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Markets in everything, deficit spending edition
The Illinois lottery may be up for sale. The current status is discussed in yesterday's NYT. The state hopes to get $10 billion. The lottery had $630 million in profits last year on sales of $2 billion. The buyer would get all profit for 75 years.
Here is the source. Larry Ribstein remarks: "Yet more evidence that a hedge fund is no match for a politician when it comes to short-term thinking."
Posted by Tyler Cowen on January 25, 2007 at 04:02 PM in Political Science | Permalink
Comments
How about establishing, then privatizing, a salt monopoly?
Posted by: Steve Sailer at Jan 25, 2007 4:13:02 PM
Who is going to be foolish enough to agree to invest in this? What happens when Illinois legalizes other private lotteries -- or even just competing casinos in downtown Chicago with jackpot slot machines that pay much better than sixty-five cents on the dollar?
Posted by: Ted Frank at Jan 25, 2007 4:30:34 PM
But we can't legalize gambling, that would be so wrong.
Posted by: JoshK at Jan 25, 2007 4:39:24 PM
A sixteen times earnings multiple is pretty steep, even for something that liquid.
On another note, I've always longed to see financial innovation in government finance markets. For example, I would jump at the chance to purchase a product which locks in all of my future government tax liabilities - sort of like a government tax mortgage. That would have as good a chance of happening as me winning the lottery, but just think of the incentives it would put in place to keep expenditures down.
Posted by: Mike at Jan 25, 2007 4:41:22 PM
It's hard to see how this can be a good deal when you take federal taxes into account. A private company would have to pay income tax on its profits that the state doesn't have to pay, so the after tax cash flow to the state is greater that to a private buyer.
Besides, if Illinois needs $10 billion what about issuing bonds against future lottery proceeds. Seems like a cheaper way to raise money.
Posted by: Bernard Yomtov at Jan 25, 2007 4:50:17 PM
Steve, I know what you're saying...and I agree...but, for the very reason you make the wisecrack, I must object to your choice of words. I don't care what "they" call it; this is not privatization. This is franchising.
Posted by: Jason Briggeman at Jan 25, 2007 5:59:01 PM
Everything comes back in style, including tax farming. Coming soon near you, privatized IRS.
Posted by: Stranger at Jan 25, 2007 6:01:24 PM
As someone who work at a hedge fund, I think you could get value a few ways
1) You would try and aggressively grow the business, because you believe the government is not as skilled as you are at marketing.
2) You could cut costs, that margin is pretty fat, but I can't believe they are running the business with 100% efficiency
3) You wouldn't use 10 Billion in equity. You would borrow say $6 Billion, use the interest deduction to save of federal income tax.
Posted by: lannychiu at Jan 25, 2007 6:07:58 PM
Let's see... that's about a 6% ROI. More expensive than Illinois bonds, I would guess, which makes it short-sighted, though not as bad as I'd have guessed.
Posted by: Tim V at Jan 25, 2007 7:03:38 PM
I sincerely hope they don't sell off such a cash cow as that. At any rate, I can say in response to Ted Frank that Daley is never going to allow a casino into Chicago. That's the last thing he wants for his image, and I don't really think anyone else will. As for legalizing all private lotteries, most of the time when a state makes a deal like this it includes a right to a monopoly. I'm currently going to school in Rhode Island where the state apparently would have had to compensate a currently open casino if they had allowed another in.
Posted by: Rob C at Jan 25, 2007 8:52:30 PM
Profits are over 30% of sales? What a business. I wish that we did that well in the drug industry, let me tell you.
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