgeable until now that I will throw the question to you. There is some economic thought that says a particular group should only produce what it has a competitive advantage in producing relative to other groups. If for instance it takes me $100 to make a car, but I can pay someone else $90 to make it, I would be foolish to make it myself and eat the $10 difference. However, your multiplier effect would seem to suggest that even if you can buy something from somewhere else cheaper, it may be more beneficial to put your money into your own economy because you may still have a net gain in the overall economy.
      If this is impossibly convoluted please excuse my inability to communicate, and answer what you can when you can even if it takes multiple posts. Also if you want me to clarify please include any questions in your reply.

      Thank you

  20. buckeyerino Says:

    First point: The casino construction has a supply chain which produces a multiplier effect, but it’s a one-time event in the life of the casino. Even though the casino operates 24/7, and drains cash from patrons 24/7, construction occurs once, so that multiplier effect is very finite. It’s very difficult to break into the casino business as an owner/operator because there are so many barriers to entry. There is no free marketplace in the casino industry. Casino cartels are artificially protected from competition. The current casino issue before Ohio voters is an example of this, as one ownership group would be permitted by Constitutional amendment to operate 4 casinos, and no one else would have any right, whatsoever, to own and operate any other casinos. Therefore, there is a tiny pool of casino tycoons that own and operate casinos across the USA. If the ballot issue passes, these casinos would be built by owners that are already entrenched in the casino industry. Where did those dollars come from? Gamblers. What end of the economic scale do most gamblers come from? The low end. So the money for these opulent edifices comes from the oppressed and impoverished. As for tax money being used in construction, there have been some accusations that changes to infrastructure would be required for casino construction, particularly relating to the proposed Toledo site, so while tax dollars aren’t used for the building, itself, some say these projects will require tax dollars because of the infrastructure changes necessary for the building’s construction.

    Second point: A transparent marketplace free of artificial distortions imposed by bureaucracies that tend to micromanage commerce need not be overly concerned with steering consumption toward particular goods, services, or industries in order to maximize the multiplier effect. Let the invisible hand do its work via empowered and informed consumers. However, the marketplace has been subject to many artificial distortions, and the casino industry especially so. Existing casino owners and operators are very much opposed to a free and open marketplace within the casino industry. Additionally, there must be some rule of law within commerce to prevent theft, fraud, piracy, scams, and rackets. Multiplier effects work when there are exchanges of commodities and services. In the case of theft, fraud, piracy, scams, and rackets, one entity is merely taking without offering anything in exchange. My personal opinion is that the casino industry is nothing but a scam. In casino transactions, the casino takes, and there is no exchange. The gambler returns home empty-handed and empty-pocketed. This is the essence of why I oppose legalizing gambling, because I don’t think we should legalize the perpetration of scams.

    Third point: Fighting against competitive advantage is like trying to stick a square peg in a round hole. Having said that, some competitive disadvantages are the results of artificial interventions. Therefore, if a region used to produce many things because of competitive advantage and no longer produces anything because competitive advantage has accrued to a rival region, one in the forsaken region needs to ask questions like: “What artificial and discretionary conditions have we introduced that have lessened our ability to compete?” “What are the inefficiencies that cost us our competitive edge, and can those inefficiencies be corrected?” “Can the resources that gave us an edge in the past be replenished that have been depleted over time?” “Are there resources that we’ve ignored that, if tapped, would yield an advantage?” “What do enlightened, empowered consumers demand, and which of those demands can we supply better than anyone else?” “Are rival regions gaining an edge through unethical means, such as piracy, bribery, slavery, etc., and what actions can be taken to hold the rival accountable?” These are just a few examples.

    In Northeast Ohio, I have no doubt that public corruption has left the region with a terrible competitive disadvantage. There are too many fingers in every pie. Adding a casino to the mix will heighten the tendencies toward corruption, as the ability to launder money is greatly facilitated.

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