By Don McNay
CNHI News Service
“Keep on working hard boy, try as you may, your going to wind up where you started from.”
I stumbled upon a fascinating academic article, entitled "The Ticket to Easy Street? The Financial Consequences of Winning the Lottery".
It was written by three economics professors, Scott Hankins at the University of Kentucky, Paige Marta Skiba at Vanderbilt University, and Mark Hoekstra at the University of Pittsburgh.
The professors were not just looking to learn the habits of lottery winners. They were searching for the answer for a much larger question, “whether a bailout will have a permanent impact or whether it will merely postpone financial pain.”
In other words, does throwing money at people solve financial problems or just push them down the road?
The paper gives empirical proof two things that I've been saying for a long time: 1. Bailouts don't work. 2. People who get large sums of money run through it in five years or less.
The professors came up with an ingenious and comprehensive way to do their research. They obtained a list of Florida lottery winners of the Fantasy Five lotto game from April, 1993 to November, 2002.
They compared those names to Florida bankruptcy records to see how many of the winners filed bankruptcy and when.
Filing bankruptcy means a person has hit bottom. You wouldn’t expect that to happen to a lottery winner. Yet it does. Over and over again.
In the first couple of years after winning a jackpot, people who won small amounts were more likely to file than large winners. That makes sense. Someone with a large amount of money a winner can initially weather a bad time or keep creditors at bay.
After three years large winners are more likely to file bankruptcy than small winners. Also, people who received large sums did not use it to pay down debt or increase assets.
Winning the lottery did not help people increase their net worth. They need to have set goals and an understand of finance to make their lives better.
Giving someone a lump sum does not make financial problems go away. It’s like putting an overweight person on a crash diet. Unless you can fix the underlying problem, they are going to fall back to their old habits.
This is true for lottery winner and the average American.
The paper makes reference to a 2007 study in the Journal of Political Economy, which said although “consumers initially used federal rebate checks to reduce debt, eventually debt levels returned to pre-rebate levels.”
Hankins, Hoekstra and Skiba concluded that “while we cannot be sure that homeowners or other beneficiaries of government aid would respond in the same way lottery winners did, the results may warrant some skepticism about the long term efficacy of such a bailout.”
You can see why bailout fail. Wall Street and lottery winners have a common bond. They have access to easy money without restraints.
In my experience with lottery winners, one of the biggest reasons for blowing their money is their family and “friends”.
The entourage hangs on until the money is gone. Once the party is over, they are nowhere to be found.
Wall Street has it’s own posse called Washington. The easy flow of campaign contributions, the revolving door between regulators and those they are supposed to be regulating, and the explosion of well connected, highly paid, lobbyists makes it impossible for Washington to tell Wall Street no.
There has been talk in Washington of another stimulus package. Instead of looking at short term solutions, the country needs to make long term, painful, economic changes.
Otherwise, like the Florida lottery winners, we are going to wind up where we started from.
Don McNay writes for the Richmond (Ky.) Register. CNHI News Service distributes his column.